The Lower Eastern Times Opening The Third Eye
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Kenya’s external liquidity challenges have lessened following the early repayment of a \$2 billion Eurobond in February of last year.
According to Fitch, an international credit rating agency, steady inflows of foreign currency and interventions by the Central Bank have helped raise foreign reserves to \$11.1 billion by the end of June.
“Kenya’s diverse economy and ongoing policy reforms have boosted investor confidence,” Fitch noted.
However, the agency cautioned that persistent issues such as weak governance, rising debt servicing costs, and difficulties in revenue collection remain significant risks.
Fitch forecasts that the fiscal deficit will reach 5.2% of GDP in the 2025/26 fiscal year, exceeding the National Treasury’s target of 4.7%.
Debt servicing is expected to increase sharply, with the interest-to-revenue ratio rising to 33%, well above the 15% average for countries with similar credit ratings.
The Treasury expects revenue to grow to 17.5% of GDP in 2025/26, up from 17% this year, while spending is projected to decrease to 22% of GDP.
Still, Fitch is more cautious, predicting revenue will only rise to 17.2%, pointing to ongoing shortfalls and weak public financial management.
The Finance Act 2025 avoided new taxes but aims to improve tax compliance through digitalization and cutting exemptions.
Fitch warned that these reforms might have limited impact due to challenges in implementation and potential revenue losses.
To fund the 2025/26 budget, the Treasury plans to borrow domestically and externally, targeting total borrowing of Sh655 billion.
About \$5 billion (around 3% of GDP) will come from foreign loans, including concessional funding from the World Bank and African Development Bank, but no IMF support is expected after Kenya’s program was cancelled.
Despite fiscal pressures, Kenya’s real GDP is forecast to grow by 4.9% in 2025, supported by stronger private sector growth and lower inflation, which was 4.5% in 2024.
Fitch emphasized that future rating changes will depend on Kenya’s ability to maintain external reserves and implement effective fiscal consolidation.
“A sharp drop in reserves or failure to reduce the fiscal deficit could lead to a downgrade,” the agency warned.
On the other hand, improved revenue collection and reduced debt levels could result in a more positive outlook.
