Kenya’s fiscal model is unsustainable because it structurally leans towards a budget deficit, currently standing at about Sh1.15 trillion and representing approximately 5.8 per cent of Gross Domestic Product (GDP).
This fiscal gap is expected to reduce slightly to about 5.5 per cent of GDP in Financial Year (FY) 2026/2027, and spike to 5.9 per cent by FY 2027/2028.
This forecast increase is largely attributed to expenditure pressures related to the general elections and rigid, massive spending commitments on offshore debt repayments.
Left unchanged, this fiscal model will definitely lead to more indebtedness and stunted growth. To escape this debt trap, it is critical for the country to jealously protect its tax base, while aggressively seeking opportunities for capital formation.
The last four years have seen a surge in foreign direct investment, infrastructure projects and Special Economic Zones (SEZs). Kenya attracted a record $3.2 billion in FY 2025/2026, UNCTAD says, signalling global confidence. Such inflows cushion the shilling against shocks like the Israel-Iran war’s fuel price spikes, and lift forex reserves to Sh1.91 trillion, or 5.9 months of import cover.
More commitments continue to be secured. The Sh2.2 trillion Dangote fuel refinery in Lamu is billed as one of the largest industrial investments ever witnessed in Kenya. This project is forecast to scale up logistics, employment and infrastructure in Kenya, and the East African Community region.
The newly announced $1 billion state-of-the-art, one-gigawatt Microsoft and G42 green data centre partnership is expected to power Artificial Intelligence, cloud computing and data storage. Besides, the investment is creating long-term, high-paying jobs in software engineering, cybersecurity, data management and digital services.
Digital Superhighway Project
The $390 billion World Bank Digital Economy Acceleration Project (KDEAP) has been launched and aims to advance high-speed internet, digitalise government services, and boost tech skills. This investment has been complemented by Kenya’s own national Digital Superhighway Project, targeting 100,000 kilometres of fibre optic cable.
It similarly aims to lower internet costs, streamline e-government services, and reduce bureaucratic delays for businesses. Together, these initiatives provide the infrastructure needed to deepen digitalisation of the economy.
Additionally, the country has attracted over Sh76.8 billion in SEZs (transforming logistics, energy and health), and Sh14.4 billion in Export Processing Zones (EPZs) – powering agro-processing and textiles – with corporate investments from firms like Taifa Gas, IX Africa, Raynham Steel, and ItalNovis. The EPZ companies provide employment in the textile, agro-processing and manufacturing sectors. By producing locally, SEZs and EPZs increase Kenya’s export volumes while substituting expensive imports with locally manufactured goods.
Moreover, the government has invested in massive highway and road networks, targeting the widening of 2,500 km of highways and up to 28,000 km of rural and national roads. In the coastal areas alone, investments in infrastructure exceed Sh340 billion, covering projects like the Mariakani-Jomvu dual carriageway and Mtwapa-Kilifi road upgrades.
These projects significantly slash transit times for goods moving from the Port of Mombasa to the hinterland, and neighbouring landlocked countries such as Uganda, Rwanda, Burundi, and South Sudan.
Furthermore, the government has directed investments into the game-changing 230,000 Affordable Housing units (and counting), County Aggregation and Industrial Parks (CAIPs), and modern Economic Stimulus Programme (ESP) municipal markets across all 47 counties. The purpose of the latter initiatives is to allow rural farmers to store, process and package their produce locally, reducing post-harvest losses. Also, they promote decentralisation of wealth. Instead of wealth concentrating largely in Nairobi and the former “White Highlands”, these parks and modern municipal markets inject capital directly into county economies, boosting rural household incomes.
Capital formation projects have a direct, compounding impact on tax revenues by widening the tax base, boosting corporate profitability, and modernising collection mechanisms. The immediate and multi-year impact is an expansion of KRA’s revenue collection to Sh2.844 trillion in FY 2025/2026 from Sh2.572 trillion realised in FY 2024/2025, representing a 10.6 per cent growth.
This growth was recorded across most tax heads. Revenue growth of Sh347 billion (14 per cent) was recorded in corporation tax, attributed to the operationalisation of manufacturing, transport and energy infrastructure. Customs duty was pushed to a historic high by imports of heavy machinery, industrial inputs, and technological hardware destined for SEZs and EPZs. Besides, large-scale infrastructure projects directly grow levies such as the Railway Development Levy and the Housing Levy.
PAYE collections continue to be boosted by thousands of workers engaged at Affordable Housing and SEZ sites, dramatically expanding the formal income tax pool. Similarly, there is evident buoyancy in VAT collections due to increased purchasing power from newly employed individuals and localised rural business activity. A highly digitalised economy allows KRA to adopt intelligent tax administration by deploying data-driven tools that enhance visibility of taxable transactions.
Deepening digitalisation of tax administration processes will widen KRA’s tax reach to the informal economy, which is currently estimated to comprise about 45 per cent of GDP despite its infinitesimal contribution to Exchequer revenues. With more taxpayers and enhanced tax revenue collections, the fiscal gap will be reduced significantly, removing pressure for external budget financing.
In the long run, Kenya will achieve the desired fiscal consolidation, which has remained elusive since the Kibaki-Raila Grand Coalition government concluded its tour of duty in 2013. Therefore, the need for bipartisan effort to attract investments for capital formation cannot be overemphasised.
Professor Ongore is a Public Finance and Corporate Governance scholar based at the Technical University of Kenya. [email protected]
