Since 2022, Kenya's macroeconomic indicators have painted a glowing picture of the economy, characterised by resilience and recovery.
Since 2022, Kenya's macroeconomic indicators have painted a glowing picture of the economy, characterised by resilience and recovery. However, these gains are primarily reflected in high-level statistics that have yet to translate into any meaningful impact on disposable incomes for ordinary citizens.
The nominal GDP is projected to reach $140.87 billion in 2026, with a stable annual growth above five per cent, representing an increase from $114.73 billion in 2022 when the economy grew by 4.8 per cent. This growth reflects a recovery from a dip in 2023, and is driven by improvements in agriculture, a strong services sector and easing inflation.
Headline inflation has dropped from a peak of 9.6 per cent in October 2022 to 4.4 per cent in January 2026. Besides, the Kenya shilling, which weakened to all-time lows against the USD in early 2024, has strengthened and stabilised around Sh129.
Further, the official foreign exchange (forex) reserves hit approximately $12.5 billion (5.4 months of import cover) in January 2026 up from $7 billion during the 2023/2024 liquidity crunch. On January 27, 2026, Moody's upgraded Kenya's credit rating from Caa1 (2022) to B3 with a stable outlook.
This upgrade was driven by a "marked decline in near-term default risk" following successful Eurobond refinancing and a rise in forex reserves. At the same time, market capitalisation has experienced a significant recovery, reaching an all-time high of Sh3.35 trillion as of February 2026. This represents a substantial increase from Sh2.0 trillion recorded at the end of December 2022 following a year of heavy losses.
Sh3 trillion milestone
The NSE crossing of the Sh3 trillion milestone is a vote of confidence in the Kenyan economy, which has emboldened owners of capital to take long positions with their investments.
Ordinarily, these beautiful statistics should translate to reduced cost of living and improved welfare for ordinary citizens. However, there seems to be stagnation in that respect, largely attributable to structural issues and policy missteps of the past decade, key among them being aggressive debt-financed infrastructure development and fiscal expansion.
Today, these choices have culminated in a "debt-trap" where capital and interest repayments consume up to 81 per cent of ordinary revenue (income tax, VAT, Customs duty and Excise duty). Between 2013 and 2022, Kenya heavily borrowed for mega projects such as the standard gauge railways without rigorous feasibility studies.
These investments have not generated adequate returns needed to service their debts, leaving taxpayers to underwrite them. Consequently, there are persistent fiscal gaps every budget cycle, forcing the government to seek more funding for budgetary support. Over the last decade, Kenya's creditor profile shifted away from cheap, long-term concessional loans toward expensive short-term debt from commercial sources and bilateral lenders such as China.
By the turn of 2026, the public debt stood at about Sh12.25 trillion, with a debt-to-GDP ratio of about 70 per cent. Another major misstep was the failure to align revenue mobilisation with increased appetite for expenditure.
Worse still is the country's shrinking tax base. Ordinary revenues as a share of GDP declined from 18.1 per cent in the FY 2013/2014 to as low as 13.9 per cent in FY 2020/2021, relative to global best practice of about 30 per cent (OECD). Persistent overestimation of tax collection has over the years led to budget deficits averaging 6.5 per cent of GDP over the last five years, necessitating continuous borrowing to bridge the gap. The debt burden arising from this vicious circle of borrowing leaves a "razor-thin margin" for health, education and other critical social services that typically benefit ordinary citizens more than the rich. To fund its deficits, the government competes with businesses for credit from local banks, reducing the incentives for lending to MSMEs.
Corruption leaks remain an enduring feature of Kenya's governance landscape, compromising investment efficiency. It is estimated that Kenya loses about 30 per cent of its budget annually (about Sh1.3 trillion at current budget level) to corruption. Start-ups and MSMEs have also expressed their inability to cope up with high compliance overheads, forcing them to fall into non-compliance or attrition.
Last but not least, the government's penchant for capital-intensive infrastructure often neglected people-centred services and the manufacturing sector. While services and agricultural sectors have grown, manufacturing continues to decline as a share of the economy, representing a paltry 7.3 per cent to 8.0 per cent of GDP. This falls far short of the United Nations Industrial Development Organization (UNIDO) and Kenya Vision 2030 target for manufacturing of 20 per cent, and fails to provide stable formal jobs needed for the millions of youth entering the labour market every year.
Policy missteps
Neglect of manufacturing sector has its historical roots in the policy missteps of the 2013-2022 period when the government prioritised imports and subsidies over supporting local manufacturers. The subsidies regime tended to support consumption, utterly neglecting production.
The effect was stunted local job creation in the manufacturing sector as Kenyan taxpayers supported foreign manufacturers. What can the government do to ensure shared prosperity? One, provide an enabling environment to support manufacturing and other productive sectors such as tourism, agriculture, ICT, and services to create more jobs.
Two, re-denominate short-term loans from the US Dollar in which about 64 per cent of offshore debts are denominated to other currencies such as Chinese Yuan. This will help manage effects of currency volatility, and reduce pressure to repay short-term loans.
Three, embrace zero-based budgeting approach to curtail opportunities for budgeted corruption, and bring down fiscal deficits.
Four, adopt a data-driven revenue forecasting approach to reduce pressure on KRA to meet unrealistic revenue targets. This will potentially enhance taxpayer compliance, encourage more Kenyans to pay their equitable tax liability and reduce tax burden.
Five, rein-in rent seeking behaviour in public service delivery to rationalise cost of doing business, and attract private capital. Six, carefully balance revenue needs with interest rates in the economy to ensure that as expensive offshore debts are being retired, the private sector is not crowded out.
Seven, create a different compliance pathway for MSMEs, that addresses their unique context. In conclusion, the rather unusual phenomenon where economic expansion exists side-by-side with stagnant disposable incomes is largely an overflow of past policy missteps.
With strict adherence to the government's fiscal consolidation strategy, while emphasizing value adding activities, the economy should pull itself with its bootstraps completely out of the woods in three to five years, subject to meticulous management of the electioneering period.
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Professor Ongore is a Public Finance and Corporate Governance Scholar based at the Technical University of Kenya. [email protected]
