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Kenya's FY 2025/26 Financial Statement: Six Things That Matter

Revenue is diversified but insufficient, deficit financing is mostly domestic, and 81.5% of spending is recurrent. A close reading of Kenya's FY 2025/26 Financial Statement.

By Stephen Omukoko Okoth·7 February 2026

#Budget#Public Finance#Fiscal Policy#National Treasury#Domestic Borrowing#Debt Interest

I reviewed Kenya's FY 2025/26 Financial Statement and prepared a detailed analysis. Here are the six things that matter most.

Revenue is diversified but insufficient. Income Tax and VAT dominate collections, supported by excise duties, import duties, and investment income. The diversification is real, but overall revenue growth remains too weak to ease fiscal pressure. Kenya continues to collect below its tax potential relative to GDP.
Deficit financing is largely domestic. Net domestic financing (KSh 591.9bn) is more than twice net foreign financing (KSh 284.2bn). This places the adjustment burden squarely on local debt markets — crowding out private sector credit and contributing to elevated lending rates that constrain business investment.
Foreign inflows overstate available fiscal space. Of KSh 624.4bn in foreign disbursements, 54% is absorbed by principal repayments on existing external debt. Less than half represents net new financing available for development spending. The gross number looks healthier than the net reality.
Domestic borrowing is highly concentrated. 98% of domestic financing comes from government securities — Treasury bills and bonds. This creates significant rollover risk. When market conditions tighten, as they have periodically, refinancing costs spike and fiscal space contracts sharply.
Expenditure is structurally rigid. 81.5% of spending is recurrent — wages, pensions, debt service, and transfers. Only 18.5% goes to development. This leaves almost no room for growth-enhancing capital investment and means the budget has very limited flexibility to respond to shocks.
Debt interest is the dominant fiscal constraint. Total debt interest (approximately KSh 1.1tn) exceeds pension payments by more than 4× and is driven mainly by domestic interest (77.5% of total interest). Until the interest burden moderates, every revenue improvement is partially absorbed before it reaches service delivery.

Source: National Treasury, FY 2025/26 Financial Statement.

Data source: Central Bank of Kenya — Commercial Banks Weighted Average Interest Rates, 1991–2025.