Budget Options for FY 2026/2027 and the Medium Term

BACKGROUND NOTES

The Kenyan economy has remained resilient, with key macroeconomic indicators pointing to a positive outlook. Real Gross Domestic Product growth has averaged 4.5 percent over the past five years, reflecting sustained economic activity. Inflation has declined and remained within the Central Bank’s target range of 5±2.5 percent, supporting price stability. Interest rates have also trended downward following the Central Bank’s accommodative monetary policy stance, with the Central Bank Rate declining from 13 percent in June 2024 to 9.0 percent in December 2025. The exchange rate has remained relatively stable, while the current account deficit has narrowed significantly from -5.2 percent of GDP in 2019 to -1.3 percent in 2024.

Despite these positive macroeconomic trends, the economy continues to grapple with a range of structural and emerging challenges that could dampen growth prospects if not adequately addressed. These include persistent revenue underperformance relative to expenditure needs, rising public debt and associated servicing pressures, and the accumulation of pending accruals that constrain liquidity within the private sector.

In addition, inefficiencies in public investment management continue to weaken the quality and timeliness of infrastructure delivery, while increasing vulnerability to climate change-related shocks such as droughts, poses risks to agriculture, food security, and overall economic stability. These pressures are further compounded by growing unemployment, particularly among the youth, which limits household incomes, suppresses domestic demand, and heightens social and fiscal pressures on government support programmes.

The 17^th edition of the Budget Options is therefore anchored on confronting these challenges in a more targeted and strategic manner. In particular, it emphasizes the urgent need to clear and prevent the accumulation of government pending accruals to ease liquidity constraints in the private sector. The edition also underscores the importance of strengthening domestic revenue mobilization to support fiscal sustainability. In addition, it highlights the need to strengthen the public investment management framework for counties to enhance project execution and value for money. Collectively, these priorities are aimed at promoting sustainable economic growth, improving fiscal resilience, and fostering job creation and productivity across key sectors of the economy.

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 2025/26 BUDGET EXPLAINER

1. This document serves as a summary of the budget, highlighting key spending priorities in the National Government for the financial year 2025/26. This document is a crucial tool for enhancing transparency, accountability and public participation in the budget process. It serves as a bridge between the Government and the general public by making it easier to understand the allocation of resources and the Government's spending priorities and also enabling the public to grasp the key aspects of the budget.

2. In essence, this budget explainer aims to promote fiscal transparency by providing a clear and concise overview of the government's financial plans. This transparency fosters accountability and encourages public participation in shaping the direction of the nation's economy. The document will enhance and strengthen social audit by the general public. In addition, this document will be able to shed light on key performance indicator and outputs that the government aims to achieve at the end of FY 2025/26.

3. Further, the document will enlighten the general public on the Consolidated Fund Services (CFS), shedding light on government debt services, remuneration of constitutional office holders and pensions. The source and types of internal and external debts will be highlighted as well as types of government pensions.

4. The document will underline the equitable share showing the allocations to the counties, additional allocations from National Government and finally loans and grant from development, highlighting the County Allocation of Revenue Bill determine allocations to each county using the formular proposed by the Commission of Revenue Allocation (CRA),County Government Additional Allocation Bill contains additional allocation both Conditional and unconditional from National government and finally allocation from development partners in form of loans and grants.

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UNPACKING OF THE SUPPLEMENTARY ESTIMATES NO. I FOR FINANCIAL YEAR 2024-2025

OVERVIEW OF PROPOSED CHANGES

1.    On Friday, 12^th  July 2024, the National Treasury submitted Supplementary Estimates I for the Financial Year 2024/2025 to the National Assembly in accordance with the Constitution and the Public Finance Management Act, Cap 412A. The Supplementary Estimates Seek to rationalize the Estimates of Expenditure for FY 2024/25 approved by the National Assembly to align the Estimates with a revised fiscal framework and cater for the FY 2023/24 carryovers. A financing gap of Kshs.344.3 billion underpins the proposed revision of the Budget Estimates for FY 2024/25 due to the withdrawal of the Finance Bill, 2024, which inhibits the collection of additional revenue from various tax statutes.

2.    The Supplementary budget proposes to reduce the budget for the Ministries Department and Agencies (MDAs) of the National Government and Independent Offices, Parliament, and the Judiciary by Kshs. 156.39 billion; out of which Kshs.34.04 billion constitutes approved recurrent expenditure; and Kshs. 122.35 billion constitutes approved development expenditure. In the Consolidated Fund Services (CFS), there is an additional Kshs.23.78 billion to cater for pension arrears for ordinary pension (Kshs.5.66 billion), Commuted pension (Kshs.15.55 billion), and Public Service Superannuation Scheme (Kshs. 2.56 billion).