Kenya’s economic rebound is increasingly fragile, according to a new warning from the World Bank.
While the country shows signs of recovery, with inflation stabilising, its exchange rate holding firm, and foreign exchange reserves sitting near record highs, mounting debt and persistent fiscal pressures threaten to derail progress.
In a recent report, the World Bank painted a cautiously optimistic picture of Kenya’s near-term economic outlook. It now expects the economy to grow by an average of 4.9 per cent annually between 2025 and 2027, a notable upgrade from earlier forecasts.
This upward adjustment reflects improving monetary conditions, stronger private sector lending, and a revival in key industries such as construction. As the Bank noted, “private sector credit grew five per cent year‑on‑year by September 2025, supported by lower lending rates and accommodative policies.”
Yet, beneath those encouraging figures, the Bank sounded a serious alarm. The fiscal deficit for fiscal year 2024/25 widened sharply to 5.9 per cent of GDP, far exceeding the government’s original target of 4.3 per cent.
According to the Bank, this gap has been driven largely by weak revenue collection and inflexible spending patterns.
“Fiscal pressures are intensifying … driven mostly by revenue shortfalls and increasingly rigid expenditure structures,” it said, noting that risks of further fiscal slippage remain very real.
At the same time, Kenya’s public debt surged to 68.8 per cent of GDP, pushing the country deeper into a high-risk debt distress category.
The World Bank underscored that Kenya stands at a crossroads. On one hand, favourable monetary and external conditions are supporting growth, but on the other, the country’s fiscal health is deteriorating.
“Many key macroeconomic indicators continue to show strength; however, the fiscal outlook remains subject to downside risks that could threaten sustained and inclusive economic growth,” Jorge Tudela Pye, the Bank’s Country Economist for Kenya, said.
Qimiao Fan, the Bank’s Division Director for Kenya, Rwanda, Somalia, and Uganda, went further. He argued that Kenya’s long-term growth potential depends critically on addressing deep-seated structural challenges.
“Economic growth momentum could be further sustained by addressing key barriers to competition, more and better‑paying jobs, and lower prices to consumers,” he said.
Urgent reforms
Indeed, the Bank’s own analysis, published under the title From Barriers to Bridges: Procompetitive Reforms for Productivity and Jobs in Kenya, points to a series of reforms it considers urgent.
These include reducing distortions that favour state-owned firms over private competitors, opening up sectors like electricity transmission and distribution to private investment, strengthening telecoms regulation, and ensuring fertiliser subsidies are allocated more fairly.
According to the report, implementing these reforms could boost Kenya’s GDP growth by up to 1.35 percentage points, and raise labour compensation growth by two percentage points, ultimately generating the equivalent of 400,000 formal-sector jobs every year.
Beyond that, the Bank highlights fundamental problems in Kenya’s labour market. Formal employment remains low at only 15 per cent, while real wages continue to decline. These are not just short-term setbacks, but signs of structural weakness that limit productivity and dampen job creation.
To address these vulnerabilities, the World Bank urges more disciplined fiscal policies. In its Public Finance Review, the Bank recommends broadening the tax base, rationalising spending, especially in state-owned enterprises, and reforming public procurement.
It argues that such changes, while challenging, could yield significant benefits: over time, they could bring down Kenya’s debt-to-GDP ratio to around 44 per cent by 2035, while boosting jobs and delivering more effective public services.
The World Bank is calling on Kenyan policymakers to act now, not just to preserve gains, but to build a more competitive, resilient economy for the future.
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