Kenya Faces High Risk of Debt Distress Due to Increased Borrowing, World Bank Warns
- The World Bank reports on Kenya's public finance indicated a heightened debt distress risk caused by increased domestic borrowing
- The Kenya Economic Update and the Public Finance Review Reports highlighted reforms that the government should take for debt management
- World Bank's Country Director for Kenya Qimiao Fan recommended the formulation of structural reforms for the competitiveness of the economy
Wycliffe Musalia has over six years of experience in financial, business, technology, climate, and health reporting, providing deep insights into Kenyan and global economic trends. He currently works as a business editor at TUKO.co.ke.
Kenya is at risk of defaulting on its debt if proper fiscal policy reforms are not met.
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This is according to the World Bank Kenya Economic Update and Public Finance Review (PFR) and the Public Finance Review Reports 2025.
The reports highlighted reforms that the government should take for debt management.
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Kenya's economic challenge
Speaking during the release of the report on Tuesday, May 27, at the University of Nairobi, World Bank's Country Director for Kenya Qimiao Fan warned that high-cost debt remains Kenya's main challenge.
"The growth environment has become much more challenging, making it more difficult to create jobs. Although significant progress has been made on inflation, the exchange rate, and the foreign currency reserves, high-cost debt remains Kenya's main challenge.
"Kenya's risk of debt distress is high, meaning there is a significant probability of Kenya defaulting on its debt," said Qimiao.
Qimiao attributed the risk to increased domestic borrowing, which increased above target as external funding shrank.
The report noted that Kenya's public debt stood at 68% of gross domestic product (GDP) in 2024.
National Treasury reported that gross domestic debt increased by KSh 777 billion in under a year, reaching KSh 6.187 trillion by May 16, 2025.
Which policy reforms should Kenya take?
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The report recommended a set of policy reforms that are estimated to bring Kenya’s debt-to-GDP level to about 44% of GDP by 2035, close to the mid-2010 figure.
Qimiao said the report findings come at a time when Kenya faces a precarious fiscal situation.
"High public debt, ballooning interest payments, and economic slowdown necessitate urgent fiscal consolidation. However, austerity measures alone are insufficient and lack social support," read the report in part.
The report emphasised that revenue policy could concentrate on broadening the tax base while improving efficiency and equity.
"This would involve rationalising tax exemptions, encouraging formalisation, reforming property taxes, and strengthening tax compliance. These changes could yield additional revenue of about 4% of GDP," it continued.
Governance reforms discussed in the report include improving the conflict-of-interest framework, tightening controls of money laundering, improved licensing regimes and digitised instant traffic fines.
Structural reforms recommended include the implementation of the Africa Continental Free Trade Agreement (AfCFTA), competition policies alongside SOE divestiture, and interventions for urban competitiveness and the reduction of the cost of living.
Kenya's economic projections
The Bretton Woods Institution noted that Kenya's economy could rebound if the recommendations in the report are met.
The report noted that Kenya’s real GDP is expected to pick up gradually in the medium term, with the external sector also projected to remain stable in the medium term.
Real GDP growth is projected to increase from 4.5% in 2025 to about 5% in 2026/27.
According to the Kenya National Bureau of Statistics (KNBS), Kenya's economy expanded by 4.7% in 2024.
Source: TUKO.co.ke
