Debt hole set to deepen, civil servants to lose perks in new plan

2025 BUDGET DAY-  Treasury CS John Mbadi arrives to read the budget at Parliament Buildinggs, Nairobi. June 12th,2025. [Elvis Ogina, Standard]

The government will over the next one-year attempt to breathe life into the struggling economy.

While National Treasury Cabinet Secretary John Mbadi spoke of yet another attempt at austerity measures that could see civil servants lose allowances, President William Ruto's administration will sink the country deeper into debt, borrowing nearly Sh1 trillion. 

Most of the debt will come from local lenders, which analysts have warned might see banks further deny businesses and households credit and continue lending to the government. 

In his Budget Statement in Parliament Thursday, Mbadi outlined measures that are expected to further support economic growth.

These include rollout of a stimulus programme that the CS referred to as Climate WorX, a social programme that gives young people jobs, which is seemingly a re-imagined Kazi Mtaani. 

Over the 2025/2026 financial year, the government plans to spend Sh4.29 trillion, financed through revenue of Sh3.32 trillion made up of Sh2.75 trillion ordinary revenue and ministerial Appropriation in Aid of Sh567 billion, and grants of Sh46.9 billion.

“The resultant fiscal deficit including grants is projected at Sh923.2 billion, equivalent to 4.8 per cent of GDP down from the estimated Sh997.5 billion or 5.7 per cent of GDP in FY 2024/25,” said Mbadi.

“The fiscal deficit for the FY 2025/26 budget will be financed by net external borrowing of Sh287.7 billion equivalent to 1.5 percent of GDP and net domestic borrowing of Sh635.5 billion, which is equivalent to 3.3 per cent of GDP.” 

The loans will sink Kenya further into debt. By March, public debt stood at Sh11.36 trillion, of which domestic borrowing was Sh6.1 trillion while external debt Sh5.2 trillion.

There have been concerns that borrowing locally would disadvantage businesses and households. The National Assembly Budget and Appropriations Committee has raised concerns about the Treasury’s growing activity in the local bonds and bills market.

“Despite the declining interest rates on government securities locally due to the easing of monetary policy stance, continued reliance on domestic borrowing may either crowd out credit to the private sector or result in high borrowing costs for the private sector," said the MPs in a report on the budget.

"Conversely, the targeted commercial financing will be subject to global market dynamics, which may necessitate changes in the borrowing strategy.”

High debt acquisition over the last decade has pushed up the cost of debt service to a point that the committee warned it is causing fiscal strain. Over the next financial year, Kenya expects to spend Sh1.9 trillion trillion in repayment of both domestic and foreign debts, of which Sh1.097 trillion will be on interest payments and Sh803 billion on debt redemption. 

On employment, Mbadi over 110,000 youth would be engaged nationwide in the Climate WorX programme, which started last year in Nairobi’s informal settlements.

“The youth will help build roads, plant trees and clean up the environment in their neighborhoods,” he said.

“Thus, through Climate WorX, the Government is not only providing a paycheck to help young people meet their immediate needs but also offering financial support to help them develop themselves and their families.”

Mbadi also said the government was repairing its dented credibility after it was put on Finance Action Task Force’s (FATF) grey list in February last year after it failed to meet required threshold in its anti-money laundering and counter terrorism oversight.

Greylisting has far reaching consequences including local firms being unable to access international finance and trade opportunities.

“One of the technical deficiencies identified in Kenya's Mutual Evaluation Report was lack of a Policy and Regulatory Framework to the Virtual Assets and Virtual Assets Service Providers. In order to regulate this sector, the Government has developed the Virtual Assets Service Providers Bill, 2025, which is currently before Parliament,” said the CS.

And while seeking to borrow more, the Treasury expects Sh70 billion to be invested by private sector players through ongoing 32 Public Private Partnerships (PPPs) projects, whereby firms build projects, including roads, and charge users to recoup their investments.

“To enhance transparency and accountability at all stages of the project lifecycle, I recently issued a circular on mandatory disclosure requirements for all privately initiated proposals. This measure is part of our broader effort to strengthen the integrity of the PPP programme and to ensure that private sector participation in public projects fosters public trust.”

President Ruto’s austerity measures have also been sustained and should see civil servants get lesser allowance packages. Mbadi said the government aims to reduce the ratio of wage bill as share of tax revenue. 

To this end, the government will implement the Unified Human Resource Management System across all public sector entities by next month. 

“This initiative is part of broader efforts to enhance public sector efficiency, improve management of wage bill and ensure the effective utilisation of public funds,” said Mbadi.

This streamlining of allowances, said the CS, is meant to improve transparency, accountability, equity and fairness thereby ensuring the total public compensation bill is affordable and fiscally sustainable.

“To this end, SRC will progressively review allowances and benefits in the future Collective Bargaining Agreements, aligning them to the Allowances Policy Guidelines for the Public Service,” he said.

These austerity measures will extend to State corporations, which the CS said are a major source of fiscal risks to public finances due to management and operational inefficiencies.

He cited an assessment conducted by the National Treasury, which identified gaps in these entities and consequently led to a Cabinet decision in January that approved reforms.

“The reforms target to address operational and financial inefficiencies, enhance service delivery and reduce over reliance on exchequer support by State corporations,” the report says.

These reforms include merger of 42 State corporations into 20 entities, dissolution of 25, restructuring of six, declassification of four public funds currently categorised as corporations and declassification of 13 professional bodies.

“The Government-Owned Enterprises Bill, 2024, is part of broader efforts to streamline public enterprises, reduce fiscal risks, and enhance service delivery to citizens,” he said. “The Bill is currently before this august House for consideration”

The 2025/2026 Budget also lays emphasis on climate change. Mbadi said Kenya remains vulnerable to the impacts of climate change, which pose both economic and fiscal risks. 

To address the challenges and opportunities in climate finance and investments, the Government has developed a number of frameworks, including the Climate Finance Mobilization Strategy, National Policy Framework on Green Fiscal Incentives, the Carbon Market Framework as well as the National Green Taxonomy.

A Public Finance Management (Disaster Risk Management Fund) Regulations, 2025, is also in the works and should establish a dedicated fund for addressing four cycles of disaster risk management, namely preparedness, mitigation, response and recovery.