Government

Revenue

Collection

•       Total revenue collected as at the end of February 2025 amounted to Kshs 1,403.7 bn, equivalent to 56.7% of the revised estimates of Kshs 2,475.1 bn for FY’2024/2025 and is 85.1% of the prorated estimates of Kshs 1,650.0 bn. Cumulatively, tax revenues amounted to Kshs 1,518.3 bn, equivalent to 57.7% of the revised estimates of Kshs 2,631.4 bn and 86.6% of the prorated estimates of Kshs 1,754.3 bn,

•        The government was unable to meet its prorated revenue targets for the eight-consecutive month of the FY’2024/2025, attaining 85.1% of the revenue targets in February 2025, mainly on the back of the challenging business environment experienced in previous months, exacerbated by high taxes and an elevated cost of living. The cost of living remains elevated in the country, which continues to impede revenue collection despite an improvement in business environment with the PMI coming in at 51.7 in March 2025, within the expansion zone, from the 50.6 recorded in February 2025. In light of this, the government is yet to fully benefit from the strategies put in place to improve revenue collection such as expanding the revenue base and sealing tax leakages, and suspension of tax relief payments. The coming months’ revenue collection performance will largely depend on how quickly the country’s business climate stabilizes. This stabilization is expected to be aided by the ongoing stability of the Shilling, despite having depreciated marginally by 0.1% against the dollar in the since the last meeting in February. Additionally, the stable inflationary pressures, and, an ease in the monetary policy in the country, with the Monetary Policy Committee (MPC) announcing a downward revision of the Central Bank Rate (CBR) by 50.0 bps to 10.75% from 11.25% following their last meeting on 5th February 2025 will continue to stabilize the business climate

•        In the short term, we expect the revenue collections to be affected as a result of the withdrawal of the Finance Bill 2024. We expect a revenue shortfall for the FY2024/2025 budget, and will likely result in Kenya missing the 4.3% fiscal deficit target this year.

•        The proposed raft of tax changes in the Finance Bill 2024 were geared towards expanding the tax base and raising revenues to meet the government’s budget for the fiscal year 2024/2025 of Kshs 3.9 tn. The government’s continued efforts to broaden the tax base were hampered.

•        Despite this the government continues to employ a raft of measures to boost revenue collection through non-tax channels by streamlining its services to the public e.g. Citizen services, the Ministry of Lands and Immigration services and proposals to broaden the tax base through the Tax Laws Amendment Bill 2024. However, the upward revision of taxes comes at a time when the business environment remains subdued, underpinned by the increased taxation that has suppressed business production levels weighing down on the projected revenue performance.

•        Nevertheless, given the improving general business environment which is underpinned by the slight depreciation of the Kenyan shilling, easing liquidity in the money market, and stabilized inflationary pressures, we expect these to support the tax revenue, but remain wary of the unpredictable tax regime that may weigh down the collections.

Government Borrowing

•        The government, as at 4^th April 2025, is 38.3% ahead its prorated net domestic borrowing target of Kshs 593.7 bn having borrowed Kshs 821.1 bn of the total borrowing target of Kshs 456.7 bn. The government currently has domestic maturities worth Kshs 538.1 bn and will have to borrow Kshs 134.8 bn monthly to meet the upcoming domestic maturities and the budget deficit in the FY’2024/2025

•        Total Borrowings as at the end of February 2025 amounted to Kshs 795.6 bn, equivalent to 50.6% of the revised estimates of Kshs 1,571.8 bn for FY’2024/2025 and are 75.9% of the prorated estimates of Kshs 1,047.9 bn. The cumulative domestic borrowing of Kshs 978.3 bn comprises of Net Domestic Borrowing Kshs 408.4 bn and Internal Debt Redemptions (Rollovers) Kshs 569.9 bn

•        Kenya has continued to receive financing from the World Bank and other bilateral lenders such as the International Monetary Fund (IMF). In November 2024, the Executive Board of the IMF announced that it had completed the seventh and eighth reviews of Kenya’s Extended Fund Facility (EFF) and Extended Credit Facility (ECF) arrangements and the second review under the Resilience and Sustainability Facility (RSF) arrangement. Notably, this enabled immediate disbursement of USD 485.8 mn under the EFF/ECF arrangements and USD 120.3 mn under the Resilience Sustainability Facility (RSF). This latest disbursement brings the total amount received under the EFF/ECF Programme to USD 3.2 bn, USD 0.7 bn short of the USD 3.9 bn expected from the whole programme and a total of USD 180.5 bn received under the RSF programme.

•        Kenya’s rising debt sustainability remains a significant concern with the government's borrowing appetite remaining high given the subdued economic environment coupled with an ever-present fiscal deficit. While credit risk was significantly reduced with the Eurobond buyback in February 2025, and new issue of USD 1.5 bn 11-year Eurobond to facilitate the buyback. This led to S&P Global Ratings to announce its revision of Kenya’s long-term sovereign credit rating, downgrading it to B-, and a stable outlook from a credit rating of B and a negative outlook. However on 31 January 2025, Fitch Ratings affirmed Kenya’s credit score at B-with outlook stable in January 2025 on the back of diversified economy and strengthening of the monetary policy frameworks. Additionally, on 24^th January 2025, the global ratings agency, Moody’s announced its revision of Kenya’s credit outlook to positive from negative, while maintaining the credit rating at Caa1, on the back of a likelihood of an ease in liquidity risks and improved debt affordability. The improved debt affordability is largely attributable to the reduction in domestic borrowing costs, evidenced by the sharp decline of yields for short-dated papers. Given the low inflation rates in the country, the stability of the exchange rate, and the ease in the monetary policy stance, domestic borrowing costs are expected to continue decreasing over the short-medium term.

Inflation

·       Year on year (y/y) inflation rate for March 2025 increased marginally by 0.1% points to 3.6%, from the 3.5% recorded in February 2025. This was in line with our expectation of an increase. Our projection was mainly driven by the easing monetary policy stance and increase in electricity prices.

·       Super Petrol, Diesel, and Kerosene remained unchanged at Kshs 176.6, Kshs167.1, and Kshs 151.4 per litre respectively.

·       Notably, March’s overall headline inflation remained within the CBK’s target range of 2.5% - 7.5% for the twenty-first consecutive month.

•        We expect inflation rates to remain within the CBK’s target range of 2.5% - 7.5% supported by the stabilizing of the Kenyan shilling against the dollar with the shilling appreciating by 4.7 bps against the dollar on year-to-date, coupled with stabilized fuel prices.

Currency (USD/Kshs)

•        Since the last meeting, the Kenyan Shilling has depreciated marginally by 4.0 bps against the US Dollar to Kshs 129.2 as at 4^th April 2025, relatively unchanged from Kshs 129.2 recorded on 31^st January 2025 despite the improved foreign reserves which are currently above the statutory requirement

•        In addition, the Forex Reserves remain sufficient at USD 10.0 bn (equivalent to 5.1 months of import cover) as of 28^th March 2025. Notably, the forex reserves are above the statutory requirement of maintaining at least 4.0 months of import cover

•        We expect the Kenyan Shilling to be supported by Diaspora remittances standing at a cumulative USD 4,956.5 mn in twelve months to February 2025, 14.5% higher than the USD 4,329.7 mn recorded over the same period in 2024, which has continued to cushion the shilling against further depreciation. In the February 2025 diaspora remittances figures, North America remained the largest source of remittances to Kenya accounting for 53.0% in the period,

•       Additionally, the shilling performance and strength is expected to be supported by the sufficient forex reserves currently at USD 9.9 bn (equivalent to 5.1 months of import cover) as of 4^th April 2025. Moreover, tourism inflow receipts which came in at The tourism inflow receipts which came in at Kshs 452.2 bn in 2024, a 19.8% increase from Kshs 377.5 bn inflow receipts recorded in 2023, and owing to tourist arrivals that improved by 14.6% in 2024, from the arrivals recorded during a similar period in 2023

GDP Growth

•        Kenyan’s economy recorded a 4.0% growth in Q3’2024, slower than the 6.0% growth recorded in Q3’2023, pointing towards a slower economic growth. The performance was driven by;

i.       The positive growth recorded in all sectors except Mining and quarrying, with most sectors recording a decline compared to Q3’2023 with Accommodation and Food Services, Mining & Quarrying and Financial & Insurance Sectors recording the highest declines of 20.8%, 11.9% and 10.8% points, respectively. Other sectors that recorded a contraction in growth rate, from what was recorded in Q3’2023 were Construction, Electricity and Water Supply and Real Estate of 6.0%, 2.4% and 2.2% points respectively;

ii.      The slowed growth in the Agricultural Sector with Agriculture and Forestry recording a growth of 4.2% in Q3’2024. The performance was a decrease of 0.9% points, from the expansion of 5.1% recorded in Q3’2023. The slower growth recorded during the quarter was however supported by a significant increase in Sugarcane production by 188.7% to stand at 2,523.5 thousand metric tonnes, from the 874.0 thousand metric tonnes registered in Q3’2023

•        We expect Kenya’s GDP to show recovery in 2025 at a faster pace, supported by sustained recovery in sectors like accommodation and food services sector, as well as recent fiscal policies such as subsidizing costs of crucial farm inputs such as fertilizer that are expected to support growth in the agriculture sector, which remains to be Kenya’s largest contributor to GDP,

•        The continued stability of the Kenya shilling has continued to support the business environment, by reducing the cost of imported inputs and decreasing the finance cost of the foreign currency denominated debts

•        Notably, the country’s PMI for the month of March 2025 increased to 51.7, from 50.6 in February, but still remaining in the expansion zone, an indication of an improved business environment in the country. Likewise, according to CEO’s survey- 2025 January report, optimism about growth prospects for the Kenyan business activity remained sustained attributed to the stable macroeconomic environment reflected in the low inflation rate and stability in the exchange rate, expectations of a decline in interest rates, continued strong performance of agriculture due to favorable weather conditions, resilience of the services sector, and improved global growth prospects.

Private Sector Credit Growth

•        The latest data from the National Treasury indicates that growth in private sector credit declined by 1.4% in December 2024, compared to 13.2% growth in a similar period in 2023, mainly attributed to exchange rate valuation effects on foreign currency-denominated loans due to the appreciation of the Shilling and reduced demand due to high lending rates.

•        We anticipate continued adoption of the risk-based pricing model in the banking sector to continue to unlock access to credit to individuals and businesses who were not captured by the previous frame works due to being considered too risky,

•        Additionally, banks have started to adjust their lending rates in line with the   CBR rate which was cut to 10.75%, in the February MPC meeting, with the weighted lending rate at 16.4% as at February 2025. This is expected to revitalize the private sector credit demand

Liquidity

•        Liquidity levels in the money markets eased, with the average interbank rate since the previous MPC meeting decreasing by 2.9 bps to 10.7% as of 4^th April 2025, from 11.0% as of 5^th February 2025, partly attributable to government payments that offset tax remittances

•        We expect liquidity in the money markets to be supported by the domestic debt maturities that currently stand at Kshs 346.8 bn worth of T-bill maturities and Kshs 162.7 bn worth of T-bond maturities for FY’2024/2025.