Reality check: Treasury cuts KRA cash target as economic slump bites

The National Treasury has cut its revenue collection target for Kenya Revenue Authority (KRA) for the next financial year, conceding that it has over the years set ambitious targets for the taxman that has in turn perennially missed the targets.

In the 2025 Budget Policy Statement (BPS), Treasury reduced the target for ordinary revenue to Sh2.835 trillion from the earlier target set in the draft BPS of Sh3.018 trillion.

Projected total revenue, which includes tax revenues collected by KRA and ministerial appropriation-in-aid (AIA), has also come down to Sh3.385 trillion from the earlier projection of Sh3.516 trillion in the draft BPS.

The Cabinet approved the BPS on Tuesday and it was presented to Parliament Thursday. The BPS is a broad guide to government spending plans.

The downward review could be an indication of the government coming to terms with the reality that the economy is not doing as well as it may have expected. 

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Kenya’s economic growth is estimated to have slowed down to 4.6 per cent in 2024, which according to Treasury was an indication of deceleration of economic activities in the first three quarters of 2024.

Data by the Kenya National Bureau of Statistics shows that most economic sectors grew at a slower pace in the third quarter of last year, resulting in the economy growing by four per cent over the three months to September 2024.

This was a deceleration from a growth of six per cent over a similar quarter in 2023, which was attributed to the decline across most sectors as well as contractions - negative growth – in construction and mining sectors.

It is the slowest pace of growth for the economy seen in any third quarter since 2020, when the country was grappling with Covid-19.

The construction sector, which has in the past been among the areas that supported the economy even in difficult times, contracted by two per cent over the quarter to September compared to a growth of four per cent in a similar quarter in 2023.

The economy’s growth estimate for 2024 of 4.6 per cent is compared to a growth of 5.6 per cent in 2023. Treasury expects growth to pick up to 5.3 per cent in 2025 and retain the same momentum over the medium term.

Treasury Cabinet Secretary John Mbadi at a Thursday briefing said the reduced revenue targets consider the current economic situation.

Revised projections

“We are more realistic about our revenue collection. The figure that was provided earlier especially on ordinary revenue of Sh3.018 billion has since been revised downwards to Sh2.835 trillion.

“This shows you that the Treasury is walking the talk. We do not just say that we have been over-projecting revenues without taking action,” the CS said.

“Even in the Supplementary Budget II, you will see we have revised downwards revenue projections to reflect the reality.”

In the BPS, ordinary revenue collection for the current financial year is expected to stand at Sh2.576 trillion, which is lower than the Sh2.631 trillion that the government had expected KRA to net by June 30 this year.

KRA is already lagging behind this financial year. As at December 2024, the taxman had achieved 44 per cent of the revenue collection target, according to the Parliamentary Budget Office (PBO), at a time when it should have been around 50 per cent.

“Owing to the challenges witnessed in enhancing revenue collection, the government has reduced its revenue target for FY2024/25 to 16.9 per cent of GDP… performance in the first half of the financial year indicates the government is still below its half year and by extension the annual revenue target,” said PBO in a new report released dated February 2025.

“As of December 31, 2024, the total ordinary revenue collected amounted to Sh1.16 trillion billion which is equivalent to 44.1 per cent of total revenue for the current financial year.”

Treasury has in the past been told to be more realistic with its tax revenue targets. The National Assembly Budget and Appropriation Committee has several times noted the ministry has been too optimistic with its ambitions on revenue collections not backed by an expanded tax base.

The result, the committee noted, is that the government ends up borrowing more to plug the fiscal deficit owing to shortfall in revenue collection.

“The committee observed that the National Treasury continues to overestimate revenue, resulting in recurring deficits and necessitating increased borrowing to cover shortfalls,” said the committee in one of its reports on the budget.

Aside from reducing the revenue projections, the government has also reduced its spending for the next financial year by more than Sh66 billion.

Overall spending for the 2025/26 financial year is now expected to be Sh4.263 trillion.

This is a slight reduction from the projections in the draft BPS published January this year in which Treasury had put the State’s overall spending for the next financial year at Sh4.329 trillion.

The BPS underwent a round of public participation before it was deliberated on by the Cabinet. It is now in Parliament for further debate including getting more input from citizens.

Lower deficit

To plug the deficit between revenues collected and the budget, the government plans to borrow Sh831 billion, or about 4.3 per cent of GDP over the 2025/26 financial year.

This is lower than the projected budget deficit for the current financial year which is expected to stand at Sh862.7 billion when the year closes on June 30.

The loans that the government plans to take for the next year are higher than the government had planned to take, which is partly on account of reduced revenue targets.

In the draft BPS, budget deficit stood at Sh759.4 billion, or 3.9 per cent of GDP.

Mbadi said this was due to fiscal discipline that the government has been implementing, which has seen the government reduce its borrowing through short-term loans. This has resulted in decline in interest rates on Treasury Bills.

“The fiscal discipline that the government has imposed has resulted in the 91-day Treasury Bill rates declining to 9.11 per cent in February 2025 compared to 16.1 per cent in January 2024.

“For a long time, the government papers have not traded in single digit interest rate.  Reduced from 16.1 per cent in January 2024,” he said, adding that 182-day Treasury Bills are being issued at 9.85 per cent from 16 per cent early last and 364 day T-Bills are at below 11 per cent from 16.4 per cent last year.

In analysing the budget, the PBO noted that the government’s fiscal consolidation efforts have had a degree of success, with the debt to GDP ratio coming down to 67 per cent in 2023/25 and is further expected to reduce to 63 per cent over the 2025/26 financial year.

It is however, still above the legal requirement of 55 per cent.

“The government’s fiscal consolidation efforts achieved in FY2023/24 have been successful in turning the tide on the upward trajectory in the growth of public debt.

“The stock of public debt had been increasing annually to peak in 2022/23 at 71 per cent of GDP in nominal terms before the government started implementing its fiscal consolidation efforts to try to tame the ballooning debt.

“The 2023/24 financial year was the first time since 2011/12 financial year that the country witnessed a reduction in the stock of public debt as a share of GDP,” said PBO.

“The reduction was largely on domestic debt which reduced from 37 per cent of GDP in the 2022/23 financial year to 33 per cent of GDP in 2023/24 financial year while external debt increased from 33 percent of GDP to 34 percent of GDP over the same period.”

PBO added that a notable concern is the increasing accumulation of non-disbursed committed loans, which continue to attract commitment fees while not benefiting Kenyans through implementation of projects that the loans are meant to be used on.

By June 2024, the parliamentary think tank said, Kenya had contracted debt totalling Sh1.38 trillion which had not yet been disbursed, resulting in approximately Sh1.583 billion in commitment fees.

“Between June 2016 and June 2024, the country cumulatively incurred a total of Sh18.9 billion in commitment fees for undisbursed loans, underscoring the financial burden of underutilised borrowed funds,” said PBO.

“The delays in the disbursement of loans defer the expected economic and social gains of the planned projects or programmes.

“Given the developmental importance of these loans, particularly concessional ones from the World Bank with favourable terms such as low interest rates and extended grace periods, it is critical to ensure their timely utilisation to avoid unnecessary commitment fees.”