Global credit rating agency Moody’s has issued a fresh warning to Kenya over its rising debt burden, pointing to weak revenue performance and persistent fiscal challenges as key threats to economic stability.

In its latest report dated July 22, 2025, Moody’s flagged the country's widening budget deficit, which rose to 5.7% of GDP higher than earlier projections despite a marginal decline in the debt-to-GDP ratio during the 2025 financial year.

The report notes that Kenya’s efforts at fiscal consolidation remain sluggish, hampered by underwhelming revenue collection, inflexible government spending, and strong public resistance to additional taxation.

This warning comes even as the Kenya Revenue Authority (KRA) reported a 6.8% growth in revenue collection, totaling Ksh2.571 trillion for the 2024/2025 financial year, in a challenging economic environment.

Moody’s cautioned that although the deficit may shrink slightly, ongoing reliance on domestic borrowing will continue to erode debt affordability. High interest rates in the local market, coupled with persistent domestic financing needs, are expected to keep borrowing costs elevated. While the country’s external accounts have improved with international reserves now covering nearly five months of imports and smaller current account deficit external debt repayments remain a significant concern.

The report warns that external debt repayments, amounting to around 3% of GDP, could strain Kenya’s foreign reserves unless new concessional funding is secured.

Access to cheaper loans from multilateral lenders like the IMF and World Bank is tied to continued economic reforms, while commercial borrowing on international markets remains costly.

Moody’s urged the government to accelerate fiscal reforms, including eliminating tax exemptions, simplifying the tax system, and improving revenue collection to put public debt on a more sustainable path.

However, the agency acknowledged that rigid expenditure structures and reduced development funding leave little room for additional budget cuts, further complicating Kenya’s fiscal outlook.

Without renewed support from international lenders, Kenya may be forced to draw from its reserves or resort to expensive borrowing options, posing fresh risks to debt sustainability.