Report calls for fiscal policy reforms to drive growth, employment

Kenya’s fiscal policy has the potential to be fine-tuned to stimulate job creation, improve public services, build greater trust among citizens, and foster inclusive economic growth, according to the most recent Kenya Public Finance Review (PFR) titled Beyond the Budget: Fiscal Policy for Growth and Jobs.

The review emphasizes the importance of stronger governance measures to prevent fiscal leakages that undermine public confidence, alongside structural reforms aimed at boosting productivity during the process of fiscal consolidation.

It forecasts that implementing these reforms could lower Kenya’s debt-to-GDP ratio to 44% by 2035, a level comparable to that seen in the mid-2010s.

Kenya Faces Urgent Need for Fiscal Consolidation Amid Rising Debt and Economic Slowdown

However, austerity measures alone are insufficient and lack public support.

“Kenya faces a high risk of debt distress, demanding decisive reforms to ensure debt sustainability while promoting growth and job creation,” said Qimiao Fan, World Bank Division Director for Kenya, Rwanda, Somalia, and Uganda.

The report recommends broadening the tax base by streamlining tax exemptions, encouraging formalization, reforming property taxes, and improving tax compliance measures that could generate an additional 4% of GDP in revenue.

On the expenditure side, boosting efficiency and equity in public spending through improved financial management, procurement reforms, public-private partnerships, state-owned enterprise restructuring, and subsidy rationalization could save about 1.7% of GDP.

Reforming the wage bill and increasing investments in social protection, education, and health are also crucial, requiring additional annual funding of 0.3% of GDP for social protection, 3% for health, and 1% for education.

Beyond fiscal measures, governance reforms are essential, including stronger conflict-of-interest regulations, enhanced anti-money laundering controls, improved licensing processes, and the digitization of traffic fines. Structural reforms focus on implementing the Africa Continental Free Trade Agreement (AfCFTA), fostering competition, divesting state-owned enterprises, and lowering urban living costs to boost competitiveness.

“Continued fiscal slippages or severe austerity measures come with significant economic and social costs,” said Marek Hanusch, World Bank Lead Economist.

“A sustainable way forward requires comprehensive reform packages.”

The World Bank’s Public Finance Review (PFR) evaluates Kenya’s public financial management and provides recommendations to better align fiscal strategies with development goals through enhanced revenue mobilization, improved expenditure efficiency, and prudent debt management