Some Kenyan workers should be exempt from SHIF contributions, says World Bank

The World Bank is urging Kenya to reassess its approach to funding Universal Health Coverage (UHC), particularly calling for a review of the mandatory Social Health Insurance Fund (SHIF) contributions imposed on certain categories of workers.

This recommendation is detailed in the Bank’s latest Public Finance Review Report (PFRR), released on Tuesday, May 27, and comes against a backdrop of growing concerns over the long-term viability of Kenya’s current UHC financing framework.

The World Bank notes that Kenya’s largely informal economy poses a major challenge to contribution-based healthcare funding models like the SHIF.

Projections show the fund may raise only Sh67 billion annually far short of the Sh157 billion needed to fully implement the Universal Health Coverage agenda.

The report warns that this funding shortfall could compromise healthcare service delivery unless the government implements urgent fiscal reforms.

To ease the burden, the World Bank recommends exempting low-income earners in the formal sector from mandatory SHIF contributions.

"Eliminating SHIF contributions for low-income formal workers could promote job formalization, minimize labor market distortions, and expand coverage to poor, informal, and low-wage formal workers," the report suggests, adding that the resulting funding gap should be bridged through the national budget.

In addition to financial concerns, the World Bank has flagged systemic weaknesses in Kenya’s health sector that threaten the effective rollout of the Social Health Insurance Fund (SHIF).

The report highlights chronic staffing shortages, insufficient medical supplies and equipment, and service delivery gaps in marginalized regions.

It urges the government to enhance coordination between national and county levels, grant more autonomy to public hospitals, and adopt centralized procurement of medical supplies through KEMSA.

The Bank also recommends aligning SHIF’s benefit package with realistic funding and fully financing key support funds like the Primary Health Care Fund (PHCF) and the Emergency, Chronic and Critical Illness Fund (ECCIF), especially amid declining donor support.

Continued investment in U.S.-funded health programs and Gavi-supported immunization efforts was also emphasized.

These health sector recommendations were issued alongside a broader economic outlook warning of mounting macroeconomic challenges.

The Bank underscored that sustained investment in health and education, paired with sound fiscal policy, is vital to driving inclusive growth and improving employment prospects especially for Kenya’s youth.

The World Bank has revised Kenya’s 2025 economic growth projection downward from 5.0% to 4.5%, citing mounting debt, high interest rates, and shrinking access to external financing.

The report reveals that Kenya’s public debt has reached 65.5% of GDP, placing the country at high risk of debt distress, with nearly a third of tax revenues now consumed by interest payments.

Limited foreign credit access has forced the government to turn to domestic borrowing, crowding out private sector credit, which declined to -1.4% in December 2024 from 13.9% the previous year.

This credit squeeze has hit key sectors like manufacturing and finance, with rising non-performing loans further straining smaller banks.

Despite a stable shilling, easing inflation, and steady remittances, economic momentum remains sluggish, with GDP growth falling to 4.7% in 2024 from 5.7% in 2023.

Kenya’s economic slowdown in 2024 was partly driven by political unrest tied to tax protests, a cutback in development spending, and growing policy uncertainty.

Despite these setbacks, the World Bank projects a modest rebound to 5.0% growth in 2026 and 2027, contingent on managing key risks such as adverse weather, fiscal stress, and global economic volatility.

Meanwhile, the current account deficit narrowed to 3.1% of GDP by February 2025, buoyed by stronger agricultural exports, resilient remittance inflows, and lower imports, though service exports, especially tourism, continue to lag behind pre-pandemic levels.

To support economic recovery and foster inclusive growth, the World Bank is calling on Kenya to implement targeted tax reforms, especially in consumption taxes, and to eliminate exemptions that favor narrow interest groups.

The Bank also emphasizes the need for more efficient public spending, quicker clearance of government arrears, and stronger oversight of fiscal programs.

It highlights the role of expanded social protection in fighting poverty, noting that while Kenya’s fiscal system helps reduce inequality, it falls short in poverty alleviation.

The report suggests that scaling up cash transfer programs could improve outcomes for vulnerable groups. Additionally, VAT reforms combined with targeted support could boost fiscal space and enhance tax fairness.