In brief
- Undoubtedly, the fiscus has been Kenya’s Achilles’ heel. Though not different from previous years, 2024 was characterized by a youth revolt that initially rejected the Finance Bill 2024 but eventually resulted in demands for government accountability.
- We project a fiscal deficit of 4.3% in FY26, slightly narrower from our expected 4.5% in FY25. Given the expected 11.6% y/y increase in FY26 expenditure requirements, the authorities will lean on revenue mobilization to address the growing spending needs.
- Revenue outturns have undershot the targets under the IMF programme since the June 2023 cutoff in the sixth review. We thus see scope for a non-funded successor programme to ensure continuity in reforms under the structural benchmarks with our view cemented by the negative deviation in revenue outturn in the latter part of the current programme.
- We forecast real GDP growth at 5.2% ± 10bps in 2025 and above the 4.5% estimated growth last year. We expect the Services sector to continue bolstering growth in Kenya amidst reduced political risk environment, and a boost to transport sectors. Disinflation trend will anchor wholesale and retail trade sector, while the lower interest rate regime will boost financial services and real estate sectors.
- We see scope for 175bps cut in the Central Bank Rate (CBR) to a terminal rate of 9.5% at the end of 2025. Our takeaway from the December 2024 MPC meeting was the dovish tone to unlock growth momentum. We do not expect aggressive moral suasion by the apex bank to nudge lending rates lower, but we think the policymakers may double down on measures to enhance the monetary policy transmission channel.
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