Listen to This Article Enhance your reading experience by listening to this article.

The government is gearing up for aggressive borrowing to address a fiscal deficit projected at Sh768.6 billion, or 4.3 per cent of gross domestic product (GDP), as it aims to manage its financial shortfall effectively.

Kenya plans to secure Sh703 billion in total borrowing for the 2024/25 fiscal year, with a significant focus on external financing from International Monetary Fund (IMF) and World Bank, alongside commercial loans from entities such as the Trade and Development Bank and the African Development Bank.

However, economists at Cytonn Investments have raised concerns regarding the sustainability of this borrowing strategy. They warn that although such measures may offer immediate relief, they could foster long-term financial vulnerabilities if not managed prudently.

Their 2025 market outlook report indicates a negative stance on government borrowing, emphasising the risks associated with escalating debt levels.

“Our outlook for 2025 is Negative on Government Borrowing. We expect the government to borrow aggressively from both the domestic and foreign markets to plug in the fiscal deficit, which is projected to come in at Sh768.6 billion, equivalent to 4.3 per cent of the Gross Domestic Product (GDP),” the economists said in their 2025 market outlook report.

Despite efforts to enhance revenue collection through the Finance Act 2023 and other proposed tax reforms, Cytonn says growth in revenue is expected to be muted.

As of November 2024, total revenue stood at Sh940.9 billion, which is only 35.8 per cent of the revised estimates for financial year 2024/25. The upward revision of taxes coincides with a decline in disposable income, further complicating revenue projections.

The government anticipates a shift in its borrowing strategy, with increased reliance on domestic lenders due to heavy external debt maturities expected in subsequent years.

This shift may lead to a rise in domestic borrowing targets, despite plans to reduce the fiscal deficit to Sh689.4 billion by financial year 2025/26.

On the monetary front, interest rates are projected to remain stable as the Central Bank maintains an expansionary policy stance to support economic growth amid a stable currency environment.

The yield curve is expected to normalize as external borrowing increases, alleviating pressure on domestic markets. “Our outlook for 2025 is Positive on Interest Rates. We expect the Central Bank to continue with the expansionary monetary policy stance in the short-to-medium term attributable to a stable currency and the need to support the economic growth,” the report states in part.

The economists are forecasting economic growth for 2025 to be between 5 per cent and 5.4 per cent, driven by a recovery in business activities and robust agricultural performance. They, however, warn that high debt distress risks and inflationary pressures could dampen this growth.

Inflation is anticipated to average around 5.3 per cent, within the government’s target range of 2.5 per cent to 7.5 per cent.

The Kenya Shilling may face depreciation pressures due to persistent current account deficits and high debt servicing costs, with projections indicating a trading range against the US dollar between Sh120.9 and Sh140.5 by year-end.

“We expect the inflation rate to remain relatively stable in the short term, but face upward pressure in the medium to long term during 2025, driven by the expansionary monetary policy stance, high electricity prices and potential depreciation of the Kenyan Shilling,” the Cytonn Economists said.

The report notes that investor sentiment remains positive for 2025, buoyed by lower fuel costs and currency stability. However, it adds that political instability and security concerns due to ongoing political tensions and opposition challenges faced by the current regime pose significant risks to confidence levels among investors.