World Bank Warns Kenya Faces High Risk of Debt Distress

Kenya’s economic recovery may be gaining pace, but its fiscal foundations are becoming increasingly fragile, the World Bank has warned in its latest assessment, signalling heightened concerns about the country’s ability to manage its growing debt burden.

In a statement released on Tuesday, November 25, 2025, the World Bank said Kenya’s economy is projected to grow at an average of 4.9 per cent between 2025 and 2027, reflecting stronger private sector credit, easing monetary conditions, and renewed activity in sectors such as construction.

The Bank cited stable inflation, a firm shilling, and foreign exchange reserves at historic highs as evidence of improving macroeconomic stability.

Private sector credit grew five per cent year-on-year by September 2025, buoyed by lower lending rates and friendlier financing conditions.

However, the upbeat outlook is overshadowed by deepening fiscal risks.

The Bank warned that Kenya’s fiscal deficit for the FY2024/25 period widened to 5.9 per cent of GDP, significantly above the initial 4.3 per cent target.

This slippage was attributed to persistent revenue shortfalls and rigid expenditure patterns that continue to strain public finances.

Public debt rose to 68.8 per cent of GDP during the same period, pushing Kenya further into the high-risk category of debt distress.

Qimiao Fan, the World Bank’s Director for Kenya, Rwanda, Somalia, and Uganda, said the country’s growth potential remains strong but could be unlocked further by dismantling long-standing barriers to competition.

He argued that reforms aimed at opening markets, lowering consumer prices, and stimulating job creation would enable Kenya to tap into more inclusive and sustainable growth.

His sentiments were echoed by Jorge Tudela Pye, the World Bank Country Economist for Kenya, who noted that while the country’s headline economic indicators appear robust, the underlying fiscal position poses significant challenges.

“Many key macroeconomic indicators continue to show strength; however, the fiscal outlook remains subject to downside risks that could threaten sustained and inclusive economic growth,” he said.

The report also exposed ongoing weaknesses in Kenya’s labour market.

Formal employment remains stuck at around 15 per cent, and real wages continue to decline, reflecting structural constraints that have long limited productivity and job creation.

The Bank’s analysis, titled From Barriers to Bridges: Procompetitive Reforms for Productivity and Jobs in Kenya, highlights the urgent need for reforms aimed at boosting competition and accelerating private sector-led growth.

Kenya’s Product Market Regulation score of 2.92, higher than that of peer economies, illustrates the heavy restrictions that continue to choke business activity.

To level the playing field, the World Bank recommends cutting exchequer transfers to commercial state-owned enterprises and shifting to performance-based systems for public service obligations.

The Bank also calls for opening up electricity transmission and distribution to private capital, strengthening competition regulation in the telecommunications sector, and ensuring a fairer and more transparent allocation of fertiliser subsidies.

According to the World Bank, implementing these reforms could raise Kenya’s GDP growth by up to 1.35 percentage points and increase labour compensation growth by two percentage points.

This would create the equivalent of 400,000 jobs annually, offering a pathway out of the persistent employment and wage stagnation that has defined Kenya’s labour landscape.

The institution’s message is clear: Kenya is making strides in stabilising its economy and boosting investor confidence, but without bold fiscal consolidation and deep structural reforms, the momentum could falter.

The risk of debt distress is rising, and the cost of inaction could undermine the country’s long-term development ambitions.