Less taxes levied on high-net-worth individuals (HNWI) and an underdeveloped property tax regime are among the resource mobilisation gaps that Kenya faces, with the financial gap projected to reach Sh1.6 trillion ($12.5 billion) annually by 2030.

As financial sector experts warn of this gap, a new report by the African Development Bank (AfDB) opines that Kenya is not taking the full pound of flesh from the wealthy and that the country does not have a clear tax framework.

The Country Focus Report 2025, themed ‘Making Kenya’s Capital Work Better for its Development’, states that Kenya’s tax system suffers from significant governance challenges that limit revenue mobilisation.

“It relies heavily on a narrow formal sector, while 86 per cent of the population works in the informal economy and contributes little tax to revenues,” the report says.

AfDB explains that although income tax accounts for 45 per cent of total collections, the country’s tax-to-gross domestic product (GDP) ratio has declined over the past decade.

It references the medium-term revenue strategy (MTRS) 2023/2024, which highlights a drop in tax effort and recognises poor capacity to tax hard-to-reach areas such as digital and informal economies.

“Inadequate taxation of elite wealth, low rates on sin taxes, and an underdeveloped property tax regime further constrain revenues,” the report says.

The report adds that the absence of a clear tax framework for emerging sectors such as online gambling leaves money on the table.

It is estimated that by 2030, due to these loopholes, Kenya will have a projected financing gap of Sh1.6 trillion (USD 12.5 billion) in order to meet the Sustainable Development Goals (SDGs).

Road sector leads with the largest gap at 55 per cent, followed by education 22 per cent, energy 20 per cent and research and development at nine per cent. “Despite improved collections, tax efficiency remains low,” the report says,

Speaking during the launch of the report, AfDB Lead Economist East Africa regional office George Kararach highlighted the urgency for Kenya to address its fiscal shortfall.

In the current budget 2025/2026, Kenya seeks to borrow almost Sh1 trillion to fill the gap. The Finance Act, 2025, seeks to raise only Sh30 billion as additional revenue.

A big chunk of the Sh923 billion to be borrowed will come from the domestic market  - Sh635.5 billion - while the rest will come from external sources.

This fiscal deficit stands at 4.8 per cent of the country's GDP, even as National Treasury Cabinet Secretary John Mbadi stated that the country's debt level is expected to be within range. 

"Kenya’s public debt is projected to remain within sustainable levels over the medium term. In present value terms, the debt to GDP is projected to progressively decline from 63.0 per cent in 2024 towards the debt anchor of 55 plus or minus five per cent of GDP by 2028," said the CS as he presented the budget before Parliament in June. 

Representing Mbadi, Treasury official Kendrick Ayot reaffirmed the government’s commitment to working closely with the AfDB.

He noted that the government is keen on adopting recommendations from the report, particularly on tax policy reforms to enhance domestic revenue mobilisation.

“These include reducing and containing public expenditure, introducing e-procurement systems, transitioning to cash basis accounting, and further digitising and automating tax collection,” said Ayot.

The AfDB report outlines the global financial architecture as a significant barrier to Kenya's development financing goals. “Kenya’s current tax-to-GDP ratio stands at just 13 per cent, significantly below its estimated potential of 27 per cent,” the report says.

The report further recommends deepening the domestic financial market, mobilising private capital, and leveraging natural resource rents as complementary funding strategies.

"Leverage fintech to mobilise savings and expand credit access and increase blended finance for climate resilient investments," the report recommends.