Kenya’s tax system is plagued by significant governance challenges that severely hinder its revenue mobilization efforts, according to a recent report by the African Development Bank (AfDB). The Country Focus Report 2025, titled ‘Making Kenya’s Capital Work Better for its Development,’ highlights several critical gaps, including the insufficient taxation of high-net-worth individuals (HNWI) and an underdeveloped property tax regime. These deficiencies contribute to a projected annual financial gap of Sh1.6 trillion (approximately $12.5 billion) by 2030, a shortfall that poses a substantial threat to the country’s ability to achieve its Sustainable Development Goals (SDGs).

The AfDB report points out that Kenya’s tax system disproportionately relies on a narrow formal sector, while a vast 86 percent of the population engaged in the informal economy contributes minimally to tax revenues. Despite income tax accounting for 45 percent of total collections, the country’s tax-to-gross domestic product (GDP) ratio has steadily declined over the past decade. The Medium-Term Revenue Strategy (MTRS) 2023/2024 further underscores this decline in tax effort, acknowledging the poor capacity to tax hard-to-reach sectors such as the digital and informal economies. Beyond the informal sector, the report also notes inadequate taxation of elite wealth, low rates on sin taxes, and the absence of a clear tax framework for emerging sectors like online gambling, all of which leave substantial potential revenue uncollected.

The financial deficit is not evenly distributed across sectors, with the road sector facing the largest gap at 55 percent, followed by education at 22 percent, energy at 20 percent, and research and development at nine percent. Despite efforts to improve collections, the overall tax efficiency remains low. During the launch of the report, AfDB Lead Economist for the East Africa regional office, George Kararach, stressed the urgent need for Kenya to address its fiscal shortfall. In response to this looming challenge, Kenya aims to borrow nearly Sh1 trillion for its current budget (2025/2026) to bridge this gap, with Sh635.5 billion sourced domestically and the remainder from external sources. The Finance Act, 2025, is projected to raise only an additional Sh30 billion, illustrating the scale of the borrowing requirement.

Despite the substantial borrowing, Treasury Cabinet Secretary John Mbadi has stated that Kenya’s public debt is projected to remain within sustainable levels over the medium term. He indicated that the debt-to-GDP ratio is expected to progressively decline from 63.0 percent in 2024 towards a target anchor of 55 percent (plus or minus five percent) by 2028. Representing the CS, Treasury official Kendrick Ayot affirmed the government’s commitment to collaborating closely with the AfDB, particularly in adopting recommendations for tax policy reforms aimed at enhancing domestic revenue mobilization. These reforms include critical measures such as reducing and containing public expenditure, implementing e-procurement systems, transitioning to cash basis accounting, and further digitizing and automating tax collection processes.

The AfDB report also identifies the global financial architecture as a significant impediment to Kenya’s development financing objectives. With Kenya’s current tax-to-GDP ratio standing at a mere 13 percent, significantly below its estimated potential of 27 percent, the need for reform is evident. To complement tax reforms, the report recommends deepening the domestic financial market, mobilizing private capital, and leveraging natural resource rents. Furthermore, it advises leveraging financial technology (fintech) to mobilize savings, expand credit access, and increase blended finance for climate-resilient investments, offering a multifaceted approach to bolstering Kenya’s economic stability and development trajectory.