FAN: Kenya needs new fiscal compact to deliver jobs, restore trust

Qimiao Fan, World Bank Division Director for Kenya, Rwanda, Somalia and Uganda/COURTESY

A year ago, I arrived in Nairobi to begin my role as the World Bank Country Director for Kenya, East Africa's largest economy.

Since then, I have listened to voices from all walks of life, from farmers grappling with climate change, to young people seeking opportunities, and leaders in government, the private sector and civil society pushing for reforms.

Kenya is a country of remarkable resilience and potential. But it stands at a difficult juncture, facing two linked challenges, namely the rising fiscal pressures and a shortage of quality jobs. Addressing these will require thoughtful, coordinated action.

The protests of June 2024 into 2025 were a stark signal. What began as opposition to tax proposals became a broader outcry over economic strain, inequality, perceived corruption and lack of opportunities. Many Kenyans want a change in direction to a more inclusive and responsive growth model.

As Kenya aims for upper-middle-income status by 2030, fiscal sustainability and job creation must go hand in hand.

Growth without broad transformation

From 2001 to 2023, Kenya’s economy grew an average of 4.5 per cent annually. Towns and cities expanded, and infrastructure improved — yet the benefits were not deep enough or even.

Public finances rely heavily on borrowing, while revenue growth has lagged. Nearly one-third of government revenue now goes to interest payments, squeezing funds for health and education. Formal job creation has not kept pace with the 800,000 young people entering the labour market each year.

Fiscal strain meets job shortages

Kenya’s growth model — largely state-led and debt-financed — built infrastructure but also left the private sector underpowered. Stagnant exports, modest foreign investment and high domestic borrowing costs have constrained job creation.

Global disruptions, from Covid-19 to inflation, rising interest rates and policy uncertainties, have compounded the pressure. The unrest of 2024–2025 made clear that change was both necessary and expected.

New fiscal compact

Kenya’s strengths in human capital, institutions and entrepreneurial energy can drive inclusive growth and job creation through a new fiscal compact built on five pillars:

First, spend smarter. Spending cuts alone will not close the gap. Protecting investment in health, education, climate resilience and infrastructure is critical. But inefficiencies are estimated at about Sh608 billion (according to the Ethics and Anti-Corruption Commission) and are a drain on resources. Redirecting even part of these funds could build a new Talanta Stadium and cover the wage bill for 100,000 junior secondary school teachers every year.

Second, mobilise revenue fairly. Kenya forgoes over Sh510 billion annually in tax exemptions — about 3.4 per cent of GDP (according to the 2024 Tax expenditure report by the National Treasury) or enough to build a new Nairobi Expressway every year. Reforming exemptions and strengthening property and wealth taxes can boost revenues without overburdening ordinary citizens.

Third, empower the private sector. Job creation comes mainly from private enterprise. Streamlining regulation, improving access to finance, and lowering borrowing costs can unlock growth.

Fourth, invest in skills. Kenya’s youthful population is a major asset. Expanding industry-led vocational training, improving school-to-work transitions and supporting innovation can prepare them for a fast-changing economy.

Fifth, lead in the green economy. Investments in clean energy, climate-smart agriculture and resilient infrastructure can create jobs while safeguarding the environment. Climate finance and carbon markets can help pay for this shift.

Power of redirected funds

Corruption is both a moral and economic issue. Eliminating bribes to traffic police, worth about 0.5 per cent of GDP annually, could within five years finance the full Standard Gauge Railway expansion to Uganda or fund a nationwide social protection upgrade — raising benefits to Sh3,000 a month, expanding to the poorest counties and strengthening climate resilience.

In our recently published Kenya Public Finance Review, we explored five policy options.  Implementation of these five policy packages could cut Kenya’s debt-to-GDP ratio by one-third in 10 years, restoring early-2010s levels. This, in turn, would free enough fiscal space to meet the extra three per cent of GDP needed each year for health and the one per cent for education.

Digital tools, stronger oversight, and public scrutiny can ensure these savings deliver visible results.

Collective leadership key to success

The technical solutions are well known. What’s needed is collective leadership willing to build consensus, confront vested interests and engage citizens, especially the youth, in shaping reforms. Trust grows when costs are fairly shared and benefits are clear.

The government’s commitment to audit public debt, implement electronic public procurement and strengthen ethics in public service is promising. But momentum will depend on delivering results people can see.

Seizing the moment

Kenya can turn this difficult moment into lasting progress. A fiscal compact rooted in fairness and transparency and focused on job creation has the capacity to meet the aspirations voiced across the country.

As the country’s long-term development partner, the World Bank will continue to support Kenya through knowledge and financing. Ultimately, the path forward must be charted by Kenya’s leaders and people.

I believe they can rise to the challenge.

Qimiao Fan is the World Bank Division Director for Kenya, Rwanda, Somalia and Uganda