As critics punch holes in Kenya’s Finance Bill 2026, they only scratch the surface of a severely flawed fiscus, predatory and extractive and biased against impoverished low-income Kenyans.
Riddled with dependent parastatals, kneejerk preconceived supplementary budgets, and irrational taxation, it hobbles and bleeds a tiny fraction of the formal working population. How did Kenyans become the proverbial milk cows?
Incomplete reforms: For an overhaul, the Presidential Task Force on Parastatal Reforms (March 2013-November 2013) and the Parastatal Reforms Implementation Committee, November 2013-December 2014, reconfigured public finances and drains from parastatals.
Outgoing President Uhuru Kenyatta considered advice to rein in and professionalise public finances and government activity in the economy.
Proposals identified, among others, the establishment of an Office of Management and Budget, a Government Investment Corporation to get rid of debt-ridden parastatals, and a world-class Sovereign Wealth Fund—vetted by the Committee on Implementation of the Constitution as a vehicle for Kenya’s incipient boom in natural resources worth trillions of shillings.
The proposals—had they been implemented then—could have helped rationalise government. Today, they are being ‘cherry picked’ in flawed rent-seeking vehicles against Article 206 of the Constitution.
The National Infrastructure Fund in particular is activated as a mongrel of the world-class and award-winning National Sovereign Wealth Fund Bill 2014. It aims to snare a pipeline of hidden public debt and corruption without accountability.
It is evident that no aspiring President of Kenya short of a relevant sound economic agenda, will have a leg to stand on hereafter, unless two cracks in macroeconomic policy are sealed: the fiscus and monetary policy.
Forays into infrastructure projects and Singaporean dreams are a hunt for funds that turn Kenya’s development potential on its head: for the reforms required to salvage the economy must start from existing economic sectors, with headline fiscal and monetary policy to drive investment and output mopping up mass unemployment, which can deliver results.
The late President Kibaki demonstrated how. The Finance Bill 2026 and proposed 2026-27 Budget signify deepening flaws. Expect the now familiar revenue underperformance.
To create hope and install a legitimate fiscus, a hierarchy of preparatory reforms are a prerequisite.
Today Kenya has the skilled Gen Z to hone capacities and capabilities needed to conceive, design, and implement the structural transformation envisaged by the Parastatal Reforms initiative of 2013-2014.
Until Kenya restructures, transforms, and aligns activities to investment, employment, and output priorities, and until the tax base is reframed to reflect productive opportunities for Kenyans, future governments will struggle, with taxation explosively misaligned to sources of gross domestic product (GDP). How can this be fixed to create hope and restore legitimacy?
Fiscal Policy: Cracks in the fiscus hibernated over decades to make taxation appear predatory, serving a thin band of compulsive elite spenders, while impoverishing the masses. Finance Bill 2026 works against leading sectors and suffocates private sector opportunities. As high as 82 percent of the population earn livelihoods in the informal sector. The formal sector hosts only 12 percent.
In the labour force of 23.8 million, only 3.1 million are formal sector workers; only less than 12.5 percent of those (387,418) earn Sh100,000 or more per month. With unemployment rampant, Finance Bill 2026 should endeavour to expand this narrow band, along with the formal corporate sector.
Efforts to overtax the band with regressive taxes worsen against ongoing corporate business closures. Revenue targets thus fail repeatedly while expenditures are as untamed in the national government as in the counties. The informal sector (MSMEs) must receive greater incentives to raise employment and the tax base.
Example: the Finance Bill 2026 and Budget 2026-27 raise tax on mobile transactions and gadgets, reversing world class gains Kenya has made in mobile financial innovations and associated employment. It depresses work for nascent highly skilled digital creatives.
By substitution, transactions will migrate to the underground and to cash. An IMF study in Cameroon, CAR, and Mali showed deadweight loss and efficiency costs reach 35 percent from similar policies. M-Pesa, Airtel Money, etc., should expect their electronic floats (aggregate balances in mobile accounts) to dwindle in favour of banks and mattresses? Who will energise digital creatives facing job cuts?
Obvious strategies to reset the tax base and tax fairness are to re-look sectors and their potential contributions to GDP. Economic activity follows from higher investment, employment, and growth of output. The tax base also rises, a key lesson and legacy from the late President Kibaki. Figure 1, based on KNBS Economic Survey 2026, ranks sectors based on contributions to GDP, 2025.
Agriculture, forestry, and fishing at 23.2 percent tops the list and should be a priority in the fiscus. It is also the foundation of livelihoods for a majority of Kenyans. Yet Kenya consistently spends less than three percent of revenues on agriculture.
The assortment labelled ‘Other sectors’ contains segments with dynamic potential for growth and tax base, on condition a well-managed transition to higher investment, employment, and growth is planned.
A notable sector is mining and quarrying. Contributing 0.8 percent to GDP, it can deliver dramatic economic gains worth trillions of shillings from Kenya’s natural resource wealth (coltan, gold, titanium and manganese, among others) through investment, employment, and growth opportunities.
A government focused on endowments could trigger a revenue boom by embedding lucrative value chains domestically. It can propel the manufacturing sector, which at present contributes a measly 7.1 percent- half its contribution after years of decline; it now ranks sixth, despite ample tax exemptions and imported inputs.
Monetary Policy: In advanced economies, fiscal policies are coordinated with monetary policies to stabilize the economy and supervise the financial system. Kenya’s banking system and financial sector profits handsomely from a small unsophisticated financial market.
Banks dominate lending and focus on government as a lucrative cash-cow.
The milk consists of customer deposits on the Liabilities side of their balance sheets (including deposits of Counties, Ministries, Departments, and Agencies (MDAs), and parastatals) on which banks pay low interest rates. Into this pool of deposits also go the electronic floats of Safaricom, Airtel, etc. So does large unutilized balances of the much-maligned Housing Levy.
Banks, from the Assets side of their balance sheets, then trade this milk, lending substantial sums to government in lucrative Treasury Bills and Bonds.
Private and foreign portfolio investors join the queue as do Pension Funds and unutilized Housing Levy balances parked in short-term government securities. Banks add a wide monopolistic interest margin called the spread and earn lucrative returns on equity (ROE) playing weekly and monthly auctions at CBK.
In 2024 ROEs reached 20 percent while US banks earned ROEs of 10 percent, half that figure. It explains why Kenyan banks consistently rank among the most profitable globally by ROE.
Problem: Government’s redemptions of securities using taxpayer funds to pay interest on its funds (as well as funds initially deposited by MDAs, Counties, and parastatals etc.) further raids taxpayers’ money to pay the banks. Government thus increases taxes to pay high rates of interest on securities lent to it partly from taxpayers money deposited in the banks.
The Parastatal Reforms team attempted to cure this impact by proposing a Treasury Single Account (TSA) at CBK for Government and MDAs, etc.
Redemptions using government revenue translate to public debt service factored in budgets. Interest Payments have risen to 40 percent of Revenues while Total Debt to GDP is over 90 percent.
Finally, the negative impacts on our financial sector defy CBK attempts to direct lending to the private sector and support capital formation as part of monetary policy. In February 2026, for the 10th consecutive rate cut, CBK cut the Central Bank Rate (CBR) by twenty-five basis points to 8.75 percent. Its decisions are highly compromised as shown in Fig 2.
Depositors in the banking system (who should be able to borrow for economic activity in financial intermediation) have little or no access to credit. Private sector access limps as credit to government ‘Crowds Out” private sector credit.
Fig 2 shows the full impact. Worldwide, Private Sector Credit is the main driver of the GDP, investment, employment, and output. Fig 2 shows ratios topping over 190 percent for USA, China, and Japan.
Kenya shoots itself in the foot with a financial sector that fails the Real Economic Sectors by perpetually starving them of capital for investment, employment output, and capital accumulation. Kenya has a lower access to credit at 31.6 percent. than Sub-Saharan Africa (SSA) average of 33.1 percent.
To paraphrase Hernando De Soto’s famous dictum on “Dead Capital” Kenya is a leading Poster child for “Why Capital Accumulation succeeds in the West and Fails Everywhere Else”
Dr Mbui Wagacha is ex Senior Economic Adviser, Executive Office of the President. He worked for UN, Geneva, the AfDB (Abidjan & Tunis) and was first Ag Chair, CBK.
