Kenya’s fiscal plans have been dealt a blow following confirmation that the World Bank has frozen a KES96.9 billion (USD 750 million) budget support loan. The delay stems from unmet reform conditions, including fiscal consolidation and governance legislation, and is expected to complicate the Treasury’s efforts to plug a widening budget deficit.
The World Bank’s Development Policy Operations (DPO) facility, which provides direct budgetary support, requires recipient countries to meet specific reform milestones. For Kenya, these include reducing its fiscal deficit—currently projected at KES901 billion for FY2025/26—and passing the long-delayed Conflict of Interest Bill. The legislation is designed to curb corruption and enhance transparency in public service, particularly in procurement and political appointments.
Despite repeated assurances from the Treasury, the bill remains stalled in Parliament, raising concerns among development partners about Kenya’s commitment to governance reforms. The earliest possible release of the funds is now pushed to July 2026, contingent on legislative progress and fiscal adjustments.
To bridge the funding gap, the Treasury plans to raise KES591.9 billion from the domestic credit market. This move is likely to exert upward pressure on interest rates, which have already surged past 15% for short-term government securities. Analysts warn that increased domestic borrowing could crowd out private-sector credit, particularly for small and medium-sized enterprises (SMEs), and dampen economic growth.
The Kenyan shilling, which had stabilized around KES151.20/USD after months of volatility, may face renewed depreciation risks if investor sentiment weakens. Sovereign bond yields remain elevated, with Kenya’s Eurobonds trading at spreads exceeding 900 basis points above U.S. Treasuries, reflecting heightened risk perceptions.
Kenya’s Complicated Debt Landscape in World Bank Freeze.
Kenya’s external debt obligations further complicate the fiscal landscape. The country faces a USD2 billion Eurobond maturity in June 2026 and is currently undergoing reviews under the IMF’s Extended Credit Facility (ECF) and Extended Fund Facility (EFF) programs. These reviews are tied to structural benchmarks, including public sector wage reforms and enhanced revenue mobilization.
Failure to unlock concessional financing from the World Bank could force the government to resort to more expensive commercial borrowing or implement politically sensitive austerity measures. This scenario poses risks to public investment, social programs, and broader macroeconomic stability.
Kenya’s reform delays stand in contrast to neighboring economies such as Rwanda and Uganda, which have successfully secured disbursements from the World Bank and the IMF after meeting governance and fiscal benchmarks. The divergence has prompted concerns about Kenya’s regional competitiveness and its ability to attract foreign direct investment.
Investor sentiment at the Nairobi Securities Exchange (NSE) remains subdued. The NSE 20 Share Index has declined by 4.2% year-to-date, while foreign portfolio inflows have slowed amid uncertainty over fiscal policy and debt sustainability. Market participants are closely watching the government’s next steps, particularly in relation to tax policy and expenditure rationalization.
Treasury Cabinet Secretary John Mbadi has reiterated the government’s commitment to fiscal discipline and reform. However, political consensus on anti-corruption legislation remains elusive, with opposition leaders accusing the administration of dragging its feet on governance reforms.
The freeze on World Bank funding is likely to intensify political debate ahead of the 2027 general elections. With limited fiscal space, the government may be forced to prioritize spending, delay infrastructure projects, or introduce new taxes—moves that could prove unpopular with voters.
Kenya now stands at a critical juncture. Unlocking the KES96.9 billion World Bank loan will require not just technical adjustments, but also political will and legislative action. The stakes are high: failure to meet reform conditions could trigger a deeper liquidity crunch, undermine investor confidence, and stall economic recovery.
Also Read: Kenya Set to Ammend Debt Ceiling as Public Debt Nears the Kes. 9 Trillion Mark
