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Kenya’s 2025/26 Budget Policy Statement: Key Highlights and Implications

Kenya’s 2025/26 Budget Policy Statement has been tabled in the National Assembly, revealing notable shifts in the country’s fiscal planning. While total government expenditure is set to reduce, some key areas—particularly recurrent spending—are receiving increased allocations.

Below is a breakdown of the major adjustments and what they mean for the economy.

1. Lower Spending, Higher Recurrent Costs

• Total expenditure was cut by KES 66.2B to KES 4.263T.

• Recurrent spending up by KES 19.4B to KES 3.096T.

• Development budget down by KES 79.6B to KES 725.1B.

2. Revenue Challenges and Widening Deficit

• Revenue target cut by KES 130.8B to KES 3.386T.

• Ordinary revenue down KES 183.8B, while Appropriation-in-Aid up KES 52.9B.

• Deficit widens by KES 71.6B to KES 831.0B.

3. Shift in Borrowing Strategy

• Domestic borrowing target up by KES 138.4B to KES 684.2B.

• External borrowing decreased by KES 66.9B to KES 146.8B.

• More local borrowing could keep interest rates high.

4. Devolution Takes a Hit

• County allocations reduced by KES 6.0B to KES 436.7B.

• This could strain essential services at the county level.

Impact on Kenyans

• Fewer infrastructure projects due to lower development spending.

• Higher domestic borrowing may keep loan rates high.

• Counties may struggle with reduced funding.

• Revenue shortfalls could lead to future tax hikes.

The government faces a tough balancing act—tightening spending while meeting growing obligations. The final budget will be key in shaping Kenya’s economic outlook.

Chartafai – Audit Firm in Kenya
By Njeru Mwangi
Managing Partner

The Future of Auditing in Kenya: Emerging Trends and Technologies

Auditing profession is progressing to an era of change in Kenya due to the technological advancement and changing regulatory landscape, and growing customer expectations. In an era where companies are operating in a varied and challenging space, audit firms also need to transform themselves and offer efficient and valuable services. Five key developments are shaping the future of auditing

  • Technology-Driven Audits

Gone are traditional sampling techniques replaced by sophisticated data analytics, artificial intelligence, and automation empowering auditors to review entire datasets almost in real-time. Cloud-based audit platforms take this a step further, enabling real-time collaboration while providing deeper financial insights.

  • Remote and Hybrid Auditing

Cloud accounting solutions have changed the landscape for audits, allowing access to data from anywhere and minimizing full onsite engagements. This hybrid approach provides more flexibility without compromising audit integrity and effectiveness.

  • Regulatory and ESG Focus

Real time VAT invoicing (eTIMS) and enhanced tax reporting are among the evolving VAT regulations that Kenyan businesses will need to navigate. Demand for Environmental, Social, and Governance (ESG) reporting is increasing from both investors and regulators, compelling auditors to assure financial and non-financial statements alike (KRA Public Notices 2024, NSE ESG Disclosure Guidance 2023).

  • Cybersecurity and IT Risk

As businesses digitize their operations, cybersecurity risks have emerged as a key focus for audit. Today, auditors evaluate IT controls to protect against cyber threats and system vulnerabilities to ensure business resiliency against this new level of risk.

  • Expanding Role: Beyond Compliance

Audit has matured from being a compliance activity to adding advisory services. Auditors play a crucial role in providing strategic insights about risk management, operational efficiencies, and business growth, and that means businesses want trusted partners in decision-making.

Supply and Dollar

The relationship between supply and the dollar is a critical concept in the world of economics. It is known that when the supply of goods and services increases, their prices tend to decline due to the excess of products available. On the other hand, when the supply of goods and services decreases, their prices tend to rise due to the shortage of products available in comparison to the demand.

Moreover, the value of the dollar is also impacted by supply and demand. If there is a high demand for the dollar, its value tends to increase compared to other currencies, while a low demand leads to a decrease in its value. Understanding this relationship is crucial, as it can significantly impact a country’s economy, particularly its ability to trade with other nations.

Over the past decade, the Kenyan shilling has experienced a significant depreciation, primarily due to persistent current account deficits, rising debt levels, and the surging prices of commodities such as crude oil. The weakening of the shilling can be attributed to the high demand for dollars from importers in the commodity and energy sectors, caused by the increasing crude oil prices globally. This situation was compounded by supply chain constraints and geopolitical pressures during the pandemic recovery period, which constrained supply in the economy.

In 2023, the Kenyan shilling continues to depreciate primarily due to the continued dollar demand from importers in the oil and energy sectors, leading to a shortage of dollars in the Kenyan market. Consequently, it is crucial to understand the relationship between supply and the dollar, particularly for those seeking a more comprehensive understanding of the global economy, as it impacts a country’s economic performance.

Resolving Disputes: An Overview of Arbitration

Arbitration provides an alternative means of settling disputes that does not involve going to court. It involves a neutral third party, called an arbitrator, who listens to both sides of the disagreement and makes a decision that is binding on both parties.
The process of arbitration is similar to a court trial, with both sides presenting their case and evidence to the arbitrator. However, arbitration is usually faster and less formal than a court proceeding.
Arbitration is commonly used in business contracts, labor disputes, and other areas where a quick resolution is needed.

It can be less expensive than going to court, and it allows parties to choose an arbitrator with specific expertise in the subject matter of the dispute.
So, while arbitration can be a useful alternative to court, it’s essential to make sure you understand the process and the potential risks involved.

 

By Chartafai.

A LIVING BURDEN

 We need to brace ourselves for tougher times as economically things seem to be getting thicker.

It goes without a doubt that over-reliance on imports by the country’s manufacturing sector and rising production costs due to high taxes has left consumers paying for more for basic commodities.

In addition Kenya became vulnerable to global shocks and a weakening currency, causing importers to spend up to 90 per cent more to buy some products.

While last year we saw the greatest hike in prices for many products, the situation worsened this year as prices rose further by up to 50 per cent in six months, forcing some manufacturers to operate below capacity, while commodity prices shot to the highest levels in June.

 The 2020 Finance Act , signed by President Uhuru Kenyatta into regulation  recently, has raised excise tax on some items and services that are considered harmful, posh or morally suspect via a minimum 10 percent.

From 1st July 2022 Kenyan consumers dealt with higher charges of alcohol, juices, cosmetics among others because the government passed new taxes to fund this year’s budget.These taxes are going to affect the tax payers by making the cost of living expensive and decreasing any disposable income for households

The new taxes are geared towards partially elevating an extra 50.4 billion Kenyan shilling in revenue. This will add to a double-digit leap in food charges which have affected the cost of living to almost a five-year high.

Over the past three years, the cost of essential goods has risen, eroding our purchasing power and making it extremely difficult for many Kenyans to make ends meet.

This can be attributed to the impact of Covid-19, the Russia-Ukraine conflict, the election tension and the ever-increasing cost of commodities due to high taxes and new levies and fees.

The problem with our country is that the government is importing almost everything and there is no manufacturing in Kenya anymore, this is because about  95 per cent of the people who purport to be manufacturing under the ‘buy Kenya build Kenya’ motto are the same people who are importing products

The government needs to cushion Kenyans from the high cost of living as the consumer needs are more than the consumer income.

 

By Chartafai.

 

Economic Effects of the Russian Ukraine War

It is quite evident that the global financial system has taken a turn for the worst the cost of living is rising day by day and one has to carefully check how to  spend each coin.
The war has caused economic downturn and rapid rising of food costs .The dollar crisis has also led to tightening up of the investment market.This in turn will  require the government to put up necessary systems in place to help  mitigate the disruptions.
Sharply growing commodity fees is one of the major effects of the war coupled with the recent covid 19 crisis.The war has left no country or enterprise untouched with  the current rising economic disruptions. The ability to afford a meal is becoming a  tedious task at a very alarming rate. Prices of wheat and other grains have already soared.
In 2019, Russia and Ukraine combined, accounted for 25 % of the global wheat exports and 14 % of corn shipments. The ongoing war  has strained the global delivery chains from semiconductors to automobile parts.
The war threatens important elements of the economy.This brings us to the current oil crisis. Russia is among the largest oil suppliers accounting for 14 % of crude oil and 9% of renewable energy globally .The 7 %  growth rate of crude oil, which in turn increases the cost of transportation and manufacturing all together thus affecting global exports
The war has caused an increase in renewable energy fees . The effect does not only highly affect farmers, as ammonia is a key ingredient in most fertilizers, this will cause a decrease in crop yields but also affect the current high cost of food produce.
The Ukraine war and the pandemic have once again shown that crises can cause widespread economic damage and set back years of per capita income and development gains
The war-triggered a spike in global oil prices also serves to underscore the need for energy security by boosting energy supply from renewable sources and stepping up the design and implementation of large-scale energy efficiency measures.
By Chartafai

 

 

The dwindling Kenyan Shilling

A currency exchange catastrophe can be predetermined at times and is more often sudden. The horrible factor of a foreign exchange catastrophe is the massive-scale economic damage and absence of funds. Such a crisis is often the  end result of a horrible  monetary  decision underlying the nation’s foreign exchange. In special words, a foreign exchange catastrophe is ordinarily taken into consideration a symptom in place of a disease of more economic restlessness.

The Kenyan foreign exchange has hit a modern-day report low rate in comparison to the dollar, after it weakened recently, indicating a persisted rally in costs of imported commodities like  cooking oil and  in addition the current dollar shortage  has seen the community foreign exchange decline to 3.5 percent this year .

Kenya spends billions importing goods, including petroleum products among many others.The costs  are  developing  due  to the fact the shilling is weakening against the dollar.The bottom line is that this kind of crisis can be in multiple forms but is mainly customary .

In addition the current investor sentiment and expectations do not move hand in hand with the economic outlook of the country. Although a properly organized monetary organization manipulation can help, foretelling the path fiscal gadget ultimately takes is hard to expect, as a result contributing to a sustained foreign exchange catastrophe.

In as much as  growing international locations as an example Kenya contributes in large part to the global economy, the bare truth is that the dollar charges which might be too high thus creates instability and will increase opportunities of capital flight and survives at the house foreign exchange.

Dollar Liquidity Constraints

 

The exchange rate has long been a sensitive issue, with most  choosing silence for fear of reprisals from the central bank.

The persistent US dollar shortages might be  triggering the emergence of a parallel exchange rate.This is common in developing countries. Some  governments respond to a balance of payments crisis by creating a dual foreign exchange market for financial transactions.

The objective of a parallel exchange rate is to avoid the  effects of a depreciation of the trading rate on domestic prices while conserving some level of control over money outflows and international reserves.

It should be noted that extensive controls on foreign exchange restrict access to official markets and thus leads to the emergence of an illegal parallel market.The illegal market then grows in importance as the authorities respond to a deteriorating balance of payments by tightening and extending exchange controls.

The risk here is that we are slowly creating a parallel shadow market with unwanted consequences.

The current shortage of dollars is triggering the emergence of parallel exchange rate that has seen lenders buying and selling well above the printed official rate, the biggest importers of goods, are  purchasing  the dollar at more than Sh120 compared to the central bank’s official exchange rate of 116.81

The volatility in the exchange rate market has slowed dollar trading among lenders or interbank deals, further worsening the scarcity of the  currency.

The scarcity has forced industrialists to start seeking dollars in advance, further increasing their working capital.

The shilling was exchanging at an average of Sh116.71 units to the dollar  based on CBK official rates, having depreciated from Sh113.13 at the start of the year and Sh104.44 at the end of March 2020.

Hest for dollars locally has gone up notably this year in line with streaming imports following the  reopening of the economy, which has unleashed repressed demand for both consumer and capital goods.

The lack of access to adequate hard currency is negatively affecting traders’ ability to settle obligations to overseas suppliers in a timely manner.

In conclusion the dollar  shortage is causing an increase in the cost of doing business as well as panic buying of forex.

 

 

Harmonise Changes in Tax Laws

The government began reviewing various tax laws including the
Value Added Tax (VAT) and Excise Tax Act in 2014, but is yet to do
the same with the Income Tax Act.
The tax – usually charged on profits from the sale of assets held for
at least 12 months – was suspended in 1985 as part of measures to
make Kenya more attractive to foreign direct investment, but tax
experts now argue that it should be reintroduced to put the country
in line with global trends.
We are losing a lot of revenue by simply not taxing wealth made
from capital gains leaving the working class to carry the country’s
financial burden,
Opponents of capital gain tax are however arguing that its
introduction in certain sectors of the economy could discourage
investment and slow down growth.
On the other hand the tax should be applied in areas such as the
sale of businesses to help boost the national revenue kitty.
The Finance Bill 2022 proposes to that the tax on disposal of property be
increased from 5% to 15% from January 2023 .Tax experts argue that a
number of the capital gains are attributable to inflation as the value of money
decreases over time therefore , an increase in the capital gain tax
should go hand in hand with the introduction of indexation.
Popular opinion is that the suspension of capital gains tax to
encourage investment has outlived its purpose and needs to be
reintroduced to enhance equity in tax payment. Taxing wealth will
help broaden the revenue base and nurtured an equitable tax regime
In conclusion, if the Bill is to be implemented Kenya’s revenue would
be growing at a higher pace by taxing the wealthy class.
The re-introduction should also factor in inflation, especially for
transactions involving disposal of property that was either acquired
or developed earlier.
By Chartafai.

Beneficial Ownership Regulations updates

Registrar of Companies Regulations Alert

Registrar of Companies requires all companies to keep and lodge a register of its beneficial owners. The gazettement of the enabling regulations under the Companies Act 2015, (Beneficial Ownership Information) Regulations, 2020, the Registrar of Companies hereby notifies all Officers of Companies and authorized persons that the Beneficial Ownership (BO) E-Register has been operationalized with effect from 13th October 2020.

To ensure compliance with these new regulations, companies are required to lodge with the registrar of companies, a list of its beneficial owners i.e the ultimate natural persons who own and control a Company.

 

Definitions of Beneficial Owners

The regulations define beneficial owner as a person who:

  • holds at least 10% of the issued shares in the company either directly or indirectly;
  • exercises at least 10% of the voting rights in the company;
  • holds a right to directly or indirectly appoint or remove a director of the company; OR
  • exercises significant influence or control over the company (participation in the finances and financial policies of a company without necessarily having full control over them)

Though the regulations are meant to disclose the owners of companies that own companies and nominee shareholders, even companies owned by natural persons should also update the Beneficial Official (BO) register.

 

Timelines

To enable Companies, comply, the Registrar hereby grants a grace period of preparation of Beneficial Ownership (BO) register up to 31st January 2021, before enforcement for non-compliance.

 

Penalties

When the company fails to comply, each officer of the company shall be subjected to a fine of up to KES 500,000 and a possibility of KES 50,000 penalty for each day in default if the default continues.

 

Way forward

In light of these new regulations, we at Chartafai LLP are keen to support our clients update their company Beneficial Ownership (BO) information with the Registrar of Companies.