Resetting Development Finance: Towards an Investment-Driven Development

Kenya is at a turning point, full of promise.

With about half its population below 18 years and 29 per cent youth (15-24 years old) making up two-thirds of the country, there are substantial growth opportunities by investing early in their education, health, and well-being as rights enshrined in the Constitution, laying the foundation for a prosperous Kenya.

However, this vision is under siege due to a shifting financial landscape marked by reduced global development assistance and limited domestic resources, jeopardising the future of the most vulnerable.

Without robust financial strategies, Kenya risks losing momentum due to its high debt burden. Economic instability, youth unemployment, recurrent climate shocks, and entrenched inequality elevate the urgency of addressing these challenges.

Kenya needs to reboot the financing model for its different social sectors - health, education, social protection, nutrition, water, sanitation, and hygiene.. This can be achieved by balancing budget allocation between the national and county levels as a critical way to finance devolved services and ensure inclusive development that reaches everyone to close the financing gaps. Setting aside specific budget funds for the social sector ensures essential services are provided and helps protect people from hardships, aligning directly with Kenya's Bottoms-Up Economic Transformation Agenda.

Official Development Assistance (ODA), a vital tool for development, has dwindled, signalling priority shifts and leaving critical gaps in development financing. In 2013, according to the World Bank, , Kenya received Ksh 393.5 billion in net ODA; by 2023, this amount decreased by 57 per cent to Ksh 167.7 billion.

With this financing gap projected by the World Bank for the 2025/2026 financial year, the measures taken to bridge the deficit—through heightened taxation and reduced spending—threaten to dismantle systems designed to safeguard the most vulnerable.

Countries dealing with debt problems are more financially at risk. The burden of servicing debt redirects resources away from critical social investments, impacting children's well-being.

While infrastructure investments—roads, railways, and power plants—serve as critical drivers of development, their debt-funded nature has contributed to a significant rise in debt now at 61.7 per cent of GDP, according to national treasury September 2024 estimates, surpassing the 55 per cent threshold for financial stability.

Over the last decade, this increase has come with drawbacks, as a large part of local revenue now goes to paying off debt, as opposed to investments in the social sectors.

However, amidst economic strain, there is a glimmer of progress. The national treasury reports show that Kenya's social sector funding has risen from Ksh 957 billion in the 2022/23 financial year to Ksh 1.13 trillion in 2024, with tax revenue projected to rise to Ksh 3.4 trillion by 2026, up from Ksh 1.85 trillion in 2022.

However, debt repayments will consume much of these gains, starving social programs of funds, while the trade tariff war further heightens economic uncertainty.

Kenya stands at a crossroads. The health system, already strained from COVID-19's lingering impacts, is in crisis due to reduced donor funding. OECD estimates show that a Ksh 75 billion funding gap jeopardises critical sectors—health, education, water, sanitation, and nutrition—lifelines for our children and the nation's future.This gap has contributed to shortages in essential health commodities and disrupted programs for HIV/AIDS, malaria, tuberculosis, and maternal and child health. These translate to families losing access to care, children missing vaccinations, and exposure to preventable diseases.

Child nutrition in Kenya faces a critical threat of reduced supplies, exacerbating food insecurity. In arid regions and refugee camps, the shortage of Ready-to-Use Therapeutic Food (RUTF), , endangers the lives of children suffering from wasting.

A preliminary assessment done by the Education Donor Coordination Group composed of development organizations and donors found that Kenya's education system is struggling from a Ksh 6.6 billion funding gap in primary education. This shortfall risks disrupting education programs in Turkana, Garissa, and Tana River counties and refugee settlements.

Water and sanitation face dire challenges, with reduced funding and deeper cuts anticipated. Projects critical to hygiene and water access, like the Sustainable Transformational and Accessible Water and Sanitation initiatives are faltering, risking the health of high-burden counties and Nairobi's informal settlements. Without intervention, the ripple effects will deeply affect public health.

Social protection systems, critical shields for families against poverty and shocks, are at a breaking point. From 2022 to 2025, the reduction of ODA will impact emergency cash assistance, worsening poverty in climate-affected regions. Kenya's safety nets supporting low-income households are overwhelmed as demand outpaces resources. Without social services, labour productivity declines, growth stagnates, and poverty deepens.

Shifting from development financing to investment-driven development is imperative. Through domestic revenue mobilization - public-private partnerships, social bonds, and improved fiscal management- reliance on aid can be mitigated. Debt restructuring could ease repayment burdens, freeing resources to invest now in people rather than creditors.

Lawmakers must prioritise high-impact interventions. Efficiency must take centre stage: cut waste, streamline spending, and allocate funds adequately and wisely.

Kenya's children are the heartbeat of its future. Their well-being and potential rest on decisions made today. Let's act with urgency and unity, prioritising sustainable investments over short-term fixes. We can secure a thriving, resilient future for the next generation—and the Kenya they deserve to inherit.

The sooner we confront this new reality, the more effectively we can realign our needs with funding mechanisms that are inclusive, sustainable, and equitable. Being optimistic is not a risk—it's a necessity for progress.

By Dr. Shaheen Nilofer, Representative, UNICEF Kenya and Dr. Abraham Rugo, Executive Director, Bajeti Hub.