Kenya plans to cut its budget deficit for the 2024/25 (July-June) fiscal year while also trying to preserve growth- supporting expenditure, the finance ministry said in its budget policy statement.

The deficit will narrow to 3.9% of gross domestic product, (GDP) from 4.9% in this financial year, the ministry said in the policy statement released late on Thursday.

To cover the deficit, the government will raise 326.1-billion shillings in net external financing, and another 377.7-billion shillings in net domestic borrowing.

Overall spending will rise to 4.19-trillion shillings from an estimated 3.90-trillion shillings in this fiscal year, the ministry said.

The government is buying back more than $1.4-billion of its $2-billion Eurobond bond maturing in June. The move has fuelled a rally in the Kenyan shilling after months of investor concerns that the East African nation could struggle to settle the 2024 bond after a surge in yields locked out frontier issuers.

The shilling recovered in Thursday's session to its strongest level against the dollar since June 2023.

The economy is expected to expand at 5.5% this year, the finance ministry said in its policy statement, maintaining its previous forecast.

President William Ruto's government took power in September 2022 after a decade of debt-fuelled infrastructure spending that pushed public debt levels up to nearly 70% of GDP from just over 40% a decade earlier.

His government has raised a range of taxes and introduced news ones, saying they are required to control debt levels and support economic growth.