Kenya’s Domestic Borrowing Surge: KSh 728 Billion Increase Signals Fiscal Pressure Amid Debt Sustainability Concerns

Kenya’s domestic debt has swelled dramatically in 2025, rising by over KSh 728 billion in just nine months as the government intensified Treasury bill and bond auctions to bridge mounting budget gaps. Data from the Central Bank of Kenya reveals that gross domestic debt jumped from KSh 5.87 trillion in December 2024 to KSh 6.60 trillion by mid-September 2025, marking one of the most aggressive domestic borrowing cycles in the country’s recent history.

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Dramatic Shift in Debt Composition

The surge in domestic borrowing reflects a strategic pivot by President William Ruto’s administration toward local financing sources amid challenging external borrowing conditions. Treasury bonds dominated this borrowing spree, climbing to KSh 5.37 trillion from KSh 4.88 trillion since January 2025, while Treasury bills rose to KSh 1.07 trillion by September 12, up from KSh 846 billion in December 2024.

This shift in debt composition reveals important strategic considerations. Treasury bonds now account for 81.40% of total domestic debt, down slightly from 83.22% in March, as the government increased its reliance on short-term Treasury bills. Treasury bills rose to 16.21% of the portfolio, up from 14.42% in March, reflecting increased appetite for short-term funding to cover immediate financing needs.

Institutional Investor Landscape

The domestic debt burden is carried by a diverse group of institutional and individual investors. Banking institutions remain the largest holders of government securities, though their proportion has slightly declined from 46.17% in June 2023 to 44.84% in September 2025. Pension funds constitute the second-largest holder group, but their share also decreased from 33.42% in June 2023 to 28.67% in September 2025.

Notably, insurance companies have maintained a steady 7% share, while parastatals’ holdings remained stable between 5% and 6%. The most significant change has been the increase in “Other Investors” from 7.13% in June 2023 to 13.46% in September 2025, indicating a diversification of domestic debt holders and potentially reflecting increased retail investor participation through platforms like CBK’s DhowCSD system.

Budget Deficit and Fiscal Management Challenges

The domestic borrowing surge coincides with significant fiscal management challenges. Treasury Cabinet Secretary John Mbadi presented Kenya’s largest budget in history—KSh 4.2 trillion for the 2025/26 financial year—but questions have emerged over a KSh 41 billion discrepancy between the announced deficit of KSh 923.2 billion and the Budget and Appropriations Committee’s approved deficit of KSh 876.1 billion.

According to Mbadi, the projected budget deficit of KSh 923.2 billion including grants is equivalent to 4.8% of GDP, down from the estimated KSh 997.5 billion or 5.7% of GDP in the current financial year. The fiscal deficit will be financed through net external borrowing of KSh 287.7 billion and net domestic borrowing of KSh 635.5 billion.

International Borrowing and External Relations

While domestic borrowing has surged, the government continues seeking external financing. In August 2025, President Ruto secured a KSh 22 billion loan from Japan during the ninth Tokyo International Conference on African Development (TICAD 9). The agreement, signed by Prime Cabinet Secretary Musalia Mudavadi and Nippon Export and Investment Insurance CEO Atsuo Kuroda, will provide up to 25 billion yen in Samurai bonds to support Kenya’s vehicle assembly and energy sectors.

Simultaneously, Treasury CS John Mbadi revealed that Kenya is negotiating with China to extend repayment terms and convert some dollar-denominated loans into yuan to ease repayment pressure. China remains Kenya’s largest bilateral creditor, making these negotiations crucial for debt sustainability.

Debt Sustainability Analysis and International Oversight

Kenya’s debt situation has attracted significant international attention and concern. The recent Debt Sustainability Analysis (DSA) indicates that Kenya’s public debt is sustainable but with a high risk of debt distress. The present value of public debt was 63.0% of GDP against the benchmark debt threshold of 55%.

Critically, the National Treasury has until November 1, 2029 to bring the present value of public debt within the threshold to comply with the law. This timeline adds urgency to current fiscal consolidation efforts.

The World Bank’s latest Kenya Economic Update notes that Kenya’s public debt remains at high risk of distress, with interest payments absorbing about a third of tax revenue. The institution emphasizes that reforms to strengthen fiscal sustainability while promoting inclusive growth are critical to revive a slowing economy and weak labor market.

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Medium-Term Debt Management Strategy

The government has developed a comprehensive approach to address these challenges through its 2025 Medium-Term Debt Management Strategy (MTDS), which guides public debt management over the period 2025-2028. The strategy recognizes that a diversified public debt structure and deepening of the domestic debt market is necessary to mitigate exchange rate risks on Kenya’s external public debt.

The redemption profile shows that 18.6% of domestic debt will mature by June 2025, mainly due to short-term Treasury bills falling due. This bunched repayment schedule over the next nine years, due to the large share of Treasury bills and near-term maturities Treasury bonds, creates significant refinancing pressure.

Treasury Bills and Bonds Market Dynamics

Kenya’s domestic debt instruments have experienced significant rate volatility. Treasury bill rates peaked at around 16% in July 2024 but have since fallen as the Central Bank eased monetary policy. By February 2025, the 91-day yield dropped below 9% for the first time since late 2022, with the 182-day around 9.4% and the last issued 364-day about 10.6%.

The decline is partly due to CBK actively rejecting expensive bids to lower the government’s borrowing costs and a cut in the benchmark interest rate. In a significant policy shift, the National Treasury announced in early 2025 that it will stop issuing new 364-day Treasury bills to reduce short-term debt and manage maturity risk.

Investment Infrastructure and Market Access

The domestic debt market’s growth has been facilitated by improved investment infrastructure. The CBK’s DhowCSD platform allows both individuals and institutions to invest directly in government securities without intermediaries. Treasury bonds require a minimum investment of KSh 50,000, while Treasury bills had minimum investments of KSh 100,000 until recent reforms improved accessibility.

Government bonds are also listed on the Nairobi Securities Exchange for secondary trading, providing liquidity options for investors. The infrastructure supports both competitive and non-competitive bidding, with the Central Bank reserving the right to accept or reject bids partially or fully.

Economic Context and Revenue Challenges

The surge in domestic borrowing occurs against a backdrop of revenue underperformance and economic pressures. Kenya’s real GDP is expected to grow 4.5% in 2025, picking up gradually in the medium term to about 5.0% in 2026-27. However, the economic slowdown has stemmed from multiple challenges including floods, high interest rates, and subdued business sentiment following protests.

Revenue collections have been underperforming expectations, creating pressure to bridge budget gaps through borrowing. The World Bank emphasizes that revenue policy could concentrate on broadening the tax base while improving efficiency and equity, potentially yielding additional revenue of about 4% of GDP.

Fiscal Consolidation Pressures and Reform Imperatives

Kenya faces significant pressure to balance fiscal consolidation with growth and development needs. The World Bank’s Public Finance Review suggests that a comprehensive set of policy reforms could bring Kenya’s debt-to-GDP level to about 44% by 2035, close to mid-2010 figures.

These reforms include rationalizing tax exemptions, encouraging formalization, reforming property taxes, strengthening tax compliance, and improving public expenditure efficiency. The report emphasizes that pathways of continued fiscal slippages or severe austerity measures are economically and socially costly.

IMF Program and International Support

Kenya’s relationship with international financial institutions remains crucial for debt sustainability. The IMF plans an in-depth review of Kenya’s debt to determine financing needs under a new program, with a debt sustainability analysis to be conducted by the time of the board’s consideration.

However, recent tensions have emerged. A World Bank DPO disbursement was withheld as of July 2025 due to concerns about fiscal prudence and governance reforms. This highlights the delicate balance Kenya must maintain between domestic political pressures and international creditor expectations.

Looking Forward: Sustainability Challenges

The dramatic increase in domestic borrowing presents both opportunities and risks for Kenya’s fiscal outlook. On the positive side, domestic borrowing reduces foreign exchange risk and keeps debt service payments within the local economy. However, the rapid growth in domestic debt could crowd out private sector credit and create sustainability challenges if not managed carefully.

Kenya’s total national debt is edging toward the KSh 12 trillion mark, with external debt reaching KSh 5.32 trillion as of May 2025. The combination of high domestic and external debt creates complex management challenges, particularly given the bunched maturity profile that requires significant refinancing over the coming years.

The success of Kenya’s fiscal strategy will depend on the government’s ability to implement comprehensive reforms while maintaining economic growth and political stability. The 2025 domestic borrowing surge reflects immediate financing pressures, but long-term sustainability requires addressing structural fiscal imbalances through revenue mobilization and expenditure rationalization.

As Kenya navigates this challenging fiscal landscape, the balance between domestic and external financing, combined with the pace and effectiveness of structural reforms, will determine whether the country can achieve debt sustainability while maintaining economic growth and social stability. The coming months will be crucial as the government seeks to implement its medium-term debt management strategy while managing immediate financing pressures.

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By: Montel Kamau

Serrari Financial Analyst

24th September, 2025