Kenya’s Domestic Borrowing Surges to KSh 853.4B: What It Means for the Debt Landscape

By the end of June 2025, the Kenyan government had mobilized KSh 853.4 billion from local sources—exceeding its original target of KSh 825.8 billion. The bulk of this financing came from non-bank financial institutions (pension funds, insurance companies, SACCOs), contributing KSh 483.9 billion, while commercial banks lent KSh 368.2 billion via Treasury bills and bonds. Smaller amounts—KSh 24.8 billion from government deposits and KSh 1.9 billion from loan repayments—made up the remainder.

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This aggressive domestic borrowing formed part of a broader government financing mix. The net financing requirement for FY 2024/25 stood at KSh 1.03 trillion (about 5.9 percent of GDP), slightly above its target of KSh 1.01 trillion (5.8 percent of GDP). To meet that gap, the government combined KSh 178.9 billion in net external borrowing with KSh 853.4 billion in domestic borrowing.

The decision to revise the domestic borrowing target upward was necessitated by revenue shortfalls and underperformance in external financing. To maintain fiscal discipline, the Treasury emphasized lower interest rates and improved domestic market liquidity.

Context: Debt Levels, Trends & Risks

Rising Domestic Debt & Servicing Costs

Kenya’s tilt toward domestic financing has deep implications:

• In FY 2024/25, domestic debt servicing crossed KSh 1 trillion for the first time, rising to KSh 1.05 trillion—a 25.9 percent increase from the previous year. Interest payments accounted for KSh 678.3 billion, while principal repayments added KSh 366.8 billion. This places significant pressure on fiscal space.
  (Source: Kenyan Wall Street)
  
• As of June 2025, domestic debt made up more than half of Kenya’s total public debt. Over the prior year, domestic debt climbed by ~16.6 percent, reaching KSh 6.2 trillion, while external debt grew more modestly to KSh 5.3 trillion. (Source: Cytonn)
  
• The shift toward short-term instruments (Treasury bills) increases refinancing risk and exposes the government to volatile interest rate environments. (Source: National Treasury’s Medium-Term Debt Management Strategy)
  

These trends raise red flags: greater domestic debt implies heavier interest obligations, more crowding out of private credit, and vulnerability to shifts in investor sentiment.

Debt Composition & Strategy

According to Kenya’s Medium-Term Debt Management Strategy (MTDS):

• As of June 2024, Treasury bonds represented 85.5 percent of domestic debt, while Treasury bills accounted for 11.4 percent.
  
• The government plans to gradually reduce reliance on short-term instruments in favor of longer-duration bonds to smooth maturities and reduce rollover risk.
  
• External debt, meanwhile, is mainly composed of multilateral and bilateral commitments, with commercial borrowing used more sparingly to manage cost and risk. (Treasury / MTDS document)
  

Thus, while the recent borrowing surge leans heavily on local markets, Kenya is signaling intent to manage the maturity profile and cost structure over time.

Projections & Upcoming Borrowing Plan for FY 2025/26

Looking ahead, the government estimates it will need KSh 1.55 trillion to finance operations and refinance maturing obligations in FY 2025/26. Of that, KSh 901 billion is earmarked for the fiscal deficit, and KSh 646.3 billion will refinance maturing domestic and external debt.

In terms of sources:

• Net domestic borrowing is projected at KSh 635.5 billion, representing ~68.8 percent of total financing. (KPMG / budget brief)
  
• Net external borrowing is expected at KSh 287.7 billion, ~31.2 percent of the total. (KPMG)
  
• The total financing requirement for the year is KSh 923.2 billion, with domestic and external components as noted. (Cytonn)
  

These forecasts align with the government’s efforts to narrow the fiscal deficit: from 5.7 percent in FY 2024/25 to 4.8 percent of GDP in FY 2025/26. (Reuters)

However, there is variation among projections: some sources suggest the deficit could tighten further to 4.3 percent of GDP, with net external financing of KSh 146.8 billion and net domestic of KSh 684.2 billion. (Reuters)

Regardless, the emphasis remains clear: Kenya will continue to lean heavily on domestic markets for funding.

Implications & Risks

Rising Debt Servicing Burden

With rising borrowing, interest payments alone are consuming an increasingly large share of the budget. If domestic debt servicing already breached KSh 1 trillion in FY 2024/25, it is likely to rise in FY 2025/26—even before considering principal amortization.

That pressure reduces fiscal space for development, social spending, and infrastructure investment.

Crowd Out Private Sector

As the government absorbs more capital in local markets, private credit growth may suffer. Already, the World Bank has flagged that high domestic borrowing, paired with elevated interest rates, is crowding out private sector activity. (World Bank)

Indeed, credit growth was reported negative in December 2024, down from strong expansion a year earlier—raising alarms about the long-term viability of Kenya’s private-sector-led growth model.

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Refinancing & Interest Rate Vulnerabilities

Short-maturity debt, such as Treasury bills, requires frequent rollover. If investor confidence wanes or rates rise sharply, rollover becomes costlier or more difficult. The MTDS notes this as a key vulnerability. (Treasury MTDS)

Moreover, if inflation or global interest rates spike, Kenya may struggle to honor rising coupon payments on floating-rate securities.

Exchange Rate & External Shocks

Even though Kenya’s external borrowing is lower relative to domestic debt, exchange rate depreciation remains a risk. A weaker shilling can inflate the local-currency value of foreign debt, adding stress to debt servicing budgets.

Recently, Fitch projected Kenya’s foreign exchange reserves might fall to USD 10.2 billion by end-2025, covering ~3.8 months of external payments, elevating external liquidity risk. (Fitch)

Reliance on Domestic Investor Base

The heavy dependence on non-bank financial institution (NBFI) funding—especially pension funds and insurers—is a double-edged sword. While these investors provide stability, any loss of confidence, regulatory shift, or mismatch in asset-liability expectations could threaten appetite for government paper.

Recent Developments That Matter

IMF Engagement & Support Potential

Kenya is expecting a visit from an IMF staff team between September 25 and October 9, 2025, to discuss potential programme support to help stabilize macro fundamentals and manage debt pressures. (Reuters)

This could unlock conditional funding or backstop support, easing external financing pressure, but it often comes with fiscal consolidation demands.

Samurai Financing from Japan

As part of efforts to diversify funding, Kenya secured USD 169 million (~25 billion yen) in Samurai financing from Japan. This deal is intended to support the vehicle assembly and energy sectors, partly to reduce reliance on expensive domestic funding. (Reuters)

While relatively small in scale, such instruments illustrate Kenya’s push to tap alternative funding sources beyond conventional domestic and multilateral channels.

Revision of Growth Forecasts & Fiscal Tightening

A downward revision by the World Bank lowered Kenya’s growth forecast to 4.5 percent in 2025, citing debt strain, high interest rates, and crowding out. (Reuters)

The government, in response to public backlash against prior tax proposals, has opted to cap its fiscal deficit at 4.5 percent of GDP for FY 2025/26—signaling tighter expenditure control. (Reuters)

These choices may calm investor nerves, but they also constrain developmental ambitions.

What to Watch: Key Indicators & Turning Points

1. Domestic debt servicing trajectory
   Will servicing cross KSh 1.3 trillion in FY 2025/26? That level would stress any budget.
   
2. Investor demand for government paper
   Continued strong uptake from pension funds and insurers will be essential to avoid yield spikes.
   
3. Fiscal discipline & budget execution
   The government must adhere to caps, control deficits, and rationalize spending.
   
4. IMF programme negotiation outcomes
   Conditional funding and structural reform requirements may shape Kenya’s macro path.
   
5. Exchange rate & external reserve health
   Maintaining shilling stability and reserve buffers is critical to limit external debt shock.
   
6. Private credit trends
   Will credit growth rebound, or continue to lag due to crowding out?
   
7. Alternative financing channels
   Issuance via Samurai, Panda, domestic infrastructure bonds, or debt swaps could ease local market pressure.
   

In Summary

Kenya’s mobilization of KSh 853.4 billion in domestic borrowing by June 2025 reflects both necessity and policy direction. In the face of revenue shortfalls and constrained external access, the government has leaned heavily on local markets to fund its deficit and roll over debt.

But this shift carries significant risks: rising debt servicing burdens, crowding out of private lending, increased refinancing vulnerability, and sensitivity to investor confidence. Kenya’s fiscal gamble hinges on sustaining demand for its debt, maintaining macro stability, and managing the delicate balance between growth and consolidation.

The coming months will be critical: will Kenya’s domestic investor base hold firm? Can fiscal discipline, IMF negotiation, and external support soften the stress? Or will pressure on debt servicing and private sector credit clip Kenya’s growth trajectory?

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By: Montel Kamau

Serrari Financial Analyst

24th September, 2025