Kenya’s National Treasury has unveiled controversial plans to borrow more than Ksh1 trillion in the 2026/27 financial year, a massive borrowing target that has reignited intense debate over the country’s rapidly rising public debt burden and the government’s capacity to manage its finances sustainably without compromising future generations’ economic prospects. The ambitious borrowing plan comes at a politically sensitive time as the country approaches the 2027 General Elections and as concerns mount about debt servicing costs consuming an increasingly large share of government revenues.
Treasury Principal Secretary Chris Kiptoo confirmed the substantial borrowing targets this week during parliamentary budget hearings, explaining that the government must bridge a widening budget deficit and sustain delivery of key services including education, healthcare, security, and infrastructure development that citizens expect despite constrained revenue performance.
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The Borrowing Breakdown: Domestic and External Sources
The comprehensive borrowing plan for the 2026/27 financial year includes net external financing of Ksh241.8 billion and net domestic borrowing of Ksh775.8 billion, representing a significant reliance on domestic capital markets to fund government operations. The external portion of the borrowing will likely come from multilateral lenders such as the World Bank and African Development Bank, as well as potentially from commercial loans in international capital markets, depending on prevailing interest rates and Kenya’s credit standing.
Meanwhile, the domestic market will be expected to absorb the bulk of the borrowing through purchases of Treasury bonds and bills issued by the Central Bank of Kenya on behalf of the National Treasury. This heavy domestic borrowing raises concerns about crowding out private sector credit, as banks and other investors allocate more of their funds to government securities rather than lending to businesses and individuals.
The Treasury aims to raise this substantial sum to cover a budget gap estimated at 4.9 percent of GDP for the 2026/27 fiscal year, representing a slight increase from the previous year’s deficit of 4.8 percent of GDP. This persistent budget deficit indicates that government spending continues to outpace revenue generation, forcing continued reliance on borrowed funds to bridge the gap between what the government collects in taxes and other revenues and what it spends on salaries, operations, development projects, and debt servicing.
Kenya’s Total Debt Burden: Breaking Down the Numbers
The borrowing announcement comes against the sobering backdrop of Kenya’s total public debt standing at Ksh12.06 trillion as of the most recent Treasury reports, a figure that represents a substantial increase from debt levels just a few years ago. This total debt comprises domestic debt of approximately Ksh6.66 trillion—money borrowed from Kenyan banks, pension funds, insurance companies, and individual investors through Treasury bonds and bills—and external debt of about Ksh5.39 trillion borrowed from foreign governments, multilateral institutions, and international capital markets.
These figures demonstrate that Kenya has crossed earlier debt ceilings that were meant to serve as guardrails preventing excessive borrowing. The Public Finance Management Act and various fiscal responsibility frameworks have established debt limits as a percentage of GDP, but these have been repeatedly revised upward or temporarily suspended to accommodate the government’s borrowing needs, raising questions about the credibility and enforceability of such fiscal rules.
Critics argue that Kenya’s current borrowing trajectory is fundamentally unsustainable, especially when combined with slow revenue growth, high repayment obligations that consume significant portions of tax revenues, and economic growth rates that may not be sufficient to outpace debt accumulation. The debt-to-GDP ratio, a key indicator of debt sustainability, has risen considerably, approaching levels that international financial institutions and rating agencies consider risky for emerging market economies.
First Quarter Borrowing: Already Halfway to Annual Target
The government has already borrowed heavily in the current 2025/26 fiscal year, raising concerns about the pace of debt accumulation. Treasury data reveals that in just the first quarter of the 2025/26 financial year, the government secured Ksh437.8 billion in new loans, an amount that represents almost half of the annual borrowing target of Ksh901 billion for the entire year.
This frontloading of borrowing is deliberate, according to Treasury officials, but it also indicates that the government may exceed its annual borrowing targets if the pace continues through subsequent quarters. Of the first quarter borrowing, domestic sources contributed Ksh339.7 billion through Treasury bond and bill issuances, while external sources added Ksh98.1 billion from multilateral and bilateral lenders.
The rapid accumulation of debt in the early months of the fiscal year reflects several factors including the need to build cash reserves ahead of large debt repayments due in early 2026, the desire to take advantage of favorable interest rates before they potentially rise, and the imperative to fund government operations despite revenue collections falling short of projections.
Revenue Shortfalls: The Underlying Crisis
A significant driver of the heavy borrowing is persistently weak revenue performance that has left Treasury scrambling to fund government operations. Treasury reported that revenue collections fell below target by a substantial Ksh83.6 billion in the first quarter of the 2025/26 fiscal year alone, representing a significant gap between what the government expected to collect and what it actually received.
Total revenues grew by a meager 1.7 percent in the first quarter, a dramatic slowdown compared to the robust 10.8 percent growth recorded in the same period last year. This deceleration in revenue growth suggests that the economy may be experiencing headwinds, that tax compliance may be weakening, or that tax policy changes have not generated the expected revenue increases.
“Budget execution in the 2025/26 fiscal year has progressed well but is constrained by slow adoption of e-procurement, revenue shortfalls against targets, as well as expenditure pressures,” Treasury Principal Secretary Chris Kiptoo acknowledged on Wednesday during parliamentary hearings on the 2026/27 budget, identifying multiple challenges facing fiscal management.
Ordinary revenues—primarily taxes on income, consumption, and imports—actually dropped by 2.9 percent in the first quarter, a sharp and concerning reversal from the 10.1 percent growth recorded in the corresponding period of 2024. This decline in ordinary revenues is particularly troubling because these represent the core, sustainable revenue sources that fund government operations, unlike one-off revenues from asset sales or special levies.
With government spending running ahead of projections by Ksh5.9 billion and revenues falling short, the budget deficit widened significantly to Ksh280.4 billion in just the first quarter, equivalent to 1.5 percent of GDP. This means that in just three months, the government has already accumulated a deficit equivalent to nearly one-third of the annual deficit target, suggesting that the full-year deficit may exceed projections unless spending is curtailed or revenues improve dramatically.
Political Dimensions: Borrowing Before the 2027 Elections
The timing of the aggressive borrowing plan has raised significant political concerns and sparked debate about the government’s motivations, especially as the country approaches the 2027 General Elections. Opposition politicians and some government critics have suggested that the administration may be frontloading spending—funded by borrowed money—to finance popular programs and projects that could boost its electoral prospects, effectively mortgaging the country’s future for short-term political gains.
Kiharu Member of Parliament Ndindi Nyoro, who chairs the influential Budget and Appropriations Committee, has been among the most vocal critics of the borrowing trend. In recent public statements, Nyoro warned that the government is borrowing more than Ksh3.4 billion every single day, a staggering figure that illustrates the scale and pace of debt accumulation.
“At the current rate, we are borrowing more than Ksh3.4 billion daily. This pace of borrowing is unsustainable and will burden future budgets, limiting our ability to fund development and essential services,” Nyoro cautioned, warning that excessive borrowing today creates fiscal constraints tomorrow as debt servicing costs consume increasing shares of the budget.
Nyoro and other critics argue that the borrowing binge could severely limit the next government’s policy options, as so much revenue will need to be devoted to repaying debts and interest that little will remain for new initiatives or responding to emergencies. This creates what economists call “fiscal space” constraints, where the government lacks room to maneuver in its budget because existing obligations are so large.
The political controversy has been amplified by the perception that some of the borrowed funds are being directed toward projects or programs with questionable development impact or toward areas where the government has made politically motivated commitments without careful cost-benefit analysis. While Treasury defends each expenditure category as necessary and properly planned, skeptics question whether all spending truly represents the best use of borrowed funds that future taxpayers will need to repay with interest.
Specific Spending Commitments Driving Borrowing
The government has explicitly linked portions of the planned borrowing to specific new spending commitments, particularly in the education and security sectors. In January 2026, the government plans to hire 20,000 intern teachers to address staffing shortages in schools and reduce teacher-to-student ratios that have been identified as obstacles to quality education delivery.
President William Ruto has announced that Ksh1.6 billion will be allocated toward teacher training programs to improve the skills and qualifications of educators, while another Ksh1 billion will go toward teacher promotions, addressing longstanding grievances from the teaching profession about career progression and compensation. These education sector investments are politically important given that teachers represent a significant voting bloc and education quality is a priority concern for many Kenyan families.
Treasury officials have also indicated that borrowed funds will support expanded health services under the Social Health Insurance Fund and other health initiatives, as well as security sector expansion including the recruitment of 10,000 police officers this week. The police recruitment is particularly noteworthy because hiring had been frozen for more than three years due to severe budget constraints, leaving the force understaffed and unable to adequately address rising crime rates and security threats.
While these spending priorities are defensible from a service delivery perspective—education, health, and security are core government functions—critics question whether all of these commitments needed to be made simultaneously and whether they could have been phased more gradually to avoid such heavy borrowing in a concentrated period.
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Treasury’s Defense: Managing Repayment Obligations
Treasury has mounted a vigorous defense of its borrowing strategy, arguing that the approach is necessary to maintain government cash flow and avoid disruptions in operations that would harm service delivery and economic stability. Officials emphasize that the borrowing is not arbitrary but rather carefully planned to match the government’s repayment schedule and fiscal needs.
Specifically, Treasury notes that frontloading borrowing—raising substantial funds early in the fiscal year—helps the government accumulate the cash reserves needed to meet large debt repayments coming due in early 2026. These repayments include significant obligations such as Eurobond maturities or buybacks, installments on loans tied to the Standard Gauge Railway project that have been a major source of external debt, and redemptions of major domestic infrastructure bonds that were issued years ago and are now reaching maturity.
By raising money well in advance of these payment deadlines, Treasury hopes to manage repayments smoothly without resorting to emergency borrowing at unfavorable interest rates. Emergency borrowing typically occurs at premium rates because lenders know the borrower is desperate and has limited options, resulting in higher costs that burden taxpayers. By planning ahead and borrowing when market conditions are favorable, Treasury argues it is actually being fiscally responsible despite the large borrowing amounts.
Domestic Market Response: Favorable Interest Rate Environment
The domestic capital market has responded positively to government borrowing so far, with investors showing strong appetite for Treasury securities. Treasury bonds raised Ksh310.6 billion in the first quarter of the 2025/26 fiscal year, while Treasury bills added another Ksh45 billion, indicating that banks, pension funds, insurance companies, and individual investors have been willing to lend to the government at prevailing interest rates.
Importantly, falling interest rates have helped ease the government’s debt servicing costs, making borrowing more affordable than it was in recent years. Bonds issued in recent months have carried coupon rates—the annual interest rate paid to bondholders—between 12 and 14 percent, which represents a significant decline from the 18.5 percent paid on similar infrastructure bonds in 2023 and 2024 when inflation was higher and monetary policy was tighter.
This decline in borrowing costs is partly attributable to Central Bank of Kenya monetary policy decisions that have gradually reduced the benchmark interest rate as inflation has moderated, creating a more favorable interest rate environment across the economy. Lower borrowing costs mean that even as the government borrows more in absolute terms, the cost of servicing that debt may not increase proportionally, providing some fiscal relief.
Treasury has strategically reopened long-term infrastructure bonds with maturities of 15 and 19 years, raising significant amounts through both primary issuance of new bonds and tap sales that add to existing bond issues. These longer-maturity bonds help extend the government’s debt profile, reducing the concentration of repayments in any single year and spreading out obligations over time.
External Financing Uncertainty: IMF Program Stalls
While domestic borrowing has proceeded relatively smoothly, significant uncertainty surrounds future external financing, creating potential complications for Treasury’s plans. Kenya had expected to secure additional support from a new International Monetary Fund (IMF) program that would provide concessional financing at below-market interest rates along with the IMF’s seal of approval that helps Kenya access favorable terms from other lenders.
However, negotiations for the new IMF program have stalled over technical disagreements about how to classify certain securitized loans in Kenya’s debt statistics. This classification issue is not merely a technicality—it affects Kenya’s reported debt levels and debt-to-GDP ratios, which in turn determine whether Kenya meets the criteria for accessing concessional funding reserved for countries with sustainable debt profiles.
The IMF is concerned that some creative financing arrangements Kenya has entered into may effectively constitute debt even if they are not classified as such in official statistics, potentially understating the true extent of Kenya’s obligations. Kenya, meanwhile, argues that these arrangements are legitimate financing tools that should not be classified as traditional debt, and that reclassifying them would unfairly penalize the country and limit its access to affordable financing.
Without the IMF program, Kenya may face significantly higher borrowing costs on international capital markets, as investors and lenders typically charge premium interest rates to countries that lack IMF backing. The IMF’s endorsement serves as a quality signal that a country is implementing sound economic policies and can be trusted to repay its debts, reducing perceived risk and lowering interest rates.
If the IMF impasse continues, Kenya may need to rely even more heavily on domestic borrowing to fill its financing gap, potentially crowding out more private sector credit and putting upward pressure on domestic interest rates. Alternatively, Kenya might need to accept more expensive commercial loans or reduce its spending plans to match available financing.
Crowding Out Concerns: Impact on Private Sector
One of the most significant concerns about Treasury’s heavy domestic borrowing is the potential for “crowding out” private sector credit. When the government absorbs Ksh775.8 billion from the domestic market in a single fiscal year, it means that banks, pension funds, and other investors are allocating these funds to government securities rather than to lending to businesses or individuals.
This can have several negative economic effects. First, it may limit credit availability for businesses seeking to invest in expansion, equipment, or working capital, potentially constraining private sector growth and job creation. Second, it may push up interest rates on private sector loans as the reduced supply of credit drives up its price. Third, it may bias the financial system toward risk-free government securities and away from the more productive but riskier lending to businesses and entrepreneurs that drives innovation and economic transformation.
Commercial banks in Kenya have faced criticism for holding large portions of their assets in government securities rather than lending to the private sector, but the generous returns and zero risk on government paper make this allocation difficult to resist from a profit-maximizing perspective. When Treasury borrows heavily, it reinforces this dynamic, potentially weakening the transmission of credit to the real economy.
Long-Term Sustainability Questions
The fundamental question raised by Treasury’s Ksh1 trillion borrowing plan is whether Kenya’s debt trajectory is sustainable over the medium to long term. Debt sustainability depends on multiple factors including the debt-to-GDP ratio and its trajectory, the interest rates paid on debt relative to economic growth rates, the composition of debt between domestic and external obligations, the currency composition and foreign exchange risks, and the purposes for which borrowed funds are used.
Economic theory suggests that borrowing can be sustainable and even beneficial if the funds are invested in productive uses that generate economic returns exceeding the cost of borrowing. For example, borrowing to build infrastructure that facilitates trade, reduces transportation costs, and enables business growth can pay for itself through increased economic activity and tax revenues.
However, borrowing to fund current consumption—including government salaries and routine operations—does not generate future revenues to repay the debt, meaning the burden falls entirely on future taxpayers without compensating benefits. Critics argue that too much of Kenya’s borrowing has financed consumption rather than productive investment, raising sustainability concerns.
Additionally, if economic growth rates are slower than interest rates on debt, the debt burden grows faster than the economy’s capacity to service it, creating an unsustainable dynamic. Kenya’s recent GDP growth rates have been modest, raising questions about whether growth is sufficient to outpace debt accumulation.
International Credit Rating Implications
Kenya’s borrowing plans and rising debt levels have implications for the country’s international credit ratings, which are assessed by agencies such as Moody’s, Standard & Poor’s, and Fitch. These ratings determine the interest rates Kenya must pay when borrowing in international markets, with lower ratings corresponding to higher borrowing costs.
Rating agencies evaluate factors including debt levels, fiscal deficits, revenue performance, economic growth prospects, political stability, and debt management capacity when assigning ratings. Kenya’s rising debt and persistent deficits put downward pressure on its credit rating, potentially triggering downgrades that would make future borrowing more expensive and difficult.
A credit rating downgrade can create a vicious cycle where higher borrowing costs increase debt servicing obligations, further straining the budget and potentially leading to additional downgrades. Maintaining Kenya’s credit rating requires demonstrating fiscal discipline, improving revenue collection, and ensuring that borrowed funds generate economic returns.
Public Sentiment and Accountability
The borrowing debate has resonated with ordinary Kenyans who increasingly question what they are getting for the massive debts being accumulated in their name. Public protests and social media campaigns have called for greater fiscal accountability, transparency in how borrowed funds are used, and reduced government spending on non-essential items.
Civil society organizations and governance watchdogs have demanded that Treasury provide more detailed accounting of where borrowed funds go and what tangible benefits they generate for citizens. There are concerns that corruption and wasteful spending may be diverting borrowed resources from their intended purposes, meaning that Kenyans bear the debt burden without receiving corresponding benefits.
Parliament has an important oversight role in scrutinizing borrowing plans and ensuring that they align with national development priorities and fiscal sustainability principles. However, critics argue that parliamentary oversight has been insufficient, with borrowing plans often rubber-stamped without rigorous interrogation of assumptions, projections, and alternative approaches.
The Path Forward: Balancing Needs and Sustainability
As Kenya navigates the tension between immediate financing needs and long-term debt sustainability, several policy options warrant consideration. First, Treasury must intensify efforts to improve revenue collection through enhanced tax administration, closing loopholes, expanding the tax base, and reducing tax evasion. Higher revenues would reduce borrowing needs and create fiscal space for priority spending.
Second, the government should rigorously prioritize spending, ensuring that every shilling borrowed generates maximum value for citizens. This requires cutting wasteful expenditure, eliminating corruption, improving procurement efficiency, and focusing on high-impact investments that drive economic growth and development.
Third, Kenya should pursue debt restructuring or refinancing opportunities that could reduce the cost of existing debt or extend repayment schedules, easing the immediate pressure on the budget. This might include negotiating with bilateral creditors, refinancing expensive commercial loans with cheaper alternatives, or accessing concessional financing from development partners.
Fourth, structural reforms to improve the business environment, boost productivity, and accelerate economic growth would increase the economy’s capacity to support and repay debt. A larger, faster-growing economy makes a given debt burden more manageable.
Finally, transparent communication with citizens about fiscal challenges, trade-offs, and the path to sustainability is essential for maintaining public confidence and political legitimacy. Kenyans deserve honest assessments of the country’s fiscal situation and meaningful engagement in decisions about borrowing and spending that affect their futures.
The Ksh1 trillion borrowing plan represents a defining moment for Kenya’s fiscal trajectory. Whether it proves sustainable and beneficial or leads to a debt crisis depends on the choices made today about how funds are raised, how they are spent, and whether the political will exists to implement the difficult reforms necessary for long-term fiscal health.
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By: Montel Kamau
Serrari Financial Analyst
25th November, 2025
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