Kenya Bets on Domestic Borrowing as Ruto Government Moves to Fund 82% of Budget Deficit Locally

Kenya’s public finance strategy is entering a decisive phase. Facing mounting debt pressures, volatile global markets, and constrained access to foreign financing, the government of William Ruto has signalled a major shift in how it plans to fund its budget deficits over the coming years. According to the latest Medium Term Debt Management Strategy (MTDS), the administration intends to finance 82% of its budget deficit through domestic borrowing, marking one of the strongest tilts toward local funding in Kenya’s fiscal history.

The strategy, published by the Public Debt Management Office and overseen by the National Treasury, lays out the government’s borrowing plans for the 2026/27 to 2028/29 fiscal period. It aims to stabilise public debt, lower borrowing risks, and reduce Kenya’s exposure to foreign exchange shocks at a time when global financing conditions remain tight.

But while the strategy reflects prudence and realism, it also raises hard questions about sustainability, private-sector crowding out, and the long-term cost of debt.

Build the future you deserve. Get started with our top-tier Online courses: ACCA, HESI A2, ATI TEAS 7, HESI EXIT, NCLEX-RN, NCLEX-PN, and Financial Literacy. Let Serrari Ed guide your path to success. Enroll today.

A Heavy Reliance on Local Markets

Under the MTDS, the government plans to source only 18% of its gross borrowing requirements externally, with the remaining 82% coming from domestic sources. In practical terms, this means banks, pension funds, insurance firms, and other local investors will shoulder the bulk of financing for Kenya’s fiscal deficits.

The strategy explicitly states:

“The 2026 MTDS aims to reduce debt costs and risks by sourcing 18% of gross borrowing from external sources and 82% from domestic sources over the medium term. From the domestic sources, the strategy is to gradually reduce the stock of Treasury bills while lengthening debt maturity and issuing medium to long-term debt securities.”

This signals not just a preference for domestic borrowing, but a shift in how that borrowing will be structured—away from short-term Treasury bills and toward longer-dated bonds that reduce refinancing pressure.

What the Numbers Mean for 2026/27

The implications of this strategy become clearer when applied to the upcoming fiscal year. The government has projected a budget deficit of KSh 1.1 trillion for the 2026/27 financial year, which begins in July.

With 82% of the deficit to be financed locally, this translates to approximately KSh 906 billion in domestic borrowing in a single year. External borrowing will account for the remaining KSh 198 billion.

For Kenya’s domestic financial system, this is a substantial funding requirement—one that will shape interest rates, liquidity conditions, and credit availability across the economy.

External Borrowing: Less Commercial, More Concessional

While the government is not abandoning external borrowing altogether, it is changing its composition. According to the MTDS:

• 12% of total external borrowing will come from concessional and semi-concessional sources, such as multilateral and bilateral development partners.
  
• Commercial external borrowing—including Eurobonds—will be reduced to just 6%.

This reflects lessons learned from recent years, when heavy reliance on commercial external debt exposed Kenya to refinancing risk, currency volatility, and sharp increases in debt-servicing costs.

By prioritising concessional loans, which typically carry lower interest rates and longer maturities, the Treasury hopes to soften the long-term burden of external obligations.

One decision can change your entire career. Take that step with our Online courses in ACCA, HESI A2, ATI TEAS 7, HESI EXIT, NCLEX-RN, NCLEX-PN, and Financial Literacy. Join Serrari Ed and start building your brighter future today.

Kenya’s Public Debt: Where Things Stand

The shift in borrowing strategy is driven by the scale of Kenya’s debt burden. As of November 2025, public debt stood at KSh 12.25 trillion, equivalent to 63.6% of Gross Domestic Product (GDP).

While this level remains below the statutory ceiling, it places Kenya firmly in the category of high-debt emerging economies, where fiscal flexibility is limited and investor confidence can shift quickly.

According to data from the Central Bank of Kenya (CBK), domestic debt alone rose from KSh 6.74 trillion in October 2025 to KSh 6.78 trillion in November 2025, underscoring the accelerating reliance on local markets even before the new strategy takes full effect.

Who Holds Kenya’s Domestic Debt?

The composition of domestic debt provides insight into where the pressure will fall.

CBK data shows domestic debt is held by:

• Financial corporations: 79%
• General government: 7.3%
• Households: 6.4%
• Non-residents: 4.6%
• Non-financial corporations: 1.8%
• Non-profit institutions: 0.9%

This concentration means banks and institutional investors will remain the primary financiers of government operations, reinforcing their central role in Kenya’s fiscal architecture.

Instruments: Bonds Over Bills

The MTDS also reveals a deliberate move to reshape the instrument mix of domestic debt.

As of late 2025, domestic debt instruments were composed of:

• Treasury bonds: 82.33%
• Treasury bills: 16%
• CBK overdraft: 0.1%
• Other domestic debt: 1.57%

The government intends to further reduce Treasury bill issuance, which carries higher rollover risk, and increase medium- and long-term bond issuance to smooth the maturity profile.

This is a critical shift. Treasury bills mature within one year, forcing frequent refinancing that exposes the government to interest rate volatility and liquidity shocks. Longer-dated bonds, while often carrying higher coupons, provide predictability and reduce refinancing stress.

Budget Choices Reflect Fiscal Trade-Offs

Borrowing strategy cannot be separated from spending decisions. Treasury Cabinet Secretary John Mbadi tabled a KSh 4.29 trillion budget for the 2025/26 fiscal year, offering a glimpse into the pressures driving borrowing needs.

Key features of the budget include:

• Recurrent expenditure increased to KSh 3.1 trillion
• Development spending cut to KSh 693.2 billion

This tilt toward recurrent spending—wages, debt service, and operational costs—limits fiscal flexibility and raises concerns about long-term growth, which depends heavily on development investment.

Defence Spending Stands Out

One of the largest beneficiaries of the budget was the Ministry of Defence, which received an allocation of KSh 202.3 billion, including KSh 2 billion earmarked for hiring.

While defence spending is often justified on security and regional stability grounds, its scale underscores the competing demands on public resources—and the difficulty of containing expenditure even as debt levels rise.

Historical Context: This Is Not New—But It Is Bigger

Kenya has leaned on domestic borrowing before, particularly during periods of external financing stress. During the COVID-19 pandemic, for example, global markets tightened and external flows slowed, forcing the government to rely more heavily on local debt markets.

However, what distinguishes the current strategy is its scale and intentionality. Rather than reacting to temporary shocks, the MTDS formalises domestic borrowing as the primary funding pillar over multiple years.

In the 2024/25 fiscal year, Kenya already financed 83% of its deficit domestically, far above the original target of 55%. Similar deviations from planned borrowing mixes occurred in earlier years, often due to delayed external disbursements.

The new MTDS effectively acknowledges this reality and builds policy around it.

Why This Matters: Beyond Treasury Auctions

The decision to fund 82% of the deficit domestically has far-reaching implications.

1. Interest Rates and Credit Availability

Heavy government borrowing absorbs liquidity that might otherwise flow to businesses and households. Banks often prefer risk-free government securities over private lending, which can slow credit growth and investment.

2. Cost of Debt

While domestic borrowing reduces currency risk, it often comes with higher interest rates than concessional external loans. Over time, this raises debt-servicing costs and constrains future budgets.

3. Financial System Stability

Kenya’s banks and pension funds are deeply exposed to government paper. While this creates stability in the short term, it also concentrates risk within the financial system.

4. Fiscal Discipline Test

Relying on domestic markets offers convenience—but it can also weaken discipline if borrowing remains easy. Sustaining investor confidence will require credible fiscal consolidation, not just refinancing.

Comparisons with Past Episodes

Kenya’s experience mirrors that of other emerging economies that turned inward during periods of global financial stress. In several cases, prolonged domestic borrowing led to:

• Rising yields
• Crowding out of private investment
• Slower economic growth

Countries that successfully navigated this path typically paired domestic borrowing with strong revenue mobilisation and expenditure control. Those that did not often faced mounting debt burdens and market fatigue.

The Role of Revenue and Reform

Ultimately, borrowing strategy can only buy time. Kenya’s long-term debt sustainability depends on:

• Expanding the tax base
• Improving revenue collection efficiency
• Rationalising recurrent expenditure
• Prioritising high-impact development spending

Without progress on these fronts, even the most carefully structured debt strategy risks becoming unsustainable.

What Investors and Markets Will Watch

As the MTDS is implemented, markets will focus on:

• Treasury bond yields and bid-to-cover ratios
• Bank credit growth to the private sector
• Debt-servicing costs as a share of revenue
• Progress on fiscal reforms and revenue measures

A loss of confidence could quickly translate into higher yields, increasing the cost of domestic borrowing.

Conclusion: A Necessary but Risk-Laden Path

Kenya’s decision to finance 82% of its budget deficit domestically reflects realism in a world where external financing is no longer cheap or predictable. It reduces currency risk, improves control over funding, and aligns borrowing with local savings.

But it is not without cost. High interest rates, pressure on private credit, and growing debt-service burdens pose real risks if fiscal consolidation falters.

The MTDS provides a roadmap—but the outcome will depend on execution, discipline, and the government’s ability to turn borrowed funds into durable economic growth. In that sense, domestic borrowing is not a solution on its own—it is a bridge that must lead somewhere better.

Ready to take your career to the next level? Join our Online courses: ACCA, HESI A2, ATI TEAS 7 , HESI EXIT  , NCLEX – RN and NCLEX – PN, Financial Literacy!🌟 Dive into a world of opportunities and empower yourself for success. Explore more at Serrari Ed and start your exciting journey today! ✨

photo source: Google

By : Elsie Njenga

3rd February, 2026