Eyes on Debt Target as Treasury Floats New Sh60 Billion Bonds

Treasury’s New Bond Sale

The Kenyan government is moving aggressively to secure financing for the 2025/26 fiscal year. The Central Bank of Kenya has announced the reopening of three long-term Treasury bonds — a 30-year Savings & Development Bond, a 25-year issue, and a 20-year bond — targeting Sh60 billion.

If fully subscribed, this sale will push Kenya’s net domestic borrowing past Sh300 billion within just the first quarter of the fiscal year. Policymakers are front-loading debt issuance while interest rates remain favourable, a strategy analysts say is meant to reduce rollover risks later in the year.

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Record Borrowing in August

The new offer comes barely a month after August’s highly successful infrastructure bond sale. Investors snapped up the paper, raising Sh95 billion in the first round. When the bond was reopened in a tap sale, the government collected an additional Sh179.8 billion.

Although Sh94.6 billion worth of bonds matured in that cycle, the net effect was a fresh borrowing of about Sh180.2 billion. As a result, net domestic borrowing year-to-date has climbed to Sh260 billion, already 41 percent of the Sh635.5 billion annual target.

Why Borrowing Is Being Front-Loaded

Kenya is opting to raise cash early in the year for several reasons:

1. Investor demand is strong. The oversubscription of August’s bond shows that appetite for government paper remains high, especially for longer tenors that lock in attractive coupon rates.
   
2. Revenue shortfalls persist. With the collapse of the Finance Bill 2024, Treasury lost an estimated Sh344.3 billion in potential revenues, forcing greater reliance on borrowing.
   
3. Debt management strategy. Issuing 20- to 30-year bonds helps smoothen Kenya’s repayment profile, reducing the risk of having too many obligations falling due in the short term.
   
4. Market conditions remain favourable. Liquidity in the money market means the government can secure funding at relatively lower costs before interest rates turn upward again.
   

The Fiscal Deficit Challenge

Kenya’s fiscal deficit widened to 5.8 percent of GDP in the year to June, compared to 5.6 percent the previous year. The Treasury cited carryover spending of Sh218 billion from FY 2023/24 as well as missed tax targets.

• Total revenues reached Sh2.918 trillion, falling short of projections by Sh67 billion, though appropriations-in-aid outperformed targets by Sh9.1 billion.
  
• Expenditures amounted to Sh3.96 trillion, below the original ceiling, but recurrent costs overshot estimates while development spending underperformed.
  
• Counties received Sh444.8 billion, which included delayed transfers from the prior fiscal cycle.
  

According to Treasury CS John Mbadi, the fiscal performance was still positive because all pending obligations were cleared, with no rollovers into the new year.

Looking forward, Treasury projects revenues of Sh3.32 trillion against expenditures of Sh4.26 trillion in FY 2025/26. If achieved, the deficit would shrink to 4.7 percent of GDP, marking a return to fiscal consolidation.

Rising Borrowing Targets

Kenya’s reliance on domestic debt has deepened in recent years. Initial borrowing estimates for 2024/25 were Sh263.2 billion, but after multiple supplementary budgets, the target ballooned to Sh815.6 billion.

The current fiscal year is following a similar pattern: even as borrowing targets are surpassed, analysts expect further upward revisions as revenue shortfalls and spending pressures persist. The front-loading of bond sales is therefore a hedge against the uncertainty of future market conditions.

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The Yuan Option: Cutting SGR Loan Costs

Alongside domestic borrowing, Kenya is also looking externally for relief. The government has opened talks with China to convert its dollar-denominated Standard Gauge Railway (SGR) loan into Chinese Yuan.

Currently, Kenya spends over Sh100 billion annually servicing the loan, part of a total of Sh130 billion owed yearly to China. The loans are pegged to the Secured Overnight Financing Rate (SOFR) with a 2 percent bank markup, pushing effective interest above 6 percent.

Switching repayment to Yuan could cut rates to about 3 percent, significantly lowering costs and shielding taxpayers from dollar volatility. However, risks remain because Kenya primarily earns and trades in dollars, meaning it would still require currency swaps to meet obligations. Negotiations may also expand to cover loan tenure extensions, offering even greater relief.

Debt Sustainability Concerns

Despite strong investor appetite, questions linger over sustainability. Ratings agencies such as Moody’s have warned that Kenya’s debt service costs are among the highest globally, consuming nearly one-third of government revenue.

With more borrowing being done locally, interest costs rise even as exchange rate risks on external loans persist. The balancing act is delicate: the government must raise funds for infrastructure, health, and education without crowding out the private sector from credit markets.

Global Comparisons: Lessons for Kenya

Kenya is not alone in managing a delicate fiscal situation.

• Ghana has faced repeated debt restructuring and IMF interventions after over-reliance on domestic borrowing.
  
• Nigeria has aggressively increased its Eurobond sales, though high yields reflect investor concern about deficits.
  
• Uganda and Tanzania have pursued concessional borrowing from multilateral lenders, often at lower costs than market-priced debt.
  

Kenya’s strategy of long-tenor domestic bonds is innovative within East Africa, giving it flexibility, but it also locks in high coupon payments for decades.

Analysts’ Take

According to NCBA Research, the near-term financing environment is favourable thanks to high liquidity in the banking sector. However, sustainability depends on:

• Meeting revenue targets in the coming quarters.
  
• Securing concessional external funding to supplement domestic debt.
  
• Ensuring that future supplementary budgets do not drastically inflate borrowing needs.
  

Implications for Businesses and Citizens

For investors, government bonds remain a safe, high-yield option compared to equities, which have seen sluggish turnover. For banks, strong demand for bonds provides profitable outlets for excess liquidity but may reduce the incentive to lend to the private sector.

For ordinary citizens, heavy domestic borrowing could eventually translate into higher interest rates on loans and mortgages, as banks prefer risk-free government paper. On the positive side, if funds are well-utilised, infrastructure and social services could benefit from the inflows.

What Lies Ahead

Several indicators will be closely watched in the months ahead:

1. Subscription levels in the Sh60 billion sale — another oversubscription would reinforce investor confidence.
   
2. Tax collection trends, especially VAT and income tax, to gauge whether revenue assumptions hold.
   
3. Inflation and interest rates, which determine how affordable borrowing remains.
   
4. External financing deals, particularly with China, IMF, and World Bank.
   
5. Debt rollover risks, as maturing obligations pile up later in the year.
   

Conclusion

Kenya’s decision to float Sh60 billion in reopened bonds underscores its urgent need to shore up financing while markets remain favourable. Strong investor demand, coupled with innovative approaches like a possible Yuan debt swap, offer short-term relief. Yet, the bigger challenge remains: aligning revenues with spending to prevent the debt burden from escalating further.

For now, the Treasury’s aggressive front-loading buys time. Whether that time is used to deepen reforms, expand the tax base, and rein in expenditures will determine if Kenya can truly return to a sustainable fiscal path.

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Photo source: Google

By: Montel Kamau

Serrari Financial Analyst

27th August, 2025