Kenya’s Public Debt Climbs to KSh 11.97 Trillion as Domestic Borrowing Accelerates Amid Fiscal Pressures

Kenya’s escalating debt burden has reached a new milestone, with total public debt climbing to KSh 11.97 trillion at the end of August 2025, according to the latest Monthly Debt Bulletin published by the National Treasury. This figure represents 67.4% of the country’s Gross Domestic Product, underscoring the significant fiscal challenges facing President William Ruto’s administration as it seeks to balance development financing needs against growing concerns about debt sustainability and the capacity to service mounting obligations.

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Significant Monthly and Annual Increases

The August 2025 debt stock represents a substantial increase of KSh 196 billion from the July 2025 level, marking one of the larger monthly increments recorded in recent periods. Even more striking is the year-on-year comparison, which reveals that Kenya’s total public debt has surged by KSh 1.23 trillion compared to August 2024 levels—an increase of more than 11% in just twelve months.

These increases have been driven by two primary factors that reflect the government’s financing strategy and constraints. First, accelerated domestic borrowing through Treasury bonds and bills has provided the government with substantial shilling-denominated financing to cover budget deficits and refinance maturing obligations. Second, fresh disbursements from multilateral development finance institutions have continued to flow into Kenya as previously committed loans and credit facilities reach their drawdown phases.

The Treasury’s data shows that Kenya’s debt composition at the end of August 2025 comprised KSh 6.57 trillion in domestic obligations, representing 54.9% of the total debt stock, and KSh 5.40 trillion in external debt, accounting for 45.1% of total borrowings. This relatively balanced split between domestic and external debt reflects deliberate policy choices aimed at diversifying funding sources while managing currency risk and interest rate exposure.

Exchange Rate Stability Provides Some Relief

One silver lining in an otherwise challenging debt picture has been the relative stability of the Kenya Shilling against major international currencies, particularly the US Dollar. According to the Treasury bulletin, the exchange rate remained broadly stable at an average of KSh 129.24 per US dollar during August 2025, providing crucial cushioning for external debt valuations.

This exchange rate stability is significant because Kenya’s external debt is primarily denominated in foreign currencies, particularly US Dollars, Euros, and Special Drawing Rights (SDRs). When the shilling weakens against these currencies, the local currency value of external debt increases automatically, even without any new borrowing—a phenomenon that has contributed to debt stock increases during previous periods of significant currency depreciation.

The Central Bank of Kenya’s monetary policy measures, including strategic interventions in the foreign exchange market and prudent management of foreign reserves, have contributed to maintaining relative currency stability. However, this stability requires continuous vigilance and adequate foreign exchange reserves, which currently stand at levels sufficient to cover approximately 4-5 months of import requirements.

While the shilling remained relatively steady against the dollar in August, the Treasury noted some modest depreciation against other major currencies. The Kenya shilling weakened by 1.9% against the Euro, 1.3% against the Japanese Yen, and 0.9% against the Chinese Yuan during the month. These movements, while relatively minor in magnitude, still have implications for debt service obligations and import costs denominated in these currencies.

External Debt Composition and Growth Dynamics

Kenya’s external debt increased by KSh 18 billion during August 2025 to reach KSh 5.40 trillion, reflecting the continued flow of disbursements from international creditors across multiple categories. The external debt portfolio encompasses bilateral loans from individual countries, multilateral financing from international development institutions, commercial borrowings from international capital markets, and guaranteed debt for state corporations.

Bilateral Debt: China Remains Dominant Creditor

Bilateral debt—loans extended directly by foreign governments—rose by KSh 8.1 billion to KSh 985.6 billion at the end of August 2025. Within this category, China maintains its position as Kenya’s largest bilateral creditor by a substantial margin, with exposure increasing to KSh 612.5 billion. This Chinese lending, primarily channeled through institutions like the Export-Import Bank of China, has financed major infrastructure projects including the Standard Gauge Railway, roads, and energy infrastructure.

France ranks as Kenya’s second-largest bilateral creditor with KSh 98.7 billion in outstanding loans, followed closely by Japan with KSh 86.7 billion. These traditional development partners have long provided concessional financing for infrastructure, education, health, and other development priorities, typically on more favorable terms than commercial borrowing.

The continued growth in bilateral debt reflects ongoing disbursements from previously committed loan agreements as infrastructure projects progress through their implementation phases. However, Kenya has faced increasing scrutiny regarding the terms and conditions of some bilateral loans, particularly from China, with debates about interest rates, collateral arrangements, and the economic viability of financed projects.

Multilateral Debt: World Bank Leads Development Financing

Multilateral obligations—loans from international financial institutions owned by multiple countries—expanded by KSh 19 billion to KSh 3.03 trillion, representing by far the largest component of Kenya’s external debt portfolio. The World Bank’s International Development Association (IDA), which provides highly concessional loans to low-income countries, accounts for KSh 1.65 trillion of this total, making it Kenya’s single largest creditor overall.

The African Development Bank (AfDB) ranks as Kenya’s second-largest multilateral creditor with KSh 546 billion in outstanding loans, while the International Monetary Fund (IMF) exposure stands at KSh 477 billion. These multilateral institutions typically provide financing on relatively favorable terms compared to commercial borrowing, often with long grace periods, extended repayment schedules, and below-market interest rates.

Kenya’s relationship with multilateral lenders extends beyond simple borrowing to encompass technical assistance, policy advice, and periodic assessments of economic performance and reform progress. The IMF, in particular, conducts regular reviews of Kenya’s economy under various lending programs, with disbursements often conditional on meeting specified performance criteria related to fiscal policy, debt management, governance reforms, and other structural adjustments.

The continued growth in multilateral debt reflects Kenya’s strategy of leveraging concessional financing from development institutions to fund priority infrastructure and social programs while limiting reliance on more expensive commercial borrowing. However, even concessional debt must eventually be repaid, and the cumulative burden of multilateral obligations contributes significantly to Kenya’s overall debt service requirements.

Commercial Debt Declines Modestly

In contrast to bilateral and multilateral debt categories, Kenya’s commercial external debt—borrowings from private international capital markets—declined by KSh 9.8 billion to KSh 1.31 trillion during August 2025. This reduction likely reflects scheduled principal repayments on Eurobonds and other commercial instruments without equivalent new issuances during the month.

Kenya has accessed international capital markets on several occasions over the past decade, issuing sovereign bonds denominated in US Dollars to institutional investors including pension funds, asset managers, and sovereign wealth funds. These Eurobond issuances have provided substantial financing at market rates, though typically at considerably higher interest costs than concessional multilateral and bilateral loans.

The country’s most pressing commercial debt challenge involves a $2 billion Eurobond scheduled for redemption in 2024, which the government successfully refinanced through a combination of a new bond issuance and buyback operations. However, Kenya continues to face significant commercial debt service obligations, with billions in principal and interest payments due over the coming years.

Guaranteed Debt for State Corporations

Guaranteed debt—government guarantees for borrowings by state corporations and other public entities—rose marginally by KSh 690 million to KSh 81.5 billion. While relatively small compared to other debt categories, guaranteed debt represents a contingent liability that could become a direct government obligation if the borrowing entities experience financial distress and cannot service their debts.

Kenya has provided guarantees for various state-owned enterprises and public projects, including energy sector entities, infrastructure development agencies, and other government-linked organizations. Treasury officials monitor these guarantees carefully, as crystallization of contingent liabilities could significantly worsen the fiscal position if multiple guaranteed entities simultaneously face repayment difficulties.

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External Debt Service Obligations

During August 2025, Kenya made external debt service payments totaling KSh 48.4 billion, comprising KSh 20.6 billion in principal repayments and KSh 27.8 billion in interest payments. These substantial monthly outflows underscore the significant fiscal burden that debt service obligations place on government finances, consuming resources that might otherwise fund education, healthcare, infrastructure, and other development priorities.

On an annualized basis, if maintained at similar levels, external debt service obligations would exceed KSh 580 billion—a substantial portion of total government revenues. When combined with domestic debt service costs, total debt service consumes an increasingly large share of the national budget, constraining fiscal flexibility and raising questions about medium-term debt sustainability.

The composition of debt service—with interest payments exceeding principal repayments—reflects the structure of Kenya’s external debt portfolio, which includes numerous loans with long grace periods where only interest is due in early years. As more loans transition from grace periods to principal repayment phases, the debt service burden may intensify further unless offset by favorable refinancing or debt relief arrangements.

Domestic Debt Acceleration

While external debt increased modestly during August 2025, domestic debt rose sharply by KSh 178.3 billion to reach KSh 6.57 trillion, representing the primary driver of the month’s overall debt increase. This acceleration in domestic borrowing reflects the government’s continued reliance on local capital markets to finance budget deficits, particularly following the politically painful withdrawal of proposed tax increases that would have generated substantial additional revenues.

Treasury Bonds Lead Domestic Borrowing

Within the domestic debt portfolio, Treasury bond holdings increased by KSh 187 billion to KSh 5.37 trillion, while Treasury bills rose more modestly by KSh 3 billion to KSh 1.06 trillion. The shift toward bonds rather than bills reflects a deliberate debt management strategy aimed at extending the average maturity of domestic debt and reducing rollover risk by relying less on short-term securities that must be refinanced frequently.

Treasury bonds, with maturities ranging from two to thirty years, provide more stable and predictable financing compared to Treasury bills, which mature in 91, 182, or 364 days. By issuing longer-dated securities, the Treasury reduces the frequency with which it must return to markets to refinance maturing obligations, lowering execution risk and potentially reducing overall borrowing costs if the yield curve is favorably shaped.

Investor Categories and Holdings Distribution

The distribution of domestic debt holdings across different investor categories reveals important information about market structure and the sources of government financing. According to Treasury data, commercial banks remain the dominant holders of government securities, with their holdings increasing by KSh 77.6 billion to KSh 2.81 trillion at the end of August 2025.

Commercial banks’ appetite for government securities reflects multiple factors including regulatory requirements to hold liquid assets, the relatively attractive yields offered by Treasury instruments compared to lending opportunities in a challenging economic environment, and the zero risk-weighting that government securities receive under prudential regulations. However, excessive bank holdings of government debt can potentially crowd out private sector lending, a concern that the Central Bank monitors closely.

Pension funds represent the second-largest holder category, with their portfolios expanding by KSh 36.0 billion to KSh 1.89 trillion. Pension funds’ substantial allocations to government securities reflect both regulatory requirements mandating minimum holdings of such instruments and the attractive yields and relative safety these securities offer for institutions managing long-term retirement savings.

Insurance companies increased their government securities holdings by KSh 12.2 billion to KSh 479.0 billion, while other holders—including individual investors, cooperative societies, and foreign investors—saw their combined holdings rise by KSh 52.5 billion to KSh 1.39 trillion.

The diversified holder base provides important stability to the domestic debt market, as different investor categories have varying investment horizons, liquidity needs, and return requirements. This diversity reduces vulnerability to concentrated selling pressure from any single investor segment and helps ensure continuous demand across market cycles.

Auction Performance and Investor Demand

The Treasury’s auction activity during August 2025 demonstrates robust investor appetite for government securities despite the elevated debt levels and associated sustainability concerns. Government securities worth KSh 186 billion were advertised during the month, attracting total bids of KSh 614 billion—an impressive oversubscription that reflects strong demand for the relatively attractive yields being offered.

From these submitted bids, the Treasury accepted KSh 361 billion in successful offers, applying its discretion to reject bids deemed too expensive or to limit uptake based on immediate financing requirements. This selective acceptance approach allows the government to balance immediate funding needs against the objective of minimizing long-term borrowing costs by rejecting offers that demand excessively high yields.

During the same period, the Treasury made redemption payments totaling KSh 175 billion for maturing securities, resulting in net domestic financing of KSh 186 billion for the month (KSh 361 billion in new issuances minus KSh 175 billion in redemptions). On a cumulative basis for the fiscal year, net domestic financing stood at KSh 235 billion against a full-year target of KSh 613 billion, suggesting the government remains broadly on track with its domestic borrowing plans.

Debt Sustainability Concerns and Fiscal Implications

While the Treasury’s ability to successfully place substantial volumes of domestic securities demonstrates current market confidence and financing capacity, the trajectory of Kenya’s public debt raises serious questions about medium and long-term sustainability. At 67.4% of GDP, Kenya’s debt-to-GDP ratio significantly exceeds levels typically considered prudent for emerging market economies, particularly those with revenue mobilization challenges and structural fiscal deficits.

The International Monetary Fund and other international observers have repeatedly cautioned Kenya about debt sustainability risks, emphasizing the need for fiscal consolidation measures that would reduce primary deficits and stabilize the debt trajectory. However, implementing such consolidation—typically involving tax increases or expenditure cuts—faces significant political resistance, as demonstrated by the public backlash against proposed tax measures in 2024.

The government’s Medium-Term Debt Management Strategy articulates objectives including gradually reducing the debt-to-GDP ratio, extending the average maturity of debt, and maintaining a balanced composition between domestic and external obligations. However, achieving these objectives while simultaneously financing infrastructure development and essential services remains exceptionally challenging given structural revenue constraints and persistent budget deficits.

Conclusion: Navigating a Narrow Fiscal Path

Kenya’s public debt reaching KSh 11.97 trillion at the end of August 2025 represents the culmination of years of deficit financing necessitated by development spending, periodic economic shocks, and structural fiscal imbalances. While the government has maintained market access and continues to successfully raise financing through both domestic and external channels, the trajectory remains concerning from a sustainability perspective.

The coming years will test Kenya’s fiscal discipline and economic management as substantial debt service obligations come due, requiring either continued successful refinancing at manageable rates or difficult fiscal adjustments to create primary surpluses sufficient to stabilize debt dynamics. For policymakers, investors, and citizens alike, the debt trajectory represents one of the most consequential economic challenges facing the nation, with profound implications for development prospects, economic stability, and fiscal sovereignty.

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By: Montel Kamau

Serrari Financial Analyst

16th October, 2025