Kenya’s Public Debt Surpasses Sh12 Trillion as Government Shifts to Domestic Borrowing

Kenya’s public debt has breached the Sh12 trillion threshold, reaching Sh12.06 trillion in September 2025, according to the latest data released by the National Treasury. This milestone represents a significant escalation in the country’s debt burden and highlights a fundamental shift in the government’s financing strategy toward domestic markets.

The total public debt burden now stands at 67.3 percent of the country’s Gross Domestic Product (GDP), with domestic debt accounting for Sh6.66 trillion (37.2 percent of GDP) and external debt comprising Sh5.39 trillion (30.1 percent of GDP). This debt accumulation reflects the persistent fiscal pressures facing the Kenyan government as it seeks to balance development spending, recurrent expenditures, and debt service obligations in an increasingly challenging economic environment.

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Dramatic Year-on-Year Debt Increase

The September 2025 debt figures represent a substantial year-on-year increase of Sh1.26 trillion compared to the Sh10.8 trillion recorded in September 2024. This 11.7 percent annual growth rate in absolute debt levels underscores the government’s continued reliance on borrowing to finance budget deficits and fund development projects across the country.

The debt-to-GDP ratio has also edged upward, rising from 66.5 percent to 67.3 percent over the same period. While this increase of 0.8 percentage points may appear modest, it indicates that the pace of debt accumulation is slightly outstripping nominal GDP growth. This dynamic raises concerns among economists about the long-term sustainability of Kenya’s fiscal trajectory and the government’s ability to service its growing debt obligations without crowding out essential public services.

Quarterly Debt Accumulation Trends

The latest Treasury data reveals that Kenya added at least Sh250 billion to its debt burden in just three months, from June to September 2025. This quarterly increase was driven entirely by a surge in domestic borrowing, which rose by Sh340 billion during this period, while external debt actually declined by approximately Sh80 billion.

This three-month snapshot illustrates the accelerating pace of domestic debt accumulation and the government’s strategic pivot away from foreign currency-denominated obligations. The reduction in external debt during this quarter likely reflects both principal repayments on existing loans and the government’s deliberate policy to reduce exposure to exchange rate risks.

Strategic Shift Toward Domestic Financing

The dramatic increase in domestic borrowing represents a fundamental transformation in Kenya’s public finance model. This shift aligns with President William Ruto’s stated commitment to reduce reliance on expensive external loans that carry significant foreign exchange risks. The President has repeatedly emphasized the need to protect Kenya from currency volatility and the vulnerability that comes with large external debt obligations denominated in foreign currencies.

This inward-looking financing strategy has become increasingly pronounced since President Ruto assumed office, reflecting both policy preference and practical necessity. The Kenyan government has actively promoted the narrative that domestic borrowing provides greater sovereignty over economic policy and insulates the country from external shocks related to global interest rate movements and currency fluctuations.

Historical Context: The Eurobond Crisis

Kenya’s increased dependence on local markets began in earnest during fiscal year 2022/23, when the country faced a $2 billion Eurobond maturity amid a perfect storm of adverse global financial conditions. At that time, Kenya confronted a tight global credit environment characterized by rising interest rates in developed economies, reduced appetite for emerging market risk, and a sharply depreciating shilling.

Like many emerging markets during this period, Kenya struggled to access affordable external financing through traditional channels. International credit markets had become prohibitively expensive, with spreads on Kenyan sovereign bonds widening significantly due to concerns about debt sustainability and political uncertainty. Faced with limited external financing options, domestic markets became the default—and often only viable—option for government borrowing.

This crisis period fundamentally reshaped Kenya’s debt management strategy and accelerated the transition toward domestic financing that continues today. The government’s success in refinancing the $2 billion Eurobond, partly through a new external issuance but also through increased domestic borrowing, demonstrated both the challenges and possibilities of this financing model.

Treasury’s Defense of Domestic Borrowing

National Treasury Cabinet Secretary John Mbadi has vigorously defended the shift toward domestic borrowing, characterizing it as more sustainable and aligned with Kenya’s long-term economic interests. Mbadi has argued that domestic debt allows the government to maintain greater control over borrowing terms, reduces vulnerability to external shocks, and keeps debt service payments circulating within the domestic economy rather than flowing abroad.

“Borrowing domestically means we are in control of our economic destiny,” Mbadi has stated in various public forums. “The resources stay within our economy, and we’re not subject to the whims of international credit rating agencies or global financial market volatility.”

However, this optimistic assessment of domestic borrowing has been challenged by economic experts who point to significant costs and risks associated with heavy reliance on local debt markets.

Economic Experts’ Counterargument: The True Cost of Domestic Debt

According to a comprehensive report by the Institute of Economic Affairs (IEA), Kenya’s domestic borrowing strategy may be significantly more expensive than Treasury officials acknowledge. The IEA analysis reveals that Kenya paid interest rates of up to 19 percent on domestic bonds during the past financial year—almost three times higher than rates typically available on commercial external loans.

“There is a false notion that local debt is cheaper. In fact, it is almost 3-4 times higher compared to multilateral and external commercial loans whose rates average between four and eight percent on the higher side,” the IEA report states emphatically.

This stark assessment challenges the Treasury’s narrative about the benefits of domestic borrowing and raises important questions about the fiscal efficiency of current government financing strategies. The IEA economists argue that while domestic debt may provide greater policy autonomy and reduce exchange rate risk, these benefits come at a substantial financial cost that ultimately burdens Kenyan taxpayers.

Even though yields on Treasury bills and bonds have since declined to an average range of eight to 13 percent—down from the peaks of 15-19 percent seen in 2024—these rates remain considerably higher than what Kenya could potentially obtain through multilateral development loans or concessional financing from institutions like the World Bank or African Development Bank.

Alternative Financing Models Proposed

The IEA economists advocate for a more nuanced approach to public finance, supporting a feasible public-private partnership (PPP) funding model, especially for capital-intensive infrastructure projects. PPP arrangements can leverage private sector efficiency and access to long-term capital while sharing risks between public and private entities.

Kenya has had mixed success with PPP projects in the past, with some initiatives like certain road projects proceeding relatively smoothly while others have encountered delays, cost overruns, or contractual disputes. However, proponents argue that refining the PPP framework and building institutional capacity for managing these complex arrangements could provide a valuable complement to traditional government borrowing.

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Debt Service Burden Intensifies

The growing debt stock has translated into an increasingly heavy debt service burden that constrains the government’s fiscal flexibility. Findings by the Controller of Budget, Margaret Nyakang’o, reveal that in the financial year 2024-25, debt service on domestic obligations alone reached Sh1.05 trillion, driven primarily by a surge in short-term Treasury bills.

This trillion-shilling domestic debt service figure represents a substantial portion of government revenues and diverts resources that could otherwise fund essential public services, infrastructure development, or social programs. Of this total debt service amount, Sh632.3 billion was allocated to interest payments—representing the pure cost of borrowing—while only Sh360.1 billion was used to reduce principal loan amounts.

This distribution reveals that the government is paying nearly twice as much in interest as it is in actually reducing its debt stock. This ratio highlights the challenge of escaping the debt trap: a significant portion of new borrowing is effectively being used to service existing debt rather than funding new development priorities.

Composition of Domestic Debt Securities

The Controller of Budget report for the past three months shows that Treasury bonds accounted for 83 percent of domestic securities, while Treasury bills comprised the remaining 17 percent. This composition reflects the government’s preference for longer-term financing instruments that provide more predictable debt service schedules and reduce refinancing risk.

Treasury bonds, with maturities typically ranging from two to 30 years, offer the advantage of locking in financing for extended periods, albeit often at higher interest rates than shorter-term instruments. Treasury bills, with maturities of 91, 182, or 364 days, serve more as liquidity management tools and allow the government to respond flexibly to short-term financing needs.

Major Domestic Debt Holders

Commercial banks remained the largest holders of government securities, reflecting their regulatory requirements to hold safe assets for liquidity management and their role as primary dealers in government securities. Kenya’s banking sector, dominated by institutions like KCB Group, Equity Bank, and Cooperative Bank, has substantial balance sheet capacity to absorb government debt.

Pension funds and insurance companies constitute the second major category of domestic debt holders. These institutional investors are natural buyers of government securities due to their need for long-term, relatively safe assets to match their long-term liabilities. However, the heavy concentration of pension fund assets in government securities has raised concerns about diversification and the potential crowding out of private sector lending.

Declining Treasury Bill Rates Signal Easing Conditions

One positive development in Kenya’s debt markets has been the substantial easing of borrowing conditions in the domestic market. The 91-day Treasury bill rate experienced a dramatic decline, falling from 15.8 percent in September 2024 to 7.9 percent in September 2025. This 7.9 percentage point reduction represents a halving of short-term borrowing costs and reflects improved liquidity in the banking system, reduced inflation pressures, and changing monetary policy stance by the Central Bank of Kenya.

This decline in Treasury bill rates has provided significant relief to the government’s debt service burden and improved the fiscal outlook. Lower borrowing costs mean that the government can refinance maturing obligations at more favorable rates and potentially reduce the overall interest burden over time.

The rate decline also reflects improved investor confidence in Kenya’s near-term economic prospects and reduced perceived risks around government debt sustainability. However, economists caution that these favorable conditions could reverse if inflation accelerates, the shilling depreciates sharply, or fiscal deficits widen beyond market expectations.

External Debt Composition and Currency Diversification

On the external debt front, multilateral lenders now account for 56.7 percent of Kenya’s foreign obligations, up from 54.9 percent a year earlier. This increased multilateral share reflects new disbursements from institutions like the World Bank, African Development Bank, and International Monetary Fund, which typically offer more favorable terms than commercial creditors.

Bilateral debt—loans from other governments—has declined to 18.5 percent of external debt, while commercial external debt now accounts for 23.4 percent. The reduction in bilateral debt may reflect the completion of certain Chinese-financed infrastructure projects that were prominent in Kenya’s debt portfolio in previous years.

Strategic Currency Diversification

Kenya has made deliberate efforts to diversify its external debt currency composition, reducing vulnerability to any single currency’s fluctuations. The share of external debt denominated in US dollars fell from 62.1 percent to 52 percent, representing a significant 10 percentage point reduction in dollar exposure.

Correspondingly, the euro share of external debt rose from 25.5 percent to 27.9 percent, indicating a strategic shift toward European currency denomination. This diversification strategy helps hedge against extreme movements in any single currency and may also reflect the currency composition of new multilateral and bilateral financing arrangements.

This currency diversification complements the broader strategy of reducing total external debt exposure and demonstrates sophisticated debt management practices. By spreading currency risk across multiple denominations, Kenya can moderate the impact of exchange rate volatility on its debt service obligations.

Macroeconomic Implications and Future Outlook

The crossing of the Sh12 trillion debt threshold and the continued shift toward domestic borrowing carry significant implications for Kenya’s macroeconomic management. High levels of domestic debt can crowd out private sector credit access, as banks allocate more of their lending capacity to government securities rather than business and consumer loans. This crowding out effect can potentially constrain economic growth by limiting productive private investment.

Additionally, the high interest rates on domestic debt mean that an increasing share of government revenues must be devoted to debt service rather than development spending or service delivery. This creates fiscal rigidity and limits the government’s ability to respond to economic shocks or emerging priorities.

Looking ahead, Kenya faces critical choices about its debt trajectory. Continued rapid accumulation of domestic debt at high interest rates risks creating an unsustainable debt spiral where borrowing increasingly serves to finance existing debt rather than productive investments. However, a return to large-scale external borrowing would reintroduce currency risks and potential vulnerability to global financial market volatility.

The optimal path likely involves a balanced approach: pursuing concessional multilateral financing where available, carefully managing domestic borrowing to avoid excessive crowding out, implementing fiscal consolidation measures to reduce overall borrowing needs, and improving the efficiency of public spending to maximize development impact from limited resources.

Conclusion

Kenya’s public debt crossing Sh12 trillion and the pronounced shift toward domestic borrowing represent pivotal developments in the country’s fiscal landscape. While this strategy offers certain advantages in terms of reduced currency risk and greater policy autonomy, it comes with substantial costs in the form of high interest rates and potential crowding out of private sector credit.

The debate between Treasury officials who champion domestic borrowing and economists who question its cost-effectiveness will likely intensify as debt levels continue rising. Ultimately, Kenya’s fiscal sustainability will depend not only on the composition of its debt but also on the government’s ability to accelerate revenue collection, improve spending efficiency, and foster economic growth that outpaces debt accumulation.

As the country navigates these complex fiscal challenges, transparent debt management, prudent borrowing decisions, and comprehensive fiscal reforms will be essential to ensuring that Kenya’s debt serves as a tool for development rather than becoming an insurmountable burden on future generations.

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By: Montel Kamau

Serrari Financial Analyst

11th November, 2025