The National Assembly Committee on Public Debt and Privatisation has warned that the government's increased borrowing from the domestic market could bring risks to the economy, including starving businesses and households of credit.
The warning comes as lower interest rates have opened a window for the National Treasury to ramp up the auction of bonds and Treasury bills through the Central Bank of Kenya –the government's fiscal agent.
The committee has asked for the "appropriate sizing" of domestic borrowing limits as the exchequer outlines its reliance on domestic funding to plug the budget deficit into the medium term.
The National Treasury is expected to tap the domestic credit market for 78 percent of government funding needs for upcoming fiscal years up to June 2029.
The CBK has been on a long-running interest rate cutting cycle, reducing its benchmark rate from 13 percent in August 2024 to 8.75 percent at present. This has in turn lowered the State’s cost of funds from issuing Treasury bills and bonds, incentivising more borrowing.
“Given the declining CBR (Central Bank Rate), the National Treasury should ensure that planned domestic borrowing remains appropriately sized and carefully timed so that government demand for funds does not unduly crowd out credit to the private sector,” the committee said.
The remarks were made in a report on the consideration of the government’s medium term debt management strategy.
Interest rates on Treasury bills and bonds have fallen in tandem with the lower CBR rate with the return on the 364-day T-bill falling to 8.9 percent last week from a high of nearly 17 percent in March 2024.
Kenya’s domestic debt closed at Sh6.83 trillion at the end of 2025 to represent 55.6 percent of the Sh12.29 trillion total debt stock.
Commercial banks, pension funds and insurance companies hold the bulk of Kenya’s domestic debt at 79.1 percent as of February 13, 2026.
Households and foreigners hold a lower share of domestic debt at 6.4 and 4.7 percent respectively as per data from CBK.
Net domestic financing for the upcoming 2026/27 fiscal year is expected to remain elevated at Sh890.4 billion from a revised Sh885.9 billion for the financial year to June 2026.
Total financing or the budget deficit is expected to remain above the Sh1 trillion mark for the third consecutive financial year in the cycle starting July 2026.
This implies that the government will borrow about Sh800 billion in each fiscal year from Treasury bills and bonds to plug the funding gap.
The Controller of Budget (COB) has made similar observations, assessing the significant shift towards domestic financing as an elevation of domestic risks.
The independent office says the concern over domestic borrowing is not in the government’s ability to issue debt but the risk for macroeconomic destabilization.
“While additional issuance may be feasible in the short term, persistent expansion could displace private investment, slow growth, raise systemic financial risks and increase future interest costs-thereby compressing fiscal space and potentially undermine the debt stabilization objective,” the COB said.
The COB has proposed the deepening of the domestic debt market and broadening the investor base to ease refinancing pressures and progressively lower borrowing costs.
This is whilst noting that Kenya’s domestic markets remain structurally narrow and concentrated despite being relatively advanced compared to regional peers.
“Government financing relies heavily on bank liquidity rather than a broad and diversified investor base, which heightens systemic risk and reinforces crowding-out pressures,” the COB added.
