The government will borrow Sh635.5 billion from the domestic market in the next financial year, triggering fears of crowding out the private sector as it seeks to fill a Sh923.2 billion budget gap.
The National Treasury targets to borrow an additional Sh30 billion, 4.9 percent increase, from the Kenyan market compared to this financial year when it borrowed Sh605.7 billion.
External borrowing will be Sh287.7 billion up from Sh281.5 billion borrowed this year or a 2.2 percent increase, signaling increased reliance on Treasury bills and bonds to cover the budget shortfall.
“The fiscal deficit for the full year 2025/26 budget will be financed by net external borrowing of Sh287.7 billion, equivalent to 1.5 percent of gross domestic product (GDP) and net domestic borrowing of Sh635.5 billion,” said Treasury Cabinet Secretary John Mbadi.
The fiscal deficit of 4.8 percent of the GDP is an improvement compared to last year’s estimate of Sh997.5 billion or 5.7 percent of the GDP.
Increased borrowing from the local market will be coming at a time when interest rates are on a decline, following interventions from the Central Bank of Kenya (CBK). CBK has reduced its indicative rate in its last six monetary policy meetings, cutting the Central Bank Rate by a cumulative 3.5 percentage points to 9.5 percent.
This has seen interest rates on the decline with the 364-day Treasury bill falling below 10 percent for the first time since October 2022, at the beginning of this month.
However, increased domestic borrowing by the government could see commercial lenders turn their back on the risky private sector and continue piling Treasury securities as has been the case in the last twelve months.
Credit growth to the private sector has remained subdued, expanding by 2 percent in the 12 months to May 2025, albeit an improvement from 0.4 percent recorded in April. Data shows top commercial banks increased their share of government securities by 13.6 percent to Sh926.9 billion in 2024.
Credit officers from commercial banks told the Central Bank of Kenya that they would invest 34 percent of their improved liquidity in Treasury bills and bonds with the private sector receiving 31 percent.
While the government is concerned with its cost of debt with interest payments hitting Sh1 trillion, it is being lured to expand its domestic market borrowing by the declining interest rates.
Cumulative domestic borrowing stood at Sh6.12 trillion in the 12 months to March 2025 being a 17 percent growth from a year earlier. External debt grew mildly over the same period by 1.35 percent to Sh5.23 trillion over the same period.
