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Treasury expands domestic borrowing to fund budget
National Treasury and Economic Planning Cabinet Secretary John Mbadi when he appeared before the National Assembly Public debt and Privatization Committee at the Continental House in Nairobi on November 28, 2024.
The National Treasury is expected to pile into the domestic debt market to plug the budget deficit over the medium term, deeming the strategy the most suitable in managing borrowing costs.
The ministry’s 2026 Draft Medium Term Debt Strategy expects 82 percent of gross borrowing needs to be met from the domestic market, with only a partial 18 percent of funding coming from external sources.
The net borrowing mix over the medium term from the 2026/27 to the 2028/29 fiscal year, is set at 78 percent domestic and 22 percent for external sources.
The overreliance on the domestic market to plug the budget hole is against private sector concerns over being crowded out as the exchequer competes with households and businesses for funding from commercial banks.
The National Treasury, however, argues that the bias towards domestic borrowing is the most cost-effective approach and further says it plans on deepening the domestic credit market to ensure the availability of optimal liquidity.
“From an array of strategies analysed, Strategy 2 (this strategy) proposes balancing lower cost external borrowing with deepening the domestic debt market, locking in fixed rates and lower foreign exchange rate exposure,” the National Treasury said in the draft MTDS.
“This strategy will lead to a reduction in debt burden while safeguarding fiscal sustainability and creating space for priority national investments."
The National Treasury is banking on innovative financing options, including the development of domestic retail digital bonds via mobile money.
Previously, the exchequer has persistently failed to keep within its set mix of domestic and external funding, exceeding the target on the auction of Treasury bills and bonds.
In the 2024/25 fiscal year, the Treasury exceeded its domestic borrowing target by 28 percent, tapping 83 percent of its revenue needs from the local market against a target of 55 percent.
The target for domestic borrowing has been consistently exceeded previously: by 23 percent in the year to June 2024, 3 percent in the year to June 2023, 12 percent in the year to June 2022 and 9 percent in the year to June 2021.
The National Treasury has blamed external funding shortfalls for exceeding prior targets on domestic borrowing.
“The strategy envisaged that 55 percent of net deficit financing (for the 2024/25 fiscal year) would be met through domestic sources, with the remaining 45 percent obtained externally. In practice, however, the financing mix shifted to 83 percent net domestic financing and 17 percent net external financing,” the National Treasury added.
“This deviation was largely due to delays in external disbursements, which required greater reliance on domestic borrowing.”
The risk indicators for existing domestic debt worsened in the period ending in June 2025, as the proportion of instruments with less than one year to maturity rose to 20.5 percent from 18.6 percent previously.
The deterioration has been attributed to the higher uptake of short-term Treasury bills and the lesser issuance of long-dated Treasury bonds.
The National Treasury expects to return to the issuance of a higher proportion of medium to long-term bonds, increasing the average time to maturity for domestic debt to fix the refinancing risk.
The stock of Treasury bills as of June 2025 stood at Sh1.03 trillion, while outstanding bonds were at Sh5.11 trillion.
