The Treasury has walked back on a plan to balance borrowing from domestic and external markets, signaling new realisation of the daunting task to get funding from outside.
In the annual borrowing plan for the 2025/26 fiscal year, Treasury plans to borrow 68.1 percent (Sh613.5 billion) of financing needs for the year locally and Sh287.4 billion (31.9 percent) from external markets.
This is a deviation from last year's plan to balance debt from local and external markets equally, coming after actual borrowing during the last fiscal year was heavily skewed towards domestic market.
The Treasury plans to borrow a total of Sh901 billion in the year to June 2026.
“The gross financing requirement of the government for the 2025/2026 fiscal year is estimated at Sh1.547 trillion equivalent to eight percent of GDP. This comprises Sh901 billion to finance the fiscal deficit and Sh646.3 billion to refinance maturing domestic and external debt obligations,” Treasury says.
The government projects to issue securities of Sh634.8 billion and get Sh149 billion from privatisation of several parastatals, including the Kenya Pipeline Company where it has targeted Sh100 billion. More domestic financing will come from repayments of loans worth Sh11.9 billion to the Treasury.
The Treasury also says the government will pay Sh182.1 billion debts, leaving the net domestic borrowing at Sh613.5 billion.
“Treasury bills will be issued primarily for cash and liquidity management purposes while liability management operations using buyback and switches will be actively applied to manage maturity risk and smoothen the redemption profile of domestic debt,” Treasury said.
It added that fixed-rate bonds with maturities of two to 25 years will be issued, complemented by infrastructure bonds to strengthen domestic financing. On the external borrowing front, the Treasury expects inflows of Sh221.2 billion from commercial financing, Sh211.2 billion from project loans and Sh195.3 billion from program loans.
The Treasury will also be repaying Sh340.2 billion maturing principal debts during the year, to leave the new external debt at Sh287.4 billion.
The National Treasury prepares the medium-term debt management strategy to guide the government in borrowing, by drawing a balance in cost and risk trade-offs.
High domestic borrowing has been criticised for heightening refinancing risks and crowding out businesses as banks concentrate lending to government while denying private sector borrowers the much-needed cash to run operations.
“While domestic borrowing presents the government with an alternative source of budget financing, unchecked borrowing could lead to refinancing risks due to high domestic interest rates, a debt trap, and limited funds to cater for recurrent and development activities,” Controller of Budget (CoB) Margaret Nyakango said in a report for the year to June 2025.
Treasury data shows that by the end of June, public debt hit Sh11.8 trillion, with domestic debt stock accounting for 53.5 percent as external debt dropped to 46.5 percent.
Kenya borrowed Sh1.03 trillion during the year to June 2025, with domestic debt accounting for Sh853.4 billion, Treasury says.
“The slight increase was driven by revenue shortfalls, which necessitated a raise in the overall financing requirement while remaining within the fiscal targets,” it said.
The government majorly borrowed from commercial banks (Sh368.2 billion) and non-banking financial institutions (Sh483.9 billion), underlining the concentration of domestic borrowing in the financial services sector.
The Kenya Revenue Authority (KRA) encountered frequent shortfalls on tax targets and were the main reasons the State sought financing refuge on the local front.
“Domestic debt increased by 17 percent (from Sh5.41 trillion as of 30th June 2024), attributable to increased borrowing in the domestic market, while external debt increased marginally by four percent (from Sh5.17 trillion as of 30th June 2024),” the CoB said in her report for the last fiscal year.
