The National Treasury will spend Sh1.09 trillion in interest payments on public debt in the next financial year (2025-26), reflecting the impact of mounting debt on Kenyans who are reeling from the high cost of living and multiple taxation.
This will mark a Sh94.2 billion rise compared to the Sh995.76 estimated to be spent on debt service in the current fiscal year ending this month.
Treasury data show the bulk of these funds amounting to Sh851.42 billion will go towards servicing domestic debt acquired largely from banks, insurance companies and pension funds through treasury bills and bonds, while Sh246.26 billion will be paid to foreign lenders.
The interest payment on loans reflects the biggest line item in this year’s budget implying that more resources will be diverted from productive investments towards servicing public debt that hit Sh11.35 trillion last March, an equivalent to 70 percent of the gross domestic product (GDP).
Kenya’s debt has quadrupled in the last 10 years to Sh11.35 trillion (70 percent of GDP) in March from Sh2.84 trillion (49.75 percent of GDP) in June 2015 with debt repayments starving other critical programmes and projects of resources.
Fiscal deficit
The Treasury’s programme-based budget for the 2025-26 fiscal year shows that the government spent Sh995.76 billion on interest payments in the current financial year (2024-25) comprising Sh767.24 billion on domestic debt and Sh228.522 billion on external debt.
Treasury Cabinet Secretary John Mbadi presents today a spending plan for the 2025-26 fiscal year amounting to Sh4.23 trillion, against projected revenues, including appropriation-in-aid of Sh3.31 trillion.
The projected fiscal deficit of Sh876.1 billion will be filled through external borrowing of Sh284.2 billion and domestic borrowing of Sh591.9 billion.
The Treasury’s debt sustainability analysis last October revealed that while the public debt is sustainable, it carries a high risk of debt distress.
For instance, the present value (PV) of public debt was 63 percent of the GDP against the benchmark debt threshold of 55 percent of debt to GDP, and the Treasury has until November 1, 2028, to bring the present value of public debt within the threshold.
During the 2023-24 fiscal year, the debt-to-GDP ratio reduced to 65.7 percent from 72 percent at the end of June 2023 helped by the appreciation of Kenya shilling against major foreign currencies.
Kenya’s total public debt stock increased by Sh303.2 billion to Sh10.58 trillion in the 2023-24 financial year from Sh10.27 trillion in the 2022-23 financial year, comprising Sh5.17 trillion and Sh5.41 trillion in external debt and domestic debt, respectively.
The Parliamentary Budget Office says the fiscal landscape remains turbulent, characterised by shortfalls in revenue collection, substantial debt service costs and rising expenditure pressures on social programmes such as education and health.
The Treasury, through its annual borrowing plan for the 2024-25 fiscal year had projected interest payments on public debt at Sh1 trillion in the current financial year (2024-25), with principal repayment of Sh900 billion.
Kenya’s public finances were in focus early last year due to concerns it could default $2 billion international bond, and later because of violent protests that forced President William Ruto to pause planned tax increases.
The Treasury bought back most of the $2 billion bond in February by issuing a new $1.5 billion bond before paying off the rest ($500 million) in June.
Concerns about Kenya’s ability to repay the 2024 Eurobonds were evidenced by the negative credit ratings it received from global rating agencies coupled with fiscal constraints and macroeconomic instability, which hurt its creditworthiness.
The successful management of Eurobond repayment in 2024 de-risked the Kenyan economy, boosting foreign investor confidence and encouraging capital inflows.
The country is also facing an increasing accumulation of non-disbursed committed loans that is becoming a matter of great public concern.
By June 2024, Kenya had contracted but not yet taken debt totalling Sh1.38 trillion, resulting in about Sh1.583 billion in commitment fees.
Between June 2016 and June 2024, Kenya cumulatively incurred Sh18.9 billion in commitment fees for undisbursed loans, underscoring the financial burden of underutilised borrowed funds. The delays in the disbursement of loans defer the expected economic and social gains of the planned projects or programmes.
The Treasury’s medium-term debt management strategy for the 2024-25 fiscal year aimed to reduce debt costs and manage risks, with a financing mix of 45 percent from external sources and 55 percent from domestic sources.
The plan focuses on maximising concessional borrowing while rolling over commercial debt from external sources.
It also seeks to lengthen the maturity of domestic debt and deepen the domestic market by issuing medium-to long-term debt securities under the benchmark bond programme.
