Kenya’s domestic debt has risen significantly, increasing by 26.7 per cent from Sh4.83 trillion in June 2023 to Sh6.12 trillion in March 2025. This increase shows the government’s growing appetite for short-term borrowing, which could harm long-term financial stability and reduce the availability of credit for businesses.

A report from the Central Bank of Kenya (CBK) for the period ending March 14, 2025, shows that Treasury Bonds make up over 84 per cent of government securities.

While these bonds offer stability with long-term maturities, they also come with strict repayment schedules. At the same time, the share of Treasury Bills has grown from 13.28 per cent to 15.12 per cent, indicating a preference for short-term financing to meet immediate cash needs.

However, this strategy raises concerns about refinancing risks, as the government frequently needs to renew short-term debts in an environment of rising interest rates. Heavy domestic borrowing is diverting resources from critical sectors like infrastructure and healthcare.

Banks, which hold 44 to 46 per cent of government securities, are lending more to the government than businesses, making it harder for small enterprises to access credit. Insurance companies and pension funds also invest in government securities, but their involvement is decreasing as they adjust their investment strategies to market changes.

Meanwhile, the growing participation of retail and foreign investors adds volatility, as these non-traditional buyers are more likely to withdraw during market shocks, further destabilizing the financial landscape. The CBK’s overdraft facility usage peaked at Sh109.82 billion in March 2025, while International Monetary Fund (IMF) on-lent funds declined, signalling reduced reliance on multilateral buffers.

With domestic debt now at 45.3 per cent of total public debt (Sh10.6 trillion as of June 2024), borrowing costs are escalating, with yields on 91-day, 182-day, and 364-day Treasury Bills reflecting tighter liquidity and risk premiums.

Debt service costs

The government’s fiscal deficit is projected to narrow to 3.3 per cent of gross domestic product (GDP) in Financial Year (FY) 2024/25, down from 5.7 per cent in FY2023/24, with further reductions to 4.3 per cent in FY2025/26 and 3.5 per cent in FY2026/27.

Debt service costs, though still elevated, are being managed through reduced external commercial borrowing and liability restructuring. Total public debt stands at 68 per cent of GDP in FY2023/24, declining to 64.8 per cent in FY2024/25, supported by improved revenue collection and currency stability.

Kenya’s fiscal troubles are “largely homemade,” rooted in past infrastructure-driven borrowing sprees and COVID-19 shocks.

While IMF programmes aim to stabilise debt through fiscal consolidation, recent protests over tax hikes and austerity measures highlight political constraints.

The withdrawal of a tax bill in July 2024, despite IMF backing, underscores the fragility of reform efforts. External debt remains a challenge, with China’s $6.3 billion bilateral loans (17 per cent of total external debt) and costly syndicated loans straining repayment capacity.

However, multilateral creditors like the World Bank remain pivotal, offering concessional terms that mitigate immediate distress. Kenya has also addressed its $2 billion Eurobond repayment in June 2024 through a $1.5 billion international bond issued earlier this year, easing near-term external pressures.

Kenya’s debt situation mirrors a broader African trend of leveraging domestic markets to avoid external shocks but at the cost of fiscal flexibility.  While Treasury Bonds offer stability, the shift toward short-term debt and reliance on overdrafts risks liquidity crises if investor sentiment sours.

The IMF’s debt sustainability analysis flags Kenya’s vulnerability to export and exchange-rate shocks, compounded by weak governance in projects like the Standard Gauge Railway.