Treasury to fund 82% of budget deficit amid credit squeeze warnings
By Aloys Michael, January 27, 2026In a move to contain borrowing costs and curb rising debt vulnerabilities, the National Treasury is set to lean on the domestic debt market as the primary source of funding for the country’s budget deficit in the medium term.
The treasury argues that prioritising local borrowing provides a more sustainable balance between cost efficiency and risk management.
The 2026 Draft Medium Term Debt Strategy (MTDS) from the Planning Ministry reveals that the government plans to meet 82 per cent of its gross borrowing needs through domestic channels, leaving just 18 per cent to be financed externally.
This strategy is a shift towards local financing to strengthen fiscal stability and reduce exposure to foreign debt risks.
“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 released on Monday, January 26, 2026.
“This strategy will lead to a reduction in debt burden while safeguarding fiscal sustainability and creating space for priority national investments.”
From 2026/27 to 2028/29, net borrowing is projected at 78 per cent domestic and 22 per cent external. The heavy reliance on local debt has raised private sector concerns about competition for credit.
The National Treasury defends the approach, citing cost-effectiveness and plans to deepen the local credit market to maintain liquidity.
The Treasury is also counting on innovative financing instruments to support the plan, including the development of domestic retail digital bonds that can be accessed through mobile money platforms.
In the past, the exchequer has repeatedly failed to adhere to its targeted mix of domestic and external financing, often exceeding planned levels in Treasury bills and bond auctions.
In the 2024/25 fiscal year, it borrowed 83 per cent of revenue needs locally, surpassing the 55 per cent target. Similar deviations were recorded in previous years:
23 per cent above target in the year to June 2024, three per cent in June 2023, 12 per cent in June 2022, and nine per cent in June 2021. The ministry attributed the overreliance on domestic borrowing to delays in external funding.
“The strategy envisaged that 55 per cent of net deficit financing (for the 2024/25 fiscal year) would be met through domestic sources, with the remaining 45 per cent obtained externally. In practice, however, the financing mix shifted to 83 per cent net domestic financing and 17 per cent net external financing,” the Treasury noted.
“This deviation was largely due to delays in external disbursements, which required greater reliance on domestic borrowing.”
Domestic debt risk signals deteriorated further in the year ending June 2025, with the proportion of instruments maturing in under one year rising to 20.5 per cent from 18.6 per cent.