Kenya borrowed about Sh2.8billion every day from the local market between July and December 2025, threatening to crowd out local borrowers, Controller of Budget Margaret Nyakang’o has revealed.
This saw Kenya’s total public debt rise to Sh7.052 trillion as of February 2026, up from Sh11.80 trillion seven months earlier.
Domestic debt accounted for the larger share of this burden. Government obligations to local lenders reached Sh6.83 trillion in the first half of the year to December 2025.
This represents 56 per cent of the total public debt stock, while external debt stood at Sh5.46 trillion.
According to Nyakang’o, domestic debt alone rose by more than Sh514 billion between, largely driven by aggressive issuance of Treasury bills and bonds in the local market.
“While domestic borrowing contributes positively to the development of the domestic debt market, increased borrowing leads to high domestic interest rates,” Nyakang’o warns in the latest National Government Budget Implementation Review Report for the first six months of 2025-26.
The Controller of Budget is now sounding an alarm over Kenya’s rising reliance on borrowing, warning that escalating domestic debt and ballooning debt service costs are tightening the government’s fiscal space and threatening economic stability.
Nyakang’o warned that the growing dependence on the domestic market to finance the budget deficit could have far-reaching economic consequences.
These elevated rates, it adds, can reduce investment by making borrowing more expensive for businesses and households.
Economists refer to this phenomenon as the crowding-out effect, where government borrowing absorbs liquidity that would otherwise be available to the private sector.
The findings show that financial institutions, including commercial banks and insurance firms, now hold the largest portion of domestic government debt.
As of December 2025, financial corporations held Sh5.25 trillion in government debt, an increase of about Sh149.7 billion in the first half of the fiscal year alone.
“High interest rates charged on government Treasury bills and bonds attract high returns with no associated risk,” the report notes.
The growing debt burden is already weighing heavily on the national budget. In the first half of the financial year, the government spent Sh923.14 billion servicing public debt, equivalent to nearly half of the approved debt-servicing budget.
Of this amount, Sh545.9 billion went toward servicing domestic debt, including principal repayments and interest payments on Treasury bills and bonds.
More worrying, the report indicates that 44 per cent of the Sh1.24 trillion revenue collected during the period was used to service domestic debt alone, pointing to the increasing strain on government finances.
This level of debt servicing significantly exceeds international benchmarks.
The International Monetary Fund recommends that a country’s total debt service should not exceed 30 per cent of revenue, yet Kenya’s domestic debt servicing alone already surpasses that threshold.
Nyakang’o cautioned that such high debt-service obligations reduce funds available for essential public services and development spending.
“When a high proportion of collected revenues are used to service debt, it limits the ability of the government to implement other programmes and deliver services to the public,” the report states.
The heavy borrowing comes as the government continues to finance a large fiscal deficit. At the start of the fiscal year, the deficit was estimated at Sh1.01 trillion, equivalent to 5.8 percent of GDP, though authorities project it will narrow to 4.5 percent of GDP.
The report also reveals that government revenues have been supplemented by increased borrowing.
During the first six months of the financial year, receipts into the Consolidated Fund rose to Sh2.17 trillion, with domestic borrowing accounting for a significant portion of the increase.
Domestic borrowing alone surged by 41 per cent compared with the same period in the previous financial year, underscoring the government’s growing reliance on local markets to fund spending.
To curb the risks associated with rising debt, the Controller of Budget recommended several measures, including reducing the fiscal deficit and rebalancing the country’s borrowing mix.
Specifically, the report advises the government to implement the Medium-Term Debt Strategy target of a 50:50 ratio between domestic and external borrowing, aimed at reducing the current over-reliance on domestic financing.
The report also calls for policies that would help lower domestic interest rates and create a more conducive environment for private sector investment.
Without decisive intervention, Nyakang’o warned, the rising domestic debt burden could undermine fiscal sustainability and limit the government’s ability to deliver economic growth and public services.
by JACKTONE LAWI
