With domestic interest rates climbing to 17% and fewer external loan options available, Kenya is grappling with the challenge of securing affordable financing for its upcoming budget, as rising borrowing costs push investors to demand higher returns.
Kenya’s ability to secure domestic loans for the next financial year is under strain, exacerbated by a prolonged standoff with local investors over interest rates, while external borrowing opportunities remain constrained.
For the 2025/26 financial year, the National Treasury intends to increase domestic borrowing by 27% to KSh522.7 billion ($4.05 billion) while slashing external borrowing by over 50% to KSh166.7 billion ($1.29 billion). This represents a shift in strategy from short-term to long-term debt securities. Comparatively, the 2024/25 budget has domestic borrowing set at KSh413.1 billion ($3.2 billion) and external borrowing at KSh355.5 billion ($2.76 billion).
However, the government’s efforts to secure domestic financing face resistance, as local investors, particularly commercial banks, pension funds, and insurers, are demanding higher returns, with average interest rates now standing at 17%. This may complicate efforts to access more affordable loans, potentially accelerating Kenya’s debt accumulation.
According to analysts at AIB AXYS Africa, “The Central Bank of Kenya (CBK) is facing a significant challenge as yield tensions are expected to increase between the CBK and investors eager to maximize real returns.”
Despite inflation being within the government’s target range at 4.4% as of August, Cytonn Investments notes that the real return on long-term debt papers—specifically 10- and 20-year bonds—remains at 12.9%.
Treasury Cabinet Secretary John Mbadi, in the 2024 Budget Review and Outlook Paper (BROP), emphasized the government’s commitment to optimizing concessional funding, lengthening the maturity profile of public debt, and deepening the domestic debt market to lower borrowing costs.
Recent bond sales, key to Kenya’s fiscal consolidation strategy, have seen weak demand, underscoring investor caution. Last week, investors bid KSh22.64 billion against a KSh30 billion target for reopened 10- and 20-year bonds, with the CBK accepting KSh19.28 billion and rejecting more costly offers. This follows a 50% shortfall in bond subscriptions during July, with investors seemingly hesitant to commit to long-term bonds, anticipating potential rate cuts by central banks globally.
Tax revenue shortfalls further complicate Kenya’s fiscal challenges. Public frustration over recent tax hikes—designed to boost revenue and reduce borrowing—adds pressure, especially as the government faces significant debt repayment obligations and funding gaps.
Kenya’s fiscal deficit, which dictates its borrowing needs, is projected to fall to KSh689.4 billion ($5.3 billion) in the next budget. The government has indicated it will focus on borrowing strictly for development purposes in the medium term, rather than for recurrent expenditure.
However, the Treasury’s increased demand for domestic borrowing could counteract the CBK’s efforts to lower interest rates. As government bonds, considered risk-free, become more attractive, they may crowd out private-sector lending, pushing up business borrowing costs.
In response to easing inflationary pressures, the CBK recently cut the base lending rate by 25 basis points to 12.75%, marking the first reduction in four years. This move is intended to make credit more accessible to the private sector, stimulate economic growth, and ease pressure on inflation and foreign exchange rates, which had surged, making debt repayments more expensive.
