Kenya’s National Treasury has increased its domestic borrowing target by KSh570 billion in the current financial year, signaling mounting fiscal pressure and tightening liquidity in the local credit market.
The revised target represents a 52.29 percent jump from the initial KSh1.09 trillion to KSh1.66 trillion as of March 31, 2026. Treasury data shows that KSh965.87 billion has already been raised, underscoring the government’s growing reliance on local lenders to bridge its budget gap.
The move is expected to intensify competition for credit between the government and private sector borrowers, potentially driving up interest rates and limiting access to financing for businesses and households.
The increase comes against the backdrop of a growing fiscal deficit in the 2025/2026 financial year. Initially, Treasury Cabinet Secretary John Mbadi had projected net domestic borrowing of KSh635.5 billion to help finance a KSh4.29 trillion budget.
However, updated figures show the budget has since expanded to KSh4.695 trillion following the passage of the Supplementary Appropriations Act (2026), reflecting higher spending needs.
According to Treasury records, the revised domestic borrowing figure of KSh1.66 trillion includes net borrowing of KSh1.12 trillion and internal debt rollovers totaling KSh544.25 billion.
The government typically raises funds locally through Treasury bills and bonds, with commercial banks, pension funds, and insurance firms accounting for the bulk of lending.
Revenue shortfall drives financing pressure
Economists warn that increased government borrowing from the domestic market could crowd out private investment, as financial institutions channel funds toward relatively low risk government securities.
The Treasury has also revised its total revenue projections upward from KSh4.43 trillion to KSh5.15 trillion for the current fiscal year. However, only KSh3.36 trillion had been collected by the end of March, leaving a financing gap of KSh1.79 trillion to be closed before June 30.
To address the shortfall, the government is targeting KSh904 billion in additional domestic borrowing, while the Kenya Revenue Authority is expected to collect approximately KSh883 billion over the remaining months.
Albert Mwenda, director general for budget, fiscal and economic affairs at the Treasury, acknowledged the scale of the challenge, noting that domestic borrowing remains a key concern.
“The expectation is that KRA might narrow the gap. It may appear large, but efforts are ongoing to minimize it,” Mwenda said in a telephone interview.
He added that while domestic borrowing is central to the financing plan, the Treasury is actively exploring alternative funding sources to reduce pressure on local markets.
Treasury officials say negotiations with external lenders are ongoing, with the aim of supplementing domestic borrowing and easing strain on the local financial system.
Among the options under consideration is the use of remaining proceeds from Kenya’s Eurobond issuance, estimated at KSh150.76 billion. Officials indicated that these funds provide some flexibility in financing the budget.
“There are other external avenues being explored. It does not necessarily mean the entire KSh900 billion will come from the domestic market,” Mwenda said.
He emphasized that while external borrowing cannot be fully factored into fiscal plans until confirmed, ongoing discussions could help reduce reliance on domestic sources.
The Treasury is also in talks with the World Bank regarding the potential disbursement of $750 million, approximately KSh97.5 billion, under the Development Policy Operation 7 program.
The funding, originally expected earlier, was delayed due to unmet governance conditions, including the need for reforms such as the Conflict of Interest Bill and improvements in public procurement transparency.
Treasury officials say most of the World Bank’s conditions have now been met, with the exception of macroeconomic adequacy assessments still under review.
“There is still engagement on one key area related to macro adequacy. The World Bank is assessing whether our fiscal projections and revenue assumptions are realistic,” Mwenda said.
He expressed cautious optimism that the funds could still be released before the end of the financial year, though risks remain.
Meanwhile, the government has not included funding from the International Monetary Fund in its current fiscal framework, citing ongoing negotiations.
The absence of confirmed external financing has heightened the urgency of domestic borrowing efforts, even as authorities seek to balance fiscal sustainability with economic growth.
The sharp increase in domestic borrowing is likely to have broader implications for Kenya’s economy. Analysts warn that heavy government demand for funds could push interest rates higher, raising borrowing costs across the economy.
This could slow private sector investment, particularly for small and medium sized enterprises that depend on bank financing.
At the same time, the government faces the challenge of maintaining fiscal discipline while addressing rising expenditure needs, including debt servicing and development spending.
With only a few months remaining in the fiscal year, the Treasury’s ability to mobilize revenue and secure additional financing both domestically and externally will be critical in determining the country’s fiscal outlook.
