NAIROBI, Kenya — The National Treasury plans to finance the bulk of Kenya’s budget deficit through the domestic debt market over the medium term, betting on local borrowing to curb costs and reduce exposure to foreign exchange risks.
Under the 2026 Draft Medium Term Debt Strategy (MTDS), the Treasury projects that 82 per cent of the government’s gross borrowing requirements will be raised locally, with external financing accounting for just 18 per cent.
The strategy marks a continued shift away from foreign loans as Kenya grapples with rising debt servicing costs and currency volatility.
Over the 2026/27 to 2028/29 fiscal period, the net borrowing mix is projected at 78 per cent domestic and 22 per cent external, reinforcing the government’s reliance on the local market.
However, the approach has raised concerns among private sector players, who warn that aggressive government borrowing could crowd out businesses and households as the state competes for limited credit from commercial banks.
The Treasury has defended the plan, arguing that domestic borrowing remains the most sustainable option available and that measures are being put in place to deepen the local debt market and maintain liquidity.
“From an array of strategies analysed, Strategy 2 proposes balancing lower-cost external borrowing with deepening the domestic debt market, locking in fixed rates and reducing foreign exchange exposure,” the Treasury said in the draft MTDS.
According to the ministry, the strategy is expected to lower the overall debt burden while safeguarding fiscal sustainability and creating room for priority national investments.
To support the shift, the Treasury is also banking on innovative financing instruments, including plans to roll out domestic retail digital bonds accessible via mobile money platforms, a move aimed at broadening investor participation.
Despite the projections, the government has historically struggled to stick to its planned borrowing mix. In the 2024/25 fiscal year, the Treasury sourced 83 per cent of its financing locally, far exceeding the 55 per cent target set at the start of the year.
Similar deviations were recorded in earlier years, with domestic borrowing exceeding targets by 23 per cent 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 Treasury attributed the persistent overreliance on domestic borrowing to delays in external funding disbursements.
“The strategy envisaged that 55 per cent of net deficit financing 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,” the ministry noted.
Debt risk indicators also worsened in the year to June 2025, with the share of domestic debt instruments maturing in less than one year rising to 20.5 per cent, up from 18.6 per cent, highlighting growing refinancing pressures.
