NAIROBI, Kenya – Kenya’s economic recovery could stall as the government’s rising appetite for domestic borrowing squeezes out private sector access to credit, the Parliamentary Budget Office (PBO) has warned.
In its latest report, the PBO cautioned that while there have been signs of recovery in private sector lending, the government’s heavy presence in local debt markets is undermining those gains.
“The trends in credit growth over the 12 months to March 2025 indicate a potential crowding out of the private sector by increased government borrowing from the domestic market,” the office said.
According to the report, banks have continued to favour lending to the government, which is viewed as a lower-risk borrower, at the expense of businesses and households.
Between March 2024 and March 2025, credit to the government nearly doubled from 8.6 per cent to 16.4 per cent, while lending to the private sector plunged from 7.9 per cent to just 0.2 per cent.
The shift, the PBO warned, is choking credit-dependent industries and households, reversing post-pandemic recovery gains.
Despite this, Treasury data shows a slight improvement in private sector lending.
Monthly credit flows to businesses rose to Sh10.7 billion in June 2025, up from Sh2.5 billion a year earlier, buoyed by a lower policy rate and a reduction in the cash reserve ratio (CRR), which has made funds cheaper for banks to lend.
“This growth reflects improved demand in line with the declining lending interest rates, and dissipation of exchange rate devaluation effects on foreign currency-denominated loans following the appreciation of the shilling,” the Treasury noted in its 2025 draft Budget Review and Outlook Paper.
Even so, credit expansion remains uneven. The PBO observed reduced lending in key sectors such as finance and insurance, trade, mining and quarrying, business services, and private households—industries heavily reliant on foreign-currency loans.
Analysts fear that unless the government reins in domestic borrowing, high interest rates could persist, discouraging investment and consumption.
The PBO report shows that in the year to June 2025, government borrowing from local markets exceeded its targets by more than three times, crowding out private borrowers.
Kenya’s total public debt hit Sh11.81 trillion by mid-2025, with a growing share owed to domestic investors, even as the Treasury pledges to maintain “prudent fiscal management” to avoid a full-blown debt trap.
