Debt pressure and development trade-offs: How domestic borrowing reshapes Kenya’s economic future

DAR ES SALAAM: FOLLOWING the Office of the Auditor-General’s disclosures that trillions of shillings in domestic borrowing intended for development financing and debt refinancing were instead utilised to support recurrent government expenditure, Kenya’s fiscal management is now under renewed scrutiny.

When I reviewed the Kenyan CAG report and considered the opinions of Kenyans, I found that the findings are sparking a lively debate among economists, policymakers, Kenyan members of parliament, political parties and investors about the sustainability of Kenya’s debt trajectory and its potential effects on economic growth, financial stability and citizen welfare.

I would like Kenyans to focus on a single vital line item that appears in all banks’ financial statements from now until the end of April 2026: earnings from government securities. How much are these domestic institutions earning from government securities? Earnings from government securities have increased, while earnings from private-sector individuals have decreased, as those who understand numbers will notice.

It is important to recognise that the number of nonperforming loans is likely to rise due to the Kenyan government’s significant borrowing in the domestic market, which some Kenyans deem illicit. This has caused Kenya’s domestic debt to exceed 7 trillion.

Currently, the combined value of bank savings, stock exchange savings, and insurance pension funds stands at 8.5 trillion. The Kenyan government has borrowed a total of 7 trillion. This suggests that private-sector enterprises are unable to access any funds in the bank. The reason for the excessively high interest rate is that interest rates in the domestic market will fall below 4% if the government stops borrowing from it.

Kenyans with ideas including creating jobs, expanding the tax base, promoting exports, or commercialising innovations will face significant challenges. For example, from a Kenyan perspective, the government should not be seen as responsible for building affordable homes, as this falls to the private sector.

They can identify market niches in various localities and respond accordingly when they acquire capital. However, the private sector is currently experiencing significant difficulties in raising capital, especially given the government’s substantial borrowing from the domestic market.

What was once a purely macroeconomic indicator has now become a real constraint on businesses and households, as public debt has exceeded Sh12 trillion and a growing share of domestic borrowing is depleting liquidity from local financial markets. The main challenges Kenya faces are the quality, transparency, and productivity of borrowing decisions, rather than the total size of its debt burden.

I would contend that government borrowing is not inherently problematic from my perspective as an economics analyst. Many economies rely on debt to finance infrastructure, industrialisation, and social investment, which in turn produce long-term economic benefits.

Nevertheless, the most recent discoveries, according to the Kenyan CAG report, indicate a shift in Kenya’s borrowing pattern from financing productive investments to covering daily government expenses, including salaries, subsidies, and administrative costs.

This distinction is critically important. Expanding future tax revenues and promoting private-sector growth can be achieved through borrowing for building transport corridors, power facilities, or digital infrastructure. Conversely, borrowing to finance consumption results in limited economic multipliers and increased repayment obligations. Debt accumulation can become self-perpetuating if such a pattern continues. The fiscal space for development expenditure shrinks as governments need to borrow more to cover their current obligations.

The analysis of how domestic borrowing affects the economic outlook of most EACs shows that Kenya’s high levels of domestic borrowing have had notable impacts on financial markets. This finding is supported by data from the Kenyan Central Bank and the CAG report, among others.

According to data, the government has reportedly borrowed billions of shillings daily from the local market from July to December 2025, resulting in domestic debt levels reaching unprecedented heights.

Substantial liquidity from the financial sector has been absorbed by this level of Treasury activity. Commercial banks might prioritise lending to the state over extending credit to businesses and households due to their attraction to relatively risk-free government securities.

The outcome is a crowding-out effect, where privatesector borrowers face stricter credit conditions and higher interest rates. Small and medium-sized enterprises that rely heavily on bank financing are not only particularly vulnerable but also unable to access capital to commercialise ideas that could be vital to the economy.

Investment, innovation, and job creation could be hindered by a decline in affordable credit over time. In a country where adolescent unemployment remains a substantial issue, these dynamics have important social consequences.

Perhaps the most worrying aspect of Kenya’s fiscal situation is the increasing share of government revenue allocated to debt servicing, despite those in authority preferring the public not to be informed. Estimates suggest that over 90 per cent of revenues are now dedicated to interest and loan repayments, leading to a scarcity of resources for public services.

Citizens are directly impacted by this fiscal austerity. Funding for health services, education programmes, infrastructure upkeep, and social protection schemes may be limited due to a reduced budget. Additionally, the government’s capacity to respond to economic disruptions is constrained by its large debt servicing obligations.

When creditors have already committed most of their revenue during recessions or crises, fiscal stimulus becomes particularly challenging. These limitations can heighten economic volatility, thereby undermining the prospects for long-term growth.

Financial markets closely monitor fiscal indicators, including debt-to-GDP ratios, borrowing patterns, and revenue mobilisation capacity. In my view, the ongoing dependence on domestic financing for recurring expenditures raises concerns about policy credibility and fiscal discipline.

The cost of borrowing may rise further if investors perceive an increase in sovereign risk. The crowding-out effect could be worsened by the potential for higher interest rates in the economy due to higher yields on government securities. It is also important to note that foreign investors might become more hesitant to invest in economies with fiscal uncertainty, which could potentially impact the stability of exchange rates and external financing conditions.

Investing in productive sectors including agriculture, manufacturing, logistics, digital services, and renewable energy is crucial for building sustainable economic growth. These sectors can boost tax revenue, encourage exports, and create jobs.

Growth momentum may be slowed when private investment is discouraged and public infrastructure spending is limited by government borrowing. Businesses might delay their expansion plans, leading to a sluggish rate of job creation.

This situation is especially concerning in Kenya, where demographic pressures demand consistent employment opportunities for a labour force that is growing rapidly. The debt cycle could become a systemic obstacle to inclusive growth if no corrective actions are taken.

Intergenerational equity is another important issue. Borrowing now to fund consumption effectively shifts repayment duties to future taxpayers, who may not enjoy the same economic advantages. Younger generations could face higher tax burdens and reduced public services if debt builds up without enough productivity gains.

This scenario highlights the importance of aligning financing decisions with longterm development strategies rather than short-term fiscal pressures.

The necessity for more robust fiscal governance frameworks is underscored by the ongoing scrutiny. Public trust and investor confidence can be improved through transparent reporting on borrowing utilisation, project outcomes, and debt sustainability assessments.

Independent audit institutions and parliamentary oversight committees are crucial for ensuring accountability. Strengthening these mechanisms can help reduce the misallocation of borrowed funds and improve the effectiveness of expenditures. Additionally, fiscal regulations, such as restrictions on financing recurrent expenditures, can serve as a form of discipline, ensuring that debt remains aligned with development objectives.

Kenya’s central bank faces a difficult balancing act. Supporting the government’s funding needs is part of maintaining financial stability. At the same time, inflation control and liquidity management could be hampered by too much domestic borrowing.

Private sector borrowing may be limited by high interest rates often needed to attract investors to government securities. This can create a feedback loop, where weaker growth lowers tax revenue and increases borrowing needs, thereby slowing economic activity.

The sustainability of Kenya’s current debt trajectory will depend on global financial conditions, revenue performance, and development prospects. Debt burdens may stabilise over time if economic growth accelerates and fiscal reforms improve revenue collection.

Nevertheless, the nation might face increased fiscal pressure if it continues to finance consumption through borrowing as interest rates climb. Possible risks include currency pressures, credit rating downgrades, and limited development spending. Ultimately, debt sustainability depends not only on numerical thresholds but also on economic productivity and policy credibility.

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Kenya’s domestic borrowing issues highlight a broader lesson for emerging economies: debt can be a useful development tool when paired with strategic investment and fiscal discipline, but it can also become a burden if used to finance recurring expenditures.

Kenyan policymakers face an important opportunity to reassess their fiscal approach as the use of borrowed funds comes under increasing scrutiny. Kenya can turn its debt load into a driver of sustainable development by focusing on productive investment, improving governance, and encouraging private-sector growth.

Kenya needs to recognise that the decisions made today will impact the livelihoods of millions of Kenyan citizens, the country’s competitiveness in the regional and global economy, and will also affect macroeconomic stability