The Kenyan private sector is staring at a liquidity drought. President William Ruto’s administration has unveiled an aggressive plan to borrow Sh906 billion from the domestic market, a move that analysts warn will crowd out private businesses and send interest rates skyrocketing.

The voracious appetite for local debt is driven by the government’s struggle to bridge a widening fiscal deficit amidst underperforming tax revenues. However, by soaking up nearly a trillion shillings from local banks and pension funds, the state is effectively competing with Wanjiku’s small business for the same pool of money.

The "Crowding Out" Effect

Financial experts are sounding the alarm. When the government offers risk-free Treasury bonds with attractive yields, banks prefer to lend to the state rather than to risky private enterprises. The result? A credit crunch where businesses cannot access capital to expand, hire, or even operate.

"It is a simple demand and supply equation," explained a leading economist in Nairobi. "If the government takes the lions share of credit, the crumbs left for the private sector will be prohibitively expensive. We are looking at interest rates hitting 20% or more."

World Bank Warnings Ignored?

The move flies in the face of recent warnings from the World Bank, which noted in its Kenya Economic Update that high domestic borrowing was already stifling private sector growth. Credit to the private sector has been on a downward trajectory, contracting to negative territory in recent months.

• Banks Play Safe: Lenders are increasingly risk-averse, parking their cash in government securities rather than lending to the real economy.
• SME Impact: Small and Medium Enterprises (SMEs), the engine of the economy, will be the hardest hit, lacking the collateral to negotiate better rates.
• Growth Stagnation: Without private credit, GDP growth is likely to slow, creating a vicious cycle of lower tax revenues and more borrowing.

A Fiscal tightrope

President Ruto faces a dilemma: borrow externally and risk debt distress, or borrow domestically and choke the economy. He seems to have chosen the latter. As the Treasury bills auction heats up, the private sector is left cold, wondering how to survive in an economy where the government is the only customer the banks want to serve.