Debt Composition Tilts Inward

Kenya's public debt surged to a new high of Sh12.05 trillion by the end of September 2025, according to the latest data released by the National Treasury's Debt Management Office. This figure, equivalent to approximately 67.3% of the nation's Gross Domestic Product (GDP), marks a significant moment in the country's fiscal history as domestic borrowing has now officially surpassed external debt.

As of Tuesday, 4 November 2025, EAT, the data reveals a strategic, if concerning, pivot in the government's borrowing strategy. Domestic debt now stands at Sh6.66 trillion, accounting for 55.3% of the total public debt. In contrast, external debt is recorded at Sh5.39 trillion, or 44.7% of the total. This development confirms a trend that has been accelerating over the past year, driven by a confluence of global market volatility and deliberate domestic policy choices under the President William Ruto administration.

The Rationale Behind the Shift

The government's increasing reliance on the domestic market is a calculated move to mitigate exposure to foreign exchange risks, which have previously inflated the shilling-denominated value of external loans. The National Treasury's 2025 Medium-Term Debt Management Strategy (MTDS) explicitly outlines a plan to prioritize local and concessional borrowing to manage these risks. The strategy, approved by the National Assembly in March 2025, set a target borrowing mix of 65% domestic and 35% external financing to cover the fiscal deficit.

This pivot has been aided by a relative strengthening of the Kenya Shilling in 2025 and declining interest rates on government securities like Treasury bills, making local borrowing more attractive for the state. However, this shift is not without significant economic consequences for ordinary Kenyans and the private sector.

Economic Implications: The Crowding-Out Effect

The most immediate concern arising from the government's heavy domestic borrowing is the "crowding-out" of the private sector. Economists and international bodies like the World Bank have repeatedly warned that when the government borrows extensively from local commercial banks, pension funds, and insurance companies, it reduces the pool of credit available for businesses and individual borrowers.

This heightened competition for capital can drive up interest rates, making loans more expensive and stifling investment and economic growth. In a May 2025 report, the World Bank noted that heavy domestic borrowing, coupled with high lending rates, was a key factor in squeezing private sector credit, which had seen negative growth. This directly impacts job creation and the expansion of small and medium-sized enterprises (SMEs), the backbone of the Kenyan economy.

The Soaring Cost of Servicing Debt

While the move to domestic debt reduces currency risk, it comes with a high price tag in the form of interest payments. Debt servicing costs have become the single largest expenditure item in the national budget, consuming an ever-larger portion of tax revenues. For the 2024/25 fiscal year, total debt servicing was projected at a staggering Sh1.85 trillion. Projections for the 2025/26 fiscal year show this figure rising to Sh1.09 trillion, with Sh851.42 billion of that amount earmarked for domestic creditors.

This means a significant portion of revenue collected by the Kenya Revenue Authority (KRA) is immediately channeled to repaying loans rather than funding essential services like healthcare, education, and infrastructure development. The Institute of Public Finance has noted that for every Sh100 in the budget, Sh33 is spent on repaying domestic debt service alone.

Sustainability and the Path Forward

Both the International Monetary Fund (IMF) and the World Bank classify Kenya as being at a high risk of debt distress, even as they describe the debt as currently sustainable. The debt-to-GDP ratio remains above the IMF's recommended threshold of 50% for developing countries. The government's own strategy aims to reduce this ratio to 57.8% by 2028 through sustained fiscal consolidation.

Achieving this target will require stringent fiscal discipline, enhanced revenue collection, and a careful balancing act. The government must finance its budget without crippling the private sector, which is essential for long-term, sustainable economic growth. As Kenya navigates this complex fiscal landscape, the focus will remain on the Treasury's ability to manage this Sh12 trillion burden while fostering an environment where Kenyan businesses can thrive.