Treasury defends high domestic borrowing amid debt warning

National Treasury PS Dr Chris Kiptoo addressing the media outside Treasury Building in Nairobi on February 13, 2025.[Boniface Okendo, Standard]

Kenya will continue to rely heavily on domestic borrowing to finance its budget deficit, even as lawmakers warn that the country risks breaching the legal debt ceiling and crowding out private sector credit.

Appearing before the National Assembly Public Debt and Privatisation Committee, National Treasury Principal Secretary Chris Kiptoo defended the FY 2026/27–2028/29 Medium-Term Debt Management Strategy, which projects domestic borrowing of about Sh 1.2 trillion in the next financial year.

Members of Parliament, however, questioned why borrowing levels remain elevated despite the government’s push to privatise State-owned enterprises and improve revenue collection.

They warned that Treasury’s own projections show public debt staying above the legal threshold of 55 per cent of GDP, plus or minus five percentage points, which must be achieved by 2028 under the Public Finance Management framework.

“From the figures you have presented, debt remains above the limit set in law. That means we are operating outside the legal framework,” MPs said, urging the Treasury to explain how it intends to comply with the debt anchor.

PS Kiptoo told the committee that the government remains committed to fiscal consolidation and argued that debt sustainability should be assessed relative to economic growth rather than absolute shilling figures.

“In relative terms, the fiscal deficit is declining, even though the nominal numbers appear high. What matters is the deficit as a percentage of GDP, not just the headline amount," he said.

He said the government inherited a strained debt position marked by high inflation, exchange rate volatility, and limited access to international capital markets.

According to Kiptoo, stabilising the economy and honouring debt obligations have been key priorities.

“Our first responsibility was to meet existing obligations,” he said, citing the buyback of a $2 billion Eurobond, which he said helped stabilise the shilling, ease dollar shortages and lower inflation.

On privatisation, lawmakers questioned why asset sales are not being used to reduce borrowing needs directly.

Kiptoo said proceeds from the sale of State-owned enterprises would not be channelled into the budget to fund recurrent expenditure.

“If you bring privatisation proceeds into the budget, you consume them once and they are gone. We are proposing to place them in a National Infrastructure Fund so they can be leveraged to attract private capital and reduce future budget pressure," he said.

MPs also raised concerns about the growing cost of domestic debt, noting that interest payments are consuming a large share of government revenue and limiting fiscal space.

Treasury officials acknowledged the pressure but said domestic borrowing offers greater flexibility in managing maturities and refinancing compared with external loans, which often come with rigid terms and cannot be rescheduled easily.