Auditor General, budget boss flag growing appetite for public debt

Auditor General Nancy Gathungu raises the alarm over hidden types of debt such as securitisation of revenues. [Benard Orwongo, Standard]

The Auditor General and Controller of Budget have raised concern over the escalating debt burden in the country, amid the Government’s growing reliance on borrowing to finance its budget.

Auditor General Nancy Gathungu has flagged what she termed as emerging and hidden types of debt such as securitisation of revenues, contingent and pension liabilities ordinarily not included in public debt discussions.

For instance, Gathungu stated that as at June 30, 2025, Ministries, Departments and Agencies (MDAs) had Sh261.63 billion in contingent exposures arising from guaranteed loans under the Consolidated Fund Services and substantial court awards.

“The Office observes that effective public debt governance requires transparency in borrowing decisions, adequate legislative oversight, comprehensive disclosure and reporting, strong internal controls, sustainable debt management practices, value-for-money assessments and effective monitoring of debt-funded projects,” she said, in a presentation made on her behalf by Deputy Auditor General, Isaac Ng’ang’a.

She said that the escalating debt burden is further escalated by the debt servicing to revenue ratio, which stood at 66 per cent as at June 2025, constraining the fiscal space.

Similarly, this implies that as high as 66 per cent of revenue mobilised is channeled towards debt repayment, leaving the government with only 34 per cent of the revenue to finance recurrent and development expenditure needs for that financial year.

On the other hand, Controller of Budget Margaret Nyakang’o said the current report shows the country is at Sh12.82 trillion in total borrowing and out of that figure, about 60 per cent is domestic and the remaining 40 per cent is external.

The impact is that up to 71 per cent of the revenues that we collect goes to loan repayment. When that happens, it leaves us with 29 per cent to do the rest of the expenditure that we would like to do, and that involves both recurrent and development. So, if you look at the kind of budget that we prepare, and you look at say 30 per cent of that money, you will find that we surely cannot survive within that 30 per cent," Nyakang'o explained.

"The impact of that is that we must keep borrowing in order to stay afloat. What perhaps we can work on is reducing our spending so that gradually, we reduce the amounts that we must borrow to stay afloat. This concept you may have heard is called fiscal consolidation. It involves a mix of increasing our revenues and reducing our spending, so that that gap that we have can get smaller with time,” she added.

She called for the need to amend the Public Finance Management Act, 2012 to place a clear statutory duty on the National Treasury to establish and maintain the Public Debt Registry, rather than pursue new stand-alone legislation, consistent with the CoB's earlier submissions on the PFM Amendment Bill process.

Nyakang’o also sought to require a statutory reconciliation between the Public Debt Registry and the CoB's quarterly Budget Implementation Review Reports, so that debt stock data and debt service expenditure data are cross-checked, and any variance is reported to Parliament.

The two made respective presentations to the National Assembly Committee on Public Petitions, chaired by Runyenjes MP Karemba Muchangi, with Gathungu saying that public borrowing arrangements has become increasingly complex and the need for robust accountability mechanisms becomes more pronounced.

The meeting follows a petition filed in the National Assembly seeking to institute a 24-month freeze on public borrowing beginning in the Financial Year 2027/2028, arguing that the measure is necessary to halt the rapid growth of Kenya's public debt and safeguard future generations from an unsustainable financial burden.

At the same time, Gathungu said Kenya has been rated at a high risk of debt distress by the International Monetary Fund (IMF) and the World Bank, a classification that underscores the serious challenges to debt sustainability.

Gathungu said that public debt oversight should not be limited to the contracting of loans, noting that effective governance requires scrutiny throughout the debt cycle, including project appraisal, loan negotiation, disbursement, utilization of borrowed funds, monitoring of project implementation, achievement of intended outcomes and eventual repayment obligations.

She also told the committee that one of the key fiscal priorities for the Government has been fiscal consolidation aimed at reducing the fiscal deficit to below three per cent of the Gross Domestic Product (GDP) as recommended by the East African Community Monetary Union Protocol.

But an audit review of fiscal deficits indicates that over the last six years by her office, Kenya has consistently recorded fiscal deficits significantly above this recommended threshold, averaging 6 per cent from the financial year 2019/2020 to 2024/2025.

This persistent fiscal imbalance, she said, has consequently led to an escalating debt burden, which was Sh11.825 trillion and the Debt-to-GDP ratio averaging 67.8 per cent as at June 30, 2025, which is much higher than the projected threshold of 55 per cent by 2028.

She said financial, compliance, performance and special audits undertaken by her office have consistently identified significant weaknesses in public debt management and reporting.

These weaknesses include unreconciled debt balances, inconsistencies across debt management systems, unsupported adjustments in debt records, inadequate documentation and weaknesses in internal controls.

Gathungu said successive audits have also identified recurring payment of commitment fees on undrawn loans, indicating instances where borrowing commitments were undertaken before projects were sufficiently ready for implementation.

Between Financial Years 2020/2021 and 2024/2025, she noted that the Government has paid Sh7.65 billion as commitment fees, which has exposed public resources to avoidable costs and undermined value for money.

“Earlier audits similarly revealed inaccuracies in debt records and unexplained variances in public debt statements. These findings point to weaknesses in debt reporting systems and demonstrate the need for stronger controls, enhanced reconciliation processes and improved financial reporting,” she explained.

She said audit evidence demonstrates that several weaknesses persist throughout the public debt management cycle, ranging from project preparation and loan contracting to debt servicing and utilization of borrowed resources.

These recurring findings suggest a need for stronger governance frameworks, enhanced accountability arrangements and improved coordination among institutions responsible for debt management.

Karemba also sought clarification on the Controller of Budget's recommendation to adopt the Commonwealth Meridian System to automate public debt management and settlement, expressing concern over the reliability of government information systems.

“You seem to have a lot of confidence in this system, and systems in this country have not a very good history. Where are you gathering the confidence to trust this Commonwealth Meridian System? Where has it worked?” posed Karemba.

Nyakang’o explained that the Commonwealth Meridian System has been successfully implemented across many Commonwealth countries and offers a comprehensive framework for public debt management.

“The Commonwealth Meridian System is actually used across Commonwealth countries, so all the countries that were, at some point, colonies of the British Empire used this system, and it has been very successful. I am a beneficiary of training about the system, and we were taken through all the elements of what this system can do, from analyzing what to borrow, analyzing sustainability figures, analyzing the governance around borrowing, all that is within the Meridian system,” replied Nyakang’o.

She further called for a clear delineation of the respective roles of the National Treasury, the Central Bank of Kenya, Parliament and the Office of the Controller of Budget in debt oversight to eliminate duplication of mandates and strengthen accountability.

On the petitioners' proposal for a two-year freeze on public borrowing, Nyakang’o noted that while the objective is understandable, the country's current fiscal position makes an immediate borrowing freeze impractical.