Borrowing spree: How expensive loans have pushed debt servicing to Sh862b

The National Treasury bypassed Parliament and tapped into expensive domestic debt.[File, Standard]

The National Treasury bypassed Parliament and tapped into expensive domestic debt, resulting in Sh861.7 billion in interest payments, accounting for 82 per cent of debt-servicing costs.

A new Auditor General report reveals that taxpayers’ money spent on servicing local loans in comparison to external debt service hit the Sh183.6 billion mark, or 18 per cent of total debt-servicing cost, in the year to June 2025. This means that local debt has now become more than three times as expensive as foreign borrowing.

The National Government audit report further shows that the National Treasury ditched the approved 2024 medium-term debt strategy, which sought a financing mix of 45 per cent foreign debt to 55 per cent  domestic borrowing. This saw the actual borrowing over the 2024/25 financial year hit the 30:70 ratios, without required Parliamentary consent.

The Auditor General notes in the report that total debt servicing over the year stood at Sh1.045 trillion, of which Sh183.6 billion was used to service foreign loans while Sh861.7 billion was used on repayment to local lenders.

This high cost of servicing local loans was despite domestic debt accounting for 53 per cent of total public debt estimated at Sh6.29 trillion as of June 2025, against foreign debts at Sh5.45 trillion or 47 per cent of total debt.

Public debt stood at Sh11.8 trillion as of June 2025. It has since grown to Sh12.86 trillion as of April 2026, largely on account of further growth in domestic debt, which stood at Sh7.19 trillion, while external debt surged slightly to Sh5.67 trillion.

“Interest on internal debt was 82 per cent while interest on external debt was 18 per cent of the total finance costs respectively. The cost of domestic debt is therefore more than three times the cost of external borrowing even though it forms 53 per cent of the total debt,” said the Auditor General in the report.

“In the circumstances, there is a need to enhance fiscal discipline through growth of revenues and controlled expenditure to reduce overreliance on expensive internal debt.”

However, the government has in recent years increased borrowing from local lenders, partly on account of restricted access to international markets.

Over the 2024/25 financial year, the government’s debt management strategy was to pursue more loans to finance the budget deficit from local lenders, targeting a financing mix of 45 per cent external and 55 per cent domestic sources.

“More recourse to domestic borrowing accompanied by less external borrowing, mainly from concessional sources, mainly to refinance maturing external debt, is the optimal strategy resulting in more favourable costs and risk indicators by 2027,” said Treasury in the 2024 Medium Term Debt Management Strategy.

“The Strategy aims at achieving a net financing mix of 45 per cent from external sources and 55 per cent from the domestic market. The Strategy will maximise semi and concessional funding while reducing commercial borrowing. The strategy seeks to deepen the domestic debt market while reducing the overall risk in the debt portfolio through issuance of medium-to long-term Treasury bonds.”

Treasury, however, contradicted its plans and borrowed more than planned from the local market, taking loans of Sh887 billion from local lenders or about 70 per cent of the total money it had borrowed during the year.

“The actual borrowing as at 30 June 2025, net external sources to domestic borrowing of Sh374 billion and Sh886.68 billion respectively, representing a ratio of 30:70 deviating from the approved strategy,” said the Auditor General’s report.

This also resulted in increasing the budget deficit by Sh492 billion to Sh1.26 trillion.

“However, there was no approval for the deviation, contrary to the Select Committee on Public Debt and Privatisation Report on the 2023 Medium-Term Debt Management Strategy that recommended that any deviation from the approved borrowing strategy required approval from the National Assembly,” said the Auditor General.

“In the circumstances, management was in breach of the medium-term debt strategy and the recommendations of the Public Debt and Privatisation Committee.”

In a recent report, the Treasury said borrowing heavily from the local market and contravening the approved strategy was on account of limited access to external financing, forcing the State to rely on domestic sources to finance the fiscal deficit.

Treasury is even considering borrowing more from the domestic market over the 2026/27 financial year, with plans to tap 82 per cent from the local market and only 18 per cent from international lenders.

“The 2026 Medium Term Debt Strategy (MTDS) aims to reduce public debt costs and risks by sourcing 18 per cent of gross borrowing from external sources and 82 per cent from domestic sources over the medium term,” said Treasury in the 2026 MTDS that outlines its borrowing for the next three years.

“From domestic sources, the strategy is to gradually reduce the stock of Treasury Bills while lengthening debt maturity by issuance of medium- to long-term debt securities. From external sources, the target is to mix concessional financing, new instruments such as guaranteed sustainability-linked bonds and minimal commercial borrowing.” 

Government’s heavy borrowing from the domestic market has been criticised for posing a risk to borrowing by households and businesses, with banks likely to divert more money to lending to the government, which is seen as a more secure borrower.

The Parliamentary Budget Office (PBO) has recently noted that Government borrowing surged from 6.5 per cent to 38.1 per cent by September 2025, while private sector credit grew by a modest five per cent. PBO raised concerns about the government's heavy presence in the local credit market and the possibility of crowding out private investment.

“Increased government borrowing has raised concerns about crowding out businesses and households. This may reduce bank liquidity, limit private credit and hamper investment and job growth if fiscal discipline and funding remain weak,” said PBO in a February 2026 report.

“The shift to greater domestic financing reflected tighter access to international markets. Higher domestic government borrowing may absorb banking sector liquidity, limit private sector credit, and slow investment and job creation. If this trend persists, it could undermine the impact of monetary easing and hamper economic growth. Strengthened fiscal consolidation, diversified financing, and lower-cost private-sector credit are essential for macroeconomic stability.”