The country's debt stock is expected to hit Sh7.5 trillion by June 2021, according to projections by the Parliamentary Budget Office (PBO).
The office warns that given the current and projected expenditure demands, Kenya's debt stock could reach Sh9.2 trillion in the 2022/23 financial year.
The projected increase this year, which is Sh873 billion or 15 percent above the national debt of Sh6.6 trillion as at June 2020, is largely attributed to the impact of low generation of domestic revenue and pressure from expenditure on the ongoing capital projects.
In the previous financial years, the figure has grown on the account of significant expenditure on infrastructure projects, energy production as well as social expenditures.
"The impact of Covid-19 on the economy is expected to adversely affect revenue generation especially for the 2020/21 financial year," the report says.
With the impact of the Covid-19 pandemic, it means that the government will borrow more from the domestic market, a move that will see the SMEs priced out of the market.
According to the budget office, debt servicing expenditures are estimated to utilise up to 49 per cent of ordinary revenues in the current financial year.
"This implies that at best, only approximately 51 per cent of nationally raised revenues will be available for the 2020/21 budget implementation," PBO says.
In the current financial year, the government plans to spend Sh3.2 trillion, a revision of the Sh2.79 trillion that was read in June during the presentation of the national government estimates by National Treasury Cabinet Secretary Ukur Yatani.
Given that the current public finance management framework has capped the national debt stock at Sh9 trillion, at the current borrowing rate, it is anticipated that there will be little borrowing space in the next three years.
Implementation of this year's budget should therefore be critical by taking into consideration financial and information requirements for a successful medium term fiscal policy implementation, says the report.
"There is also the need to utilise debt and revenue resources for initiatives that maximise positive impact on private and public investment," it adds.
PBO further notes that 2020/21 will present difficult economic conditions for fiscal consolidation measures required to maintain debt at sustainable levels.
This includes reduced economic activity, subdued current account balance and slowdown in revenue generation is likely to adversely affect fiscal consolidation efforts.
The magnitude of the economic stimulus to be undertaken to lift the economy is likely to require significant financing beyond what has already been provided for in the budget.
Under these circumstances, it is difficult to implement fiscal consolidation measures.