Nairobi — Kenya's growing reliance on domestic borrowing is raising a critical question: is the government stabilizing its finances or quietly tightening the squeeze on the broader economy?
Fresh analysis by the Institute of Public Finance (IPF) shows that domestic debt now accounts for the largest share of Kenya's public debt, fundamentally reshaping how the government finances its budget and how capital flows across the economy.
As of June 2025, Kenya's total public debt stood at approximately Sh11.8 trillion, with domestic borrowing accounting for 54 percent.
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By March 2026, domestic debt had risen further to about Sh7.08 trillion.
"Domestic debt is no longer the quiet cousin it's now over half of Kenya's total debt," IPF notes. "It is shaping everything from bank lending to your cost of living."
"When domestic debt rises, the entire economy feels the squeeze."
Is domestic borrowing becoming too expensive?
The cost of borrowing locally is emerging as a central concern.
According to IPF, domestic debt carries an average interest rate of about 12 percent, more than double concessional external loans.
"Domestic debt is 2-3x more expensive than concessional external debt, yet Kenya increasingly relies on it," the report states.
"Are we borrowing domestically because it is strategic or because it is the only option left?"
This concern is echoed by the International Monetary Fund, which in its October 2025 Regional Economic Outlook for Sub-Saharan Africa warned that domestic borrowing is "significantly more expensive than external borrowing" and risks "crowding out private-sector investment."
Data from the Central Bank of Kenya (CBK) shows Treasury bill and bond yields surged to multi-year highs in 2024, with short-term rates reaching up to 16 percent, reflecting increased government demand for local funds.
Is the government crowding out private sector growth?
As the government borrows more locally, another question emerges: who is being pushed out of the credit market?
The IPF report shows that domestic borrowing is largely sourced from banks, pension funds, and insurance firms' institutions that would otherwise finance businesses.
"High concentration in government securities crowds out private sector credit. SMEs lose out," the IPF notes.
The World Bank has similarly cautioned in its May 2025 Kenya economic update that "domestic borrowing, coupled with high lending rates, risks crowding out the private sector."
Are debt costs overwhelming public finances?
Kenya's rising domestic debt burden is also putting pressure on public finances, raising a deeper question about fiscal sustainability.
Total debt servicing costs have surged to about Sh1.72 trillion in the 2024/25 financial year, according to IPF data.
"Every shilling spent on domestic debt interest is a shilling not spent on citizens," the IPF states.
"Debt service consumes more than the social sectors; the amount spent on debt service is far higher than that on health and social protection."
Moody's said in July 2025 that Kenya is spending "about one-third of its government revenue on interest payments", highlighting mounting debt affordability pressures.
S&P Global Ratings noted in March 2025 that IMF programmes "often act as a catalyst for other financial flows", underscoring Kenya's reliance on external financing credibility.
Fitch Ratings has also flagged in mid-2025 sovereign commentary that Kenya's rising reliance on domestic borrowing increases refinancing risks and debt sustainability pressures.
Are transparency and accountability keeping pace?
Beyond cost and sustainability, governance concerns are also coming into focus.
"Domestic debt is not just a financial issue, it is a governance issue that affects taxation, service delivery, and economic stability," IPF says.
"Lack of transparency can erode public trust and weaken democratic oversight."
The report highlights weak parliamentary oversight, limited transparency in how borrowed funds are used, and the absence of binding rules on domestic borrowing for recurrent expenditure.
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Is Kenya being pushed into domestic borrowing?
Kenya's shift toward domestic debt is unfolding against tightening global financial conditions, which have made external borrowing more expensive and less accessible.
Under its Medium-Term Debt Management Strategy, the government plans to increase reliance on domestic borrowing while reducing exposure to foreign currency risk.
But this raises a critical dilemma: does reducing exchange rate risk justify higher borrowing costs at home?
As Kenya leans more heavily on domestic markets, the debate is shifting from how much the country borrows to how; and at what cost.
If domestic debt continues to rise faster than economic growth and if servicing it continues to absorb public resources, then a more fundamental question emerges:
Is domestic borrowing cushioning Kenya's economy or quietly constraining its future?
