Treasury to borrow more locally in a bid to tame rising loan costs

Households and businesses could be further squeezed out of credit as the National Treasury plans to crank up borrowing from local banks in coming years.

In its Medium Term Debt Strategy, Treasury said it plans to increase borrowing from domestic sources to 75 per cent and reduce borrowing from foreign lenders to 25 per cent, which could see banks reduce their appetite for lending to private sector.

Local and foreign lenders currently have an almost equal share of public debt, which stood at Sh10.93 trillion as of December 2024, of which Sh5.868 trillion is from domestic sources and Sh5.057 trillion from external lenders.

Treasury Cabinet Secretary John Mbadi on Wednesday said the decision has been driven by a need to reduce government’s borrowing costs and risks, with external debt prone to such risks as currency volatility. 

This was seen two years ago when the shilling sunk to a low of Sh160 against the US dollar, which had a major impact on the cost of servicing external debt.

Following the strengthening of the Shilling over the last year to trade at about Sh130 to the dollar, Kenya’s ="https://www.standardmedia.co.ke/national/article/2001510005/how-public-debt-is-tightening-its-grip-on-kenyans-strained-wallets">external debt reduced< by a trillion from Sh6.089 in December 2023 to Sh5.057 trillion last December.

Mbadi also noted the new administrations in countries such as the US are relooking their models of support to countries like Kenya, which could result in reduction of cheap external loans. “We must be alive to the fact that external sources are shrinking. This is considering the policy pronouncements in major economies… we are no longer looking forward for much support from there and we have to look inward and without establishing our domestic markets,” he said.

“External financing is becoming scarce. It is not an option. If we had that option of getting that money, then we could engage in a debate. You can see what is happening with the US support. The move by the US might also have an ="https://www.standardmedia.co.ke/business/business/article/2001506080/public-debt-now-at-sh106tr">impact on the support< we have been getting from Europe,” said Mbadi.

He noted that the options that Treasury was growing tax revenues but noted it is careful not to hike taxes for Kenyans but also using “little resources that we have prudently and efficiently while curbing corruption.” He said efficiency and curbing corruption might not be achieved overnight and instead the government had to borrow to bridge budget deficits. “If there is room for borrowing, we will think domestically,” he said.

Among the external sources of credit drying up for Kenya include the International Monetary Fund (IMF), which will not disburse a Sh110 billion ($850 million) funding, which was part of the Extended Fund Facility (EFF) and Extended Credit Facility (ECF), in which IMF was to advance $3.6 billion (Sh468 billion) to Kenya for budgetary support.

The release of the funds, which was done periodically after IMF reviews, was on condition that Kenya met terms set by IMF. Kenya however failed to meet some conditions including restructuring of Kenya Airways, subsidising certain goods including fuel and increasing taxes to grow tax revenues.

Mbadi explained that Treasury and IMF mutually agreed to pursue a new programme and abandon the final review due to time constraints.

“We successfully went through eight reviews, we had one review left but we had  limited time to the period when this programme ends on April 1. We sat down with the IMF when the mission was here and agreed we cannot complete the review within the time left and mutually agreed to start ="https://www.standardmedia.co.ke/national/article/2001508589/cob-calls-for-fiscal-discipline-as-public-debt-surges-past-set-limit">discussions on a new programmIn borrowing locally, past experience has shown that commercial banks prefer lending to the government through Treasury Bills and Bonds, which they view as more stable compared to households and businesses.