How high borrowing costs compound Kenya's debt challenges
Business
By
Brian Ngugi
| Sep 16, 2025
Moody's has sounded an alarm that the Kenyan government is currently battling sharply high borrowing costs, which are worsening fiscal strains and limiting credit availability for private businesses.
This development confronts President William Ruto's government with a new challenge, as it struggles to fulfil promises to boost employment and incomes, with the economy still fragile and a general election now two years away.
The warning also comes amid a borrowing spree by the National Treasury to plug budget deficits and fund development projects, even as domestic revenues fall short.
The report underscores the difficult trade-off for National Treasury mandarins between funding growth and managing a mounting debt burden that has alarmed international lenders and investors.
Moody's, in the report comparing African economies, stated that high interest rates, weak policies, and tough market conditions have made loans and credit more expensive for Kenya, Nigeria, and South Africa.
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While these nations need large funding for development, they face interest rates far higher than advanced economies due to limited access to cheaper finance.
“Borrowing costs are high across the board,” said Moody’s Senior Vice President Lucie Villa. “Debt costs for banks, non-financial companies and governments have increased in all three markets alongside higher policy rates during the past five years.”
For Kenya, the problem is particularly acute. Moody’s blamed overborrowing by the government and shallow local markets that restrict access to affordable credit for businesses and heightening fiscal risks.
The agency's assessment aligns with a stark warning from Kenya’s Controller of Budget, Margaret Nyakang’o, who recently revealed that the government has breached its own borrowing thresholds.
In her recent report, she noted that the public debt had hit Sh11.73 trillion by June 2025, a sharp increase of approximately Sh3 trillion since President Ruto took office in September 2022.
The domestic debt now comprises 54 per cent of the total debt which stands at Sh6.33 trillion, breaching the government's medium-term strategy that aimed for a balanced 50-50 split with external debt to mitigate risks; according to the Controller of Budget.
This reliance on expensive domestic borrowing has come at a steep cost. Debt servicing consumed Sh1.59 trillion in the last financial year alone, eating up 91 per cent of the budget allocated to public debt. Interest payments on domestic debt totalled to Sh678.25 billion, underscoring the strain of high local interest rates.
Nyakang’o warned that these obligations were “limiting cash flows and affecting the operations of business activities”, as well as crowd out productive sectors.
Moody's noted that while borrowing costs on international markets have eased slightly for lower-rated nations like Kenya, they remain elevated at about 500 basis points over US Treasuries.
Cheaper loans from development partners have not been enough to offset high rates in local and international markets.
The ratings agency stressed that redressing these imbalances will require structural reforms and stronger policy frameworks over time.
For the Ruto administration and his money men at the Treasury, analysts say the urgent task is to balance the need for development funding with prudent debt management to prevent high borrowing costs from undermining Kenya's growth prospects.