Mbadi's Sh1tr domestic debt shocker in 2026-27 Budget

The government plans to borrow heavily from the domestic market to finance the budget deficit for the 2026-27 financial year.

The move could continue crowding out businesses and households from the credit market as local lenders increasingly lend to the government. 

In the draft Budget Policy Statement (BPS), the National Treasury plans to finance 91 per cent of the budget deficit or Sh1.01 trillion through borrowing from local lenders.

In the BPS, Treasury projects the budget deficit to reach Sh1.106 trillion over the 2026-27 financial year. 

It expects to finance through borrowing Sh1.006 trillion through borrowing locally, while the balance of Sh99.5 billion will be borrowed from foreign lenders.

Local borrowing will be significantly higher compared to the Sh613.5 billion that the government plans to borrow locally over the current financial year to June 2026. 

The budget deficit is the difference between the total budget and revenues the government expects to raise locally, mostly through taxes but also other sources such as fees charged by ministries, departments and agencies, also referred to as Appropriation-in-Aid.

The total budget for the 2026-27 financial year is estimated to be Sh4.64 trillion. Revenues, including the Appropriation-in-Aid, are forecast to reach Sh3.487 trillion, with the difference – the budget deficit – expected to be at Sh1.106 trillion.

“Based on the projected revenue and expenditure framework, the fiscal deficit, including grants is expected to reach Sh1.106 trillion (5.3 percent of GDP) in FY (financial year) 2026-27, from the projected deficit of Sh901 billion (4.7 percent of GDP) in FY 2025-26,” said Treasury in the BPS, which is a roadmap for the budget and details government’s spending plans, revenue mobilisation and debt management for the coming financial year and the medium term.

“The FY 2026-27 fiscal deficit will be financed through net external borrowing amounting to Sh99.5 billion (0.5 per cent of GDP) and net domestic financing of Sh1.006 trillion (4.8 per cent of GDP).”

Treasury has, in the recent past, increased borrowing from the local market, with loans sourced locally surging ahead of loans advanced by foreign lenders.

As of September 2025, Kenya’s public debt stood at Sh12.054 trillion, with domestic debt 55.3 per cent of the total stock of public debt, while external debt accounted for 44.7 per cent, according tothe  Treasury’s latest data on debt.

This has been a drastic and fast departure from a scenario where external debt has always accounted for more than 50 per cent of total debt.

In September 2023, for instance, domestic debt accounted for 46.4 per cent of total debt while external debt was at 53.6 per cent. As the government increased borrowing locally, this started to change, and domestic debt stood at 51.9 per cent of total debt as of September 2024, while external debt was at 49.8 per cent.

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. 

Borrowing Sh1 trillion from the local market over the 2026/27 financial year will see Treasury further increase its reliance on local lenders to finance the budget deficit.

The push for local borrowing has, in recent years, been due to a seemingly hostile global lending space characterised by a shift in policies in developed markets that have seen credit from these markets to developing markets like Kenya shrink. 

Since 2022, for instance, central banks in developed markets, particularly the US Federal Reserve, have raised interest rates to combat domestic inflation, making dollar-denominated assets, such as US government bonds, more attractive to global investors seeking safe and higher-yield opportunities, in turn moving away from markets such as Kenya.

Kenya’s poor rating by major global rating firms has also seen global investors demand high premiums when lending to the government; thus, even as global interest rates start to ease, borrowing has remained expensive for Kenya.

This has seen the government shun the more expensive commercial external loans in favour of domestic securities. 

Local interest rates have also been on the decline, further incentivising the government to look inward. The 91-day Treasury Bill rates have dropped to an average of 8.2 per cent in 2025 from 16 per cent in 2024. 

The Kenyan government's intention to borrow over Sh1 trillion domestically for its Sh4.6 trillion 2026/27 budget risks disrupting the credit market's recovery and edging out the private sector.

This could lead to a repeat of a volatility cycle seen in the country in recent years, where increased borrowing by the government and high interest rates crowded out businesses and households, with private sector lending slumping to 0.9 per cent in 2024 and a brief contraction of -2.9 per cent in early 2025 before rebounding to 6.3 per cent in November 2025 as interest rates eased.