How Treasury is edging out 'mama mboga' for banks

MPs have warned of the government’s high appetite for local debt, arguing that it locks out Kenyan businesses and households from accessing loans. 

The National Treasury in the first Supplementary Budget for the 2025/26 financial year said it had increased the amount it plans to borrow from local lenders by Sh323 billion as it struggles to finance an expanded budget, even as revenues failed to match the higher spending.  

National Assembly’s Budget and Appropriations Committee (BAC) said the trend, which has also seen Treasury reduce foreign borrowing as global lenders make it increasingly difficult for Kenya to borrow, could have disastrous effects on the economy as businesses might be edged out of the credit market, risking stunting the economy and job losses. 

The concerns by the MPs add to numerous voices that caution the Treasury’s shift to heavy local borrowing to fund the budget deficit. In the supplementary budget, the government plans to finance 80 per cent of the deficit through local borrowing, which fits its medium-term debt strategy of borrowing 75 per cent of the deficit locally.

Traditionally, foreign debt has accounted for more than half of the borrowing, but this has shifted in recent years, with local loans now accounting for the biggest proportion.  

According to the mini budget that was approved by Parliament on Wednesday, the total budget has grown by Sh316.7 billion to Sh4.62 trillion from the earlier approved budget of Sh4.2 trillion over the current financial year.

Treasury expects revenues from taxes and other sources to reach Sh2.78 trillion, an increase of Sh29 billion from an earlier expectation of Sh2.75 trillion. The modest increase in revenue that will be collected in the year to June 30, however, fails to match the Sh316.7 billion increase in the total budget. 

Treasury said it would finance the bigger hole by increasing the amount it will borrow, with what it plans to borrow from the local market significantly going up. The budget deficit, which will go up by Sh221 billion to Sh1.186 trillion from Sh933 billion, will largely be financed through local borrowing. 

The government will borrow Sh947.8 billion from the domestic market, an increase of Sh323.1 billion. The huge local borrowing has, however, resulted in a reduction of foreign loans that the government plans to take, which is expected to reach Sh227.7 billion by the end of the financial year, which is a reduction of Sh60 billion from the Treasury's plan to borrow from foreign lenders this year. 

“The Committee noted that the increased reliance on domestic borrowing to finance the widened deficit raises important macro-fiscal concerns,” said the committee in a report on the Supplementary Budget, which also noted that the shift in deficit financing strategy has been driven by lower interest rates locally and challenges in external financing rising from geopolitical factors.  

“The  elevated domestic borrowing may exert pressure on local financial markets and crowd out private sector access to credit, thereby constraining investment, dampening economic activity and potentially increasing borrowing costs in the medium term.” 

“The committee underscored the need to cushion the private sector against higher interest rates arising from this shift.” 

Reliance on domestic debt in the recent past has seen domestic debt account for 55.59 per cent (Sh6.837 trillion) of total debt as at December 2025, which stood at Sh12.299 trillion, according to data by the Central Bank of Kenya. 

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.  

The Budget and Appropriations Committee noted that failure by Kenya to live within its means has become a challenge, with revenues always falling short while the government keeps adjusting the budget upwards and borrowing to meet the spending needs.  

In the period between June 2025 and February 2026, revenue collection, including AIA, amounted to Sh1.98 trillion, which, according to the BAC report, fell short of the target by Sh155.2 billion. 

“The committee noted with concern the revenue shortfalls recorded as of February 2026 and emphasised the need to enhance revenue mobilisation efforts, noting that KRA has been adequately resourced to undertake institutional and policy reforms aimed at improving tax administration, sealing revenue leakages and broadening the tax bases,” said the committee. 

“The revenue gap raises concerns about the sustainability of the proposed expenditure increases,” the committee added.