CoB warns of looming Sh3.32 trillion debt crisis

The Controller of Budget (CoB) has raised concerns over Kenya’s heightened vulnerability due to its external debt profile, highlighting the risk of default on Sh3.32 trillion falling due within the next year.

Margaret Nyakang’o said that a huge portion of external debt, about 61 per cent, or Sh3.32 trillion, falls due within one year, indicating substantial near-term repayment pressure.

She spoke yesterday before the National Assembly Committee on Public Debt and Privatisation, chaired by Balambala MP Abdi Shurie, during discussions on the Consolidated Fund Service (CFS) expenditure (Supplementary Estimates I) for Financial Year 2025/26.

According to the CoB, fiscal deficits have worsened the probability of default by increasing public debt, noting that deficits have become a moving target due to over-projected revenue collection that remains unmet. She added that the government previously defaulted on Sh53.6 billion Treasury Bonds by one to two months, with bonds often paid later than their due dates.

Nyakang’o also warned that depreciation of the Kenyan shilling against major currencies, particularly the euro and pound, has increased the local currency cost of servicing external debt. The Sh3.32 trillion repayment is part of the Sh5.5 trillion external debt stock due over the next 10 years. Other obligations include Sh197.72 billion due in one to two years, Sh7.74 billion in three years, Sh134.03 billion in five years, Sh393.51 billion in 10 years, and Sh1.41 trillion maturing in at least 10 years.

She criticised poor budget planning at the National Treasury, noting that government Ministries, Departments and Agencies (MDAs) have exploited Article 233 of the Constitution and paid commitment fees on undrawn loans, pushing the country into a pressured financial position. A recent Auditor-General report showed Sh6.6 billion paid as commitment fees between FY 2020/21 and 2023/24 on undrawn foreign loans financing capital projects, raising concerns over fiscal discipline.

Debt servicing constitutes the largest component of CFS expenditure. In the first six months of FY 2025/26, total debt service amounted to Sh923.14 billion, comprising domestic debt of Sh545.35 billion (59 per cent) — Sh183.67 billion principal and Sh362.24 billion interest, and external debt of Sh377.24 billion (41 per cent), Sh272.35 billion principal, Sh102.25 billion interest, Sh548.73 million commitment fees, and Sh2.09 billion other charges. “Notably, interest payments of Sh464.49 billion slightly exceeded principal repayments of Sh456.01 billion, indicating that a substantial share of public resources is directed towards borrowing costs rather than reducing the debt stock,” Nyakang’o said.

She warned that the current CFS structure exposes the government to fiscal risks, as rising debt service relative to revenue poses a debt sustainability threat. Concentration of domestic debt in short-term instruments creates liquidity and refinancing risks, while reliance on market-based borrowing exposes the government to interest rate risk in a high-interest environment.

The CoB reported that public debt remains elevated at Sh12.29 trillion as of December 2025, equivalent to 67.8 per cent of GDP, significantly above the statutory debt ceiling of 55 per cent. While debt growth moderated to four per cent in the first six months of FY 2025/26, reliance on domestic borrowing is increasing, with the Medium-Term Debt Strategy 2026 targeting 82 per cent domestic financing and 18 per cent external.

Nyakang’o said this shift introduces new vulnerabilities, including crowding out of private sector credit, upward pressure on interest rates, and potential dampening of economic growth. Sustained expansion of domestic borrowing at projected levels may prove fiscally and economically costly, especially given the substantial repayment burden within the next year. “Without sustained deficit reduction and careful liability management, risks will only be redistributed rather than resolved. Transparency, enforcement of the Public Finance Management framework, and improved project preparation to minimise commitment fees are essential,” she said.

Nyakang’o also warned that continued reliance on borrowing to meet recurrent and debt obligations risks a debt spiral, where new loans are required to service existing debt.

The approved CFS budget for FY 2025/26 is Sh2.14 trillion, including Sh1.9 trillion for public debt, Sh234.9 billion for pensions and gratuities, and Sh4.74 billion for salaries and allowances for constitutional office holders. Debt servicing represents 89 per cent of the CFS allocation.

She recommended forming an inter-agency oversight mechanism, including the Central Bank and CoB, to strengthen scrutiny over debt acquisition and utilisation.