Fears Rise Over Heavy Government Borrowing Despite CBK Assurances

Fears have emerged over Kenya’s sharply increased domestic borrowing target for the 2025/26 financial year, even as the Central Bank of Kenya (CBK) moves to calm concerns about a possible rise in interest rates.

The government raised its domestic borrowing target to Sh996 billion from Sh635 billion in the first supplementary budget, a jump of Sh361 billion, after expanding the overall budget by Sh363.9 billion to Sh4.66 trillion amid a wider revenue shortfall.

The revision initially sparked concerns that increased state borrowing could crowd out private sector credit and push interest rates higher. However, CBK Governor Kamau Thugge has downplayed these fears, noting that much of the financing has already been secured. By the time of his remarks, the government had borrowed about Sh850 billion, leaving only around Sh150 billion to be raised locally over the remainder of the fiscal year.

The risk of a spike in interest rates is seen as lower partly because borrowing has been front-loaded. This means a large portion of the funds was raised earlier, reducing pressure on the domestic market in the coming months. Even so, the scale of borrowing continues to raise concerns about its potential impact on credit access for businesses and households.

At the same time, Kenya has been on an easing path, with the CBK cutting its benchmark rate from 13 percent at the start of 2024 to 8.75 percent by April 8, 2026. This has helped lower the average commercial lending rate from 17.22 percent in November 2024 to 14.8 percent by February 2026.

The easing measures are aimed at boosting lending to the private sector, and early signs show some progress, with private sector credit growth reaching 8.1 percent in March, marking 13 consecutive months of positive growth. However, the outlook remains uncertain as rising inflation and external shocks linked to the US-Israel war with Iran continue to push pump prices higher, complicating the path for further rate cuts.