Treasury Turns to Local Borrowing as External Financing Delays Persist

Kenya’s Treasury has again shifted its financing strategy toward the domestic market, reducing its reliance on external borrowing while significantly increasing planned local borrowing for the current financial year. The adjustment reflects growing pressure to meet funding needs as delays in external financing continue to weigh on budget execution.

The Treasury cut its net external borrowing target by Sh61.6 billion to Sh225.8 billion, while raising planned net domestic borrowing by Sh385.1 billion to Sh998.6 billion. This shift comes as the budget deficit in the Supplementary I 2025/2026 Budget rose by Sh323.4 billion to Sh1.22 trillion, highlighting both the scale of the government’s financing needs and the challenges of securing funds from abroad on time.

At the centre of the adjustment are delayed disbursements from multilateral lenders, particularly the World Bank Group’s Development Policy Operation framework. Funding that had been expected has yet to materialise, with concerns cited around fiscal management, governance, and conflict-of-interest reforms. Even though the revised external borrowing plan still includes the DPO loan and progress has been made on required actions, the delays have forced a rethink of financing priorities.

The Central Bank of Kenya has also indicated that the country is pursuing separate emergency World Bank support linked to the economic impact of the Iran war. This underscores the broader external pressures shaping Kenya’s financing environment.

At the same time, domestic borrowing conditions have become more favourable. Since August 2024, the Central Bank has reduced its base rate from 13 percent to 8.75 percent over ten consecutive Monetary Policy Committee meetings. This easing has helped push government bond yields down to about 11–13 percent from highs of 18 percent in 2024, while Treasury bill rates have declined to roughly 7.4–8.3 percent from 15–17 percent.

As a result, cheaper domestic financing has given the Treasury room to replace delayed external inflows with local borrowing. A similar approach was taken in the 2024/2025 financial year, where external borrowing was revised downward and a larger share of the deficit was financed locally.

This pattern is increasingly becoming a consistent feature of Kenya’s fiscal strategy, especially when reform-linked external financing proves slower and less predictable than initially planned.