Kenya’s National Treasury has resorted to borrowing to fund routine government functions, revealing the escalating pressure of the country’s substantial debt crisis.
Members of Parliament are aware of the impending crisis and have expressed concern over the deteriorating financial outlook.
Legislators cautioned that debt repayments are absorbing a substantial portion of government income, restricting funds available for public investments.
This development came after the Treasury acknowledged that billions of commercial loans intended for debt management are being redirected to the government’s general operating budget.
A report by the National Assembly’s Public Debt and Privatisation Committee emphasized that external loans designated for liability management are not being solely utilized for debt repayments.
Instead, considerable amounts are being merged into the Consolidated Fund to cover regular government spending.
The committee also voiced apprehension about loans obtained under questionable terms that are ‘not restricted to particular projects’.
Part of these funds finances the overall budget deficit and supports approved government expenses through the Consolidated Fund, according to the report.
The committee further questioned the application of commercial loans secured through debt liability management procedures.
The report indicates that external loans acquired for debt management are not exclusively allocated for debt reduction.
Despite being commercial loans, they are not designated for specific projects but are combined within the Consolidated Fund for general budget support, even when acquired under potentially disadvantageous conditions.
During their examination of the 2026-27 Budget Estimates, legislators reiterated warnings that debt servicing costs have escalated to levels endangering fiscal stability.
Kenya’s public debt currently totals Sh12.8 trillion.
For the upcoming fiscal year, the government anticipates Sh2.3 trillion in loan repayments, comprising Sh1.3 trillion in interest and Sh1 trillion in principal.
Legislators lamented that substantial debt payments are limiting funding for development initiatives.
For the coming fiscal year, the Treasury has allocated just Sh749 billion for development purposes.
This implies that debt repayment amounts to nearly triple the development budget.
Out of the estimated Sh4.8 trillion total expenditure for 2026-27, recurrent expenditures, including wages, will account for Sh3.54 trillion.
In comparison to the current fiscal year, development funding will decline by Sh9.47 billion.
Nevertheless, recurrent expenses will increase by Sh145.55 billion.
The expansion in expenditures is mainly propelled by mandatory and non-discretionary commitments, particularly debt servicing and pensions, which heighten overall financing requirements and further restrict fiscal flexibility, as stated in the report.
Consolidated Fund Services expenditures, primarily comprising debt repayments, interest payments, and pensions, are projected at Sh2.56 trillion for 2026-27.
Within this total, public debt servicing alone will represent Sh2.31 trillion, while the budget deficit is expected to reach Sh1.1 trillion.
This necessitates government borrowing to cover the shortfall, with legislators noting that debt is displacing investments that would stimulate economic growth.
Domestic debt interest payments alone are forecast to reach Sh986.73 billion in the upcoming fiscal year, an increase from Sh883.76 billion in 2025-26.
External debt servicing will total Sh680.38 billion, consisting of Sh412.87 billion in principal and Sh267.51 billion in interest payments.
The committee cautioned that extensive domestic borrowing will likely intensify refinancing challenges and escalate interest payment burdens.
Domestic debt servicing is expected to constitute approximately 71 percent of total debt service expenditures in fiscal year 2026-27, according to the report.
Legislators characterized the deficit as the largest ever forecast at the beginning of a fiscal year.
This reflects a persistent expansionary fiscal approach and suggests ongoing growth in the public debt portfolio, the committee noted.
The report indicates that public debt is anticipated to grow by over Sh1 trillion for the third year in succession.
To address the deficit, the Treasury intends to borrow Sh995.7 billion domestically and Sh116.2 billion from international creditors.
Despite the Treasury’s calls for fiscal restraint, legislators observed that public debt will likely stay above the statutory limit of 55 percent of GDP.
Consequently, Parliament has instructed the National Treasury to present a binding debt reduction strategy within 30 days.
The strategy must specify yearly objectives, policy actions, and schedules for reducing the debt load and restoring public debt to the established benchmark.
Lawmakers also questioned if existing development spending levels can generate the economic expansion needed to maintain debt sustainability.
Development expenditures are projected at merely 3.6 percent of GDP, a figure the committee deems insufficient for a nation pursuing swift economic advancement.
To rectify this disparity, legislators recommended that the Treasury gradually raise development expenditures from 3.6 percent to 10 percent of GDP over the medium term while optimizing non-priority recurring expenses.
Legislators cautioned that merging commercial loans into general budget financing creates transparency issues.
The Treasury is required to reveal how loans are allocated, including amounts dedicated to debt reduction, general budget support, and specific projects.
The report also revealed ‘a concerning pattern of debt forgiveness and write-offs affecting state entities that received government loans’.
Legislators warned that ongoing write-offs or forgiveness of obligations from defaulting public institutions might promote financial misconduct.
The committee observed that debt forgiveness executed without legal repercussions or parliamentary reporting is problematic.
Accordingly, the Treasury has been ordered to establish an accountability framework for defaulting entities within three months.
Over Sh1 trillion in bailout funds has been wasted, with legislators contending that they must participate in future decisions regarding write-offs.
No debt relief is anticipated in the near future, as nearly half of next year’s budgetSh2.3 trillionis reserved for debt repayment.
From the Sh2.3 trillion allocation, Sh1.3 trillion will be allocated for interest payments.
Domestic interest will constitute the largest portion at Sh986 billion, whereas international creditors will receive Sh267 billion.
An additional Sh1.06 trillion is allocated for principal repayment, with Sh648 billion going to domestic lenders and Sh412 billion to external creditors.
Beyond debt issues, legislators emphasized increasing pension liabilities as another significant fiscal challenge.
Pension expenditures are projected at Sh241.94 billion for 2026-27, positioning it as the second-largest element of Consolidated Fund Services after debt servicing.
The report indicates that pension payments have increased substantially over recent years, intensifying pressure on public finances.
Despite these concerns, legislators recognized some encouraging elements in the Treasury’s forecasts.
Inflation is anticipated to stay within target levels, while the fiscal deficit is expected to gradually decrease from 5.3 percent of GDP in 2026-27 to 3.3 percent by 2028-29.
Legislators concluded that the nation’s financial future hinges on whether the government can control the expansion of debt servicing costs.
The requirement to enhance fiscal discipline has never been more urgent, the report states, cautioning against ongoing borrowing that doesn’t guarantee value for money.
The debt burden coincides with Treasury projections of total revenues of Sh3.63 trillion, necessitating borrowing of Sh1.11 trillion.
Budget analysts assert that aggressive domestic revenue generation, particularly by reducing value-added tax expenditures, could offer a solution.
This approach should be combined with a mandatory, systematic settlement of outstanding government invoices to free up private sector liquidity and boost economic expansion, according to the Parliamentary Budget Office.
Nevertheless, the budget demonstrates a clear bias toward sectors considered crucial before the 2027 General Election, with security-related appropriations receiving a significant portion.
Based on Treasury projections, the present value of public debt-to-GDP, which was 65.3 percent in June of last year, will continue exceeding the statutory 55 percent threshold throughout the medium term.