State to raid domestic debt market to fund budget deficit

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The government is planning to raid the local credit market to fund the budget deficit for the financial year starting July 1. This move is likely to further slow loans to the private sector, hurting businesses and job creation.

According to the report submitted to the Parliament by the Budget and Appropriations Committee (BAC) on Wednesday, President William Ruto’s regime plans to borrow Sh591.9 billion out of a Sh876.1 billion deficit domestically, with Sh284.2 billion to be sourced from the international credit market.

The Samuel Atandi-led committee has raised a red flag, saying that the state's huge local borrowing will either crowd out the private sector or increase the cost of borrowing for the private sector.

“Despite the declining interest in government securities locally due to easing monetary policy stance, continued reliance on domestic borrowing might either crowd out the private sector or result in high borrowing costs,’’ the report reads in part.

The committee underscores the need for fiscal discipline in maintaining the projected deficit throughout the financial year rather than reviewing it upwards during supplementary estimates.

The concern by the Parliamentary budget team is coming at a time various institutions including the Central Bank of Kenya (CBK), The Institute of Social Accountability (TISA), the Institute of Public Finance (IPF) among others have warned of the state competing with the private sector for credit in the local market.

Lending to the private sector has been on a declining mode for almost two years now.

Despite the recent drop in average commercial bank lending rates — from 17.2 per cent in November 2024 to 15.8 per cent in March 2025 — private sector credit growth has remained anemic. In February, it even contracted by 1.3 per cent, before recording a marginal growth of 0.2 per cent in March.

According to CBK, commercial bank lending to the private sector contracted by 1.4 per cent in December 2024 compared to the previous year, mainly reflecting exchange rate valuation effects on foreign currency-denominated loans following the appreciation of the shilling.

This saw the number of new jobs created last year drop marginally to 703,700 from 720,900 in 2023, with the private sector accounting for 90.0 per cent of all new jobs, according to the 2025 Economic Survey.

Already, the Kenya National Chamber of Commerce and Industry (KNCCI) has projected low revenue and muted jobs this financial year, attributed to the high cost of living, high taxes and unfavorable policies.

The 2025 business barometer by KNCCI based on a comprehensive survey conducted with 1981 businesses from all sectors, both formal and informal, and across all sizes, reflecting a broad spectrum of the Kenyan business landscape further shows that 60 per cent of businesses do not expect to increase their workforce in 2025, a significant shift from previous years when employment growth expectations were more optimistic.

“The negative outlook on employment growth is linked to a decline in sales and an increase in operational cost,’’ the report reads.

Speaking during an interview at a local radio station, Gichengo said that if Kenya doesn’t heed the advice from the global lender of last resort, it is likely to be excluded from the international debt market, forcing it to look inward, a move further shrink private sector lending.

“No support from the IMF and World Bank means increased domestic borrowing by the government. This will cripple businesses, lead to massive job losses and trigger high cost of living. Things are not looking good. The National Treasury plans to fund the budget deficit for 2025/6 with over 80 per cent domestic borrowing,’’ she said.

An economist, Daniel Mwangura, terms the government’s plan to borrow more locally as contradictory, considering that CBK has been easing commercial lending rates to incentivize the private sector.

“Why push banks to cut borrowing rates only to set up the state against the private sector? The National Treasury must also stop deceiving Kenyans that local borrowing is cheaper. Multilateral loans could have been an easier option,’’ Mwangura said.

Although the planned budget deficit is slightly lower than 2024/5, the National Treasury has increased it by close to Sh10 billion when compared to estimates in the Budget Policy Statement (BPS) released earlier in the year.

The Sh4.23 trillion budget to be presented in Parliament by the National Treasury CS, John Mbadi, on June 12 is Sh57.8 billion lower than earlier projected, with major cuts effected on the development budget and loan interests.

According to the report, the recurrent budget will take the lion’s share at Sh1.79 trillion, having increased by Sh59.3 billion compared to BPS figures. This is followed by Consolidated Fund Services (CFS) at Sh1.33 trillion, with interests on loans gobbling Sh1.1 trillion.

Close to Sh707.8 billion has been earmarked for development expenditure, while devolved units have been allocated Sh405.1 billion.