Fears as MPs approve Treasury plan that could squeeze local borrowers

The move is likely to squeeze businesses and households out of credit.

This is part of the Treasury's Medium-Term Debt Management Strategy, which has now been approved by the National Assembly’s Public Debt and Privatisation Committee.

The strategy outlines a borrowing mix of 78 per cent domestic and 22 per cent external financing for the financial years 2026-27 to 2028-29.

Under the plan, the government will borrow Sh1 trillion locally in the next financial year alone, with total borrowing over the two financial years projected at Sh2.4 trillion.

Economists warn that the aggressive shift to local borrowing risks pushing up interest rates and crowding out private sector borrowers as the government becomes the dominant player in the domestic credit market.

The Parliamentary Budget Office (PBO) has already raised red flags over the strategy, warning in its review of the 2026-27 Budget Policy Statement that heavy domestic borrowing could restrict credit to the private sector.

“The heavy reliance on domestic borrowing presents a key risk… as it may exert upward pressure on interest rates, crowd out private sector credit and heighten refinancing risks,” the PBO cautioned.

Controller of Budget Margaret Nyakang’o echoed the concern in her submission to Parliament, warning that increased domestic borrowing may “constrain private sector credit and dampen economic growth through potential crowding-out effects.”

She said financial institutions, particularly commercial banks and insurance companies, already hold about Sh5.25 trillion of domestic debt as of December 2025, exposing the sector to concentration risks.

The debt strategy indicates that Treasury intends to issue mainly medium- to long-term Treasury bonds.

While the government argues this approach reduces exposure to volatile foreign exchange risks associated with external borrowing, analysts say it could strain liquidity in the banking sector.

Small and medium-sized enterprises are likely to bear the brunt.

Unlike large corporations that can access international capital markets, SMEs depend almost entirely on local banks for financing.

If banks continue to shift their portfolios toward risk-free government securities, SMEs could face higher borrowing costs or be locked out of credit altogether.

The Institute for Social Accountability warned in its submission to Parliament that the heavy reliance on domestic borrowing is poised to deepen the crowding-out effect on an already struggling private sector.

The debt strategy itself acknowledges the risk.

With commercial banks holding billions in customer deposits, government securities backed by the full faith of the State present a safer and more attractive option than lending to businesses grappling with economic uncertainty.

MPs on the Abdi Shurie-led committee have nonetheless approved the strategy. They, however, urged caution.

“Given the declining CBR, the National Treasury should ensure that planned domestic borrowing remains appropriately sized and carefully timed so that government demand for funds does not unduly crowd out credit to the private sector,” the committee said in its report.

The lawmakers also called for development expenditure to be increased above the statutory minimum of 30 per cent, arguing that without sustained economic expansion, the growing debt burden will become unsustainable regardless of its source.

The decision comes at a time when the Central Bank of Kenya has been easing monetary policy to stimulate economic activity.

The Central Bank Rate has been cut from 13.0 per cent in August 2024 to 9.25 per cent in October 2025, with commercial banks’ average lending rates falling to 15.1 per cent.

However, analysts warn that aggressive domestic borrowing could undermine the gains made through monetary easing.

Total public debt stood at Sh12.25 trillion as at November 2025, split at 55 per cent domestic and 45 per cent external, and is projected to rise to Sh15.7 trillion by June 2029.

INSTANT ANALYSIS

For the ordinary Kenyan seeking a loan to buy land, build a home or expand a business, the government’s strategy signals a tougher credit environment ahead. With Treasury taking a larger share of local funds, loans could become more expensive and harder to secure, despite falling policy rates. In short, as the State borrows more at home, private borrowers may find themselves pushed to the back of the queue.