The National Treasury building in Nairobi.
Kenya’s net external borrowing will fall by nearly a quarter (24.3 per cent) to Sh269 billion in the financial year starting July, throwing an increased burden on domestic lenders to shoulder the budget deficit.
The National Treasury’s Budget Policy Statement (BPS) shows the net foreign financing will fall from the Sh355.5 billion that is planned for the current financial year.
The State will instead turn more to the local market where it plans to bump up the net domestic financing by 43.7 per cent to Sh593.7 billion from Sh413.1 billion that is contained in the current financial year.
The foreign and domestic financing is expected to cover the estimated budget deficit of Sh862.7 billion, which is a 12.2 percent growth from the gap of Sh768.6 billion that is in the current financial year that ends in June.
The Sh862.7 billion will take the fiscal deficit to 4.3 percent from the current year’s 4.9 percent, even though below the 3.8 percent that was contained in the 2024 Budget Policy and Outlook Paper.
The State’s decision to trim external borrowing coincides with the expected rise in spending on paying off maturing loans. This comes at a time when conditions on the external debt market have been improving given the progressive cuts in the base rates in key markets like the US.
Increased participation in the local market risks piling pressure on the private sector, which is desperate for lower interest rates to pull out of December’s 1.4 per cent contraction in credit growth—the first since 2002.
Banks had by the end of November last year increased lending rates to levels last seen 22 years ago but this is beginning to soften following regulatory interventions such as lowering the central bank rate.
The government is optimistic that a reduction in interest rates will help it ease its fiscal pressures, by lowering both its borrowing costs and that of businesses.
“Interest rates have begun to decline as a result of easing of the monetary policy, reducing borrowing costs and freeing up fiscal space for growth-enhancing initiatives by businesses,” said Treasury in the latest Budget Policy Statement.
The decline in interest rates is the reason the global rating agency Moody’s changed Kenya’s outlook for its creditworthiness to positive from negative, citing reduced liquidity risks even as access to the financial market has improved.
A positive outlook means the US-based rating agency is less likely to downgrade Kenya’s rating on its foreign-currency debt in its next review, a major relief to President William Ruto’s government which has been desperate to send signals of fiscal discipline to investors.
Treasury BPS shows a budget size of Sh4.336 trillion in the next fiscal year from the current Sh3.948 trillion. The budget is expected to cross the Sh5 trillion mark in the 2027/2028 financial year which will be President Ruto’s last budget in the current term.
