Kenya’s ballooning public debt, now standing at Ksh10.58 trillion (65.7% of GDP), has put Treasury Cabinet Secretary John Mbadi in a tight spot as he grapples with strategies to reduce borrowing while maintaining economic stability.
The National Treasury’s 2025 Medium-Term Debt Management Strategy (MTDS) outlines a roadmap for curbing the nation’s debt burden, but it also highlights 11 major challenges that could derail these efforts. With Kenya’s debt-to-GDP ratio exceeding the Parliament’s cap of 55%, Mbadi faces a tough balancing act of managing repayments, securing sustainable funding sources, and stabilizing the economy.
Kenya’s Debt Breakdown as of June 2024
According to the MTDS framework, by the end of June 2024:
- Total public debt: Ksh10.58 trillion (65.7% of GDP)
- Domestic debt: Ksh5.41 trillion
- External debt: Ksh5.17 trillion
The debt stock of Ksh10.32 trillion, excluding IMF Special Drawing Rights (SDR) allocation, CBK overdrafts, suppliers’ credit, and bank advances, reflects Kenya’s mounting fiscal obligations.
As Mbadi takes over, his greatest challenge lies in implementing sustainable debt management strategies while ensuring the economy remains resilient.
Challenges in Managing Kenya’s Public Debt
The Treasury has outlined 11 key obstacles that could impact debt management:
1. Credit Rating Downgrade
Kenya’s recent sovereign credit rating downgrade has negatively impacted borrowing terms, leading to:
- Higher interest rates on loans
- Limited access to international credit markets
- Declining investor confidence
- Exchange rate fluctuations affecting debt sustainability
2. Weak Public Debt Legal Framework
The Public Debt Management Office (PDMO) lacks full autonomy to oversee and implement debt management strategies effectively.
3. Legal Overlaps in Fiscal Management
Conflicts between the CBK Act and the Public Finance Management (PFM) Act 2012 have created loopholes, allowing the Central Bank of Kenya (CBK) to exert excessive control over fiscal agency matters without adequate accountability.
4. Tight Budget and Cash Constraints
Due to recurrent fiscal deficits, the government relies heavily on borrowing to fund the budget, further increasing public debt.
5. Exchange Rate Risks from External Borrowing
A large portion of Kenya’s debt is denominated in foreign currencies, making repayments vulnerable to exchange rate volatility.
6. Unstable Global Market Conditions
External factors such as:
- Market volatility
- Fluctuating global interest rates
- Declining investor appetite complicate Kenya’s ability to secure affordable loans.
7. Legal Reforms Moving Slowly
Efforts to strengthen domestic borrowing frameworks and deepening the bond market have been slow due to bureaucratic inefficiencies and conflicting regulatory mandates.
8. Poor Understanding of Public Debt Management
Debt management remains a complex and politically sensitive issue, requiring sustained public awareness and capacity-building initiatives.
9. High Stock of Maturing Treasury Bills
The over-reliance on short-term Treasury bills puts pressure on liquidity, making debt refinancing a major risk.
10. Lack of Separation Between Borrowing and Liquidity Management
The Exchequer’s liquidity operations and debt management operations are currently intertwined, causing refinancing risks that could disrupt financial stability.
11. Struggles to Adapt to Changing Lending Regulations
Kenya must align borrowing strategies with evolving international lending regulations, which remains a resource-intensive process.
The Way Forward: Treasury’s Debt Management Strategy
To tackle these challenges, the Treasury is implementing key measures to curb debt accumulation and ensure fiscal sustainability:
- Reducing short-term borrowing (Treasury bills) and shifting to long-term instruments to manage refinancing risks.
- Expanding revenue generation through tax compliance reforms and broadening the tax base.
- Prioritizing concessional loans over commercial borrowing to secure low-interest credit.
- Enhancing public-private partnerships (PPPs) to reduce dependence on public funds for infrastructure projects.
- Implementing zero-based budgeting to streamline government spending and cut wasteful expenditures.
Final Thoughts
John Mbadi faces one of the toughest economic challenges in Kenya’s history. With Ksh10.5 trillion in public debt, the Treasury must balance economic growth, fiscal discipline, and social welfare needs without further deepening the crisis.
If the government fails to act swiftly, Kenya risks higher borrowing costs, economic slowdowns, and worsening debt distress. However, effective policy implementation, legal reforms, and prudent financial management could steer the country towards debt sustainability.
As Mbadi and his team navigate these hurdles, all eyes remain on the 2025 Budget Policy Statement, where new debt restructuring plans will be closely scrutinized.
