Within four months, government has sought more than 70 percent of its annual borrowing target, balancing concessional World Bank funding with costly commercial loans as domestic bond rates climb.
Government started the 2025/26 financial year with a clear financing plan: fund just over half of the Shs72.37 trillion budget from domestic revenue and cover the rest through borrowing and grants.
The domestic borrowing target was Shs11.38 trillion, with external loans expected to contribute Shs13.4 trillion.
But in just three and a half months, government has already sought Shs8.2 trillion in new loans, highlighting the pace and intensity of the government’s funding strategy.
The loans include concessional funding from the World Bank and commercial loans from Standard Chartered and Citi, seeking to finance power lines, oil roads, and infrastructure projects.
The World Bank, resuming lending after a two-year freeze, has pledged $2b (about Shs7 trillion) over three years to support transport, energy, ICT, and agriculture, according to Ramathan Ggoobi, the Finance Ministry permanent secretary.
Government is relying on these concessional loans as domestic bond rates hover near 17.9 percent in the primary market. And experts think the domestic bond market has become a little expensive.
‘Government borrowing at 17 percent in the domestic bond market is already expensive. Anything beyond that would indicate distress. We might see 18 percent soon, but 20 percent would be intolerable. That is why concessional World Bank loans, usually at 5 to 6 percent in dollars, are the best option,’ says financial markets consultant Alex Kakande.
Commercial borrowing is also on the rise. Government has already sought Parliament’s approval to borrow Shs1.4 trillion for power line projects and Shs469b for oil roads from Standard Chartered and Shs933 billion for road projects from Citi.
Two trends stand out in government’s borrowing so far – the first is the speed.
By October, government’s loan approvals and domestic bond sales totaling Shs11.4 trillion had already consumed over 70 percent of the annual borrowing plan in just one quarter.
Finance Minister Matia Kasaija emphasized the approach in his June budget speech, saying, ‘By intentionally prioritizing investments in infrastructure, the speed of economic transformation is destined to be faster.’
Second is the mix. Concessional World Bank loans are relatively cheap and help ease pressure on local markets.
Commercial loans, by contrast, are costly and short-term, adding financial risk. Public debt had risen to Shs116 trillion (about $32 billion) by June 2025, a more than 25 percent increase from the previous year, driven largely by domestic borrowing.
Treasury bond auctions alone have raised about Shs6 trillion since July, nearly 30 percent of the domestic borrowing target. Front-loading gives government early cash to fund projects and refinance maturing debt, but burning through Shs8.2 trillion in loans plus Shs6 trillion in bonds in just four months risks overshooting the year’s borrowing envelope.
Debt service costs are already projected at Shs15 trillion for the year.
Since July, borrowing domestically has become more expensive. Interest rates on short-term bonds (2-5 years) have risen from 15 to 17 percent, and long-term bonds (15+ years) from 16.5 to 18 percent.
Higher borrowing costs translate into higher interest payments. On the Shs6 trillion borrowed from domestic bonds, interest is projected to cost between Shs954b and Shs1 trillion this year.
A third of government revenue is now allocated to domestic debt service, according to the National Budget framework.
‘For investors, this is a sweet spot. You are earning 16 to 18 percent in shilling terms while inflation is below 6 percent. That is a double-digit real return,’ says Masha Michael Katende, an investment associate with Cornerstone Asset Managers.
This has made activity at the bond market surge, with trading up 20 percent compared to last year.