The Treasury made net borrowing of Sh437.8 billion in the first three months of the fiscal year, frontloading on debt amid a revenue shortfall that has signalled an upward revision in the budget deficit projection.
Net borrowing from the domestic market amounted to Sh339.7 billion, while external lenders put up Sh98.1 billion, as per latest disclosures by the National Treasury.
This borrowing is equivalent to 48.6 percent of the total target of Sh901 billion for the fiscal year, out of which the domestic market is expected to contribute Sh613.5 billion and external lenders Sh287.4 billion.
On the revenue side, there was a shortfall of Sh83.6 billion in the quarter to September, while spending was Sh5.9 billion above target. As a result, the budget deficit in the quarter stood at Sh280.4 billion, equivalent to 1.5 percent of gross domestic product (IGDP), against a target of Sh189.5 billion (1.1 percent of GDP).
‘Budget execution in the 2025/26 fiscal year has progressed well but constrained by slow adoption of e-procurement, revenue shortfalls against targets as well as expenditures pressures,’ said Treasury Principal Secretary Chris Kiptoo, in a presentation during the launch of public sector hearings on the 2026 budget on Wednesday.
‘Total revenues grew by 1.7 percent by end September 2025, compared with a growth of 10.8 percent by end September 2024, while ordinary revenues contracted by 2.9 percent compared with a growth of 10.1 percent over the same period.’
By borrowing larger sums early, the government is also giving itself liquidity headroom to cover its needs when large maturities and coupon payments come due, especially in January and February, when payments are made towards external loans related to the standard gauge railway, Eurobonds and large domestic infrastructure bonds.
In the domestic market, the government borrowed a cumulative Sh310.6 billion through Treasury bond sales, with Treasury bills contributing a further Sh45 billion in new debt.
The bonds included a reopening of two infrastructure papers of 15 and 19-years in August, which raised combined Sh180.14 billion through primary and tap sales.
In July, the Treasury had netted Sh66.7 billion through reopened 20 and 25-year bonds, while September’s issuance raised Sh63.8 billion from three reopened bonds.
The uptake came at a time of falling interest rates, which will help the government lower its borrowing costs that now account for the largest share of recurrent expenditure.
The bonds sold in the quarter carry coupon (actual interest rates) of between 12 and 14 percent, which was significantly lower compared to the highs of 18.5 percent paid out on infrastructure bonds issued in 2023 and 2024.
The falling rates also boosted bid volumes in the August infrastructure bonds from investors who were scrambling to lock in the papers before rates fell further. The two papers raised offers of Sh323.4 billion in the primary sale, and Sh207.5 billion in a subsequent tap sale.
Rates on the short-term treasury bills have also come down to the seven percent to nine percent range from 16 percent to 17 percent in August last year, giving the government another avenue to cheap cash from the market.