The Treasury has cut the net amount it expects to borrow from external lenders in the current financial year by Sh61.6 billion to Sh225.8 billion, reflecting delays in accessing loans from multilateral lenders and falling interest rates that have made domestic borrowing cheaper.
The external target has been cut despite the budget deficit going up by Sh323.4 billion to Sh1.22 trillion in the Supplementary I 2025/2026 Budget that was passed last week. In response, the Treasury has raised the net domestic borrowing target by Sh385.1 billion to Sh998.6 billion in the mini budget.
In the June 2025 budget, Kenya had pencilled in an expected drawdown of Sh170.5 billion from the World Bank’s Development Policy Operation (DPO) funding framework, before revising the target down to about $750 million (Sh97 billion).
This amount is yet to materialise after the World Bank expressed concerns about delayed reforms in fiscal management, governance and tackling conflict of interest among public officials.
In a presentation to investors on the sidelines of last week’s World Bank and IMF Spring meetings, the Treasury indicated that the revised external target was still inclusive of the DPO loan, adding that it had made progress in implementing the required actions to unlock the funding.
At the same time, Central Bank of Kenya (CBK) Governor Kamau Thugge said that Kenya was pursuing a separate emergency funding package from the World Bank to cushion the economy from shocks related to the Iran war.
However, the exchequer warned that failure to unlock the World Bank funds could result in yet another upward revision of the domestic borrowing target.
‘The revision in the external target points to a financing issue, looking at the DPO reduction, and the fact that we have not seen progress on the $1 billion (Sh129 billion) second tranche of the UAE-backed loan,’ said Churchill Ogutu, an economist at Capital A Investment Bank.
‘The lower domestic interest rates and high liquidity in the market have been a good coincidence therefore for the government, allowing the domestic market to come in and plug the higher budget deficit.’
Domestic interest rates have been on a downward trend since August 2024, coinciding with the CBK cutting its base rate from 13 percent to 8.75 percent in the course of 10 consecutive monetary policy committee meetings.
The latest meeting on April 8, however saw the MPC hold the rate at the current level of 8.75 percent, citing concerns about possible inflationary pressure due to the war in Iran.
At the same time, the interest rates on government bonds have come down to a range of 11 percent to 13 percent, from highs of 18 percent in 2024, while Treasury bill rates are now ranging between 7.4 percent and 8.3 percent, down from 15 percent to 17 percent in mid-2024.
In the 2024/2025 fiscal year, the government also cut the external borrowing target while expanding domestic borrowing, following similar struggles to meet conditions set by multilateral lenders.
The budget statement of June 2024 had set the deficit at Sh597 billion, which was to be financed through domestic borrowing of Sh263.2 billion, and external funding worth Sh333.8 billion.
Three revisions through supplementary budgets followed, with the deficit expanding to Sh997.5 billion in the mini budget of June 2025 and net domestic borrowing set at Sh815.6 billion-three times the original projection.
The government ended up breaching this target in its final budget outcome where the total deficit settled at Sh1.034 trillion, financed through domestic borrowing of Sh854.5 billion and external borrowing of Sh179.7 billion.