As long as domestic borrowing continues to expand, monetary adjustments by the Central Bank of Kenya (CBK) will remain cosmetic and ineffective.
In Kenya’s current fiscal landscape, the greatest paradox is not simply that the government owes more than it possesses in liquid resources, but that the remedies prescribed to address this imbalance often serve the State more than the people.
When total debt far outpaces cash and cash equivalents, the economy is effectively living on borrowed time, with liquidity shortages constraining the ability of both the government and the private sector to function. According to recent reports, public debt in 2025 has climbed above Sh11 trillion, even as revenue growth remains sluggish and falling short of what is needed to service the debt without sacrificing other obligations.
The Central Bank of Kenya has tried to portray monetary policy as the engine for recovery. Rate cuts, revised loan pricing formulas, and persuasion to commercial banks to reduce lending rates are part of this strategy.
These moves might appear reassuring: in April 2025, the CBK lowered its policy rate by 75 basis points to around 10.00 percent, aiming to stimulate credit growth.
Yet these policy shifts neglect the reality that the state itself remains the chief claimant on domestic capital. When the government continues to issue domestic debt-such as long-term Treasury bonds with coupon rates upward of 13.20 percent to 13.40 percent, and funds being raised at these levels-banks and investors naturally find government securities more attractive and safer than private sector loans.
Private sector credit tells the more concerning side of the story. By December 2024, credit to the private sector stood at Sh3.86 trillion, but growth was negative in Q4, with a 1.4 percent year-on-year decline-even as households, the trade and manufacturing sectors remain important borrowers.
Households took about Sh1,317.4 billion (34.1 percent of private credit), while trade and manufacturing took 16.9 percent and 15.0 percent, respectively.
These figures suggest that demand remains, but the supply of credit is choked-banks are reticent to lend to riskier private actors when government securities provide relatively high, risk-free returns.
In addition, Treasury bill yields, and bond coupon levels remain high, reinforcing what is already obvious: the state is crowding out the private sector.
The result is a vicious cycle where private investment is starved, households and businesses remain credit-constrained, and growth slows. Inflation and borrowing costs remain elevated.
With each round of short-term domestic borrowing, rollover risk increases. The state’s solvency becomes the central concern, not inclusive growth.
Kenya’s path out of this quagmire requires much more than lower rates. Structural reforms are necessary: debt issuance must shift toward long dated, concessional financing; incentives and guarantees need to encourage banks to lend to SMEs and productive sectors; fiscal discipline must be strengthened; and transparency in debt, cash holdings, and liquidity management must improve so that policy signals are credible.
The CBK, as monetary custodian, must act not as the Treasury’s enabler but as a guardian of an inclusive financial system. Unless domestic borrowing is contained, unless the incentives change, CBK’s well-intentioned adjustments will remain cosmetic and ineffective. And unless monetary policy is not aligned with fiscal policy, anything else is a mirage.
Investors demand yields for government securities in double digits, especially for long-term bonds. These attractive rates make lending to government very appealing, while loans to households or small businesses offer less return for more risk. Hence, even though the policy rate is lowered, the transmission to private lending rates is weak.
The high yields on government paper effectively provide a safe harbor for liquidity that might otherwise flow to more productive but riskier private investments.
The logic of cuts in rates or adjustments to pricing formulas assumes that banks will reorient their balance sheets toward growth-oriented lending. But when the state is issuing large volumes of debt-bills and bonds-and offering high rates on government paper, that assumption fails.
Banks are profit-seeking entities; for them, holding government securities is often the lower-risk, higher-return path. Private sector lending suffers not just because of risk or demand but because supply of credit is diverted toward sovereign debt.
This dynamic reveals the deeper contradiction: CBK’s monetary adjustments are less about empowering private growth and more about easing the government’s debt servicing burden.
Debt service is elevated, liquidity margins are thin, and the government depends heavily on domestic borrowing to meet recurrent expenses. Under these conditions, rate cuts and loan formula tweaks are at best marginal relief at worst promotional rhetoric.