Treasury’s renewed appetite for local loans to hurt firms

Kenyan businesses face significant challenges in accessing credit due to high lending rates, a situation that could further be exacerbated by the government’s growing appetite for borrowing locally.

This is as the National Treasury plans to crank up borrowing from local banks in the coming years, crowding out the private sector. 

Treasury Cabinet Secretary John Mbadi said the government has planned to increase credit supply as it struggles to keep lending rates down. The move comes at a time when credit growth for the private sector is shrinking. Economists say this move by the government risks crowding out the private sector.

“Banks will tend to lend more money to the government because they consider it risk-free, which means interest rates will go up and private businesses will struggle to get credit from banks,” Economist Ken Gichinga said. According to Mr Gichinga, access to credit has been tough for the private sector due to high interest rates. Government borrowing is also continuing to crowd out the private sector.

Currently, Kenya’s credit rating has been downgraded by all main international rating agencies, affecting the country’s credit access. The country can only access funding from international markets at high costs to debt, stricter rules and potentially at unfavourable conditionalities.

Mr Gichinga said the downgrade makes it more expensive to raise funding from international credit markets and that the cost of external credit rating is already high.

Recently, Kenya raised Sh193.7 billion ($1.5 billion) from a new Eurobond at an interest rate of 9.5 per cent. It will be redeemed in three equal instalments of Sh64.5 billion ($500 million) in February 2034, February 2035 and February 2036. 

Following Kenya’s credit rating downgrade, analysts argue the rating has not improved and the country is still at risk of borrowing at a higher cost. In July 2024, Kenya’s credit rating was downgraded, from B3 to Caa1, and at the time, the outlook was negative.

Liquidity risks

Global ratings agency Moody’s revised Kenya’s outlook to “positive” from “negative” on the back of potential ease in liquidity risks and improving debt affordability over time.

Kenya’s struggle with heavy debt and looking for new financing lines was exacerbated by the nationwide protests against proposed tax increases. The report by Moody’s has shown that if the government effectively manages its fiscal consolidation, domestic financing costs will continue to decline, ultimately, opening doors for external funding.

“What has changed is the outlook. The outlook is based on what is likely to happen in the future,” analyses from the Institute of Public Finance showed. “Our credit rating as a country has not really improved, and we are still at the risk of borrowing at a higher cost.” “Kenya continues to be assessed by the IMF to be at high risk of debt distress for breaching the upper thresholds of key debt sustainability ratios,” noted the IFS fiscal analysis 2025. According to the medium term debt strategy, 2025-2028, Treasury plans to increase borrowing from domestic sources to 75 per cent and reduce borrowing from foreign lenders to 25 per cent.

Currently, local and foreign lenders have an almost equal share of public debt, which stood at Sh10.93 trillion as of December 2024, of which Sh5.87 trillion is from domestic sources and Sh5.06 trillion from external lenders.

Despite the continued drop in the CBK benchmark rate that has seen lenders compelled to reduce interest on loans, economists have in the past expressed concern that the trend may be reversed if the government’s appetite for domestic debt remains unchecked

According to economist Patrick Muinde, Kenya seems to have become a ‘Fuliza’ republic without any consideration of responsible application to debt. He notes that the general public is not spared in the indictment of the complexities of public debt management.

However, according to Mbadi, external sources of borrowing are shrinking. “If there is room for borrowing, we will think domestically,” he said. “External financing is becoming scarce. It is not an option. If we had that option of getting that money, then we could engage in a debate.”

He said the options that Treasury had were growing tax revenues, but added that it is careful not to hike taxes for Kenyans, but use “little resources prudently and efficiently while curbing corruption.”

Treasury has maintained that it will continue borrowing to bridge the budget deficit, as it cannot balance the budget now. And as the government continues on a borrowing spree, economists suggest alternative strategies to ease this burden.

A progressive tax policy that encourages production without stifling businesses could help generate revenue sustainably. Additionally, shifting certain government responsibilities to the private sector or devolving them can also help.

“The government can review its tax policy and come up with a progressive tax policy that does not hurt production, and enables the generation of revenue in a way that does not stifle business,” said Gichinga.

This will encourage enterprise participation, and the government can collect more revenue. He advises the government to consider offloading expenses that are not necessarily meant for the national government.

“And let them be moved to the private sector or devolved to the counties, so that the national governments can focus.”