By Benadeta Mwaura - Reporter
Kenya, 19 November 2025 - Kenya’s Ministry of Finance recently announced that the government plans to aim for a budget deficit of 4.9% of GDP in the fiscal year 2026/27 (July to June).
On the surface, that’s barely higher than the 4.8% the government is already working with, but beneath the numbers, there’s a complex web of risks, debt pressures, and tough trade‑offs.
To plug this gap, Kenya intends to borrow KSh 241.8 billion from abroad (about US$1.86 billion) and KSh 775.8 billion locally to cover the rest.
This dual strategy shows how dependent the country is on both international and domestic financing, a double-edged sword in today’s volatile economic climate.
Why the Deficit Matters is it More Than Just Numbers
On one hand, this deficit target is a signal: the government is serious about fiscal sustainability.
As Principal Secretary Chris Kiptoo put it, they “need to focus on fiscal sustainability” even while funding critical projects. But hitting this mark isn’t easy, and the way Kenya plans to finance the gap carries real risks.
Heavy reliance on domestic borrowing worries many. Ratings agency Moody’s recently warned that Kenya’s debt servicing costs will remain high because a large share of the borrowing is local. According to them, about two-thirds of Kenya’s fiscal financing comes from the local market, nearly 4% of GDP every year. The danger? These high-interest local loans crowd out investment in the private sector and make debt more expensive to manage.
The World Bank adds another layer: even though some macroeconomic signs (like inflation and reserves) are improving, Kenya’s fiscal position is “fragile.” They point out that interest payments absorb about a third of tax revenue, limiting how much the government can spend on important social services.
What This Means for Kenya and what lies ahead
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This is not just about balancing the books. The decisions being made now could shape Kenya’s future economic path.
Debt Sustainability: By targeting a high but controlled deficit, the government is trying to walk a tightrope, financing growth, but not drowning in debt.
Crowding Out: Heavy domestic borrowing risks pushing out private sector investment. When the government borrows too much locally, interest rates rise, and businesses may struggle to access affordable credit, potentially slowing growth.
Interest Bill Pressure: With a large portion of national revenue committed to servicing debt, funds that could have gone into public services, infrastructure, or social programs may instead go toward paying interest.
Credibility & Investment: Successfully managing this deficit could strengthen investor confidence in Kenya’s economy, but missing the target or mismanaging debt could raise red flags and discourage investment.
The government will need to deliver on this target, which requires strong revenue collection, disciplined spending, and smart borrowing strategies. It may also pursue reforms that reduce borrowing costs or shift financing toward growth-enhancing investments rather than simply relying on loans.
External risks remain significant. Global interest rate fluctuations, currency volatility, and changing investor sentiment could all impact Kenya’s ability to maintain this deficit target.
On the positive side, if the government successfully manages these challenges, it could pave the way for more stable and sustainable economic growth, offering a stronger foundation for future development.
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