In a strategic shift, the National Treasury is set to ramp up borrowing from local banks, aiming to source 75% of its funding domestically while reducing reliance on foreign lenders to 25%. This move, according to Treasury Cabinet Secretary John Mbadi, is driven by the need to mitigate risks associated with external debt, such as currency volatility.

As of December 2024, Kenya's public debt stood at Sh10.93 trillion, with Sh5.868 trillion sourced locally and Sh5.057 trillion from external lenders. The shift towards domestic borrowing could potentially squeeze credit availability for households and businesses as banks may prefer the stability of lending to the government through Treasury Bills and Bonds.

Mbadi highlighted the impact of currency fluctuations, recalling when the shilling depreciated to Sh160 against the US dollar, significantly increasing the cost of servicing external debt. The strengthening of the shilling to around Sh130 to the dollar has since reduced external debt by a trillion, from Sh6.089 trillion in December 2023 to Sh5.057 trillion last December.

The Treasury CS also noted that changing policies in major economies, such as the US, could lead to a reduction in cheap external loans. “We must be alive to the fact that external sources are shrinking,” Mbadi stated, emphasizing the need to look inward and strengthen domestic markets. He added that external financing is becoming scarce, making it imperative to explore internal options.

Mbadi mentioned that the government is focused on growing tax revenues and utilizing resources prudently while curbing corruption. However, he acknowledged that achieving efficiency and curbing corruption are long-term goals, necessitating borrowing to bridge budget deficits in the interim. “If there is room for borrowing, we will think domestically,” he said.

The International Monetary Fund (IMF) will not disburse a Sh110 billion ($850 million) funding, which was part of the Extended Fund Facility (EFF) and Extended Credit Facility (ECF), in which IMF was to advance $3.6 billion (Sh468 billion) to Kenya for budgetary support. Kenya failed to meet some conditions including restructuring of Kenya Airways, subsidising certain goods including fuel and increasing taxes to grow tax revenues. Mbadi explained that Treasury and IMF mutually agreed to pursue a new programme and abandon the final review due to time constraints.

Mbadi clarified that the decision to pursue a new program with the IMF was a mutual agreement, driven by time constraints. With the existing program ending on April 1, completing the ninth review within the limited timeframe was deemed unfeasible. Consequently, discussions have commenced on a new program.