Kenya's Public Debt Crisis: How the Country Borrowed Its Way to KES 12.3 Trillion and What It Means for Taxpayers

Kenya's public debt has surpassed KES 12.3 trillion (approximately USD 95 billion) by the end of 2025, representing a debt-to-GDP ratio of 67.5 percent—well above the East African Community convergence criterion of 50 percent and approaching levels that economists consider unsustainable for developing economies. The debt burden has grown dramatically from KES 1.8 trillion in 2013, nearly sevenfold in just over a decade, driven by ambitious infrastructure spending, persistent budget deficits, expensive commercial borrowing, and the economic shocks of the COVID-19 pandemic. Debt service obligations reached KES 1.72 trillion in the 2024/25 financial year, consuming 71.2 percent of ordinary revenue and leaving limited fiscal space for essential services and development programmes.

How Kenya's Debt Grew So Fast

Kenya's debt accumulation accelerated from 2013 when the government embarked on large-scale infrastructure projects, most notably the Standard Gauge Railway (SGR) from Mombasa to Nairobi, financed through a USD 3.5 billion loan from China Exim Bank. Other major debt-financed projects include the Nairobi Expressway, the LAPSSET Corridor, the Last Mile electricity connectivity programme, and county-level infrastructure under devolution. While these investments aimed to drive economic growth, many were financed through expensive commercial loans rather than concessional development financing.

The shift from concessional to commercial borrowing fundamentally changed Kenya's debt profile. Before 2010, the majority of external debt came from multilateral institutions like the World Bank and bilateral donors at low interest rates and long repayment periods. The introduction of Eurobonds—starting with a USD 2 billion debut issue in 2014—brought commercial-rate borrowing with shorter maturities and higher interest costs. By 2025, Eurobond obligations constituted a significant portion of external debt, with costly refinancing cycles becoming a recurring fiscal challenge.

Domestic vs External Debt

As of September 2025, Kenya's debt composition stood at KES 6.66 trillion in domestic debt (37.2 percent of GDP) and KES 5.39 trillion in external debt (30.1 percent of GDP). The proportion has shifted notably toward domestic borrowing in recent years, from a 54.7 percent external to 45.3 percent domestic split in December 2023 to approximately 46.3 percent external and 53.7 percent domestic by December 2024. This shift reflects the government's strategy to reduce foreign currency exposure and manage exchange rate risks.

Domestic debt is primarily held through Treasury bonds and Treasury bills purchased by commercial banks, pension funds, insurance companies, and retail investors through the Central Bank of Kenya (CBK). While domestic borrowing eliminates currency risk, heavy government borrowing from the domestic market crowds out private sector credit, raising interest rates and reducing the availability of affordable loans for businesses and individuals. External debt is owed to multilateral institutions (World Bank, IMF, African Development Bank), bilateral creditors (China, Japan, France, Germany), and commercial creditors (Eurobond holders).

The Eurobond Challenge

Kenya's Eurobond obligations have created a recurring refinancing cycle that exemplifies the debt trap concern. In February 2024, Kenya issued a USD 1.5 billion Eurobond at 10.375 percent yield to partially repay a USD 2 billion bond maturing in June 2024. In February 2025, the pattern repeated with another USD 1.5 billion issue at 9.95 percent to refinance a USD 900 million Eurobond maturing between May 2025 and May 2027. These yields are substantially higher than Kenya's earlier borrowing costs, meaning the country is paying more to service existing debt rather than funding new investment.

As of early 2026, Kenya is looking at further Eurobond deals to manage upcoming debt maturities, raising concerns about a perpetual refinancing cycle where new expensive debt replaces maturing expensive debt without reducing the overall burden. The African Business magazine and international analysts have questioned whether this pattern is sustainable, particularly given Kenya's revenue collection challenges and the political constraints on raising taxes demonstrated by the rejection of the Finance Bill 2024 amid widespread protests.

Chinese Loan Restructuring

In a significant debt management move, Kenya redenominated three SGR loans totalling USD 3.5 billion from China Exim Bank from US dollars to Chinese yuan (renminbi). This currency conversion is expected to save Kenya approximately KES 27.79 billion (USD 215 million) annually in debt servicing costs, with repayments set to begin in January 2026. The restructuring reflects both economic pragmatism and Kenya's deepening economic ties with China.

However, the International Monetary Fund (IMF) has warned that such currency swaps, while easing short-term fiscal pressure, can expose countries to new forms of currency volatility. The Chatham House analysis suggests the move reflects economic pragmatism rather than a strategic pivot away from Western institutions, but it nonetheless introduces yuan exchange rate risk into Kenya's debt portfolio. The long-term implications will depend on the yuan's stability relative to Kenya's export earnings, which are predominantly denominated in US dollars.

IMF Relations and Fiscal Policy

Kenya's previous IMF programme expired in April 2025 after the government struggled to implement agreed fiscal consolidation measures, including tax increases that sparked public opposition. Negotiations for a successor programme continued through late 2025, with discussions set to resume in Nairobi in early 2026. The IMF has maintained that Kenya's debt is sustainable but at high risk of distress, requiring continued fiscal consolidation, improved revenue collection, and prudent borrowing practices.

The absence of an active IMF programme has implications beyond direct financing. IMF programmes serve as signals of macroeconomic credibility to international investors and development partners, influencing the terms at which Kenya can access commercial markets and the volume of bilateral aid flows. The government's 2025/26 budget did not factor in IMF funding following the programme's lapse, creating additional pressure on domestic borrowing and revenue mobilisation.

Impact on Kenyans and the Path Forward

The debt burden directly affects ordinary Kenyans through multiple channels. High debt service payments mean less money for healthcare, education, social protection, and infrastructure maintenance. Government borrowing from domestic markets raises interest rates, making mortgages, business loans, and consumer credit more expensive. The need to generate foreign currency for external debt repayment puts pressure on the shilling, contributing to inflation through higher import costs. Tax increases to bridge fiscal gaps—such as the contested Housing Levy and proposed tax measures—reduce disposable income.

Addressing the debt crisis requires a multi-pronged approach: improving Kenya Revenue Authority (KRA) tax collection efficiency to boost revenue without excessive tax rate increases, prioritising concessional over commercial borrowing, ensuring debt-financed projects generate sufficient economic returns, strengthening the legal framework for debt management and transparency, and diversifying the economy to expand the tax base and foreign exchange earnings that service external obligations.