Mounting debt crisis: Treasury borrowing to pay wages, allowances

The National Treasury is now borrowing to finance day-to-day government operations, it has emerged, laying bare the growing strain of Kenya's mounting debt burden.

 MPs are seized of the looming crisis and have raised alarm over the worsening fiscal situation.

 The MPs warned that debt servicing is consuming a significant share of government revenue, leaving limited resources for public investment.

 This followed the Treasury’s admission that billions in commercial loans meant for managing public debt are being channelled into the government’s general recurrent budget.

 In a report, members of the National Assembly’s Public Debt and Privatisation Committee highlighted that external loans meant for liability management operations are not being used exclusively to repay debts.

 Instead, a significant portion is pooled into the Consolidated Fund to finance routine government expenditure.

 Similarly, the committee expressed concern that loans procured on potentially unfavourable terms are “not ring-fenced for specific projects”.

 “A portion of the proceeds is used to finance the overall budget deficit and support approved government expenditures through the Consolidated Fund,” the report reads.

 The committee also raised concerns about the use of commercial loans contracted under debt liability management operations.

 According to the report, external loans obtained for debt management purposes are not used exclusively for debt prepayment.

 “Although these are commercial loans, they are not ring-fenced for specific projects but are pooled within the Consolidated Fund for general budget financing, even where they may be obtained on potentially unfavourable terms.”

 MPs, in their review of the 2026-27 Budget Estimates, further cautioned that debt servicing costs have reached levels that threaten fiscal sustainability.

 Kenya's public debt currently stands at Sh12.8 trillion.

 In the next financial year, the government projects it will pay Sh2.3 trillion in loan repayments — Sh1.3 trillion in interest payments and Sh1 trillion in principal repayments.

 MPs complained that the heavy debt repayments are crowding out development spending.

 In the next fiscal year, the Treasury has earmarked only Sh749 billion for development.

 This means the amount consumed in debt repayment is almost three times larger than the development budget.

 Of the projected total expenditure of Sh4.8 trillion in the 2026-27 financial year, recurrent spending, including salaries, will consume Sh3.54 trillion.

 Compared to the current financial year, the development vote will decrease by Sh9.47 billion.

 However, recurrent expenditure will rise by Sh145.55 billion.

 “The expenditure growth is largely driven by statutory and non-discretionary obligations, particularly debt service and pensions, thereby increasing gross financing needs and further constraining fiscal flexibility,” the report states.

 Consolidated Fund Services expenditure, which mainly consists of debt repayments, interest payments and pensions, is projected at Sh2.56 trillion in 2026-27.

 Of this amount, public debt service alone will account for Sh2.31 trillion, with the budget deficit standing at Sh1.1 trillion.

 This means the government has to borrow to plug the gap, with MPs observing that debt is crowding out growth-enhancing investments.

 Domestic debt interest payments alone are projected to hit Sh986.73 billion in the next financial year, up from Sh883.76 billion in 2025-26.

 External debt service will amount to Sh680.38 billion, including Sh412.87 billion in principal repayments and Sh267.51 billion in interest payments.

 The committee warned that heavy domestic borrowing is likely to worsen refinancing risks and increase interest payment pressures.

 “Domestic debt service is projected to account for about 71 per cent of total debt service expenditure in FY 2026-27,” the report says.

 MPs described the deficit as the highest ever projected at the start of any financial year.

 “This indicates a continued expansionary fiscal policy stance and points to sustained growth in the public debt stock,” the committee said.

 The report notes that public debt is expected to increase by more than Sh1 trillion for the third consecutive year.

 To finance the deficit, the Treasury plans to borrow Sh995.7 billion locally and Sh116.2 billion from foreign lenders.

 Despite the Treasury’s austerity call, MPs noted that public debt is expected to remain above the statutory debt anchor of 55 per cent of GDP.

 As a result, Parliament has directed the National Treasury to submit an enforceable debt reduction plan within 30 days.

 The plan must outline annual targets, policy measures and timelines for reducing the debt burden and returning public debt to the set threshold.

 Lawmakers further questioned whether current development expenditure levels are sufficient to generate the economic growth required to support debt sustainability.

 Development expenditure is projected at only 3.6 per cent of GDP, a level the committee considers inadequate for a country seeking rapid economic transformation.

 To address the imbalance, MPs recommended that the Treasury progressively increase development spending from 3.6 per cent to 10 per cent of GDP over the medium term while rationalising non-priority recurrent expenditure.

 MPs warned that pooling commercial loans into general budget financing raises accountability concerns.

 The Treasury is expected to disclose how loans are utilised, including the portions used for debt prepayment, general budget support and specific projects.

 The report also exposed “a worrying pattern of debt forgiveness and write-offs involving state agencies that borrowed funds from the government”.

 MPs warned that continued write-offs or forgiveness of obligations owed by defaulting public entities could encourage financial indiscipline.

 The committee noted that debt forgiveness undertaken without legal consequences or reporting to Parliament is risky.

 As a result, the Treasury has been directed to develop an accountability framework for defaulting entities within three months.

 More than Sh1 trillion in bailouts has gone down the drain, with MPs arguing that they must be involved in any future decisions on write-offs.

 There are no signs of debt relief any time soon, with nearly half of next year’s budget, Sh2.3 trillion, earmarked for debt repayment.

 Of the Sh2.3 trillion allocation, Sh1.3 trillion will go towards interest payments.

 Domestic interest will take the lion’s share at Sh986 billion, while foreign lenders are set to receive Sh267 billion.

 An additional Sh1.06 trillion is for repayment of principal, with Sh648 billion going to domestic lenders and Sh412 billion to external creditors.

 Beyond debt concerns, MPs highlighted growing pension obligations as another major fiscal challenge.

 Pension expenditure is projected at Sh241.94 billion in 2026-27, making it the second-largest component of Consolidated Fund Services after debt servicing.

 The report notes that pension payments have risen sharply over the years, increasing pressure on public finances.

 Despite the concerns, MPs acknowledged some positive indicators in the Treasury’s projections.

 Inflation is expected to remain within target ranges, while the fiscal deficit is projected to decline gradually from 5.3 per cent of GDP in 2026-27 to 3.3 per cent by 2028-29.

 MPs concluded that the country’s fiscal future will depend on whether the government can curb the growth of debt service costs.

 “The need to strengthen fiscal discipline has never been greater,” the report says, warning against continued borrowing without ensuring value for money.

 The weight of debt comes as the Treasury projects total revenues of Sh3.63 trillion, meaning Sh1.11 trillion will have to be borrowed.

 Budget experts say aggressive domestic revenue mobilisation, specifically through reducing value-added tax expenditures, could provide a way out.

 “This should be coupled with a mandatory, structured clearance of government pending bills to unlock private sector liquidity and stimulate economic growth,” the Parliamentary Budget Office said.

 Even so, the budget reflects a clear preference towards sectors seen as critical ahead of the 2027 General Election, with security-related allocations taking a substantial share.

 According to Treasury projections, the present value of public debt-to-GDP, which stood at 65.3 per cent in June last year, will remain above the statutory limit of 55 per cent throughout the medium term.