The government spent Sh632.3 billion on interest payments, nearly twice as much as it did on paying off the actual loans themselves, the Controller of Budget has revealed.
New findings by the Controller of Budget, Margaret Nyakang’o, show that in the financial year 2024-25, debt service on domestic obligations hit Sh1.05 trillion, driven by a surge in short-term Treasury bills.
Out of this, Sh632.3 billion went to interest payments, while only Sh360.1 billion was used to reduce principal loan amounts.
“The total domestic debt service was Sh992.39 billion, comprising principal repayments of Sh360.09 billion and interest payment of Sh632.30 billion,” said Nyakang’o in the National Government Budget Implementation Review Report for 2024-25 financial year.
According to Nyakang’o, Kenya’s growing reliance on short-term domestic borrowing to plug budget deficits is now triggering fresh concerns, as it has increased local debt service obligations by Sh1.05 trillion up from Sh830 billion the previous year.
The sharp increase – largely driven by high interest costs on treasury bills–has exposed the government to heightened refinancing risks, as more debt falls due within shorter periods, forcing the National Treasury to repeatedly roll over obligations at even steeper costs.
Nyakang’o warns that this approach comes with a substantial cost as the high interest rates on these short-term instruments mean that the government is paying a premium for its borrowing.
Short-term debt instruments such as 91-day, 182-day and 364-day Treasury bills have become the government’s preferred source of financing in recent months, as constrained access to external markets and tightening global credit conditions limited longer-term options.
Domestic debt servicing accounted for the bulk of Kenya’s repayment obligations in the year, outpacing external commitments and underlining the shift in borrowing patterns.
Of the Sh1.7 trillion spent on public debt in the period, the report shows Sh992.4 billion went to domestic lenders – with interest costs making up the lion’s share.
This dynamic reflects a worrying trend, where Kenya is spending far more servicing interest than actually reducing the size of its obligations, locking the economy into a cycle where new borrowing funds old loans.
The high debt service burden has left limited fiscal space for investment in development projects and essential services.
Ministries, Departments and Agencies (MDAs) reported delayed funding for infrastructure, education and healthcare projects, while pending bills swelled to Sh524.8 billion by June 2025.
The report points out that capital works accounted for only a fraction of total spending, with Sh90.4 billion going to construction and civil works compared to hundreds of billions absorbed in the debt service.
This risk is compounded by the fact that commercial banks – which hold 42.6 per cent of domestic debt – dominate the market.
Should banks decide to reduce exposure or demand higher rates, the government’s borrowing costs could spike even further, she said.
Kenya’s pivot to domestic markets comes at a time when external financing has become increasingly expensive and elusive.
The report shows that while external debt grew by just 4 per cent in 2024-25 fiscal year to Sh5.40 trillion, domestic debt ballooned by 17 per cent to Sh6.33 trillion.
The Controller of Budget report further reveals that debt service consumed 55.5 per cent of total revenues in the 2024-25 financial year, far above the 30 per cent threshold recommended by the IMF.
This leaves limited fiscal space for development spending and critical public services, as more resources are diverted towards debt obligations. Ministries, Departments and Agencies (MDAs) have already reported delays in project implementation due to cash flow constraints, with pending bills ballooning to Sh524.8 billion by June 2025.
