AfDB flags Kenya’s mounting debt pressure, state spending

A new review by the African Development Bank (AfDB) has raised fresh concerns over Kenya's rising public debt, escalating debt servicing costs, and growing pressure on government spending.

While the outlook released on Tuesday shows Kenya's economy remains stable, AfDB warns that the listed factors could significantly constrain the country’s development agenda.

The bank projects Kenya’s economy to grow at 5.4 per cent in 2026, up from 4.9 per cent the previous year, supported largely by the services sector, household consumption, and a gradual recovery in agriculture. The bank also forecasts a moderation to 5.0 per cent growth in 2027.

However, it takes note of the tightening fiscal environment that is increasingly limiting the government’s ability to finance key programmes and investments.

Of particular concern is Kenya’s rising public debt burden currently standing at about Sh12 billion, which the continental bank warns is exerting sustained pressure on public finances.

Kenya has relied heavily on borrowing—both domestic and external—to fund infrastructure development and bridge budget deficits. While this has supported growth, it has also led to a sharp increase in debt servicing obligations.

This is also reflected at the continental level, with the report saying Africa’s economic outlook faces strong headwinds from persistent debt distress and shrinking fiscal space.

“Despite some fiscal consolidation, debt levels remain above pre-pandemic levels,” the outlook says inn part.

The combined effect of heavy debt burden and constrained fiscal space, it notes, threatens the momentum of Africa’s growth and structural transformation.

The report notes that several African states, including Kenya, returned to the Eurobond market in 2025, where Kenya raised $1.5 billion in October, followed by Angola ($1.75 billion) and Nigeria ($2.35 billion).

“However, borrowing costs remain high, as sovereign spreads exceed pre-pandemic level. Kenya’s bond was issued in two tranches, with the seven-year tenor at 7.875 per- cent and the 12-year at 8.8 per cent,” it says.

While the move signals renewed investor confidence and provided short-term financing relief, the relatively high interest rates point to persistent risk concerns. This would mean the government will face heavier repayment obligations in the years ahead.

According to the AfDB, a growing share of government revenue is now being channelled towards repaying loans, leaving less fiscal space for critical sectors such as infrastructure, health, education, and social protection.

The trend, the bank cautions, risks crowding out development spending and slowing the pace of economic transformation.

“Combined with currency risks, elevated financing costs pose a threat to debt sustainability and social spending. They could derail the current growth momentum, impair long-term development, and thus increase the risk of social and political fragility,” it says.

The AfDB also highlights the risks posed by rising global interest rates, which have made external borrowing more expensive and complicated debt refinancing efforts.

Domestically, increased government borrowing has tightened liquidity in the financial system, with the state competing with the private sector for credit. This has the potential to push up interest rates and reduce access to financing for businesses, ultimately slowing private sector growth.

According to the National Treasury, Kenya expects to borrow Sh925 billion in domestic debt and Sh229 billion in external debt this fiscal year to bridge a Sh1.2 trillion budget deficit.

Total domestic debt has surpassed Sh7.1 trillion as of February 2026, creating high-interest repayment pressure and squeezing credit availability for the private sector.

Beyond debt, the report flags broader pressures on government spending, including persistent budget deficits and rising recurrent expenditure. With a significant portion of the budget committed to wages, interest payments, and other fixed costs, the room for discretionary spending, especially on development projects, continues to shrink putting pressure on the Kenya Kwanza administration project delivery.

This fiscal squeeze is already being felt in key sectors tied to Kenya’s long-term growth ambitions, with a number of flagship projects stalling.

The AfDB notes that inefficiencies in public spending and slow project execution further compound the problem, reducing the overall effectiveness of government investment.

At the same time, Kenya’s economic outlook remains vulnerable to external shocks. The AfDB points to climate-related risks, particularly drought, as a major threat to agricultural output and rural incomes.

In addition, fluctuations in global commodity prices especially fuel and food in the face of the Middle East crisis continue to exert pressure on inflation and the cost of living.

Despite these challenges, the AfDB maintains that Kenya’s economic fundamentals remain relatively strong compared to its regional peers.