Kenya’s Debt Story: Structural Vulnerabilities and the Path to a Sustainable Trajectory
Category: Debt
By: Faith Nzomo,
In the mid-2010s, Kenya embarked on a path toward fiscal consolidation, a strategy designed to set the national public debt on a permanent downward trajectory by boosting domestic revenue collection and rationalizing public spending. More than a decade later, these efforts bore no fruits. The country’s debt-to-GDP ratio surged to a high of 72% in 2023 from 50% of GDP in 2015 -a clear signal of departure from fiscal consolidation goal. Servicing this swelling debt burden is becoming increasingly difficult as debt servicing now sits at the top of fiscal priorities, absorbing more than two thirdsof annually collected revenue. This leaves a small pool of resources for the essential public investments needed to drive economic growth.
It is however, not the first time the country has navigated such waters. By analyzing debt trends from the late 1990s to the present, this blog identified a recurring cycle of debt accumulation and decumulation providing the vital context for the county’s current predicament.
Chart 1: Composition of Kenya’s Debt Burden, 1996 – 2026
Source: Author’s compilation using data from National Treasury
From FY 1995/96 to the start of the millennium, Kenya’s debt ratios skyrocketed, hitting a high of 79%. This surge was fueled by a mix of internal systemic issues—such as poor governance and weak policy frameworks—and crises, including the HIV/AIDS pandemic and severe droughts. Poverty levels rose and economic growth dropped, hence the country became increasingly dependent on debt to navigate these crises.
During this period, the debt crisis was not an isolated national struggle, but rather a widespread regional phenomenon. This prompted the IMF and World Bank to offer remedies through the Heavily Indebted Poor Countries (HIPC)and Multilateral Debt Relief (MDR) initiatives —support that Kenya was unable to access. The programs were designed as a lifeline for countries meeting specific poverty and debt-to-export criteria. However, because Kenya’s debt was classified as ‘sustainable’ by these standards, the country did not qualify for relief. This exclusion meant that Kenya continued to grapple with a significant and unaddressed fiscal challenge that would shape its policy for years to come.
The county’s debt trajectory however reached a pivotal turning point in 2002, when there was a change in administration. This ushered in a period of improved governance and faster economic growth. Debt ratios were pushed down further by the shift away from over-reliance on external financing due to reduced access, leading to a decline in external debt ratios from 50% of GDP in FY1995/96 to 21.7% of GDP by FY 2006/07. Further, debt servicing burden was eased by successful debt restructuring initiatives through the Paris and London Clubs-which led to the rescheduling of US$650 million in arrears providing a 50% debt relief in present-value terms. In addition, relief also came from the cancellation of US$30 million in bilateral loans from China, Finland, and the Netherlands.
In addition, the government revolutionized the domestic landscape by deepening the local securities market. This included the listing of longer-dated Treasury Bonds on the Nairobi Securities Exchange (NSE). The ratio of short-term Treasury Bills to long-term Treasury Bonds underwent a dramatic transformation, flipping from 90:10 to 30:70. By the end of FY 2005/06, these combined efforts had successfully brought total public debt down to 51% of GDP, achieving the much-needed relief from fiscal pressures and offering a conducive fiscal environment for economic development.
Chart 2: Change in the composition of Domestic Debt
Source: Author’s compilation using data from National Treasury
Recovery efforts were temporary stalled due to the 2007 Post-Election Violence and the 2008 global financial crisis, which pushed debt-to-GDP ratio back up to 51% by 2010. However, recovery efforts and enhanced revenue collection soon bore fruit, driving the ratio down again to a decade low of 41% in 2011/12.
That stability, however, was short-lived. The last decade has seen a reversal of these gains, with debt breaching the 50% threshold in 2014/15 before accelerating to a peak of 72% of GDP in 2023. This rapid re-accumulation was fueled by a spree of ambitious infrastructure projects financed through expensive, non-concessional commercial loans. This aggressive borrowing, coupled with persistent revenue shortfalls, the shock of the COVID-19 pandemic, and a sharply depreciating Shilling, inflated the cost of debt servicing and foreign-denominated obligations.
Kenya’s attainment of lower middle-income country (LMIC) status in 2014 played a big role to the reduced access to affordable and long-term concessional loans. This shift in access compelled the country to increase its reliance on international capital markets, as evidenced by the issuance of its debut 5- and 10-year Eurobonds in the same year (see chart 3). This coupled with increased domestic borrowing pushed interest rates up (r>g), ultimately resulting to the sharp increase in total debt.
Chart 3: Changing Creditor Profile of External Debt
Source: Author’s compilation using data from National Treasury
Although current projections suggest a gradual decline in the debt-to-GDP ratio—from 67% in FY 2023/24 to 64% by end of FY 2025/26—these figures remain well above the 55% threshold (in present value terms) mandated by the PFM (Amendment) Act of 2023. Recent World Bank-IMF Debt Sustainability Analysis (DSA) findings reveals that Kenya has significantly breached most of the debt sustainability thresholds under the baseline scenario. Specifically, on total debt, the present value (PV) of total public debt-to-GDP ratio is expected to remain above the 55% benchmark until 2029. The situation is even more critical for external debt as PV of external public and publicly guaranteed (PPG) debt-to-exports solvency indicator breaches its 180% threshold through 2030, while the debt service-to-exports liquidity indicator exceeds its 15% threshold for a much longer term, remaining elevated until 2037. The only indicator projected to fall below its sustainability threshold (18%) is the external debt service-to-revenue ratio, starting in 2029.
Chart 4: Kenya’s Total Public debt (% of GDP) indicator under different scenarios
Source: Author’s compilation using data from DSA
Additional DSA stress tests—which subject the debt path to hypothetical shocks like lower GDP growth or exchange rate depreciation, have shown that even a moderate shock would rapidly worsen debt indicators and potentially trigger immediate debt distress.
Conclusion
The recurring cycles of debt accumulation and decumulation that characterized the period from 1995 to present highlight the critical need for a fiscal consolidation strategy that works. The surge in debt has consistently been driven by three key factors. First, external shocks—ranging from pandemics like HIV/AIDS and COVID-19 to natural disasters like droughts—which repeatedly strain the country’s finances. Since Kenya’s economy is heavily reliant on agriculture, these weather-related events slow down economic activity leading to low output. Since tax revenues rise one for one with output, a slowdown reduces the present value of future tax streams, making it even more difficult to service the debt. A vulnerability to these shocks is compounded by a lack of fiscal buffers.
Secondly, a changing creditor profile has led to a costly shift away from cheaper, concessional borrowing toward more expensive, short-term debt from commercial sources and countries like China. This move is largely attributed to the country’s classification as a lower-middle-income nation. A similar shift towards more expensive instruments (T-Bonds) has also occurred domestically with domestic financing projected to hit Ksh 1Trillion in FY 2026/27.
Lastly, weak institutional and legal capacity remains a key driver. This is evidenced by the inability of budget institutions to manage finances prudently and the failure to adhere to fiscal rules —leading to perennial budget credibility issues—remains a fundamental driver of debt accumulation. To permanently break this pattern and secure a downward, sustainable path for public debt, Kenya must demonstrate unwavering fiscal discipline, foster sustained economic growth that expands the tax base, and develop robust fiscal buffers to effectively manage future economic and climate shocks.
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Kenya’s Debt Story: Structural Vulnerabilities and the Path to a Sustainable Trajectory
| Post date: Tue, Jan 27, 2026 |
| Category: Debt |
| By: Faith Nzomo, |
In the mid-2010s, Kenya embarked on a path toward fiscal consolidation, a strategy designed to set the national public debt on a permanent downward trajectory by boosting domestic revenue collection and rationalizing public spending. More than a decade later, these efforts bore no fruits. The country’s debt-to-GDP ratio surged to a high of 72% in 2023 from 50% of GDP in 2015 -a clear signal of departure from fiscal consolidation goal. Servicing this swelling debt burden is becoming increasingly difficult as debt servicing now sits at the top of fiscal priorities, absorbing more than two thirdsof annually collected revenue. This leaves a small pool of resources for the essential public investments needed to drive economic growth.
It is however, not the first time the country has navigated such waters. By analyzing debt trends from the late 1990s to the present, this blog identified a recurring cycle of debt accumulation and decumulation providing the vital context for the county’s current predicament.
Chart 1: Composition of Kenya’s Debt Burden, 1996 – 2026
Source: Author’s compilation using data from National Treasury
From FY 1995/96 to the start of the millennium, Kenya’s debt ratios skyrocketed, hitting a high of 79%. This surge was fueled by a mix of internal systemic issues—such as poor governance and weak policy frameworks—and crises, including the HIV/AIDS pandemic and severe droughts. Poverty levels rose and economic growth dropped, hence the country became increasingly dependent on debt to navigate these crises.
During this period, the debt crisis was not an isolated national struggle, but rather a widespread regional phenomenon. This prompted the IMF and World Bank to offer remedies through the Heavily Indebted Poor Countries (HIPC)and Multilateral Debt Relief (MDR) initiatives —support that Kenya was unable to access. The programs were designed as a lifeline for countries meeting specific poverty and debt-to-export criteria. However, because Kenya’s debt was classified as ‘sustainable’ by these standards, the country did not qualify for relief. This exclusion meant that Kenya continued to grapple with a significant and unaddressed fiscal challenge that would shape its policy for years to come.
The county’s debt trajectory however reached a pivotal turning point in 2002, when there was a change in administration. This ushered in a period of improved governance and faster economic growth. Debt ratios were pushed down further by the shift away from over-reliance on external financing due to reduced access, leading to a decline in external debt ratios from 50% of GDP in FY1995/96 to 21.7% of GDP by FY 2006/07. Further, debt servicing burden was eased by successful debt restructuring initiatives through the Paris and London Clubs-which led to the rescheduling of US$650 million in arrears providing a 50% debt relief in present-value terms. In addition, relief also came from the cancellation of US$30 million in bilateral loans from China, Finland, and the Netherlands.
In addition, the government revolutionized the domestic landscape by deepening the local securities market. This included the listing of longer-dated Treasury Bonds on the Nairobi Securities Exchange (NSE). The ratio of short-term Treasury Bills to long-term Treasury Bonds underwent a dramatic transformation, flipping from 90:10 to 30:70. By the end of FY 2005/06, these combined efforts had successfully brought total public debt down to 51% of GDP, achieving the much-needed relief from fiscal pressures and offering a conducive fiscal environment for economic development.
Chart 2: Change in the composition of Domestic Debt
Source: Author’s compilation using data from National Treasury
Recovery efforts were temporary stalled due to the 2007 Post-Election Violence and the 2008 global financial crisis, which pushed debt-to-GDP ratio back up to 51% by 2010. However, recovery efforts and enhanced revenue collection soon bore fruit, driving the ratio down again to a decade low of 41% in 2011/12.
That stability, however, was short-lived. The last decade has seen a reversal of these gains, with debt breaching the 50% threshold in 2014/15 before accelerating to a peak of 72% of GDP in 2023. This rapid re-accumulation was fueled by a spree of ambitious infrastructure projects financed through expensive, non-concessional commercial loans. This aggressive borrowing, coupled with persistent revenue shortfalls, the shock of the COVID-19 pandemic, and a sharply depreciating Shilling, inflated the cost of debt servicing and foreign-denominated obligations.
Kenya’s attainment of lower middle-income country (LMIC) status in 2014 played a big role to the reduced access to affordable and long-term concessional loans. This shift in access compelled the country to increase its reliance on international capital markets, as evidenced by the issuance of its debut 5- and 10-year Eurobonds in the same year (see chart 3). This coupled with increased domestic borrowing pushed interest rates up (r>g), ultimately resulting to the sharp increase in total debt.
Chart 3: Changing Creditor Profile of External Debt
Source: Author’s compilation using data from National Treasury
Although current projections suggest a gradual decline in the debt-to-GDP ratio—from 67% in FY 2023/24 to 64% by end of FY 2025/26—these figures remain well above the 55% threshold (in present value terms) mandated by the PFM (Amendment) Act of 2023. Recent World Bank-IMF Debt Sustainability Analysis (DSA) findings reveals that Kenya has significantly breached most of the debt sustainability thresholds under the baseline scenario. Specifically, on total debt, the present value (PV) of total public debt-to-GDP ratio is expected to remain above the 55% benchmark until 2029. The situation is even more critical for external debt as PV of external public and publicly guaranteed (PPG) debt-to-exports solvency indicator breaches its 180% threshold through 2030, while the debt service-to-exports liquidity indicator exceeds its 15% threshold for a much longer term, remaining elevated until 2037. The only indicator projected to fall below its sustainability threshold (18%) is the external debt service-to-revenue ratio, starting in 2029.
Chart 4: Kenya’s Total Public debt (% of GDP) indicator under different scenarios
Source: Author’s compilation using data from DSA
Additional DSA stress tests—which subject the debt path to hypothetical shocks like lower GDP growth or exchange rate depreciation, have shown that even a moderate shock would rapidly worsen debt indicators and potentially trigger immediate debt distress.
Conclusion
The recurring cycles of debt accumulation and decumulation that characterized the period from 1995 to present highlight the critical need for a fiscal consolidation strategy that works. The surge in debt has consistently been driven by three key factors. First, external shocks—ranging from pandemics like HIV/AIDS and COVID-19 to natural disasters like droughts—which repeatedly strain the country’s finances. Since Kenya’s economy is heavily reliant on agriculture, these weather-related events slow down economic activity leading to low output. Since tax revenues rise one for one with output, a slowdown reduces the present value of future tax streams, making it even more difficult to service the debt. A vulnerability to these shocks is compounded by a lack of fiscal buffers.
Secondly, a changing creditor profile has led to a costly shift away from cheaper, concessional borrowing toward more expensive, short-term debt from commercial sources and countries like China. This move is largely attributed to the country’s classification as a lower-middle-income nation. A similar shift towards more expensive instruments (T-Bonds) has also occurred domestically with domestic financing projected to hit Ksh 1Trillion in FY 2026/27.
Lastly, weak institutional and legal capacity remains a key driver. This is evidenced by the inability of budget institutions to manage finances prudently and the failure to adhere to fiscal rules —leading to perennial budget credibility issues—remains a fundamental driver of debt accumulation. To permanently break this pattern and secure a downward, sustainable path for public debt, Kenya must demonstrate unwavering fiscal discipline, foster sustained economic growth that expands the tax base, and develop robust fiscal buffers to effectively manage future economic and climate shocks.
More Blogs
Kenya’s National Budget: A Matatu Ride Reflecting Fiscal Volatility and Structural Inefficiencies
Introduction The matatu metaphor can be used to analytically frame Kenya’s budget as a system that is subject to binding constraints, evolving expectations, and continuous adjustment to shocks. Like the matatu sector, fiscal policy reflects a balancing act between efficiency and quick action seeking to respond to public service delivery while constrained by competing sector […]
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According to the Annual Debt Report 2024/25, as shown in Chart 1 below, Kenya today is such that for every one hundred shillings the Kenyan government raises in tax revenue, approximately ksh71 goes directly into servicing existing debt before a single hospital is staffed, a classroom is built, or a kilometre of road is constructed. […]