Kenya's domestic debt interest payments soar by Sh98 billion in a year

Taxpayers paid an extra Sh98.1 billion in interest payments on the government’s domestic debt in the year ending June 30, 2025, as increased local borrowing coincided with elevated interest rates.

Data from Controller of Budget (CoB) Margaret Nyakang’o shows that interest on domestic debt climbed to Sh632.3 billion in June 2025, up from Sh534.2 billion a year earlier, reflecting the steepest rise in over five years at 18.36 per cent.

The Sh632.3 billion expenditure on interest payments between July 2024 and June 2025 eclipsed the Sh545.8 billion allocated to all development projects for the period and was just Sh40 billion shy of the funding allocated to the entire education sector.

The spending also surpassed the Sh542 billion spent on both interest and principal payments on domestic debt five years ago, according to the CoB report on the national government budget for the 2024/25 fiscal year.

Interest payments during the year exceeded principal repayments by 75 per cent, with November 2024 alone accounting for Sh88.4 billion. Other peak months were August 2024 (Sh74.4 billion), September 2024 (Sh64 billion), and June 2025 (Sh74.3 billion). The combined interest payments in these four months amounted to Sh301 billion, more than all the funding allocated to projects undertaken by seven state departments during the year.

“All the funding for projects in roads, housing, agriculture, energy and transport sectors during the year cost Sh281 billion,” reads the report.

The heavy spending on domestic interest comes as the CoB raises concerns over the government’s heavy borrowing from within the country, warning it could have significant implications on the economy and worsen the repayment burden.

“However, recent growth in the proportion of short-term debt instruments, like treasury bills, heightens the government’s exposure to refinancing risks, especially in a high-interest-rate environment,” Nyakang’o said.

“While domestic borrowing presents the government with an alternative source of budget financing, unchecked borrowing could lead to refinancing risks due to high domestic interest rates, a debt trap and limited funds to cater for recurrent and development activities.”

The report shows that total domestic debt service during the year totalled Sh992.4 billion, with interest accounting for about two-thirds (Sh632.3 billion) and principal just Sh360 billion.

Domestic interest costs increased by Sh98.1 billion from Sh534.2 billion in the year to June 2024, exceeding the previous year’s growth of Sh79.3 billion. Interest has been the main driver of the surge in domestic debt service, which has more than doubled as a share of national government revenues, rising from 20 per cent in 2020 to 43.6 per cent in 2025.

Domestic debt now makes up 54 per cent of Kenya’s Sh11.7 trillion public debt as of June 2025. Overall public debt grew by Sh1.14 trillion from Sh10.56 trillion a year earlier, while domestic debt alone increased by 17 per cent (Sh920 billion), from Sh5.41 trillion in June 2024 to Sh6.3 trillion.

This followed the Treasury’s decision to borrow Sh915.7 billion from the domestic market, surpassing the original plan by Sh379.7 billion.

“Domestic debt increased by 17 per cent (from Sh5.41 trillion as of June 30, 2024), attributable to increased borrowing in the domestic market, while external debt increased marginally by 4 per cent (from Sh5.17 trillion as of June 30, 2024),” the report notes.

Domestic debt comprises treasury bonds (Sh4.63 trillion), treasury bills (Sh615.9 billion), Central Bank of Kenya overdraft (Sh61 billion), pre-1997 CBK debt (Sh17.2 billion), IMF lending to government (Sh83.5 billion) and other obligations (Sh5.6 billion).

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Nyakang’o highlighted that the growing reliance on short-term loans increased the share of treasury bills from 11.4 per cent of domestic debt in June 2024 to 15.9 per cent in June 2025.