Parliamentary Budget Office warns government borrowing risks slowing economic recovery
In its recent report, the Parliamentary Budget Office highlighted that while private sector credit has shown some gains, continued heavy borrowing by the government from domestic markets could reverse these gains.
The Parliamentary Budget Office (PBO) has warned that increased appetite for government debt is limiting access to loans for businesses and households, threatening to slow economic recovery despite recent improvements.
In its recent report, the office highlighted that while private sector credit has shown some gains, continued heavy borrowing by the government from domestic markets could reverse these gains.
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“The trends in credit growth over the 12 months to March 2025 indicate a potential crowding out of the private sector by increased government borrowing from the domestic market,” the PBO said.
Kenya’s private sector has faced tight credit conditions for successive years since the Covid-19 pandemic, as banks preferred to lend to the government. According to the PBO, in the 12 months to March 2025, credit to the government doubled from 8.6 per cent to 16.4 per cent, while lending to the private sector dropped sharply from 7.9 per cent to 0.2 per cent.
Despite this, lending to private businesses showed some recovery from an average negative growth of -1.7 per cent recorded between November 2024 and February 2025. Official Treasury data for June 2025 shows that monthly credit flows to the private sector rose to Sh10.7 billion, up from Sh2.5 billion in June 2024, offering hope for companies that had been sidelined for nearly five years.
“This is due to the easing of the monetary policy rate and the reduction of the CRR (Cash Reserve Ratio) to lower the cost of funds for banks,” reads the 2025 draft Budget Review Outlook Paper by the National Treasury.
The Treasury further reported that private sector credit from banks grew 2.2 per cent in the year to June 2025, down from four per cent in the year to June 2024.
“This growth reflects improved demand in line with the declining lending interest rates, and dissipation of exchange rate devaluation effects on foreign currency-denominated loans following the appreciation of the shilling,” it said.
Reduced credit growth was also noted in certain sub-sectors, including finance and insurance, trade (imports), mining and quarrying, business services and private households, largely due to their reliance on foreign currency-denominated loans.
The PBO warned that risks of relapse remain amid the government’s continued high borrowing. Data shows that in the year to June 2025, domestic government borrowing exceeded targets by more than three times, crowding out households and businesses and keeping interest rates elevated.
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