Business

World Bank Sounds Alarm on Kenya’s Mounting Sh12 Trillion Public Debt

Kenya’s escalating domestic borrowing has reached critical levels, with the World Bank warning that government debt absorption by commercial banks is constraining private sector access to credit and threatening economic recovery.

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In its November 24 economic update, the World Bank reported that Kenya’s net domestic borrowing surged to 5 percent of GDP in the fiscal year ending June 2025, driving total public debt to 68.8 percent of GDP — equivalent to approximately Sh12 trillion at current exchange rates.

The report highlighted a troubling trend in the banking sector, where commercial banks now hold 42.6 percent of government debt. Financial institutions have increasingly favored government securities over private sector lending, responding to high interest rates and weak loan demand in an uncertain economic climate.

This “crowding out” effect poses significant risks to business growth and job creation, even as Kenya’s economic growth forecasts have been revised upward to 4.9 percent. The preference for risk-free government paper means businesses seeking expansion capital or working capital loans face tighter credit conditions precisely when recovery momentum is building.

The World Bank’s assessment places Kenya at high risk of debt distress, raising questions about the government’s capacity to sustainably manage its debt obligations. A growing portion of government revenue is being diverted to interest payments rather than productive investments in infrastructure, healthcare, education, and other services that could support long-term growth and employment.

The timing presents particular challenges for policymakers, who must navigate the delicate balance between financing government operations and supporting private sector recovery ahead of the 2027 general elections. The political calendar adds urgency to demands for economic policies that deliver tangible improvements in business conditions and job opportunities.

Financial analysts note that while domestic borrowing avoids foreign exchange risks associated with external debt, the current trajectory threatens to create a vicious cycle where high government borrowing keeps interest rates elevated, further discouraging private investment and undermining growth potential.

The World Bank’s warning comes as debates intensify over Kenya’s fiscal strategy, with business leaders and economists calling for measures to ease the government’s appetite for domestic credit and create more space for private sector financing.