The Central Bank of Kenya’s move to fast-track borrowing from the domestic debt in the first half of the fiscal year is likely to minimise pressure on interest rates despite the Sh272.4 billion increase in the full-year borrowing target in the upcoming supplementary budget.
Analysts at NCBA Investment Bank estimate that the government had achieved 114 percent of its prorated gross domestic borrowing target by the end of January, meaning that it has already covered part of the expanded funding before the supplementary budget is passed.
A higher domestic borrowing target usually signals to the market that the government is likely to be more accommodative of higher yield demands to close the larger funding gap.
But the CBK has been aggressively pulling down rates by cutting its policy rate by a cumulative 4.25 percentage points to 8.75 percent since August 2024. Recent bond auctions have also been oversubscribed in a liquid money market, allowing the apex bank to run ahead of its net target and ease pressure on new borrowing going forward.
This should help ward off the pressure on yields on government securities, which have been on a downward trajectory in tandem with the Central Bank Rate cuts.
Treasury bonds auctioned in 2025 and in the first two months of this year paid coupons or interest rates of between 11.67 percent and 14.63 percent, down from highs of up to 18.5 percent in 2024.
T-bill interest rates have meanwhile fallen to a range of 7.6 percent and 8.97 percent, from a high of 16.7 to 16.9 percent in August 2024.
“Against the backdrop of below-target tax collections and accelerated recurrent spending, gross domestic borrowing is running above the prorated budget at 114 percent,” said the NCBA analysts in a weekly note.
“We see sustained reliance on the domestic market to plug the deficit. Positively, liquidity conditions remain adequate, while investor demand remains robust.”
The upcoming mini-budget is expected to raise the net domestic borrowing limit to Sh885.9 billion from the Sh613.5 billion that was approved in the June 20925 budget, while the external borrowing target comes down by Sh32.6 billion to Sh254.8 billion.
This is to fund a wider budget deficit of Sh1.14 trillion from the previously approved Sh901 billion. The larger deficit is on account of higher expenditure and a Sh111.6 billion shortfall in revenue collection in the first six months of the fiscal year, where the government netted Sh1.53 trillion against a target of Sh1.64 trillion.
“Given the budget performance of the first half of the 2025/2026 fiscal year, there is a need to revise the budget in order to accommodate the revenue shortfall and expenditure pressures,” Treasury PS Chris Kiptoo told MPs in a presentation on the Budget Policy Statement on February 19.
“These adjustments are expected to be tabled before Parliament during the supplementary budget process later in this financial year.” In addition to running ahead of its domestic borrowing target, the Treasury has also made progress on its external borrowing with last week’s Sh290.3 billion ($2.25 billion) Eurobond sale.
The proceeds will fund a $500 million (Sh64.5 billion) partial buyback transaction targeting two existing Eurobonds that are maturing in 2028 and 2032, with the balance of Sh225.79 billion ($1.75 billion) going towards budget funding.
By the end of January, the Treasury had only filled 41 percent of its external financing target of Sh284.7 billion. The reduced quantum of borrowing as per the supplementary budget, coupled with the proceeds of the latest Eurobond sale, should help the government close this deficit significantly.
