Interest payments on Kenya’s public debt are set to hit Sh1.2 trillion in the fiscal period 2026/27, with the Parliamentary Budget Office (PBO) warning that the higher repayment obligation will crowd out development spending.
The budget office —which advises lawmakers on economic and budget affairs— noted in a report to the Budget and Appropriations Committee (BAC) of the National Assembly, that the higher interest payment on the country’s Sh12.1 trillion debt stock is projected to escalate in the medium term.
Parliament buildings in Nairobi.
Photo credit: Dennis Onsongo | Nation Media Group
This, as the fiscal deficit in the next financial year- 2026/27- is set to widen by Sh216 billion, hitting Sh1.15 trillion.
The budget office document shows that the amount required for interest service as a share of the total budget has increased from 15 percent in the financial year 2018/19 to over 25 percent, which is Sh1.1 trillion in the current financial year 2025/26.
According to the PBO, continued escalation in debt-servicing costs is crowding out development spending, and stems largely from sustained fiscal deficits averaging 7.4 percent of GDP between the financial years 2014/15 and 2020/21.”
“Interest payments on public debt have increasingly constrained fiscal flexibility, limiting resources available for essential service delivery and development initiatives,” the PBO document says.
The 2026 Budget Policy Statement (BPS), currently under consideration in Parliament, shows that the government is projecting to spend Sh4.7 trillion in the financial year 2026/27 but with a deficit of Sh1.15 trillion.
This increased fiscal gap is expected to be financed through a combination of external and domestic sources, with Sh225.5 billion from foreign disbursements and Sh924 billion from domestic borrowing.
BPS is prepared by the National Treasury annually, and outlines the government’s strategic financial and policy priorities as required by section 25 of the Public Finance Management (PFM) Act.
The document projects that Kenya Revenue Authority will collect Sh3.5 trillion during the 2026/27 fiscal period, leaving the projected gap, about 5.3 percent of the GDP, compared to the Sh933 billion, which is 4.7 percent of the GDP in the current period 2025/26.
“The substantial reliance on domestic borrowing to cover the larger deficit raises concerns, as it could crowd out private sector access to credit, potentially constraining investment and economic activity in the medium term,” says PBO.
Other than the higher allocation of the national cake going towards debt repayment, the budget office has also cautioned that persistently low absorption rates of development expenditure in recent years have led to stalled progress on key projects despite overall budget increases.
For instance, the actual development spending in the fiscal period 2018/19 was Sh586.14 billion out of a Sh2.4 trillion budget, while in the period 2024/25 it was Sh589.56 billion against “a much larger Sh3.98 trillion total budget.”
This, the budget office says, highlights ongoing inefficiencies in project implementation that must be dealt with.
Controller of Budget Margaret Nyakango.
Photo credit: Jared Nyataya | Nation Media Group
Controller of Budget (CoB) Margaret Nyakang’o, in her National Government Budget Implementation Review Report for the first three months of the 2025/26 financial year- July, August, and September- advised the government to limit borrowing to development projects.
This, as it emerged that Sh507.98 billion was incurred in debt repayments during the first three months of the current financial year, which saw public debt cross the Sh12 trillion mark.
“To enhance fiscal impact and ensure debt sustainability, borrowing should be strictly aligned with development projects that have measurable economic and social returns,” says Dr Nyakang’o.
The CoB document reveals that increased borrowing to finance the budget on projects that have no economic or social returns exposes the country’s fiscal space.
The BPS notes that in advancing the Bottom-Up Economic Transformation Agenda (Beta), “the government will sustain its growth-supportive fiscal consolidation efforts by restraining expenditures and strengthening revenue mobilisation.”
“This approach is intended to moderate the pace of public debt accumulation while ensuring that delivery of essential public services remains uncompromised,” says BPS.
