The government’s overdraft charges for the first three months of the financial year 2025/26, declined to Sh697.5 million compared to a similar period in the last financial year according to the Controller of Budget (CoB) Dr Margaret Nyakang’o in a report before parliament.
Dr Nyakang’o’s National Government Budget Implementation Review Report (NGBIRR) for July, August and September 2025/26 period, attributes the decline in overdraft interest payments to the decrease in Central Bank of Kenya’s (CBK) interest rates which stood at 9.5 percent in August 2025.
The reduction in CBK rates is in comparison to the 12.75 percent in August 2024 that saw the overdraft facility interest charges hit Sh1.93 billion over the same period last year- July, August and September 2024.
This means that in the period under review, the overdraft limit of Sh97.05 billion, was charged at an average interest rate of 9.6 percent on the amount outstanding at the end of each month.
“The decline in overdraft interest payments during the reporting period was primarily due to the decrease in CBK’s interest rates,” the CoB report states.
The government overdraft facility is an emergency short-term borrowing available only to the National Treasury on behalf of the government, to cover temporary cash shortfalls and not a sustained funding mechanism.
It is administered through the CBK, the country’s banking industry regulator and is restricted to a maximum of five percent of the most recent audited national government revenue.
The facility is limited to development expenditure financing, repayable within 12 months in line with the Public Finance Management (PFM) Act with the interest rate charged, a direct function of the prevailing Central Bank Rate (CBR).
This means that the high daily interest charge is designed to reflect the facility’s intended temporary use to manage liquidity in the economy as well as discourage prolonged use of the facility.
This is predicated on inflationary concerns that excessive government borrowing from the Central Bank is often likened to "printing money".
“This practice can lead to macroeconomic instability and fuel inflation, making the cost of living higher for Kenyans, specifically the poor. Therefore, high interest charges act as a deterrent to mitigate this risk,” says Kiharu MP Ndindi Nyoro, an economist.
Section 15 (2) (c) of the PFM Act states; “over the medium term, the national government’s borrowing shall be used only for the purpose of financing development expenditure and not for recurrent
Section 15 (3) of the PFM Act further states that short term borrowing shall be restricted to management of cash flows.
The CoB document shows that the July 2025 interest charges on the overdraft facility stood at Sh431.3 million compared to the Sh758.4 million, representing a 43 percent decline.
The August 2025 overdraft interest repayment was Sh215.6 million compared to the Sh596.32 million during a similar period in 2024, about a 64 percent drop.
In the month of September 2025, the National Treasury paid Sh50.6 million in overdraft interest charges, a 91 percent decrease of the Sh569.8 million paid during a similar period in 2024.
Section 36 (4) of the CBK Act stipulates that CBK shall publish the lowest interest it charges on loans to banks “and that rate shall be known as Central Bank Rate.”
The level of the CBR is reviewed and announced by the Monetary Policy Committee (MPC) of CBK at
The CBR is the base for all monetary policy operations in order to enhance clarity and certainty in monetary policy implementation.
Although the CBR has been reducing, fiscal analysts at the Parliamentary Budget Office (PBO) warn that sustained use of overdraft could cause inflation.
“A high rate discourages excessive government borrowing from CBK, which is crucial for the maintenance of price stability,” said a PBO fiscal analyst.
The fiscal analyst notes that the high CBR motivates the National Treasury to seek cheaper, more
PBO is a non-partisan professional office of parliament with the primary function of providing professional services in respect of budget, finance and economic information to parliament and its committees.
