The Treasury has cut its target for net domestic borrowing for the fiscal year ending next June by Sh132 billion, reducing the risk of crowding out the private sector in access to credit and easing pressure on borrowing costs.
The target for net domestic financing has been lowered to Sh898 billion from Sh1.03 trillion, just a month after the 2026/27 Budget Statement was presented on June 11.
The Treasury will instead borrow more from foreign markets to offset the reduction in domestic borrowing from banks, pension funds and insurance firms through Treasury bills and bonds, underscoring improved prospects for securing external financing.
The cut in domestic borrowing is expected to increase the pool of funds available in banks for lending to households and businesses.
It will also strengthen the government’s efforts to lower borrowing costs by reducing competition for funds in the domestic market, allowing banks to lower deposit and lending rates.
The government’s overall borrowing target for the fiscal year remains unchanged at Sh1.145 trillion.
“The resulting fiscal deficit, including grants, is Sh1.145 trillion (5.5 percent of GDP) and will be financed by net external financing of Sh247.2 billion (1.2 percent of GDP) and net domestic financing of Sh898 billion (4.3 percent of GDP),” the National Treasury said in its latest disclosures.
The Treasury had initially planned to finance the deficit through Sh116.2 billion in net external borrowing – equivalent to 0.6 percent of GDP – and Sh1.03 trillion in net domestic borrowing, equivalent to 4.9 percent of GDP.
The increase in external financing reflects improved prospects for raising funds abroad as the Treasury seeks to diversify its borrowing sources.
The diversification of external funding is aimed at improving debt sustainability by broadening the investor base, extending debt maturities and lowering financing costs.
“The government is evaluating opportunities to access new and diversified international capital markets. This includes the potential issuance of Samurai bonds in the Japanese market and Panda bonds in the Chinese domestic market,” Treasury Cabinet Secretary John Mbadi said on June 11.
“By tapping into these markets, the government stands to benefit from deep and diversified pools of capital, secure potentially competitive financing terms, and promote currency diversification within the debt portfolio, thereby reducing reliance on traditional funding sources.”
The lower target for domestic financing is expected to ease pressure on credit markets and support continued growth in private sector lending.
Private sector credit has recovered over the past 20 months, growing 9.3 percent in May 2026 compared with two percent a year earlier.
The recovery has been supported by successive cuts in the Central Bank Rate (CBR), which has fallen from 13 percent in 2024 to 8.75 percent.
Average lending rates declined to 14.5 percent in May 2026 from 15.4 percent a year earlier.
Credit growth has remained strong in key sectors of the economy, particularly trade, agriculture, and building and construction.
The revised financing plan will hold if the Exchequer meets its tax revenue targets or contains public spending.
In previous years, revenue shortfalls have widened the fiscal deficit, forcing the government to borrow more domestically.
For instance, the Treasury exceeded its net domestic borrowing target by Sh161.7 billion in the fiscal year ended June 2026.
Net domestic borrowing totalled Sh1.135 trillion, against an approved target of Sh973.6 billion.
Of this amount, Sh993.1 billion was raised through the sale of Treasury bills and bonds by the Central Bank of Kenya (CBK).
