Kenya’s net external borrowing in the next fiscal year (2025-26) is expected to more than halve to Sh166.7 billion, from Sh355.5 billion in the current year, thanks to a sharp increase in repayments of original debt that will have to be rolled over using new borrowing.
Financial forecasts published by the National Treasury in Budget Review and Forecast Paper (PROP) 2024 The data shows that domestic lenders are instead expected to bear the burden of financing the government’s fiscal deficit next year, which is expected to reach Sh689.4 billion.
External debt repayments are expected to rise to Sh500.2 billion in 2025-26 from Sh330.7 billion this year, meaning a larger share of foreign borrowing will go to meet the needs of existing lenders rather than to finance the upcoming budget.
These heavy maturities could therefore leave Kenya at risk of missing out on the expected decline in the cost of external credit as the US Federal Reserve gradually cuts policy rates in the coming months.
Between March 2022 and July 2023, the Federal Reserve raised interest rates from a range of 0.25-0.5 percent to a range of 5.25-5.5 percent, making US financial assets attractive to investors.
As a result, emerging economies like Kenya have faced higher premium demands from external commercial lenders to lure them away from the lower risks and higher returns of the United States.
Lowering interest rates in the United States would therefore lead to more favorable borrowing conditions in the international market, ideally allowing the government to shift the financing burden there away from the domestic market, reducing competition with the private sector for bank credit.
Lower government demand for domestic credit would also help the Central Bank of Kenya lower interest rates, since state borrowing rates are considered a risk-free floor for domestic borrowing.
However, given the limited scope for external borrowing due to long maturities, the government instead expects to raise the domestic borrowing target for 2025-26 to Sh522.7 billion from Sh413.1 billion in the current year.
This comes despite plans to reduce the fiscal deficit from Sh768.6 billion to Sh689.4 billion next year.
For the Central Bank of Kuwait, cutting domestic interest rates has become a priority now that it has managed to tame high inflation and the exchange rate has moderated from its highs recorded in the first quarter of the year.
At its latest Monetary Policy Committee meeting, the central bank cut its key interest rate to 12.75% from 13%, beginning what is expected to be a gradual easing of monetary policy, aimed at stimulating economic growth by making access to capital less expensive for businesses.
High interest rates over the past 12 months have contributed to a slowdown in private sector credit growth to 4 percent by the end of June from 13.9 percent at the start of the year and a rise in the ratio of non-performing loans to total loans in the banking sector to 16.3 percent in June 2024, up from 14.5 percent a year earlier.