Kenya’s Public Debt Near Crisis Levels as AfDB Pushes for Governance and Policy Overhaul

The Africa Economic Brief, Volume 16, Issue 2 (2025), published by the African Development Bank Group's Vice Presidency for Economic Governance and Knowledge Management, delves into the escalating public debt crisis in Kenya. Authored by Duncan O. Ouma and Martin Wafula Nandelenga, economists at the African Development Bank, the report, "Unpacking the Drivers of Public Debt Dynamics in Kenya", builds on data from the International Monetary Fund (IMF) and the Government of Kenya to unpack the fiscal and institutional drivers of Kenya's debt dynamics. It reveals that despite sustained borrowing to fuel infrastructure and social programs, weaknesses in fiscal management and external shocks have left the country walking a fine line between solvency and distress.

Rising Debt, Declining Cushion

Kenya's public debt rose sharply from 42.2 percent of GDP in 2013 to 72 percent in 2023 before moderating to 65.7 percent in 2024, thanks largely to the strengthening of the Kenyan shilling. As of June 2024, total public debt stood at USD 81 billion, equal to two-thirds of GDP. External borrowing made up 48.9 percent of this amount, while domestic debt accounted for 51.1 percent. Among external creditors, multilateral institutions held the largest share at 50.5 percent, followed by commercial lenders (25.4 percent) and bilateral partners like China, France, and Japan (23.8 percent). China alone held 16.4 percent of Kenya's external debt, underscoring Nairobi's dependence on Chinese credit.

The study highlights the dangerous concentration of foreign-denominated debt, two-thirds in US dollars and another 21.4 percent in euros, leaving Kenya highly exposed to exchange rate shocks. On the domestic side, non-bank creditors such as pension funds and institutional investors dominate, holding 52.5 percent of local debt. According to the IMF's 2024 debt sustainability analysis, Kenya's overall debt remains sustainable but highly vulnerable, with key solvency and liquidity indicators breaching international thresholds.

Fiscal Pressures and Institutional Gaps

The authors point to fiscal deficits, high interest costs, and exchange rate depreciation as the main forces driving Kenya's debt accumulation. State-owned enterprises (SOEs) have been a particularly heavy drain, consuming nearly 38.5 percent of total external borrowing, more than any other sector. Transport and energy follow with 21.8 percent and 9.4 percent, respectively.

Despite Kenya's robust legal framework for public financial management (PFM), implementation has lagged. The Debt Management Office (DMO), charged with overseeing borrowing, lacks adequate technical expertise and tools to identify and mitigate fiscal risks. Similarly, the National Assembly's oversight role remains limited by capacity constraints, leading to short-term, expensive debt structures and growing contingent liabilities. The study also cites poor coordination within the National Treasury and an overreliance on Eurobonds, whose high yields, such as the 10.35 percent rate on the 2024 issue, add further strain to public finances.

The Price of Weak Fiscal Discipline

Kenya's external position has been battered by multiple shocks: the Russia-Ukraine conflict, Middle East tensions, and global supply disruptions. These have eroded reserves from USD 9.49 billion in 2021 to USD 7.34 billion in 2023, while domestic political instability and policy uncertainty have deterred foreign investment. Although fiscal consolidation efforts have achieved some success, cutting the deficit from 8.2 percent in 2021 to 5.5 percent in 2024, structural weaknesses persist.

The report notes that while the government has sought to shift toward longer-term borrowing, investor appetite remains skewed toward short-term Treasury bills, undermining debt management objectives. Meanwhile, Kenya's revenue mobilization efforts have fallen short due to a narrow tax base and external headwinds, including global financial tightening. Oversight institutions like the Office of the Auditor General and the Controller of Budget have strengthened fiscal transparency, yet limited technical capacity has reduced their effectiveness in preventing risky borrowing and ensuring compliance with fiscal rules.

Reforms for a Sustainable Future

To avert a potential debt crisis, the African Development Bank calls for a focused reform agenda anchored in fiscal discipline and institutional strengthening. Policymakers are urged to prioritize concessional borrowing over commercial debt, diversify loan currency portfolios, and expand the tax base to boost revenue. A more flexible and realistic approach to fiscal rules is recommended, with "escape clauses" to accommodate economic shocks while maintaining a long-term commitment to sustainability.

Central to these reforms is the need to empower the Debt Management Office with skilled personnel, technical tools, and adequate funding. The report also advocates for creating an independent fiscal council composed of experts from academia and public finance institutions. This body would provide unbiased fiscal forecasts, assess risks, and advise the government on sustainable borrowing strategies. Strengthened coordination between the DMO, macroeconomic policy unit, and cash management department is vital for coherent debt management.

A Delicate Balance Between Growth and Prudence

The Africa Economic Brief concludes that Kenya's debt is manageable but precarious. The challenge lies not in the existence of debt itself, but in how it is structured, managed, and serviced. The country's legal frameworks are sound, yet implementation gaps, institutional weaknesses, and reliance on expensive short-term debt have created persistent vulnerabilities. To safeguard fiscal stability, Kenya must pair its growth ambitions with disciplined debt management, transparent governance, and stronger institutions. The authors warn that without structural reforms and credible fiscal rules, Kenya risks slipping from sustainability into distress, undermining decades of progress toward inclusive economic development.