Revenue shortfalls and higher spending have become a common feature of government budgets.
The National Treasury has cashed 41 percent of its annual domestic borrowing target just two months into the fiscal year, signalling a rush to capitalise on a highly liquid market to secure early funding to plug its budget deficit.
New disclosures by the Central Bank of Kenya (CBK) show that the net borrowing in July and August stood at Sh406 billion, against the full fiscal year target of Sh987.4 billion. This means that the Treasury has already tapped 41.11 percent of its annual domestic target with 10 months still to go.
The State mainly borrows from the domestic market via Treasury bonds, with a smaller share coming through Treasury bills and overdrafts from commercial banks and the CBK.
August’s infrastructure bond issuance, which netted Sh312 billion from record bids of Sh460.4 billion from investors, was key to the State’s efforts to accelerate its borrowing in the domestic market.
The large uptake of debt also gives the Treasury crucial headroom in case revenue continues to lag behind target, without risking a spike in interest rates, which happens when investors sense that the government is desperate for cash.
“It makes sense for the Treasury to frontload the borrowing and send a signal to the market that its appetite for cash will be contained down the road, setting interest rate expectations for the rest of the year,” said Churchill Ogutu, the head of research at Capital A Investment Bank.
“It therefore reduces the pressure to make large borrowings towards the end of the fiscal year.”
In September, the CBK will be back in the market for a further Sh120 billion through two reopened bond issuances, potentially pushing it past the 50 percent mark in borrowing within the first quarter of the fiscal year.
The first sale targeting Sh60 billion opened on Thursday, with the CBK reopening a 15-year bond that was first floated in 2019 at an annual interest rate of 12.34 percent, and a 30-year paper first sold in 2011 at 12.5 percent. The issuance closes on September 2.
The second sale of the month that will also target Sh60 billion will see the CBK reopen a 20-year bond from 2019 at 12.87 percent and a 30-year paper first issued in April 2026 at a rate of 12.5 percent.
There are no bond maturities in September, meaning that all the cash raised from the sales should ideally go towards the net borrowing column, unless the government utilises some of it to settle the maturing Sh213 billion Treasury bills.
T-bills are usually rolled over by investors when they fall due, especially in a period of high liquidity when there is competition to place cash in government securities.
Potential upward revisions in the borrowing target through supplementary budgets have also made it prudent for the CBK to keep ahead of the borrowing target in recent fiscal years.
Revenue shortfalls and higher spending have become a common feature of government budgets, with the domestic market shouldering the burden of meeting the expanded budget deficit.
In the fiscal year ended June 2026, the Treasury opened with a projected budget deficit of Sh923.2 billion, equivalent to 4.8 percent of GDP.
Spending and revenue revisions through the year, however, meant that the actual deficit rose to Sh1.26 trillion by the end of June 2026, equivalent to 6.8 percent of GDP.
In the previous year, the budget statement (of June 2024) had set the budget hole at Sh597 billion, but three supplementary budgets pushed the total deficit to Sh1.034 trillion, financed through domestic borrowing of Sh854.5 billion and external borrowing of Sh179.7 billion.
A higher domestic borrowing target usually signals to the market that the government is likely to be more accommodative of higher yield demands to close the larger funding gap.
