National Treasury increases domestic borrowing target by Sh324 billion to fund budget shortfall

The National Treasury has officially signaled a shift in its fiscal strategy by increasing the domestic borrowing target for the current financial year. According to updated estimates, the government now intends to raise an additional Sh324 billion from the local market. This move brings the total net domestic borrowing target to Sh732.2 billion, up from the Sh408.2 billion initially projected in the original budget estimates.

This adjustment follows the withdrawal of the Finance Bill 2024, which left a substantial gap in the government's revenue projections. The withdrawal of the bill was a response to widespread public protests, forcing the executive to reconsider its tax-raising measures. Consequently, the government has had to find alternative ways to fund its operations and capital projects, leading to this heavy reliance on the domestic credit market.

Commercial banks and institutional investors are expected to be the primary sources of these funds through the sale of Treasury bills and bonds. While the government views this as a necessary step to maintain fiscal stability, economists often monitor such increases for their potential impact on private sector credit. When the state enters the domestic market with higher borrowing requirements, it frequently competes with the private sector for available liquidity, a phenomenon known as crowding out.

The Treasury’s decision is part of a broader set of fiscal adjustments aimed at managing a Sh597 billion budget hole created by the rejection of new tax measures. In addition to increased borrowing, the government has announced a series of expenditure cuts across various departments. These austerity measures are intended to offset some of the revenue losses, though the scale of the deficit has necessitated the substantial increase in debt accumulation.

For the construction and infrastructure sectors, this fiscal shift carries specific implications. The Kenyan government has traditionally been the largest driver of infrastructure development, with major projects in roads, water, and housing relying heavily on exchequer releases. A tighter fiscal environment, characterized by higher debt service obligations and a focus on essential recurrent expenditure, often leads to delays in payments to contractors and the slowing down of new project approvals.

External funding remains part of the mix, but the domestic market has become a more immediate focus. The Treasury noted that while external borrowing targets have also seen some adjustments, the local market offers a more accessible route to liquidity in the short term. However, this comes at the cost of high interest rates, as the government must offer competitive yields to attract investors into its debt instruments.

Contractors and suppliers to the government will be watching the implementation of this revised budget closely. The ability of the state to meet its pending bills often depends on the success of these borrowing programs. With the increased target, the Treasury aims to ensure that the government remains liquid enough to meet its immediate financial obligations, even as it navigates a challenging political and economic landscape.