Kenya Is Turning Back to Multilateral Lenders to Ease Its Budget Pressure

Kenya is again looking to the World Bank, African Development Bank and potentially the International Monetary Fund for cheaper external financing as the government tries to reduce its dependence on expensive domestic borrowing, manage a large fiscal deficit and preserve room for private sector credit. Central Bank of Kenya Governor Kamau Thugge said on 16 October that the government is in discussions with multilateral development banks over fresh financing expected before the end of the current financial year in June 2027, including a possible World Bank Development Policy Operation and additional support from the African Development Bank. A debt for food swap is also being considered, while Kenya expects to have access to about $400 million through a World Bank emergency financing mechanism. The individual amounts are smaller than some of Kenya’s recent infrastructure financings, but the financing strategy captures the country’s central fiscal problem more clearly than many of the larger projects do. Kenya needs to borrow, but the composition of that borrowing increasingly matters because domestic debt is expensive, external commercial borrowing can expose the country to currency and refinancing risk, and concessional multilateral finance is comparatively cheaper but usually comes with reform conditions and slower approval processes. The 2026/27 budget targets a fiscal deficit of about 5.5 percent of GDP and roughly KSh247.2 billion in net external financing. Kenya is therefore trying to secure external funding that can substitute for some domestic borrowing rather than simply adding another layer of debt on top of existing obligations. The World Bank Is Becoming More Important to Kenya’s Budget Kenya has already relied heavily on policy based financing from the World Bank this year. In June, the lender approved a $750 million Development Policy Operation, comprising a $340 million IBRD loan and $410 million in concessional IDA financing, tied to reforms in public financial management, accountability, social protection and the broader business environment. The government is now discussing another DPO, with Treasury officials previously indicating that the proposed facility could be worth about $725 million. The African Development Bank is also considering another policy based operation, while earlier in the year it approved a €293.9 million reform linked loan. This pattern matters because development policy loans are different from project loans. Instead of financing a road, dam or hospital directly, they provide budget support after governments agree to specific policy and institutional reforms. For a government facing large debt service obligations, these facilities are attractive because they can be deployed across the budget while carrying terms that are generally more favourable than domestic or commercial market borrowing. Kenya’s renewed interest in this type of financing therefore reflects a shift in the fiscal debate from how much the government can borrow to how cheaply and sustainably it can finance the deficit. Domestic Borrowing Is Becoming the More Expensive Option The strongest case for multilateral financing is the cost differential with domestic debt. Thugge said concessional external financing would reduce the government’s dependence on domestic borrowing and could allow banks to direct more credit toward businesses rather than government securities. That is a significant issue for Kenya because heavy government borrowing from the domestic market can crowd out private sector credit. When Treasury bills and government bonds offer attractive yields with relatively low risk, banks have less incentive to lend to businesses, particularly smaller firms that carry higher credit risk and require more monitoring. The result is that fiscal pressure can transmit directly into the private sector. A government borrowing heavily at high domestic rates can push up the cost of capital throughout the economy, while companies face higher lending rates and tighter credit conditions. Cheaper multilateral financing can therefore improve the fiscal position in two ways. It reduces the government’s interest burden relative to high cost domestic borrowing and can release domestic liquidity for private sector lending. The trade off is that multilateral financing is rarely unconditional. The World Bank’s June operation, for example, was tied to reforms in public finance, governance and social protection, meaning that access to cheaper financing requires the government to maintain a policy programme that lenders consider credible. The Debt for Food Swap Is More Ambitious, But Less Certain Kenya is also considering a debt for food swap, which would represent a more unconventional attempt to restructure part of its debt burden while directing fiscal savings toward food security. The idea has been discussed before. President William Ruto announced a proposed $1 billion debt for food swap with the US International Development Finance Corporation in December 2025, but Kenya’s Public Debt Management Office said earlier this month that no bank had yet been mandated to arrange the transaction and that the Treasury was targeting completion by March 2027. The structure could allow Kenya to refinance expensive debt on more favourable terms while committing the resulting savings to agricultural or food security programmes, although the final mechanics have not been disclosed. Its attraction is understandable because it tries to address two pressures at once: a high cost debt stock and persistent food security vulnerabilities. However, swaps of this kind are more complicated than ordinary budget loans because they require agreement on the debt being refinanced, the source of replacement financing, the monitoring of redirected savings and the programmes that receive the fiscal benefit. For now, it remains an option rather than a completed transaction. The $400 Million Emergency Facility Is Not Ordinary New Borrowing Kenya is also expected to make around $400 million available through the World Bank’s Rapid Response Option to deal with risks including disease outbreaks, extreme weather and energy related shocks. The distinction is important because this is not equivalent to receiving a completely new $400 million loan. The mechanism allows Kenya to redirect part of existing undisbursed World Bank project financing when an eligible emergency occurs, meaning it provides liquidity and flexibility without necessarily increasing the debt stock by the full amount. That mechanism has become more relevant as Kenya faces multiple external risks, including higher energy prices, regional health threats and weather related disruptions associated with El Niño. It also shows how Kenya’s fiscal strategy is moving toward contingency financing rather than relying entirely on borrowing after shocks occur. The government is trying to secure access to funds that can be deployed quickly when crises affect food prices, public health or the budget. The IMF Still Matters Even Without a Programme Kenya does not currently include new IMF financing in its fiscal plans, but the Fund remains part of the discussion. An IMF team is expected in Nairobi in December for an Article IV consultation, and Thugge said a new programme could be discussed during that visit. He also acknowledged that IMF financing would be cheaper than domestic alternatives and could reduce the government’s reliance on local borrowing. That leaves Kenya in an unusual position. The government is not formally planning around a new IMF programme, but the fiscal incentives for reaching one remain strong because concessional or semi concessional multilateral financing can lower borrowing costs and provide a degree of policy credibility that may also help in international capital markets. The political cost of IMF conditionality, however, remains significant after several years in which tax increases and fiscal reforms generated strong domestic resistance. Any new programme would therefore need to balance lender demands for fiscal consolidation with the political limits of raising additional revenue or cutting spending too aggressively. Kenya’s Fiscal Problem Is Increasingly About the Price of Money Kenya’s debt debate is often framed around the size of the public debt stock, but the more immediate problem is increasingly the cost and composition of financing. The government continues to face large expenditure commitments and debt service obligations, while domestic borrowing remains expensive and international commercial borrowing exposes the country to global interest rates and foreign exchange risk. Multilateral financing offers cheaper money, but usually in exchange for policy commitments and reform benchmarks. That is why the current talks with the World Bank and African Development Bank matter beyond the headline amounts. They suggest that Nairobi is trying to reduce the average cost of financing the state by replacing some expensive borrowing with cheaper multilateral capital. The strategy will help only if it is accompanied by a narrower fiscal deficit over time. If cheaper loans merely finance persistent large deficits, Kenya will improve the price of its borrowing without materially changing the underlying debt trajectory. If they allow the government to reduce expensive domestic borrowing while implementing credible fiscal reforms, however, the benefit could extend beyond the Treasury by lowering pressure on interest rates and leaving more bank credit available to businesses. The next important signals will therefore come from the size and conditions of the proposed World Bank and AfDB operations, the progress of the debt for food swap, and whether the December IMF discussions develop into negotiations for a new programme.