In recent years, Kenya’s external debt has been on the rise, reaching an all-time high of $38.3 billion by September 2023, marking a significant milestone in the country’s borrowing trajectory. 

This surge in external debt highlights Kenya’s growing reliance on financing sources to meet its fiscal obligations and fund developmental projects. Amidst this backdrop, the government is undertaking measures to reduce its reliance on domestic banks for borrowing.

Kenya’s borrowing history highlights the evolution of debt composition and financing mechanisms over the years.

From the Baker Plan in 1985 to the Toronto Plan in 1988 and the Brady Initiative in 1989, the country has explored various avenues to manage its debt obligations and fiscal deficits. 

Notably, in 2012/13, domestic debt accounted for a substantial 56% of Kenya’s total debt, reflecting a heavy reliance on local borrowing. However, by 2015, gross public debt had surged to an estimated 61.7% of GDP, signaling a growing debt burden.

In the fiscal year 2019/20, Kenya grappled with the challenge of debt repayment, with the government repaying Ksh 718 billion compared to Ksh 886 billion borrowed. 

This dynamic signifies the importance of fiscal prudence and debt management strategies to ensure sustainable economic growth and financial stability.

Moreover, Kenya’s external debt reached $41.2 billion in 2021, representing an 8.32% increase from the previous year.

One significant development impacting Kenya’s borrowing landscape is the expectation of reduced interest on Kenyan bonds as the country ventures into issuing a new eurobond. 

Kenya’s decision to pursue a new euro bond stems from the need to access the international bond market to raise funds for a buyback of the 10 year $2 billion eurobond issued in 2021.

This move signifies the country’s strategy to manage its debt obligations and potentially reduce reliance on domestic banks for financing. 

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By tapping into the international bond market, Kenya also aims to diversify its funding sources and potentially secure funds at more favorable terms, which could have implications for reducing government reliance on domestic banks. 

Additionally, by financing the buyback through international bonds, Kenya may be able to alleviate pressure on its domestic banking sector, thereby allowing banks to redirect their resources towards other productive investments within the economy.

The shift towards reducing reliance on domestic banks is expected to bring about several changes in banks’ balance sheets.

Monetary policy changes, such as adjustments in nominal interest rates, can directly impact banks’ profitability and lending capacity. 

Moreover, the expansion or shrinkage of central bank balance sheets may entail trade-offs between monetary policy objectives and financial stability, affecting banks’ risk exposure and income streams.

Additionally, the government’s reduced reliance on domestic banks for borrowing could lead to changes in lending practices within the banking sector.

In a low-interest-rate environment, banks may face challenges in maintaining the responsiveness of loan supply, potentially impacting credit risk assessment, capital capacity, operational efficiency, liquidity management, and overall lending operations. 

Furthermore, increased government borrowing from external sources may influence banks’ risk appetite and credit guidelines, necessitating robust risk management frameworks to mitigate potential risks.

The issuance of eurobonds however presents opportunities for banks to diversify their asset portfolios and access foreign funding sources. Eurobonds offer benefits like broader investor access and risk diversification without currency conversion, aiding banks in bolstering their resilience and liquidity management.

This strengthens banks’ capacity to navigate financial challenges and optimize resource allocation.