Kenya’s budget deficit to hit 5.9%: What it means for business loans

Kenyan businesses are facing uncertainty over credit costs and availability as the government projects its budget deficit will widen to 5.9% of gross domestic product (GDP) in the 2027/28 financial year. This projection, released by the National Treasury on October 9, 2026, marks a 0.4 percentage point increase from the 5.5% deficit forecast for the previous year.

The widening deficit stems from a projected decline in domestic financing to Ksh929.1 billion, down from Ksh1.04 trillion, and an increase in net external financing to Ksh423.8 billion, up from Ksh247.2 billion.

Government borrowing affects businesses because commercial banks hold significant government securities. When government debt offers attractive returns, banks may prioritize lending to the Treasury, potentially reducing funds available for private-sector loans. However, the latest Treasury projections suggest that domestic financing could decline by Ksh110.9 billion, which might alleviate some pressure on local credit markets.

Kenya's National Infrastructure Fund is also purchasing government bonds to improve liquidity and encourage banks to lend more to businesses and households.

The Central Bank of Kenya (CBK) has warned that government borrowing could crowd out private borrowers, but the projected financing mix does not guarantee higher loan costs for businesses. Domestic financing is expected to decline by Ksh110.9 billion, which could ease some pressure on local credit markets if the government adheres to its borrowing plan.

The Central Bank Rate stands at 8.75% as of October 7, down from 14.8% in December 2025. However, the impact of the projected deficit on commercial lending rates remains uncertain, as the government has not specified how its financing strategy will affect commercial lending rates. Businesses should monitor the upcoming budget presentation for a clearer indication of the government's financing mix and its potential impact on loan costs.