By Benadeta Mwaura - Reporter
Kenya, June 20, 2026 - Kenya's efforts to raise fresh financing and refinance maturing debt could remain costly despite signs of improving conditions in global financial markets, according to a new report by the United Nations Conference on Trade and Development (UNCTAD).
The report warns that while borrowing conditions for developing countries have improved modestly since the peak of global monetary tightening, financing costs remain significantly higher than those faced by advanced economies, exposing countries such as Kenya to persistent debt vulnerabilities.
UNCTAD's latest report, Financing Development: External Flows of Financial Capital to Developing Countries and Their Cost, notes that sovereign bond yields for developing economies eased to an average of 5.7% in 2025, down from 6.8% between 2022 and 2024. However, borrowing costs remain well above pre-pandemic levels and continue to carry substantial risk premiums.
"External finance remains insufficient, expensive, and volatile," the report states, warning that high borrowing costs are rapidly eroding fiscal space and constraining sustainable development in many developing economies.
The findings come as Kenya grapples with rising debt servicing obligations that continue to absorb a growing share of public resources. According to Treasury projections contained in the 2026/27 budget, debt-related expenditure is expected to reach approximately KSh2.56 trillion, exceeding combined allocations to key sectors including education, healthcare, agriculture, affordable housing, and climate resilience programmes.
UNCTAD warned that interest payments on public debt in developing countries are rising faster than government revenues, limiting governments' ability to finance critical public services.
"Interest payments on public debt in developing countries increased 2.6 times faster than government revenues, indicating a deterioration in public sector debt sustainability," the report says.
Between 2018 and 2024, 99 developing countries, home to approximately 5.5 billion people, experienced a decline in fiscal space as rising debt servicing costs consumed larger portions of government revenues.
The UN agency also highlighted growing refinancing risks, noting that average sovereign bond maturities in developing countries have fallen sharply from around 17 years before 2021 to just 9.5 years in 2025, forcing governments to return to international markets more frequently.
Kenya, which has increasingly relied on a mix of domestic borrowing, syndicated loans, and international bond issuances to finance budget deficits and manage maturing obligations, remains exposed to these global financing pressures.
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The country's fiscal deficit for the 2026/27 financial year is projected at KSh1.15 trillion, equivalent to 5.5% of gross domestic product, with the Treasury planning to finance the shortfall largely through domestic borrowing.
Treasury Cabinet Secretary John Mbadi told Parliament that the government intends to raise KSh1.03 trillion through net domestic borrowing and KSh116.2 billion through net external borrowing.
"The fiscal deficit will be financed through net external borrowing of KSh116.2 billion, equivalent to 0.6% of GDP, and net domestic borrowing of KSh1.03 trillion, equivalent to 4.9% of GDP," Mbadi said during his budget presentation.
UNCTAD said developing countries continue to borrow at rates two to four times higher than advanced economies, with access to affordable long-term financing remaining constrained despite easing market conditions.
The report urges governments to strengthen debt management frameworks, improve transparency, and diversify funding sources through instruments such as local currency financing, green bonds, and debt-for-development swaps. It also calls for greater international support through expanded concessional financing and more effective debt restructuring mechanisms.
Kenya has already signalled plans to pursue alternative financing options as part of its medium-term debt strategy. While presenting the 2026/27 budget, Mbadi said the government was exploring innovative instruments including debt-for-food swaps, debt-for-development swaps, Samurai Bonds in Japan, and Panda Bonds in China to diversify the country's debt portfolio and reduce reliance on traditional financing sources.
The Treasury maintains that ongoing fiscal consolidation measures, including enhanced domestic revenue mobilisation, tighter expenditure controls, and improved public spending efficiency, will help place public debt on a sustainable path over the medium term.
However, analysts caution that unless borrowing costs ease more significantly and economic growth accelerates, debt servicing pressures could continue to limit the government's ability to finance development priorities.