THE GREAT DEBT DECEPTION: Why Kenya Can't Borrow Like Japan — and the Quiet Carnage of the Sh1 Trillion Domestic Gamble

Part 1 of 3: The Borrowing Paradox | The Daily Pulse

There is a peculiar comfort in bad comparisons.

In a recent parliamentary debate, a lawmaker noted — with the confidence of someone who just discovered Google — that Japan's debt-to-GDP ratio sits above 230%, while Kenya's hovers around 65–68%. The implied question: if Japan can do it, why all the drama?

It is the economic equivalent of pointing at Usain Bolt and asking why your grandfather can't run the 100 metres in under 10 seconds. Technically, they are both human. But context, as any serious economist will tell you, is everything.

Meanwhile, the National Treasury has doubled down on a plan to borrow approximately Sh1 trillion domestically in the coming fiscal year — roughly Sh4 billion every single day. The World Bank has already responded by cutting Kenya's 2025 growth forecast from 5.0% to 4.5%, flagging this very borrowing as the primary headwind. Private sector credit growth didn't just slow — it went negative, contracting by 1.4% in December 2024 compared to growth of 13.9% just a year prior.

This is not a footnote. This is the story.

The Japan Illusion: Why 230% Debt Isn't What It Looks Like

Let's dispense with the comparison once and for all, because it keeps resurging like a bad campaign promise. Japan's ability to carry enormous debt rests on a very specific — and frankly bizarre — set of conditions that took decades to construct and cannot be photocopied.

For nearly a decade, the Bank of Japan operated with negative interest rates. This means commercial banks were paying the central bank to hold their money. The logic: Japan has been fighting deflation — falling prices — for thirty years. When prices fall, people delay spending, businesses defer investment, wages stagnate, and the economy quietly freezes. Negative rates were a fiscal defibrillator, meant to shock liquidity back into the system.

More critically, the vast majority of Japanese Government Bonds are owned by Japanese citizens, Japanese banks, and Japanese institutions, denominated in Yen — a currency Japan controls. It is, in essence, a country that owes money to itself. The political and economic implications of that arrangement are profound and largely non-transferable.

Kenya's situation is structurally inverse. We borrow in foreign currencies that we cannot print. We face inflation, not deflation — meaning high interest rates are a feature, not a bug, of our monetary policy. Debt service already consumes over half of government revenue. And our debt, now at 65.5% of GDP, keeps us firmly on the IMF and World Bank's high-risk-of-debt-distress list — a classification that is, to put it diplomatically, not aspirational.

The Japan comparison is not just wrong. It is a distraction from the real and urgent question.

The Paradox Nobody Wants to Answer: Why Pay 17% When the IMF Charges 3%?

This is where it gets interesting — and where fiscal policy starts to look less like strategy and more like avoidance. IMF concessional loans come at approximately 3% interest. Kenya's Treasury Bills and Bonds, at their recent peak, were clearing at rates well above 16%. Even with the Central Bank Rate now reduced to 10%, domestic borrowing remains dramatically more expensive than available multilateral options.

Treasury CS John Mbadi has argued, not unreasonably, that external loans carry exchange rate risk — when the shilling weakens, dollar-denominated debt balloons in local currency terms. Kenya's painful experience with its Eurobond is a legitimate cautionary tale.

But here is the other side of that coin, the one that tends to get quietly set aside: IMF loans come with conditionality — fiscal consolidation requirements, spending discipline, structural reform benchmarks. These are politically uncomfortable. Domestic borrowing requires no press conference in Washington. No awkward questions about the wage bill. No mandated audit of state corporations.

So we pay a 14-percentage-point premium for the privilege of borrowing without accountability. That is not a sovereign strategy. That is sovereign avoidance — and the bill is being quietly handed to the private sector.

The Sh4 Billion Daily Heist: How the Government Is Eating the Economy

Here is the mechanism, and it is almost elegant in its perversity.

When the government borrows heavily from the domestic market, it competes directly with businesses for the same pool of funds. Banks face a binary choice: lend to a small manufacturer in Thika who might default, or lend to the government — zero risk, guaranteed return, no single obligor limit.

The single obligor rule, for context, is a CBK regulation that prevents banks from lending more than 25% of their core capital to any one borrower — designed to prevent catastrophic concentration risk. This rule explicitly does not apply to the government. Banks can shovel unlimited funds into Treasury securities. And they have: commercial banks now hold 42.6% of Kenya's domestic debt, a figure the World Bank flagged directly in its November 2025 Kenya Economic Update.

The result is not subtle. At recent CBK auctions, government bond issuances were oversubscribed by up to 200%. Banks are not just preferring government paper — they are racing to buy it. Meanwhile, private sector credit growth went negative. Non-performing loans hit 17.2% of gross loans by February 2025. The average maturity of domestic debt has shortened from 8.5 years to 7.4 years — a sign that even lenders are nervous about locking in long-term.

The economy grew at just 4.7% in 2024 — its slowest since the pandemic. The World Bank, in its characteristic understatement, called it "a signal that businesses are becoming increasingly unable to tap credit to expand or hire workers."

In plain language: the government is the most dangerous competitor in Kenya's credit market, and it plays by different rules than everyone else.

The Irony Hiding in Plain Sight

The single obligor rule is supposed to protect the financial system by ensuring no single borrower can bring down a bank. It is sound regulation. Except the most voracious borrower in the country is entirely exempt from it.

There is no cap on how much a bank can lend to the Republic of Kenya. There is a cap on how much it can lend to Bidco, to a tea cooperative in Kericho, or to the tech startup in Kilimani trying to make payroll. The very enterprises the regulation was designed to protect by diversifying risk are the ones being starved of capital — legally and by design.

This is the quiet absurdity at the heart of Kenya's fiscal moment.

Where This Leaves Us

Treasury CS Mbadi is not wrong that the financial sector is resilient, or that dollar-denominated debt carries real risk. Both things can be true. What is also true is that borrowing 78% of this year's fiscal deficit domestically — approximately Sh648 billion — while private sector credit contracts is a policy that prioritises the government's convenience over the economy's health.

There are green shoots: the CBK has been cutting rates, T-bill yields have come down from their peaks, Moody's revised Kenya's outlook from negative to positive in January 2025, and Fitch and S&P maintained stable B- ratings. The trajectory is better than it was. But the structural logic — government as unlimited borrower, banks as willing enablers, private sector as residual claimant on whatever is left — has not fundamentally changed.

The parliamentary debate should not be about whether we look like Japan. It should be about whether we are slowly building an economy where the government's borrowing appetite leaves no oxygen for the businesses, workers, and entrepreneurs who are supposed to generate the growth that makes all of this borrowing sustainable in the first place.

That is a circular trap. And we are moving around it at Sh4 billion per day.

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About the Author

Dr. Julius Kirimi Sindi is a global expert in research funding, policy impact, and donor relations. With extensive experience in analyzing philanthropy, business, and science funding, Dr. Sindi fosters sustainable and inclusive research ecosystems. He has facilitated international business relationships across Africa, Europe, and Asia. His upcoming book, "The Blueprint of Life Well Lived," explores successful strategies for navigating complex business environments while achieving sustainable growth. He is the author of an upcoming book "How Societies Change and Why Most Reforms Fail," which introduces an African Theory of Scaling rooted in emotional truth, political safety, and system coherence. I hope to publish "CHANGING THE BATTERIES - How to Renew Purpose, Growth, and Connection When Your Light Grows Dim" as soon as possible. He is also the creator of The Daily Pulse, a widely read LinkedIn newsletter offering sharp, human-centered analysis of policy, politics, and development.