10th U6+ Consortium of African Universities International Conference

This study evaluates the sustainability of Kenya’s public debt within the framework of the 2026 Medium-Term Debt Management Strategy (MTDS), which guides fiscal policy for the FY 2026/27–2028/29 period. As of March 2026, Kenya’s public debt stands at KSh 12.83 trillion, equivalent to 70.2% of GDP, necessitating a strategic pivot toward fiscal consolidation. The 2026 MTDS mandates a shift in borrowing composition—targeting 78% net domestic borrowing against 22% net external borrowing—with an overarching goal of reducing the fiscal deficit from 5.5% in FY 2026/27 to 3.3% by FY 2028/29. Employing an Autoregressive Distributed Lag (ARDL) model on data spanning 2015–2026, this research examines the interplay between this domestic-heavy borrowing trajectory, private sector credit accessibility, and macroeconomic stability. Preliminary findings suggest that while the shift to domestic financing mitigates foreign exchange and refinancing risks, it concurrently heightens the risk of "crowding out" private sector investment, a critical concern for the government’s Bottom-Up Economic Transformation Agenda (BETA). Furthermore, the study explores the sensitivity of debt-servicing costs to current inflationary pressures and exchange rate volatility. By analyzing these trade-offs, the research offers evidence-based policy recommendations for optimizing the debt portfolio, improving expenditure efficiency, and fostering inclusive growth while adhering to the fiscal responsibility principles enshrined in the Public Finance Management (PFM) Act. The study concludes that the efficacy of the 2026 MTDS hinges not merely on borrowing ratios, but on the successful implementation of structural revenue mobilization and the rigorous rationalization of non-essential public expenditure.