Kenya’s escalating public debt crisis has come under sharp scrutiny in the Auditor-General’s July 2025 report, which highlights the precarious state of on-lending to State-Owned Enterprises (SOEs). The National Treasury’s 2024 Annual Public Debt Report, referenced in the audit, underscores the growing threat of debt distress, with serious implications for fiscal stability.
On-lending is the practice where the Kenyan government borrows from external creditors and subsequently lends the funds to SOEs to finance projects in sectors such as agriculture, energy, health, transport, and water. While intended to drive development, it shifts the repayment burden to SOEs, with the government acting as guarantor. When SOEs default, the National Treasury must service the loans, further straining public finances.
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As of 30 June 2024, the Auditor-General reported that loans on-lent to 35 SOEs totalled KSh 874.9 billion, representing 17% of Kenya’s external debt of KSh 5.17 trillion. Alarmingly, only 1.04% (KSh 1.6 billion) of the KSh 153.8 billion principal due had been repaid, while penalties for non-repayment had reached KSh 197.7 billion. This dismal recovery rate poses a severe risk: defaults could compel the government to absorb these debts, worsening fiscal pressures.
The report also noted that the Directorate-General of Public Investments and Portfolio Management (D-GIPE) had taken no action by May 2025 to enforce repayment or recover outstanding amounts—an alarming oversight.
This crisis is far from new. By May 2023, SOE loan defaults had already surpassed KSh 1 trillion, with some loans written off entirely—a clear sign of persistent mismanagement. In the 2021/22 financial year alone, 31 SOEs made no repayments, deepening fiscal strain. The knock-on effect has been a constrained national budget, forcing more borrowing and limiting funds for essential services.
Interviews with SOE leaders, particularly in the water sector, reveal that inadequate revenue generation is the main reason for non-repayment. Many SOEs cannot service loans due to operational inefficiencies and an overreliance on government subsidies. Without structural reforms, the Auditor-General warns, the cycle of borrowing and default will persist, pushing Kenya closer to debt distress. The World Bank’s May 2025 economic update echoed this warning, flagging high repayment obligations and weak revenue performance.
The Kenya Railways Corporation (KRC) exemplifies the on-lending crisis. It has defaulted on three loans totalling KSh 569.3 billion, taken in 2014 and 2015 to finance the Standard Gauge Railway (SGR) project. Only Phase 1 (Nairobi–Mombasa) and Phase 2(a) (Nairobi–Naivasha) have been completed; Phases 2(b) and 2(c) remain unfinished, limiting revenue potential. KRC’s inability to generate sufficient income has placed a heavy repayment burden on the National Treasury.
The Kenya Ports Authority (KPA) is also central to SGR revenues under a “Take or Pay” agreement, with collections deposited into an escrow account. Between July 2023 and December 2024, KPA collected USD 162 million (about KSh 22.6 billion) but transferred only USD 116 million for SGR loan servicing. This shortfall raises serious questions about revenue management and escrow account transparency.
The Auditor-General’s findings reflect broader debt concerns. The National Treasury reported total public debt at KSh 11.36 trillion by March 2025, with debt servicing costs consuming 89% of the Consolidated Fund Services budget, according to the Controller of Budget. The World Bank has warned of Kenya’s high debt distress risk, further compounded by its reduced 2025 GDP growth forecast of 4.5%.
The Treasury’s 2025 Medium-Term Debt Management Strategy seeks to reduce borrowing costs and boost domestic revenue collection. However, without tackling SOE inefficiencies and enforcing repayment discipline, these measures are unlikely to be enough. The ongoing public debt audit, due in August 2025, promises a full review of Kenya’s debt portfolio since independence, potentially a watershed moment for future policy.
Kenya stands at a fiscal crossroads. The Auditor-General’s report lays bare the vulnerabilities of on-lending and the mounting risks from SOE defaults. Urgent reforms are needed to strengthen revenue streams, enforce accountability, and restore fiscal stability before unpaid loans push the nation deeper into economic peril.
