UN Warns Kenya Faces Expensive Borrowing Despite Global Rate Cuts

National Treasury Building

Kenya could continue facing high borrowing costs despite improving conditions in global financial markets, according to a new report by the United Nations Conference on Trade and Development (UNCTAD).

The report shows that developing countries have recorded some relief as major central banks cut interest rates. However, African economies still pay higher premiums compared to developed nations.

The warning comes as Kenya prepares to refinance maturing debt and seek additional funding for budget needs. The country continues to rely on borrowing to support government operations and development projects.

Africa Still Pays Higher Debt Costs

UNCTAD said average borrowing yields for developing countries declined from 7.3 per cent in 2023 to 5.7 per cent in 2025.

However, African countries have not benefited equally from the improvement. The report shows African sovereign borrowers paid rates close to 8 per cent in 2025.

“In 2025, the average coupon rate for all developing countries stood at 5.8 per cent, with significantly higher rates, close to 8 per cent, for frontier market economies and African sovereigns,” UNCTAD stated.

The report noted that African countries suffered heavily during the global monetary tightening period after the Covid-19 pandemic.

Borrowing yields for African economies nearly doubled during the period. The increase pushed many governments into more expensive debt obligations.

Kenya Faces Financing Challenges

Treasury Cabinet Secretary John Mbadi said Kenya faces challenges accessing affordable external financing.

He explained that the government must balance external borrowing with domestic financing. He warned that both options come with challenges.

“External borrowing is not very certain. We are not getting concessional loans easily because Kenya is now seen as a developing economy with the capacity to access commercial funding,” Mbadi said.

He added that global uncertainty has forced investors to demand higher returns before lending money.

According to Mbadi, increased domestic borrowing could also affect businesses. He said government borrowing from local markets could reduce funds available to the private sector.

The Treasury has projected about Ksh116 billion in external borrowing. The remaining deficit financing is expected to come from domestic sources.

Debt Costs Could Limit Government Spending

Kenya has increasingly relied on Eurobonds and syndicated loans to finance development projects and repay existing obligations.

Higher borrowing costs mean the government spends more money on debt repayments. This reduces funds available for essential services and development programmes.

UNCTAD warned that countries remain locked into expensive debt once they issue bonds at high interest rates.

“Coupon rates do not adjust after issuance and therefore lock countries into long-term financing costs determined at a specific moment in time,” the report said.

This means Kenya could continue paying higher interest rates even if global markets improve further.

Shorter Loan Periods Add Pressure

UNCTAD also raised concerns over shorter repayment periods for foreign-currency bonds.

The average maturity period for new foreign-currency bonds dropped from about 17 years between 2015 and 2021 to 9.5 years in 2025.

Shorter repayment periods increase pressure on governments because they must repay large amounts within a shorter timeframe.

The report said developing countries paid an average borrowing premium of 1.9 percentage points above advanced economies in 2025.

For Kenya, the challenge remains finding affordable financing while managing debt repayments and maintaining economic growth.