East African economies are edging towards a debt trap, driven by growing reliance on expensive commercial borrowing, including bank loans and Eurobonds, a new report warns.

The report by UK-based Gatsby Africa says rising debt service costs over the past 15 years are increasingly constraining the region’s ability to finance development.“Higher repayments are reducing investment in essential sectors such as health and education and crowding out private sector access to credit,” says the report, East Africa: Trends Report – Projecting the Future, dated January 2026.

Private borrowing by governments expanded sharply between 2009 and 2023 with bond issuances rising to 16.8 percent of total debt, while commercial bank loans accounted for 14.1 percent, “reflecting a shift towards costlier, short-term instruments such as Eurobonds”.

Fiscal squeeze‎“The consequences are now visible in fiscal spending. Debt servicing now exceeds spending on social sectors such as health and education, diverting resources from human capital and long term growth investment.”The impact is already visible in public spending. In Kenya, about 68 percent of total revenue is used for debt service. Commercial banks are increasingly buying government securities instead of lending to businesses, holding 36.7 percent of domestic debt instruments as of the week ending March 26, according to the Central Bank of Kenya data.“This reduces credit available to the private sector. Low domestic revenue mobilisation deepens these pressures. Tax-to-GDP ratios across Kenya, Uganda, Tanzania and Rwanda range from 12-16 percent, compared with a global average of 34 percent,” the report says.

Without stronger revenue generation and improved debt management, the region risks a cycle of rising debt costs, shrinking fiscal space and slower growth.

The report cautions against borrowing to finance recurrent expenditure such as public sector wages and government operations, urging states to prioritise investments with clear economic returns, including job creation.“Public debt can support faster growth when it funds infrastructure and productive sectors that expand competitiveness, rather than recurrent costs or projects with limited economic impact,” the report says.“Large infrastructure projects – such as railways or strategic road networks – should reduce logistics costs, support trade and ease maintenance burdens. When these returns do not materialise, high public borrowing raises financing costs for the private sector without offsetting gains in productivity, efficiency or growth”.

Poorly designed or weakly governed investments risk becoming a drag on growth and macroeconomic stability rather than drivers of transformation, the report notes.

Market shiftWith debt service already elevated, governments have limited room to finance development, widening the gap for infrastructure, health and education spending.

Official development assistance is projected to fall by 9-17 percent in 2025, cutting off a key funding source as fiscal space tightens. The impact is expected to be most severe in aid-dependent social sectors.

East Africa now faces a widening development finance gap, with rising debt costs, declining concessional funding and weak domestic revenue mobilisation constraining long-term investment.“Heavy government borrowing from domestic markets is crowding out private sector credit, and weaker credit ratings are raising the cost of external borrowing,” the report says.

According to the report, remittances have become a more stable source of foreign exchange than foreign direct investment (FDI), with Kenya receiving $4.9 billion in 2024 – more than double its FDI inflows – though much of this supports consumption rather than investment.

Venture capital remains modest and concentrated, underscoring both its potential and its volatility.

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