Kenya president spoke to IMF chief after pulling tax hikes, sources say

By Aaron Ross

NAIROBI (Reuters) -Kenyan President William Ruto spoke by phone with International Monetary Fund chief Kristalina Georgieva in the days after he withdrew $2.7 billion in proposed tax hikes in response to deadly protests, two diplomatic sources told Reuters.

The finance bill containing the tax increases was central to policy reforms agreed by Kenya with the IMF as part of a lending programme worth $3.6 billion.

Analysts say its withdrawal a week ago is likely to result in Kenya missing key programme targets, although the government does not urgently need cash from the IMF after it was able this year to repay a bond that was originally worth $2 billion by issuing a new seven-year bond.

The IMF has been a major target of the ire of young Kenyan protesters, who have accused it of being the driving force behind the proposed tax hikes.

The two sources, who spoke on condition of anonymity, did not provide details about Ruto and Georgieva's phone call.

However, they said there was agreement among major donors that the IMF needed to show flexibility on programme targets as Kenya looked to fill the gap caused by the bill's withdrawal.

One of the sources added that the government should show a commitment to reducing wasteful spending, cracking down on corruption and increasing accountability in exchange for that flexibility.

The IMF reached a staff level agreement with Kenya in early June on a policy package needed to complete the lending programme's seventh review, expected to unlock a disbursement of several hundred million dollars, but the deal has not yet received approval from the fund's Executive Board.

"We remain deeply concerned by the recent tragic events in Kenya and maintain close ongoing and constructive dialogue with the Kenyan authorities," an IMF spokesperson said when asked about the call.

Ruto's spokesperson did not respond to requests for comment.

Since shelving the bill, Ruto has pledged to include austerity measures in a supplemental budget, but has also suggested that the government will need to significantly increase borrowing in the 2024/25 fiscal year.

An IMF spokesperson said last week that its main goal has been helping Kenya overcome its economic challenges and improving its people's well-being.

"I think the IMF will continue helping Kenya, but the disbursements are more likely to resume toward the end of this year," said Pavel Mamai, managing partner and portfolio manager at Promeritum Investment Management.

"The IMF will basically ask Kenya to regroup and present a new reform plan."

At least 39 people have been killed in the protests since mid-June, according to a government-funded human rights organisation. Anti-government demonstrations have continued since Ruto pulled the bill, although with lower turnout.

(Additional reporting by Karin Strohecker and Libby George in London; Editing by Alexander Smith)