There are concerns that Kenya’s president, William Ruto, may have to back down from a financial law due to violent turmoil, casting doubt on the country’s ability to meet IMF targets, and perhaps raising borrowing costs.

Unpopular taxes on bread, sugar, vegetable oil, mobile money transfers, and some imports were included in the law.

Although the IMF did not respond right away when asked if it would change Kenya’s necessary goals, Neville Z. Mandimika of Morgan Stanley stated in a note that the original plan was to generate additional revenue of 346 billion Kenyan shillings ($2.68 billion), or 3% of GDP. Its withdrawal “will likely result in Kenya missing the 4.7% fiscal deficit target this year and 3.5% target next year as per the IMF programme,” he said.

“Our main goal in supporting Kenya is to help it overcome the difficult economic challenges it faces and improve its economic prospects and the well-being of its people,” IMF spokesperson Julie Kozack said in a statement.

Kenya signed on for additional financing to help climate change initiatives in May 2023, bringing its total IMF loan access to $3.6 billion. Kenya had already agreed to a four-year loan with the IMF in 2021. Before releasing finance tranches, the IMF mandates periodic evaluations of reforms, in Kenya’s instance every six months.

Before President William Ruto abandoned the tax bill on Wednesday, Kenya and the IMF reached a staff-level agreement earlier this month on a seventh assessment, with a warning of potential revenue shortfalls. The study theoretically cleared the way for $976 million, but it failed to obtain important IMF board approval.

“There isn’t a great deal of room to manoeuvre unless you start doing much more thorough reviews” of spending, said Giulia Pelligrini, senior portfolio manager with Allianz Global Investors, of what Kenya can do to meet targets. “So it’s going to be difficult.”

She continued by saying that the anticipated conclusion will be a combination of government budget cuts and IMF flexibility on program aims.

Following Ruto’s reversal, Kenya’s sovereign dollar bonds declined. According to Morgan Stanley, Kenya had less access to foreign bonds now that eurobond yields were back above 10%, which would force them to borrow more money domestically.

“The next catalyst for spreads would be statements from the IMF on how the programme will be recalibrated to reflect this new reality,” Mandimika wrote.

The violence in Kenya, where doctors reported that 23 people had died this week following violent battles between protesters and police, has been condemned by the United States.

William Ruto, the President of Kenya, backed down on Wednesday from his plans to raise taxes in response to protesters who had invaded parliament, started nationwide rallies, and threatened to take further action this week.

In the most critical crisis of Ruto’s two-year administration, the move will be viewed as a huge success for a week-old, youth-led protest movement that evolved from online condemnations of tax rises into large-scale marches seeking a political overhaul.

On social media, however, some protestors said that they would still go ahead with Thursday’s march despite Ruto’s backpedalling, with many of them restating their demands that he step down.

A day after violence between police and protestors at the assembly and across the country left at least 23 people dead and several others wounded, according to medics, Ruto declared he would not sign a finance measure that included the tax increases.

“The United States is deeply concerned about and we condemn the reported violence in all its forms,” White House national security spokesman John Kirby told reporters.

Shortly after MPs passed the tax proposals on Tuesday, police opened fire on crowds who had gathered around parliament and then broke into the assembly’s enclosure.

“The United States has been in touch with the Kenyan government to urge appropriate use of force by the police, to respect human rights … and we will continue to push for calm to prevail,” said Kirby.