NAIROBI, Oct 16 (Reuters) – Kenya is in discussions with the United Arab Emirates for a $1.5 billion commercial loan with an 8.25% interest rate and a seven-year tenor, Finance Minister John Mbadi said on Wednesday.

The East African nation is seeking to diversify its sources of financing after deadly protests forced the government to abandon a slate of tax hikes and delayed disbursements from the International Monetary Fund (IMF). Reuters reported the prospective loan last month.

“This loan is cheaper than the Eurobond we borrowed at 10.7%,” Mbadi told a news conference, referring to a $1.5 billion dollar-denominated bond issued in February to partially buy back a portion of a maturing $2 billion Eurobond.

Kenya has satisfactorily answered the questions raised by the IMF around the country’s current lending programme, which was interrupted by the protests and the abandonment of the finance bill, Mbadi said. He will hold more meetings with the fund in Washington DC next week.

“After that, the funds will be disbursed,” Mbadi said.

The IMF’s executive board will meet on Oct. 30 to consider the staff review of Kenya’s programme, Bloomberg news agency reported, citing people familiar with the matter.

Asked about the report, the Fund said the date had not yet been set.

“No date has been confirmed yet for the Board’s deliberation. We will communicate the date and related information in due course,” it said.

Kenya would seek a new fund programme when the current one runs out next year, Mbadi said, but he called for more realistic fiscal targets to underpin future lending.

“I completely believe some of the targets we have set with the IMF were unrealistic,” he said, citing a target of lowering the fiscal deficit to 3.8% this financial year from 5.2% in the year that ended in June, which has since been removed.

RISK EXPOSURE?

The government is also talking with the IMF after the lender raised some concerns about the potential commercial loan from the UAE, the minister said.

“There are issues to be discussed, including with the IMF, which had expressed some reservations, because we are talking about this being an external loan and is dollar-denominated, it may expose us to additional risk,” he said.

The government has countered that the loan was cheaper than the other options, including Eurobonds, Mbadi said.

“Those are issues that we are discussing. We haven’t firmed them up. We are looking for the transaction adviser on the same,” he said.

The government has set the foreign borrowing target for this financial year at 168 billion shillings ($1.31 billion), while the UAE loan if finalised would bring in the equivalent of 195 billion shillings, helping the government to cut local borrowing.

President William Ruto’s government has prioritised lowering elevated lending rates in the economy, Mbadi said, to support businesses and economic growth.

Policymakers cut the central bank’s benchmark lending rate by 75 basis points last week to 12%, but Mbadi said it should be at 10% or lower.

Under Ruto, who took over in September 2022, Kenya has forged closer ties with the UAE.

The UAE’s Abu Dhabi National Oil Company (ADNOC) and Emirates National Oil Company were among three Gulf firms Ruto’s government picked last year to supply Kenya with oil on longer credit terms, in a shift from an open tender system.

The UAE provided Ethiopia with $1 billion in 2018 to help with a severe hard currency cash crunch, and the central banks of both sides announced an $817 million swap line in July.

The UAE also signed a deal with Egypt earlier this year to develop a prime stretch of its Mediterranean coast that was expected to bring $35 billion of investments into the Egyptian economy.

($1 = 128.5000 Kenyan shillings)

(Reporting by Duncan Miriri; Editing by Angus MacSwan, Mark Potter and Gareth Jones)