Western nations urge Kenya to seek IMF review of corruption issues, sources say

NAIROBI, Oct 1 (Reuters) - Major shareholders at the International Monetary Fund are urging Kenya to request an IMF assessment of corruption and governance issues as part of a push to unlock lending that has been stalled by the shelving of tax hikes, three sources said.

Disbursement of around $600 million under an IMF plan that expires next year has been held up since the government in withdrew $2.7 billion in tax increases after mass protests.

The demonstrations, in which more than 50 people were killed, brought to the fore issues of corruption and misgovernance, with young protesters complaining that their taxes were being used to fund politicians' lavish lifestyles.

Western governments have been encouraging a governance diagnostic, or IMF assessment, of corruption and governance vulnerabilities, said the sources.

The sources, who include two diplomatic sources and one who is familiar with the situation, spoke on condition of anonymity to discuss private conversations.

A governance diagnostic must be requested by the country in question.

"We have encouraged the authorities in the past and continue to do so in requesting governance diagnostics," the Fund told Reuters.

Kenya's finance ministry did not respond to requests for comment. A governance diagnostic request would facilitate discussions about further IMF support, two of the sources said.

The assessment would look at "where the leaks are, where the challenges are, where the problems are and then proposing responses", said the source who is familiar with the situation.

The IMF has published governance diagnostic reports on 14 countries since 2014, including Ukraine, Cameroon and Sri Lanka, and additional diagnostics are underway, according to the Fund's website.

Kenyan authorities are looking for fresh revenue-raising measures after rescinding the tax increases.

Finance Minister John Mbadi said in August that the government would have to restore some measures from the scrapped bill. However, last month Mbadi said he would seek suggestions from the public on new legislation to boost revenue.

Diplomatic sources say the government will need to present a credible plan to narrow its fiscal deficit before the IMF will consider new disbursements.

This article originated on Reuters.