By Natalia Zinets and Matthias Williams
KIEV (Reuters) - Ukraine secured a new $3.9 billion stand-by aid agreement with the International Monetary Fund on Friday, helping the country maintain financial stability and the trust of investors as it heads into a choppy election period next year.
The IMF announced the deal hours after the government decided to raise household gas prices by nearly a quarter, an outstanding IMF requirement, as the prime minister warned the country was headed for default without an IMF deal.
The new agreement would span 14 months and replaces the previous $17.5 billion aid programme that has propped up Ukraine's war-battered economy since 2015.
It is subject to Ukraine passing a 2019 budget in line with the IMF's requirements and the approval of the IMF's executive board, which is expected to take a decision later in the year, the IMF said.
"The new SBA ... will provide an anchor for the authorities' economic policies during 2019," an IMF statement said.
"... it will focus in particular on continuing with fiscal consolidation and reducing inflation, as well as reforms to strengthen tax administration, the financial sector and the energy sector."
'NO OTHER OPTION'
The new deal will allow the government, which must service a rising debt burden next year, to go to the market to issue new debt and would also pave the way for the European Union and other foreign donors to disburse more aid.
The government initially had agreed to raise gas prices but later backtracked, knowing the potential for voter anger during presidential and parliamentary elections.
"We have no other option to prevent extremely difficult events," Prime Minister Volodymyr Groysman said during a televised cabinet meeting earlier on Friday.
"If we are not able to continue cooperation with our international partners," Groysman warned, then the country will not be able to service its debt.
"This may lead to the situation when Ukraine will be put into default," he said, a return to the 1990s of "hyper-inflation, price increases, wage devaluation."
Ukraine's eurobonds rose across the curve following the announcement of a gas price hike.
Giving a taste of the backlash that is likely to follow, Olena Babak, a lawmaker of the opposition Samopomich party, told the 112 news channel that it would push Ukrainians into poverty.
"This is a crime against Ukraine," she said.
The IMF joined efforts to rescue Ukraine from economic crisis following Russia's annexation of Crimea in 2014 and the outbreak of a Kremlin-backed separatist insurgency.
But IMF aid had effectively been frozen since April 2017 as Ukraine's performance on reforms slowed down and due to the government's refusal to raise gas prices, kept artificially low since Soviet times, to market levels.
The spotlight will now be on discussions on the 2019 budget which parliament must vote on by the end of the year. One sticking point could be Ukraine's plans for a change to how companies are taxed.
Groysman said household gas prices would be raised by 23.5 percent from Nov 1.
(Additional reporting by Pavel Polityuk; writing by Matthias Williams; editing by Susan Fenton, Louise Heavens, William Maclean)
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Updated Date: Oct 20, 2018 00:05:24 IST