UPDATE 2-Ukraine in talks with IMF on new standby deal: president's ally

Ukraine has begun talks with the International Monetary Fund on a new standby deal that would replace the current $17.5 billion assistance programme, the president's parliamentary representative said on Friday.

A fresh standby agreement could give Ukraine breathing space as it has struggled to fulfill some of the conditions of its existing deal and needs to service rising debt payments.

The IMF and Western allies have pumped billions of dollars into the country since the 2014 Maidan uprising and the annexation of Crimea by Russia that pitched Ukraine into crisis.

But the $17.5 billion packages has been effectively frozen since April 2017 amid a slowdown in required economic reforms and efforts to tackle entrenched corruption. Kiev has banked only $8.7 billion originally made available under the deal and its debt obligations will peak in 2018-2020.

Iryna Lutsenko, the president's parliamentary representative, did not say what the terms of the new agreement might be or when it would start.

She also did not address whether the government would agree to raise natural gas prices, which is a key sticking point in the current deal, but took the negotiations for a standby agreement as a positive signal.

"This means that the IMF appreciated the reforms, the pace, the results of the reforms that we made within the framework of that programme and are ready to provide us with another programme," she said on the sidelines of the Yalta European Strategy (YES) meeting in Kiev.

The IMF wants Ukraine to raise household gas prices, which have been kept artificially low since Soviet times, to market levels. Prime Minister Volodymyr Groysman agreed to raise tariffs in 2016 but the plan then stalled.

An IMF mission is now in Ukraine for talks but has so far declined to comment on the prospect of a new standby aid deal.

A source with knowledge of the IMF negotiations told Reuters on Thursday that Kiev would decide by Oct. 1 whether to raise gas prices.

Separately, the central bank governor said Ukraine hoped to reach a deal on continued cooperation with the IMF next week, and that optimism around such an agreement had helped calm the foreign exchange market.

"Negotiations with the IMF continue, the mission is finishing its work next week and we expect a positive decision on continuing cooperation," Yakiv Smoliy said in a joint interview. "The situation on the market is already stable." 

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