KIEV, July 3 – The International Monetary Fund agreed in principle Friday to provide Ukraine with $14.9 billion in a 2.5-year standby lending package in order to stabilize its economy, which suffered a major contraction last year.

The final approval of the lending package, however, will come if the government demonstrates its commitment to go ahead with unpopular economic reforms within weeks.

"The goal of the economic program is to entrench fiscal and financial stability, advance structural reforms, and put Ukraine on a path of sustainable and balanced growth," IMF Mission Chief Thanos Arvanitis, who just completed a two-week mission in Kiev, said, quoted by Dow Jones Newswires.

U.S. Secretary of State Hillary Clinton, who met President Viktor Yanukovych in Kiev on Friday, hours before the IMF had made the announcement, said the government will have to work hard to implement the reforms and to improve its inefficient energy sector.

Ukraine’s economy contracted 15% on the year in 2009, reflecting a major drop in the country’s exports due to weak worldwide demand for steel and other commodities.

The IMF said the Ukraine must enact enough fiscal adjustment to contain the government deficit to 5.5% of gross domestic product in 2010 and 3.5% in 2011 "with a view to setting public debt firmly on a declining path."

“The staff-level agreement is good news – and we are positively surprised that it came this soon given the unwillingness on the part of Ukrainian authorities to implement politically unpopular measures,” Goldman Sachs, the investment bank, said in a report.

The reforms expected of President Viktor Yanukovych’s coalition include increasing the price of natural gas. But the IMF said “resources” would be allocated to protect the poorest from the consequences.

Other measures will require tax and social security structural reforms and expenditure rationalization combined with efforts to improve tax administration, while additional resources are allocated in the budget to protect the poorest segment of the population, the IMF said.

Financial-sector reforms call for an adequate level of capitalization and strengthening of the independence of the National Bank of Ukraine.

Energy-sector restructuring will focus on strengthening the gas sector, cutting state natural-gas company Naftogaz's financial deficit to 1% of GDP in 2010 and balancing its finances in 2011, the IMF said.

"Legislative reforms will be aimed at modernizing the economy and improving business environment to restore robust economic growth over the coming years," the IMF said. (tl/dj/ez)