UPDATE 1-IMF approves $3.3 billion Ukraine loan tranche

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WASHINGTON, July 28 (Reuters) - The International Monetary Fund on Tuesday agreed to release a $3.3 billion loan tranche to Ukraine after approving a second review of the country's $16.4 billion IMF program.

The IMF said its board also approved adjustments to the loan program, including a deeper budget deficit to take account of financial difficulties at state energy company Naftogaz.

"To cushion the impact of the sharper economic contraction and to reflect the imbalances of the state gas company Naftogaz, the revised economic program targets a broadened fiscal deficit," the IMF said. The IMF did not elaborate on the deficit.

IMF First Deputy Managing Director John Lipsky said Ukraine was moving ahead with a strategy to strengthen the finances of Naftogaz. A key step, he said, was to develop a schedule of natural gas price increases to bring domestic prices in line with international ones.

"Corrective fiscal measures and structural reforms are a priority to ensure fiscal sustainability and to avoid crowding out of private sector borrowing," Lipsky said.

"The authorities have reduced nonpriority expenditures as well as taken a number of steps to restore viability in the natural gas sector," he added.

Lipsky also said Ukraine's monetary policy stance was adequate although the central bank stood ready to tighten policies if inflation or exchange rate pressures were to reemerge. (Reporting by Lesley Wroughton; Editing by Kenneth Barry)