Ukraine's parliament on Thursday approved budget cuts bringing the deficit in line with the International Monetary Fund's requirements after brief resistance from the Communist allies of the government.
Reducing government spending is central to an austerity package which the IMF has insisted the former Soviet republic sign up to in exchange for a $14.9 billion stand-by program later this month intended to stabilize the economy.
The Communists had first voted against the bill, but supported it in a second vote a few hours later.
The government has proposed cutting spending by more than $2 billion to reduce deficit to 4.99 percent of gross domestic product from 5.3 percent by slashing funding for investment programs in sectors such as agriculture and coal mining.
The proposed cuts also affected the state-run pension fund and the Defense Ministry.
The IMF, which suspended Ukraine's $16.4 billion program last year after the previous government reneged on promises of financial constraint, has urged Kiev to keep the consolidated budget deficit within 5.5 percent of GDP this year.
The consolidated figure includes subsidies to state energy firm Naftogaz, projected at up to one percent of GDP this year, that help maintain artificially low domestic energy prices.
In a potentially painful move to raise prices, the parliament approved in the first reading the setting-up of a new government body that would regulate tariffs for utilities such as gas, heating, electricity and water.
The legislature, which has it was ready to work overtime to adopt measures needed for the IMF deal, also approved in the first reading a bill designed to strengthen the central bank's independence -- another issue pushed by the Fund.
However, the adoption of a new tax code, another important part of President Viktor Yanukovich's economic reform program, has been delayed until September.
The cost of insuring Ukrainian debt fell, with five-year credit default swaps, down to 605 basis points. That is 16 bps tighter than Wednesday's close, CDS monitor CMA DataVision said.
Ukraine's cash bonds also outperformed. Its portion of the JPMorgan EMBI Plus sovereign bond index tightened a massive 27 basis to 585 bps over U.S. Treasuries while the underlying index was 12 bps tighter.
(Additional reporting by Sujata Rao in London; Writing by Olzhas Auyezov; Editing by Ron Askew)