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Cyprus is successfully carrying out the reforms necessary under its 10 bln euro bailout programme and will get the next tranche of financial help as planned, a draft report by the European Commission showed on Monday.
Inspectors from the Troika of international lenders — Commission, European Central Bank and IMF — visited the island in the second half of July to assess progress on strengthening public finnaces.
"Staff concluded that Cyprus' economic adjustment programme is on track," said the draft report which is pending approval of the EU finance ministers this week in order to release the next tranche of 1.5 bln euros in aid from the euro zone's bailout fund.
The sum will not be in cash but in the form of bonds that will be used to recapitalise the island's financial sector excluding the Bank of Cyprus, which has a separate bail-in restructuring plan with funds raised from unsecured deposits, and Laiki Popular Bank, which has been closed down.
The IMF will separately disburse 86 mln euros of its share of the bailout.
"The authorities have taken decisive steps to stabilise the financial sector and have been gradually relaxing deposit restrictions and capital controls," the report said.
The island economy, hit hard by the restructuring of its once oversized banking sector, is expected to contract 8.7% this year after shrinking 2.4% in 2012. It is expected to contract a further 3.9% in 2014 and will only start to grow again in 2015, by a forecast 1.1%.
The government in Nicosia is expected to show a budget deficit of 6.5% of GDP this year, up from 6.3% last year and is forecast to rise to 8.4% in 2014 before falling to 6.3% again in 2015 and 2.9% in 2016.
"The fiscal targets have been met as a result of significant fiscal consolidation measures underway and prudent budget execution," the report said. "Structural reforms have been taken forward in important areas, although delays and partial compliance were observed in a number of cases."
The report said there were so far no changes to the key macro-economic and fiscal forecasts which could change the initial assumption that Cypriot debt would peak at around 127% of GDP in 2015 and decline to 123% in 2016.
