Inspectors from the European Commission, the European Central Bank and the International Monetary Fund visited Cyprus in July to assess the progress on strengthening public finances.“Staff concluded that Cyprus‘ economic adjustment programme is on track,” said the draft report, obtained by Reuters.

The report, which must be approved by EU finance ministers, means the next tranche of aid – €1.5 billion from the eurozone’s bailout fund – will be disbursed. 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 restructuring plan, and Laiki Bank, which has been closed down. The IMF will separately disburse the next €86 million tranche 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%.

Nicosia is expected to have a budget deficit of 6.5% of GDP this year, up from 6.3% last year. It 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 no changes so far 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.

Source: Cyprus Mail