Cyprus on track with bailout reforms, EU report says

BERLIN, Sept 2 Mon Sep 2, 2013 6:53am EDT

BERLIN, Sept 2 (Reuters) - Cyprus is successfully carrying out the reforms necessary under its 10 billion 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 European Commission, the European Central Bank and the International Monetary Fund - together known as the troika - visited Cyprus 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, obtained by Reuters.

The report, which must be approved by EU finance ministers, means the next tranche of aid - 1.5 billion euros from the euro zone'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 Cyprus Popular Bank, which has been closed down.

The IMF will separately disburse the next 86-million-euro 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 percent this year after shrinking 2.4 percent in 2012. It is expected to contract a further 3.9 percent in 2014 and will only start to grow again in 2015, by a forecast 1.1 percent.

Nicosia is expected to have a budget deficit of 6.5 percent of GDP this year, up from 6.3 percent last year. It is forecast to rise to 8.4 percent in 2014 before falling to 6.3 percent again in 2015 and 2.9 percent 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 percent of GDP in 2015 and decline to 123 percent in 2016.

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