NICOSIA International lenders gave an upbeat assessment on Wednesday over progress made by Cyprus in meeting the conditions of a financial aid program, but said it was tempered by an uncertain economic outlook.
"This review found the program to be on track, with authorities having made good progress towards meeting their objectives," IMF Mission chief Delia Velculescu said on Wednesday during a conference call closing a mission to Cyprus.
Cyprus was teetering on the brink of a financial meltdown earlier this year, hammering large depositors at the island's two largest banks with losses.
Lenders from the EU, the ECB and the IMF, known as the troika, wrapped up their first assessment visit to the Mediterranean island since it agreed to a 10 billion euro ($13 billion) bailout package in March.
"The assessment is a positive one. Important steps have been taken and those have been acknowledged but I want to stress big challenges still lie ahead of us," said Finance Minister Harris Georgiades.
"We are committed to adopting the program and will intensify efforts."
The lenders' report is key to Eurozone finance ministers unlocking a further tranche of aid of about 1.5 billion euros to Cyprus in mid-September.
Velculescu said fiscal measures introduced by Cypriot authorities in December 2012 and in April 2013 led to a 'better fiscal performance measured up against program targets'.
But high uncertainty remained for the macro economic outlook which called for continuous fiscal prudence, she said.
"Available indicators do not indicate that a revision to the macro economic projections underlying the program are warranted at this time, however uncertainty remains large."
Under the adjustment program, lenders anticipate Cyprus's 17-billion-euro economy will contract 8.7 percent this year and 3.9 percent in 2014. It expects a primary deficit of 2.4 percent in the current year and 4.25 percent in 2014.
Key short term risks related to an uncertain macro-economic environment and the magnitude of an economic recession underway triggered by deep restructuring in the banking sector and capital controls, she said.
Cyprus enforced capital controls on March 29 to prevent a flight of cash from its banks. Although restrictions have been eased, there are still limits on cash withdrawals, cheque transactions and on large cash movements.
"Authorities are developing a milestone-based roadmap to gradually relax capital controls in an orderly way in line with progress in the overall banking strategy," Velculescu said.
Under bailout terms, Cyprus shut down one insolvent bank, Laiki, and forced big depositors to contribute towards recapitalizing a second, Bank of Cyprus BOC.CY.
Recapitalization of that bank was concluded on Tuesday, when authorities said depositors would take a 47.5 percent hit on their savings exceeding 100,000 in return for an equity stake in the lender.
(Reporting By Michele Kambas; Editing by Ron Askew)