NICOSIA - Cyprus's international lenders praised its fiscal reform programme on Tuesday, as the government pledged to significantly relax capital controls soon.
In their third assessment of progress on a three-year adjustment programme, lenders from the European Union and the International Monetary Fund said the Mediterranean island had made notable progress.
It had exceeded fiscal targets - a better performance even than Ireland, the only euro zone country to have completed a bailout programme, according to one Commission source - while experiencing a milder recession than expected.
"Indeed, demand has held out better than expected ... and that is largely due to the private sector consumption, which reacted relatively less negatively than we expected," said Delia Velculescu, the mission chief for the IMF in Cyprus.
Cyprus, one of the smallest economies in the euro zone, closed a loss-making major bank and saddled large depositors with losses in a brutal adjustment to qualify for 10 billion euros in aid in March 2013.
The lenders said Cyprus's economy probably contracted by about 6% in 2013, about 2 percentage points better than their last forecast in December. Their projected decline in output for 2014 remained unchanged at 4.8%, with modest growth of about 1% expected in 2015.
Cyprus's statistics department is due to issue flash preliminary quarterly and yearly data for 2013 on Wednesday. The island's finance ministry has already said it expects output to have fallen by about 5.5% last year.
Cyprus's banks pushed the country towards default when they sought help from the cash-strapped government after losing billions on lending to Greece.
Depositors were subsequently forced to pay to recapitalise a bank, a process known as a 'bail-in', and capital controls were imposed - a new development in the euro zone's long debt crisis.
Harris Georgiades, Cyprus's finance minister, said on Tuesday there would be significant steps towards easing capital controls soon.
Existing controls mean cash withdrawals are capped at 300 euros a day, breaking time deposits is prohibited, cheques cannot be instantly cashed and large cash transfers are vetted.
"Starting next week we will have significant relaxations to restrictive measures," Georgiades told journalists, without elaborating.
A clean bill of health on reforms and legislation facilitating privatisations are needed for lenders to approve a next tranche of aid worth about 236 million euros.
Most of Cyprus's bailout money is being used to plug deficits and cover debt repayments, with 1.5 billion euros going towards recapitalising co-op banks, a network of small lenders.
One senior commission source said the island's performance in meeting its bailout targets was "quite unusual".
"It's not the general experience. Ireland is the example that targets were met, but on the fiscal side I do not recall having seen actually targets being outperformed.
"That is I think very encouraging," the source said