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Cyprus restructuring 'on target, challenges remain'

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(NICOSIA) - Cyprus's economic restructuring programme is on target, with fiscal targets for 2013 performing better than expected, but the outlook remains challenging, international lenders said Tuesday.

The assessment was made by the European Commission, European Central Bank and the International Monetary Fund after their latest review of the programme, agreed with Cyprus last March in exchange for a 10 billion euro ($13.6 billion) bailout.

"Cyprus's programme remains on track, with the macro-fiscal outturn better than expected," a joint statement said.

"Fiscal targets for 2013 have been met with considerable margin, due to both continued prudent budget execution and a less severe recession than anticipated," it added.

Gross domestic product contracted by about six percent in real terms, but that was some two percentage points better than forecast at the time of the last quarterly review.

Consumer spending fell, but by less than expected, and the key tourism and services sectors proved "resilient."

At the same time, the financial sector is "showing signs of stabilisation," the statement said.

The outlook is for GDP to contract by 4.8 percent this year, as demand continues to be weighed down by high debt levels, with a return to "positive but modest growth" of around one percent in 2015, led by non-financial services.

"Nonetheless, risks to the outlook are substantial," the statement said.

In particular, the financial sector needs to continue its process of restructuring and tackle its high level of non-performing loans, which is hampering the ability to lend.

There is also a need to continue to strengthen implementation of banking sector regulation and supervision as well as of the anti-money laundering framework.

In return for the bailout by the so-called troika, Cyprus agreed to wind down its second-largest bank, Laiki, and impose losses on larger depositors in under-capitalised largest lender, Bank of Cyprus.

The troika also urged Cyprus to move ahead with the privatisation of key state-owned assets such as telecoms and electricity, "essential to increase economic efficiency, attract investment, and as a means to reduce public debt."

The review will be put to the members of the troika for approval by early April. Its acceptance would pave the way for the disbursement of 150 million euros from the EU and about 86 million euros from the IMF.

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