Cyprus is successfully carrying out the reforms necessary under its €10 billion bailout programme and will get the next tranche of financial help as planned.
This is according to a draft report by the European Commission.
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," the draft report, obtained by Reuters, said.
The report, which must be approved by EU finance ministers, means the next tranche of aid - €1.5 billion 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 €86m 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,'' it added.
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% of GDP in 2015 and decline to 123% in 2016.
