NICOSIA, Cyprus — The International Monetary Fund said Wednesday it will contribute 1 billion euros to an overall financial rescue package of 10 billion euros ($12.8 billion) for Cyprus.
The IMF's managing director Christine Lagarde said the contribution would be made via a three-year loan that's expected to be cleared by the fund's executive board in early May.
Earlier this week, the final terms of the Cyprus bailout were agreed between the small Mediterranean island nation and the European Union and the IMF, following a protracted crisis that saw the country's banking sector shut down for the best part of two weeks.
Lagarde and Olli Rehn, the top monetary affairs official at the European Commission, the EU's executive arm, said “significant challenges lie ahead for Cyprus” as the government sets in motion a multiyear program of reforms to rebuild its banking sector and austerity.
Apart from spending cuts and tax increases worth about 5 percent of Cyprus' annual gross domestic product that have already been put in place, Lagarde said the country will need to do more. She said Cyprus will have to raise another 2 percent through measures such as a corporate tax rate hike from 10 to 12.5 percent, and the doubling of the interest rate tax to 30 percent.
The IMF chief said an additional 4.5 percent will be needed over the medium term if the country is to achieve a budget surplus worth 4 percent of its annual GDP by the target date of 2018. “We believe that it provides a durable and fully financed solution to the underlying problems facing Cyprus and provides a sustainable path toward a recovery,” Lagarde said.
EU Commission spokesman Olivier Bailly said the bailout will need parliamentary approval by the end of this month so rescue money can reach Cyprus in May.
To secure the bailout, Cyprus had to agree that bondholders, investors and savers in the country's two biggest banks — Bank of Cyprus and Laiki — take a hit.
Laiki, the country's second-largest lender, will be broken up with depositors with more than 100,000 euros ($128,000) taking major losses. Savers with more than 100,000 euros at the Bank of Cyprus could face losses of up to 60 percent as part of the deal.
The remaining 40 percent of those large Bank of Cyprus deposits remain frozen “for liquidity reasons.”
But the country's central bank said Wednesday a quarter of that 40 percent would be freed up to let cash-starved businesses keep running.
To head off a potential bank run, Cypriot authorities imposed restrictions on how much people can take out of their accounts when they reopened last week.
The restrictions included a daily cash withdrawal limit of 300 euros and a cap of 1,000 euros in cash for people leaving the country.