The International Monetary Fund says it will contribute €1 billion ($1.5 billion) to a financial rescue package of €10 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 early next month.
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 close to 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 multi-year programme of reforms to rebuild its banking sector and austerity.
Apart from spending cuts and tax increases worth around 5 per cent 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 per cent through measures such as a corporate tax rate hike from 10 to 12.5 per cent, and the doubling of the interest rate tax to 30 per cent.
The IMF chief said an additional 4.5 per cent will be needed over the medium term if the country is to achieve a budget surplus worth 4 per cent of its annual GDP by the target date of 2018. That surplus is needed to get the country's debt "on a firmly downward path".
"This is a challenging programme that will require great efforts from the Cypriot population," Lagarde said. "We believe that it provides a durable and fully financed solution to the underlying problems facing Cyprus and provides a sustain-able path toward a recovery."
EU Commission spokesman Olivier Bailly said the bailout would need parliamentary approval from several of Cyprus' euro partners by the end of this month so that the first batch of rescue money can reach Cyprus in May.
"We think this is a good agreement in the regard that it addresses the three main problems of the Cypriot economy," said Bailly.
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 will be broken up with depositors with more than €100,000 taking major losses. Savers with more than €100,000 at the Bank of Cyprus could face losses of up to 60 per cent as part of the rescue deal.
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 after a nearly two-week closure to allow politicians to hammer out the bailout deal.
The restrictions, the first imposed in the 17-member group that use the euro, included a daily cash withdrawal limit of €300 and a cap of €1000 in cash for people leaving the country.
The Finance Ministry said yesterday the restrictions would be extended for another three days starting today with another renewal expected after then.