Cypriot Economy Better Than Expected Says EU - by Nektaria Stamouli

Cyprus's economy is expected to contract less than expected this year before returning to growth in 2015, according to a European Commission report Wednesday, which added that the Mediterranean island's economic adjustment program remains on track.

The European Union's executive arm said Cyprus's economy is now forecast to contract 4.2% in 2014, down from an estimated 4.8% previously, largely because the economy last year was better than expected.

The report, which was conducted after a review of the program by the Commission, the European Central Bank and the International Monetary Fund, said that Cyprus's economy is projected to grow 0.4% next year. 

However, growth thereafter will only gradually improve, with domestic demand weighed down by very high levels of private-sector indebtedness.

"While the increase in unemployment has slowed significantly, large non-performing loans are constraining the ability of banks to supply credit to the economy," the report said.

Cyprus agreed a 10 billion euro ($13.7 billion) rescue package in March 2013 as the country's banking system teetered on the brink of bankruptcy.

Read more: Cypriot Economy Better Than Expected Says EU - WSJ