ECB EU IMF April 2013
International Monetary Fund (IMF) executive director Christine Lagarde, Eurogroup President Jeroen Dijsselbloem and European Economic and Monetary Affairs Commissioner Olli Rehn attend a news conference at the end of a Eurogroup meeting at the European Council building in Brussels, March 25, 2013. Reuters

The International Monetary Fund announced Wednesday that it will contribute 1.04 billion euros ($1.34 billion) over three years to Cyprus' 10 billion-euro rescue plan in exchange for widespread reforms of the Cypriot economy.

"This is a challenging program that will require great efforts from the Cypriot population," said IMF Managing Director Christine Lagarde in a statement. "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 that the fiscal and financial policies of the program seek to distribute the burden of the adjustment fairly among the various segments of the population and to protect the most vulnerable groups.

On Wednesday, Cyprus' central bank also unfroze 10 percent of deposits over 100,000 euros at Bank of Cyprus PCL to allow business and individuals access to some of their savings, a move aimed at easing controls and stemming capital flight following the banking crisis.

The IMF said its executive board will be asked to sign off on the new assistance effort in early May.

"The program entails a well-paced fiscal adjustment that balances short-run cyclical concerns and long-run sustainability objectives, while protecting vulnerable groups," said European Commission Vice President Olli Rehn and Lagarde in a joint statement. "The social welfare system will be reviewed with the view to ensuring sustainability and social fairness."

In return, Cyprus will have to push cuts and savings worth 4.5 percent of annual economic output by 2018, on top of cuts worth 5 percent of GDP through to 2015. An extra 2 percent of GDP in savings will come from an increase in the country's corporate tax from 10 percent to 12.5 percent and a hike on interest-income tax from 15 percent to 30 percent, the Wall Street Journal reports.

"The European Commission and the International Monetary Fund stand by Cyprus and the Cypriot people in helping to restore financial stability, fiscal sustainability and growth to the country and its people," the joint statement said.

Cyprus' 17 billion-euro economy represents about 0.2 percent of the euro zone's economic output.

Lagarde says Cyprus' capacity to collect revenues will be strengthened with the implementation of a comprehensive reform agenda to modernize and harmonize procedures, improve internal coordination and exploit economies of scale.

"Public financial management reforms will include the implementation of a medium-term budget framework and the adoption of a law on fiscal responsibility," Lagarde said. "In addition, to enhance the efficiency of the economy and reduce public debt, viable state-owned enterprises will be privatized. Finally, based on an assessment of needs, the program will supplement the recent reform of the pension system with additional measures to ensure its long-run sustainability."