Cyprus’s economy may contract 1.5 percent this year, compared to an estimate of 0.5 percent due to budget-cutting efforts as it negotiates an international bailout, Finance Minister Vassos Shiarly (photo) said on Monday.

The finance chief told reporters in Nicosia he aims to cut the fiscal shortfall to 3.5 percent of gross domestic product from a forecast 4.5 percent.

Shiarly said that the government will need no additional financing should the fiscal deficit remain at 3.5 percent of GDP this year and added that next year’s budget gap will widen compared to the 0.5 percent of GDP initial forecast.

In January to July, the central government’s fiscal deficit on a cash basis was 3.4 percent.

Shiarly said that talks with the European Commission, the European Central Bank and International Monetary Fund are continuing.

“Talks are in a very advanced stage and I believe that at the next visit of the troika to Cyprus we will be in position to agree the first draft of the rescue memorandum,” he said.

Troika officials told Cypriot lawmakers on July 27 that the country’s public finances “are in worse shape than we expected,” signaling that the bailout may exceed the 10 billion euros staffers first estimated.

The new estimate is in the range of 12 billion to 16 billion euros, a European official said last month on condition of anonymity.

Shiarly said that Cyprus’s second bilateral loan request from Russia, from which it last year signed a 2.5 billion euros loan agreement, is not an obstacle in the negotiations with the troika.

[Bloomberg]