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By Jan Strupczewski
BRUSSELS (Reuters) - Cyprus should reach a primary surplus of four percent of GDP in its budget from 2017 onwards to ensure public debt falls, a memorandum of understanding between Nicosia and international lenders on a 10 billion euro (8.48 billion pounds) bailout said.
The document lists fiscal steps, as well as reforms of public administration, pensions, healthcare, labour market privatisation and services that the Mediterranean island agreed to undertake in exchange for euro zone financial aid.
According to the memorandum of understanding (MoU), obtained by Reuters, Cyprus will have a budget deficit before debt servicing costs of 395 million euros or 2.4 percent of GDP this year, a bigger gap than the 1.9 percent of GDP in 2012.
Next year the primary deficit will grow to 678 million euros or 4.25 percent of GDP and then shrink to 344 million or 2.1 percent of GDP in 2015.
In 2016, the island is to reach a primary surplus of 204 million euros or 1.2 percent of GDP and 4 percent from 2017 onwards.
The deficit targets in nominal terms and as a percentage of GDP in the MoU imply that international lenders expect the Cypriot economy to contract almost 8 percent this year against 2012, shrink again by around 3 percent in 2014 and return to around 1 percent growth in 2015 and 2016.
The MoU said Cyprus would raise at least 1.4 billion euros from selling state-owned assets, including stakes in the country's telecoms, electricity and port companies.
The document said the island had excellent prospects for increasing its revenues from tourism and that the government would conduct a study of how to make that sector more competitive.
Cyprus hopes to earn a lot of money from selling natural gas, undersea deposits of which have been discovered off the island's coast.
The agreement with international lenders said that Nicosia would prepare a plan in the second quarter of what infrastructure it would need to exploit these deposits as well as outline the necessary laws and make plans for setting up a fund that would manage the money from the gas sales.
To improve public finances, Cyprus will freeze public sector pensions and raise the retirement age for the government pension scheme by 2 years, as well as raise excise duties on alcohol, tobacco and petrol, increase value added tax, corporate tax and the tax on interest earnings and dividends.
All the measures are to help bring down Cypriot debt to around 100 percent of GDP in 2020.
The Cypriot administration will also start charging at least 17 percent more for all public services than now.
(Reporting By Jan Strupczewski; Editing by Adrian Croft)