The European Commission has criticized the government of Cyprus for increasing public spending without consulting its international creditors first.
In a draft report seen by SPIEGEL, the Commission said Cyprus had announced a number of steps that will boost outlays, such as a plan to grant tax advantages to customers of Cypriot banks to encourage them to shift their capital back to the island.
The troika -- made up of the European Commission, International Monetary Fund and European Central Bank -- recently scrutinized the progress Cyprus is making in implementing reforms imposed as a condition for the international bailout of 10 billion ($13.17 billion) given to the small Mediterranean island nation in April.
Under the terms of the bailout, Cyprus shrank its oversized banking sector, the mainstay of its economy, by closing the second biggest bank, Laiki, and restructuring Bank of Cyprus. It also agreed to raise taxes, cut spending and implement structural reforms to improve its public finances and to be able to eventually repay its debt.
The tax measure for bank customers is likely to lead to higher costs for the government budget, the Commission report says.
In the future, the government must inform the troika "to minimize the risk of initiatives that could have a significant impact on the achievement of program targets," the report says.
But it also says that Cyprus is making progress on its reforms.
"The fulfilment of program pledges has begun in all major areas," the report says, but it adds "in the field of budgetary measures and structural reforms the progress has been mixed."