yprus's economy is adjusting following the 2013 recession, which was "not as severe as anticipated", the International Monetary Fund (IMF) has said.
"Signs of stabilisation are emerging in the banking sector," said the IMF in a report.
Cyprus agreed to a 10bn-euro ($13.8bn; £8.3bn) bailout with the European Union and the IMF last year.
Cyprus's second-largest lender - Laiki Bank - was closed down.
Although the recession was not as severe as expected, there may be more pain to come, warned the IMF.
"The outlook remains challenging, with rising unemployment, falling credit, and increasing non-performing loans," it said.
Ukraine crisis
Cyprus had to seize money from big savers, many of them Russian, as a condition of its bailout and capital controls are still in force.
The current crisis in Ukraine may also add to the country's woes, the IMF said.
"The Ukraine crisis may lead to capital flight from non-resident depositors of foreign banks in Cyprus, which may affect the business service sector."
Cyprus was nearly bankrupted after Greece's financial crisis in 2010.
The country's banks were hit heavily but its government did not have the funds to issue a bailout.
Slow economic growth and the stance of international lenders, who stopped offering loans, added to the pressure on the country's finances.
The head of the Cypriot central bank, Panicos Demetriades, resigned last month.
He reportedly experienced difficulties with Cyprus' government and had been criticised for his handling of the country's rescue package.
The IMF report is the first since the collapse of a coalition government in February. Political support for the rescue plan, or lack thereof, is a risk, the IMF noted.
The IMF maintained its forecast of a 4.8% contraction in Cyprus's economy this year, before picking up to growth of 0.9% in 2015, helped by rising exports.
Exploiting offshore gas reserves, and the reunification of the island could raise the economy's long-term growth potential, the IMF said.
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