Nicosia, Oct 21 (IANS): The Cypriot government Monday asked lawmakers to pass an austerity budget, the first since a bailout agreement with international lenders in March, which is expected to drive the economy of the eastern Mediterranean island deeper into recession.

Cyprus concluded a 10-billion-euro ($13.7 billion) bailout deal with the Eurogroup and the International Monetary Fund (IMF) at the beginning of this year, but was forced to use depositors' money to recapitalise its largest bank and wind down its second largest lender in return, Xinua reported.

The Eurogroup has since modelled its official policy for salvaging banks on the Cyprus precedent.

Cyprus's Finance Minister Haris Georgiades told the parliamentary finance committee, which started a detailed examination of next year's budget, that the 2014 budget takes into account further cuts in public sector salaries and pensions amounting to 3 percent, on top of more cuts of over 15 percent already in force, and also further hikes in the value added tax and consumer levies on fuel.

"(The year) 2014 will be the most difficult year of the memorandum (of understanding) as all economic problems will peak," he said.

Unemployment is expected to further rise to 19.5 percent next year, up from its current 17-percent level and just below 12 percent in 2012.

As a result of an expected drop in government income from taxation, the budget's revenue was cut back by 1.3 percent to 6.638 billion euros and the expenditure was brought down by 2 percent to 7.565 billion euros.

A deficit of 6.3 percent - just below one billion euros - will be financed with loan money from the Eurogroup and the IMF as Cyprus was shut out of international markets since mid-2011.

Georgiades said Cyprus has already drawn 47 percent of its 10-billion-euro bailout limit, which amounts to nearly two-thirds of its annual economy.

"The economy has to be able to return to international markets for financing by 2016 when the 10 billion euros provided by the adjustment program will be exhausted," Georgiades warned.

He said that Cyprus's foreign debt will peak at 123 percent of its GDP at the end of 2015, but it should be able to return to growth and a budgetary primary surplus by the end of that year.

Central Bank of Cyprus Governor Panicos Demetriades also told the lawmakers that the restructured banking sector will face further problems as a result of an expected increase in non-performing loans, a rise in unemployment and a reduction in household incomes and business profitability.

However, he said the banks have been sufficiently recapitalised and should be able to absorb the shock and gradually rebound.

Demetriades, who is faced with the prospect of an action by the government in the High Court to have him removed for actions and omissions damaging the economy, said the government's budget measures are moving in the right direction.