The International Monetary Fund approved a $1.33 billion (1.0 billion euro) bailout loan for Cyprus on Wednesday and released the first $110.7 million to the Cypriot government.
The loan is part of a combined $13 billion (10-billion-euro) emergency financing deal set by the IMF and the European Stability Mechanism that aims to support the government as it seeks to stabilize the ravaged Cypriot banking sector.
"It is intended to stabilize the country's financial system, achieve fiscal sustainability, and support the recovery of economic activity to preserve the welfare of the population," the IMF said in a brief statement.
IMF Managing Director Christine Lagarde said that stabilizing the banking sector was an "immediate priority."
"The authorities need to complete the bank recapitalization process, including by using public funds for solvent institutions where necessary," she added, noting that "decisive steps" would be taken to restructure weak banks.
"Temporary payment restrictions should be relaxed at a pace consistent with maintaining financial stability, while minimizing distortions to economic activity. It is important to strengthen supervision and regulation of banks and credit cooperatives, and to enhance the framework for anti-money laundering."
The announcement came two days after the ESM, the European Union's new financial stability backstop, handed over the first two billion euros ($2.6 billion) of loans agreed under the controversial Cyprus aid deal.
The deal was set in March after the Cypriot government agreed to force depositors and bondholders in Cyprus's leading banks to take huge losses in order to keep the country's banking system from imploding.
The new funds came as official data released earlier showed Cyprus's economy contracted by 1.3 percent in the first quarter from the previous quarter, and 4.3 percent year-on-year.
It was the seventh successive quarter in which the Mediterranean island's economy has been in negative territory.
Construction, manufacturing, electricity, transport, trade, tourism and services all declined from January to March.
According to the IMF, the European Commission and the European Central Bank -- the troika of international lenders who set the bailout program -- the Cypriot economy is expected to contract 8.7 percent this year and 3.9 percent in 2014.