IMF Executive Board Concludes 2017 Article IV Consultation with the Czech Republic

June 26, 2017

On June 21, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Czech Republic.

The Czech economy has been doing well. It grew by 2.4 percent last year, and unemployment is now the lowest in the European Union. Headline inflation is at the target and external deflationary pressures have faded. In addition, nominal incomes are growing solidly.

Given momentum in the economy, real GDP growth is projected to increase to 3 percent in 2017, largely driven by domestic demand. But labor shortages are expected to constrain growth to about 2½ percent over the medium term. With tight labor markets and strong aggregate demand, inflation is expected to reach 2.3 percent this year, before coming back to the 2 percent target.

Monetary policy has been accommodative, but the process of normalizing monetary conditions has begun. The koruna:euro exchange rate floor that had been in place for over three years was removed in April. Capital inflows had accelerated in the run-up to the exit from the koruna floor. But financial market reaction to the removal of the floor has been muted, with the koruna appreciating by 2½ percent so far. The policy rate remains unchanged at 0.05 percent.

The banking system remains liquid and profitable. Private credit has continued to expand. The Czech National Bank has responded to risks arising from the residential housing market with steadily tighter limits on loan-to-value ratios, but some borrowers are nonetheless becoming overstretched.

Fiscal overperformance last year, including from lower capital spending and strong tax revenues, led to a surplus of 0.6 percent of GDP. General government debt has declined to just above 37 percent of GDP, one of the lowest levels in the EU. Strong economic growth and better revenue collection mean a surplus of 0.4 percent of GDP is expected for 2017; current policies and improved tax collection would imply continued small surpluses from 2018.

Some progress has been made on structural reforms, including measures targeted at R&D and the labor market. However, challenges remain, including with infrastructure, the planning framework for public investment, a high labor tax wedge, and shortages of skills. Additionally, complex administrative procedures for building permits limit the ability of housing supply to respond quickly to demand.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the Czech Republic’s economic performance, including solid growth and high employment. They expected steady growth to continue, as in staff’s baseline scenario. At the same time, Directors noted that this relatively positive outlook is subject to risks and uncertainties, including those related to increasing household financial vulnerabilities and supply-side constraints. They encouraged the authorities to remain vigilant to the challenges ahead and to continue their policy efforts to promote growth and further boost resilience.

Directors welcomed the smooth exit from the exchange rate floor. They viewed the exchange rate path as an important source of uncertainty—they concurred that the exchange rate appears to be moderately undervalued, and that further appreciation is likely over the medium term, but the exchange rate could yet fluctuate as speculative positions are unwound. In the event of severe volatility, foreign exchange interventions could be used, but should not be employed to lean against natural structural adjustment. Directors supported the stance taken by the authorities and staff that, given the uncertainties, changes to the policy rate should be implemented cautiously.

Directors noted signs that some households are becoming overstretched as they borrow to finance house purchases. They concurred that, for the Czech National Bank to be able to guard against financial vulnerabilities, a wider range of tools is needed, and therefore supported recommendations that the CNB be given binding powers over loan-to-value, debt-to-income, and debt-servicing-to-income ratios. They agreed that the acceleration of credit growth raises concerns that lending standards might slip.

Directors agreed with staff’s emphasis on supportive structural policies. Labor—especially skilled labor—is in short supply, and the economy faces unfavorable demographics over the long term. Policies should be directed to boosting labor supply and quality, such as by addressing incentives for women with small children to participate and older workers to delay retirement, boosting skills, and investing in infrastructure. Addressing infrastructure and housing supply constraints would in turn necessitate improving the regulatory environment.

Directors concurred that, given the relatively low public debt ratio, fiscal policy should prioritize raising growth potential via modest increases in physical and human capital, rather than necessarily reducing debt. For such increases to be efficient and well targeted, the authorities should seek to establish a unified and transparent plan for infrastructure over the long term. Debt management should focus more on minimizing costs for an acceptable level of risk over the medium term, which would likely imply taking advantage of currently low rates and extending maturities.


Table 1. Czech Republic: Selected Economic Indicators, 2012–22

(Annual percentage change, unless noted otherwise)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Staff projections

NATIONAL ACCOUNTS

Real GDP (expenditure)

-0.8

-0.5

2.7

4.5

2.4

3.0

2.4

2.3

2.3

2.3

2.3

Domestic demand

-2.1

-0.6

3.4

4.8

1.4

2.9

2.8

2.7

2.8

2.8

2.8

Consumption

-1.4

1.1

1.6

2.7

2.4

2.8

2.6

2.4

2.4

2.4

2.4

Public

-2.0

2.5

1.1

2.0

1.2

2.3

2.2

2.0

2.0

2.0

2.0

Private

-1.2

0.5

1.8

3.0

2.9

3.0

2.7

2.6

2.6

2.5

2.5

Investment

-3.9

-5.1

8.6

10.0

-0.9

3.0

3.5

3.5

3.5

4.0

4.0

Exports

4.3

0.2

8.7

7.7

4.3

3.8

3.5

4.0

4.0

4.0

4.0

Imports

2.7

0.1

10.1

8.2

3.2

3.9

4.2

4.7

4.7

4.7

4.7

Contribution to GDP

Domestic demand

-2.1

-0.6

3.1

4.5

1.4

2.8

2.6

2.6

2.6

2.7

2.7

Net exports

1.3

0.1

-0.4

0.1

1.0

0.2

-0.3

-0.3

-0.3

-0.4

-0.4

Investment (percent of GDP)

25.9

25.1

25.1

26.3

24.6

24.9

25.0

25.1

25.2

25.5

25.8

Gross domestic investments (percent of GDP)

26.2

24.7

25.9

27.4

26.2

26.5

26.5

26.6

26.7

26.9

27.1

Gross national savings (percent of GDP)

24.6

24.1

26.1

27.6

27.4

27.1

26.8

26.7

26.4

26.3

26.1

LABOR MARKET

Employment

0.4

1.0

0.8

1.4

1.9

1.2

-0.4

-0.5

-0.3

-0.3

-0.3

Total labor compensation

2.3

0.7

3.5

4.6

5.9

6.4

4.0

4.1

4.0

4.1

4.0

Unemployment rate (in percent)

7.0

7.0

6.1

5.0

4.0

3.4

3.4

3.5

3.5

3.5

3.5

PRICES

Consumer prices (average)

3.3

1.4

0.3

0.3

0.7

2.3

1.8

2.0

2.0

2.0

2.0

Consumer prices (end-of-period)

2.4

1.4

0.1

0.0

2.0

2.3

1.8

2.0

2.0

2.0

2.0

Producer price index (average)

2.1

0.8

-0.7

-3.2

-3.2

…

…

…

…

…

…

MACRO-FINANCIAL

Money and credit (end of year, percent change)

Broad money (M3)

4.8

5.8

5.9

8.0

6.5

Private sector credit

2.6

3.7

3.6

6.5

7.8

Interest rates (in percent, year average)

Three-month interbank rate

1.0

0.5

0.4

0.3

0.3

…

…

…

…

…

…

Ten-year government bond

2.8

2.1

1.6

0.6

0.4

…

…

…

…

…

…

Exchange rate

Nominal effective exchange rate (index, 2005=100)

118.4

116.9

111.6

110.3

112.7

…

…

…

…

…

…

Real effective exchange rate (index, CPI-based; 2005=100)

118.2

116.1

109.9

108.0

109.9

…

…

…

…

…

…

PUBLIC FINANCE (percent of GDP)

General government revenue

40.5

41.4

40.3

41.4

40.5

40.9

41.0

41.0

41.1

41.1

41.1

General government expenditure

44.5

42.6

42.2

42.1

39.9

40.4

40.6

40.5

40.6

40.6

40.6

Net lending / Overall balance

-3.9

-1.2

-1.9

-0.6

0.6

0.4

0.5

0.6

0.5

0.5

0.5

Primary balance

-2.8

-0.2

-0.8

0.3

1.4

1.2

1.2

1.2

1.1

1.1

1.0

Structural balance (percent of potential GDP)

-1.5

0.1

-0.8

-0.6

0.5

0.2

0.3

0.4

0.4

0.4

0.5

General government debt

44.5

44.9

42.2

40.3

37.2

35.2

33.2

31.2

29.4

27.7

26.1

BALANCE OF PAYMENTS (percent of GDP)

Trade balance (goods and services)

5.0

5.8

6.4

5.8

7.5

6.7

6.4

6.1

5.7

5.3

4.8

Current account balance

-1.6

-0.5

0.2

0.2

1.1

0.7

0.3

0.1

-0.2

-0.6

-1.0

Gross international reserves (billions of euros)

34.0

40.8

44.9

59.2

81.3

125.5

125.2

123.9

122.8

122.0

121.3

(in months of imports of goods and services)

3.6

4.5

4.1

5.6

7.7

11.2

10.5

9.8

9.2

8.6

8.1

(in percent of short term debt, remaining maturity)

94.3

103.1

88.0

105.6

122.3

160.5

163.2

163.9

163.9

163.2

161.7

MEMORANDUM ITEMS

Nominal GDP (USD billions)

207.4

209.4

207.8

185.2

192.9

195.3

208.5

220.5

232.9

245.3

257.4

Population (millions)

10.5

10.5

10.5

10.5

10.6

10.6

10.6

10.6

10.6

10.6

10.6

GDP per capita (USD)

19,740

19,913

19,769

17,570

18,282

18,459

19,680

20,786

21,935

23,075

24,179

Real GDP per capita

-1.0

-0.6

2.8

4.3

2.3

2.7

2.2

2.1

2.1

2.2

2.2

Output gap (percent of potential output)

-1.9

-4.0

-2.5

0.2

0.4

0.6

0.5

0.4

0.5

0.3

0.1

Sources: Czech National Bank; Czech Statistical Office; Ministry of Finance; Haver Analytics, and IMF staff estimates and projections.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm .

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