Press Release No. 14/402
September 2, 2014
On August 27, 2014, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Czech Republic.
The Czech economy exited the recession in 2013. The recovery was triggered by exports, but has been increasingly supported by domestic demand, with contributions from investment and household consumption. Moreover, high frequency indicators suggest that growth has remained strong in recent months. Unemployment entered a gradually declining path in 2013 on the back of gains in employment. Exports are performing very well, and the current account deficit is likely to narrow and approach balance this year. Inflation has been falling and is fluctuating just above zero, but this is mainly due to administrative prices and energy prices, while core indicators are on a moderate upwards trend.
A sharp fiscal adjustment led to an exit from the Excessive Deficit Procedure (EDP) and kept debt levels contained, but exacerbated the recession. The adjustment was driven mainly by a compression of capital expenditure, partly due to implementation bottlenecks, while an increase in VAT rates helped boost revenue. As a result, but also owing to one-off factors, the overall fiscal deficit narrowed from 4.2 percent of GDP in 2012 to 1.5 percent in 2013. The fiscal stance continued to improve, with the structural deficit narrowing by 1.3 percentage points of GDP on the heels of a cumulative 2.4 percentage point of GDP consolidation during 2011–12.
The Czech National Bank (CNB)—an inflation targeter—resorted to foreign exchange intervention to avoid deflation, consistent with Fund advice. In November 2013, facing the zero lower bound for its policy rate and the risk of a persistent undershoot of its inflation target, the CNB decided to use the exchange rate as an additional instrument for inflation targeting and announced its commitment “to prevent excessive appreciation of the koruna below CZK27 per euro by intervening in the foreign exchange market”, implying a 6 percent depreciation that was expected to bring inflation to target in the monetary policy horizon.
The financial sector remains strong and financial market volatility is low. Banks have improved their already strong capital position reaching a capitalization ratio of 16.5 percent at end-2013 compared with 15.6 percent in 2012. Credit growth is currently low, mainly due to weak demand, but is likely to recover gradually given strong balance sheets in both financial and non-financial sectors. Bond yields increased somewhat in the second half of 2013 in line with global trends, but have recently approached historical lows again.
Executive Board Assessment2
Executive Directors welcomed the recent strong and broad-based rebound of the Czech economy, with falling unemployment and more robust domestic demand. These notwithstanding, inflation remains well below target, and potential growth is still below the level necessary to facilitate convergence of Czech per capita income to that of other advanced European economies. Meanwhile, external uncertainties, including about growth prospects and geopolitical tensions in the region, continue to cloud the near-term outlook. In this light, Directors stressed the importance of a comprehensive growth strategy that includes supportive macroeconomic policies and accelerated structural reforms.
Directors underscored the need for a growth-friendly fiscal strategy, anchored in a clear medium-term framework. They generally supported the prudent easing of the fiscal stance in the near term, geared toward increasing capital investment, particularly in infrastructure. At the same time, they encouraged the authorities to continue to improve tax administration, combat tax evasion, and use revenue over-performance for priority expenditures and debt reduction. Directors welcomed the authorities’ commitment to the medium-term structural deficit target, and looked forward to the adoption of a new medium-term fiscal framework, comprising fiscal rules, a debt brake, and an independent fiscal council.
Directors noted that while inflation is projected to rise gradually toward the central bank’s target, there remain a sizable output gap and considerable risks to the economic recovery. They therefore saw merit in maintaining the current accommodative stance by keeping the exchange rate floor in place while considering modalities for a timely exit. Directors agreed that the central bank should continue to focus on inflation targeting and return to the floating exchange rate once deflation risks recede and the inflation forecast and inflation expectations become entrenched around the inflation target.
Directors observed that the financial system is sound and resilient, with banks maintaining strong capital and liquidity buffers. They encouraged the authorities to remain vigilant, conduct proactive supervision, and improve the supervisory architecture in line with the European and global initiatives, building on recent progress in implementing the FSAP recommendations. Directors welcomed the authorities’ consideration of the pros and cons of joining the euro-area banking union ahead of euro adoption.
Directors called for renewed momentum in structural reform to boost potential growth, especially in light of demographic challenges. They recommended that priority be given to increasing investment in physical and human capital, removing labor market rigidities, and improving the business environment more broadly. They also encouraged further steps to promote labor participation, advance research and development, and upgrade technical skills.
| Czech Republic: Selected Economic Indicators, 2008–16 |
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| |
|
|
|
|
|
|
|
|
|
|
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
|
|
|
|
|
|
|
|
Staff Proj. |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nominal GDP (USD billions) |
225.4 |
197.2 |
198.5 |
216.1 |
196.4 |
198.4 |
200.0 |
208.9 |
216.7 |
|
Population (millions) |
10.3 |
10.4 |
10.5 |
10.5 |
10.5 |
10.5 |
10.5 |
10.6 |
10.6 |
|
GDP per capita (USD) |
21,794 |
18,913 |
18,973 |
20,603 |
18,699 |
18,871 |
18,985 |
19,796 |
20,511 |
|
Real economy (change in percent, unless stated otherwise) |
|
|
|
|
|
|
|
|
|
|
Real GDP |
3.1 |
-4.5 |
2.5 |
1.8 |
-1.0 |
-0.9 |
2.5 |
2.5 |
2.4 |
|
Domestic demand |
2.2 |
-5.4 |
2.0 |
-0.1 |
-2.9 |
-0.8 |
1.8 |
2.9 |
2.8 |
|
Private consumption |
2.8 |
0.2 |
0.9 |
0.5 |
-2.1 |
0.1 |
1.3 |
2.5 |
2.5 |
|
Investment |
1.9 |
-20.2 |
5.4 |
0.8 |
-5.0 |
-4.4 |
3.0 |
4.4 |
4.0 |
|
Exports |
4.0 |
-10.9 |
15.4 |
9.5 |
4.5 |
0.2 |
7.2 |
5.0 |
4.0 |
|
Imports |
2.7 |
-12.1 |
15.4 |
7.0 |
2.3 |
0.6 |
7.0 |
5.8 |
4.6 |
|
Ouput gap (percent of potential output) |
5.4 |
-2.7 |
-1.2 |
0.2 |
-1.3 |
-2.7 |
-1.9 |
-0.5 |
-0.1 |
|
CPI (average) |
6.3 |
1.0 |
1.5 |
1.9 |
3.3 |
1.4 |
0.6 |
1.9 |
2.0 |
|
PPI (average) |
4.5 |
-3.1 |
1.3 |
5.5 |
2.1 |
0.8 |
… |
… |
… |
|
Unemployment rate (in percent) |
4.4 |
6.7 |
7.3 |
6.7 |
7.0 |
7.0 |
6.4 |
6.0 |
5.6 |
|
Gross national savings (percent of GDP) |
26.8 |
21.4 |
21.0 |
21.6 |
22.0 |
20.8 |
22.2 |
22.4 |
22.5 |
|
Gross domestic investments (percent of GDP) |
28.9 |
23.8 |
24.8 |
24.5 |
23.3 |
22.3 |
22.4 |
22.7 |
22.9 |
|
Public finance (percent of GDP) |
|
|
|
|
|
|
|
|
|
|
General government revenue |
38.9 |
38.9 |
39.1 |
40.0 |
40.3 |
40.9 |
41.3 |
40.7 |
40.0 |
|
General government expenditure |
41.1 |
44.7 |
43.7 |
43.2 |
44.5 |
42.3 |
42.5 |
42.2 |
41.1 |
|
Net lending / Overall balance |
-2.2 |
-5.8 |
-4.7 |
-3.2 |
-4.2 |
-1.5 |
-1.2 |
-1.4 |
-1.2 |
|
Structural balance |
-3.9 |
-5.1 |
-4.3 |
-3.2 |
-1.9 |
-0.6 |
-0.6 |
-1.2 |
-1.2 |
|
General government debt |
28.7 |
34.6 |
38.4 |
41.4 |
46.2 |
46.0 |
44.3 |
44.3 |
44.1 |
|
Money and credit (end of year, percent change) |
|
|
|
|
|
|
|
|
|
|
Broad money (M3) |
13.6 |
0.2 |
1.9 |
2.8 |
4.8 |
5.8 |
… |
… |
… |
|
Private sector credit |
16.1 |
0.8 |
3.0 |
5.5 |
2.6 |
3.7 |
… |
… |
… |
|
Interest rates (in percent, year average) |
|
|
|
|
|
|
|
|
|
|
Three-month interbank rate 1/ |
4.0 |
2.2 |
1.3 |
1.2 |
1.0 |
0.5 |
0.4 |
… |
… |
|
Ten-year government bond 2/ |
4.6 |
4.8 |
3.9 |
3.7 |
2.8 |
2.1 |
2.0 |
… |
… |
|
Balance of payments (percent of GDP) |
|
|
|
|
|
|
|
|
|
|
Trade balance (goods and services) |
2.7 |
4.3 |
3.4 |
4.2 |
5.5 |
6.2 |
7.0 |
6.9 |
6.9 |
|
Current account balance |
-2.1 |
-2.5 |
-3.8 |
-2.9 |
-1.3 |
-1.4 |
-0.2 |
-0.3 |
-0.4 |
|
Gross international reserves (US$ billion) |
37.0 |
41.6 |
42.5 |
40.3 |
44.9 |
56.2 |
57.9 |
60.8 |
63.4 |
|
(in months of imports of goods and services) |
3.2 |
4.5 |
4.0 |
3.2 |
3.7 |
4.6 |
4.5 |
4.4 |
4.3 |
|
Exchange rate |
|
|
|
|
|
|
|
|
|
|
Nominal effective exchange rate (index, 2005=100) |
121.6 |
116.2 |
118.7 |
122.4 |
117.7 |
115.7 |
… |
… |
… |
|
Real effective exchange rate (index, CPI-based; 2005=100) |
125.6 |
120.5 |
122.5 |
125.1 |
121.3 |
118.8 |
… |
… |
… |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Sources: Czech Statistical Office; Czech National Bank; Ministry of Finance; HAVER, and IMF staff estimates and projections. |
|
1/ Offer rate. 2014 entry is January-June average. |
|
2/ 2014 entry is January-June average. |
| Czech Republic: Selected Economic Indicators, 2008–16 |
| |
| |
|
|
|
|
|
|
|
|
|
|
2008 |
2009 |
2010 |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
|
|
|
|
|
|
|
|
Staff Proj. |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Nominal GDP (USD billions) |
225.4 |
197.2 |
198.5 |
216.1 |
196.4 |
198.4 |
200.0 |
208.9 |
216.7 |
|
Population (millions) |
10.3 |
10.4 |
10.5 |
10.5 |
10.5 |
10.5 |
10.5 |
10.6 |
10.6 |
|
GDP per capita (USD) |
21,794 |
18,913 |
18,973 |
20,603 |
18,699 |
18,871 |
18,985 |
19,796 |
20,511 |
|
Real economy (change in percent, unless stated otherwise) |
|
|
|
|
|
|
|
|
|
|
Real GDP |
3.1 |
-4.5 |
2.5 |
1.8 |
-1.0 |
-0.9 |
2.5 |
2.5 |
2.4 |
|
Domestic demand |
2.2 |
-5.4 |
2.0 |
-0.1 |
-2.9 |
-0.8 |
1.8 |
2.9 |
2.8 |
|
Private consumption |
2.8 |
0.2 |
0.9 |
0.5 |
-2.1 |
0.1 |
1.3 |
2.5 |
2.5 |
|
Investment |
1.9 |
-20.2 |
5.4 |
0.8 |
-5.0 |
-4.4 |
3.0 |
4.4 |
4.0 |
|
Exports |
4.0 |
-10.9 |
15.4 |
9.5 |
4.5 |
0.2 |
7.2 |
5.0 |
4.0 |
|
Imports |
2.7 |
-12.1 |
15.4 |
7.0 |
2.3 |
0.6 |
7.0 |
5.8 |
4.6 |
|
Ouput gap (percent of potential output) |
5.4 |
-2.7 |
-1.2 |
0.2 |
-1.3 |
-2.7 |
-1.9 |
-0.5 |
-0.1 |
|
CPI (average) |
6.3 |
1.0 |
1.5 |
1.9 |
3.3 |
1.4 |
0.6 |
1.9 |
2.0 |
|
PPI (average) |
4.5 |
-3.1 |
1.3 |
5.5 |
2.1 |
0.8 |
… |
… |
… |
|
Unemployment rate (in percent) |
4.4 |
6.7 |
7.3 |
6.7 |
7.0 |
7.0 |
6.4 |
6.0 |
5.6 |
|
Gross national savings (percent of GDP) |
26.8 |
21.4 |
21.0 |
21.6 |
22.0 |
20.8 |
22.2 |
22.4 |
22.5 |
|
Gross domestic investments (percent of GDP) |
28.9 |
23.8 |
24.8 |
24.5 |
23.3 |
22.3 |
22.4 |
22.7 |
22.9 |
|
Public finance (percent of GDP) |
|
|
|
|
|
|
|
|
|
|
General government revenue |
38.9 |
38.9 |
39.1 |
40.0 |
40.3 |
40.9 |
41.3 |
40.7 |
40.0 |
|
General government expenditure |
41.1 |
44.7 |
43.7 |
43.2 |
44.5 |
42.3 |
42.5 |
42.2 |
41.1 |
|
Net lending / Overall balance |
-2.2 |
-5.8 |
-4.7 |
-3.2 |
-4.2 |
-1.5 |
-1.2 |
-1.4 |
-1.2 |
|
Structural balance |
-3.9 |
-5.1 |
-4.3 |
-3.2 |
-1.9 |
-0.6 |
-0.6 |
-1.2 |
-1.2 |
|
General government debt |
28.7 |
34.6 |
38.4 |
41.4 |
46.2 |
46.0 |
44.3 |
44.3 |
44.1 |
|
Money and credit (end of year, percent change) |
|
|
|
|
|
|
|
|
|
|
Broad money (M3) |
13.6 |
0.2 |
1.9 |
2.8 |
4.8 |
5.8 |
… |
… |
… |
|
Private sector credit |
16.1 |
0.8 |
3.0 |
5.5 |
2.6 |
3.7 |
… |
… |
… |
|
Interest rates (in percent, year average) |
|
|
|
|
|
|
|
|
|
|
Three-month interbank rate 1/ |
4.0 |
2.2 |
1.3 |
1.2 |
1.0 |
0.5 |
0.4 |
… |
… |
|
Ten-year government bond 2/ |
4.6 |
4.8 |
3.9 |
3.7 |
2.8 |
2.1 |
2.0 |
… |
… |
|
Balance of payments (percent of GDP) |
|
|
|
|
|
|
|
|
|
|
Trade balance (goods and services) |
2.7 |
4.3 |
3.4 |
4.2 |
5.5 |
6.2 |
7.0 |
6.9 |
6.9 |
|
Current account balance |
-2.1 |
-2.5 |
-3.8 |
-2.9 |
-1.3 |
-1.4 |
-0.2 |
-0.3 |
-0.4 |
|
Gross international reserves (US$ billion) |
37.0 |
41.6 |
42.5 |
40.3 |
44.9 |
56.2 |
57.9 |
60.8 |
63.4 |
|
(in months of imports of goods and services) |
3.2 |
4.5 |
4.0 |
3.2 |
3.7 |
4.6 |
4.5 |
4.4 |
4.3 |
|
Exchange rate |
|
|
|
|
|
|
|
|
|
|
Nominal effective exchange rate (index, 2005=100) |
121.6 |
116.2 |
118.7 |
122.4 |
117.7 |
115.7 |
… |
… |
… |
|
Real effective exchange rate (index, CPI-based; 2005=100) |
125.6 |
120.5 |
122.5 |
125.1 |
121.3 |
118.8 |
… |
… |
… |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Sources: Czech Statistical Office; Czech National Bank; Ministry of Finance; HAVER, and IMF staff estimates and projections. |
|
1/ Offer rate. 2014 entry is January-June average. |
|
2/ 2014 entry is January-June average. |
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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