## 1. Key Challenges to Sustained Productivity Growth

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### Context and recent performance
- Over the past two decades, the Czech Republic converged steadily towards the living standards of more advanced EU economies, supported by market-oriented policies, monetary and fiscal discipline, a sound financial system, and solid institutions.
- Since 2016, growth momentum weakened as non-auto manufacturing, energy, and construction started running out of steam, hampered by decelerating productivity growth, high energy costs, and sluggish demand.
- After rebounding from the pandemic, the economy stagnated in 2022-23 due to large increases in commodity prices, a jump in the household saving rate, and a fall in real wages.
- Structural headwinds: significant integration in global value chains, concentration in trading partners/products/suppliers, high energy intensity, and adverse demographics.
- The Czech auto industry contributes to 10 percent of the country's value added and faces pressures from the transition to EVs and foreign competition.

### Main findings on productivity
- Post-pandemic underperformance only partly reflects exposure to specific markets or economic structure:
  - Counterfactual analysis indicates only a third of the output loss relative to the pre-pandemic trend can be attributed to the Czech Republic having the structure of an average EU country.
- Recent shocks exposed preexisting vulnerabilities:
  - Labor productivity fell considerably more than in the EU in 2022-23; labor hoarding and a sharper fall in real wages contributed.
- Declining trend in productivity growth:
  - Post-GFC productivity growth decelerated; lower capital deepening and a notable deceleration in total factor productivity (TFP) that never recovered to pre-GFC growth rates.
- Sectoral drags:
  - Construction sector output has shrunk by nearly 25 percent over the last ten years and underperformed in value added and productivity, hampered by shortages of skilled workers and administrative burdens.
  - Energy sector contracted significantly due to falling demand, phasing out of coal production, and limited investment in renewables.
  - Non-auto manufacturing has been stagnant for almost a decade.
  - Large and widening TFP gaps for the Czech energy and construction sectors from EU top performers.
- Misallocation of labor and capital:
  - High-productivity sectors (including manufacturing and financial services) have steadily reduced workforce while low-productivity public administration expanded considerably.
  - Bank credit growth concentrated to low-productivity sectors, including public administration, while credit and FDI to manufacturing have declined.

### Recent macro developments and key indicators
- Growth:
  - GDP expanded in the first half of 2024 by an average 1.2 percent on a sequential annualized basis; recovery uneven with consumption strengthening and investment remaining weak.
- Labor market:
  - Unemployment rate at 2.6 percent in 24Q3 (lowest in the EU); labor force on a downward trend aside from temporary migration inflows of Ukrainian refugees.
- Inflation:
  - Headline inflation peaked at 18 percent in September 2022, reached the CNB 2 percent target in February 2024, and drifted to 2.8 percent by November 2024.
  - Core inflation stood at 2.3 percent.
- Monetary policy:
  - CNB lowered the policy rate by a cumulative 300 basis points starting in December 2023 to 4 percent currently.
  - A simple Taylor rule suggests monetary policy is still tight.
- Fiscal policy:
  - Budget deficit estimated to have stayed below 3 percent of GDP in 2024.
  - Fiscal tightening measured as change in the cyclically adjusted balance of about 1.1 percent of GDP (with a structural balance alternative implying around 0.4 percent of GDP tightening after excluding one-offs).
  - Projected public debt ratio at 43.1 percent of GDP, some 14 percentage points above pre-pandemic levels.
- Housing and mortgages:
  - Flows of new mortgage loans year-to-date exceed 2014-20 levels, though number of loans below long-term averages.
  - Residential and commercial property prices bottomed out in late 2023 and posted a moderate rebound.
- Financial sector soundness:
  - Aggregate capital ratio at 22.6 percent of risk-weighted assets at mid-2024, with voluntary buffers of more than 6 percentage points.
  - Five systemic banks use internal ratings-based approaches with mortgage risk weights averaging around 18 percent (versus 35 percent under standardized approach).
  - NPLs at 1.8 percent of total loans; stage 2 loans around 12 percent.
  - Investment funds more than doubled assets in three years to around 18 percent of GDP.
- Macroprudential adjustments:
  - June 2024: CNB lowered the countercyclical capital buffer (CCyB) by 50 basis points to 1.25 percent and introduced a general systemic risk buffer (SyRB) at 0.5 percent effective January 2025.
  - LTV limit set at 80 percent (90 percent for applicants under 36 years); DSTI and DTI limits remain deactivated.
- External position:
  - Current account surplus widened from 0.4 percent of GDP in 2023 to 1.4 percent at end-September 2024.
  - Nominal exchange rate vs. the euro depreciated by around 2.5 percent in 2024.

### Policy recommendations to lift productivity and sectoral prescriptions
- System-wide measures:
  - Faster digitalization to boost TFP.
  - Enhanced use of existing tax credits for R&D to support innovation and raise TFP growth.
- Sector-level measures:
  - Expedite administrative processes, especially at local administration level, to address construction sector bottlenecks.
  - Scale up renewable investments in the energy sector.
- Reallocation and financing:
  - More targeted active labor market policies to channel labor towards higher-productivity sectors.
  - Improve availability of venture capital and equity financing to support higher-productivity investment and firm scaling.
- Auto industry (Box 2):
  - Incentivize innovation and support workforce retraining and development.
  - Expand infrastructure, including an adequate charging network.
  - Calibrate consumer incentives to facilitate EV transition and mitigate competitiveness pressure from China and other entrants.

### Outlook, risks, and near- to medium-term projections
- Near-term outlook:
  - Growth is expected to accelerate to 2.4 percent in 2025 from a projected 1 percent a year earlier.
  - Recovery in the second half of the year was supported by higher real disposable income, but near-term outcomes were dampened by a currently restrictive policy mix and a weak external environment.
- Medium-term growth:
  - Medium-term potential growth is now estimated at around 2 percent (from 2.5 percent previously).
- Inflation outlook:
  - Inflation is expected to rise further above 3 percent in the near term on food price base effects, then converge back towards 2 percent by 2025H2.
- Risks:
  - Downside growth risks: further geoeconomic fragmentation; weaker-than-anticipated recovery among key European trading partners (especially Germany); stronger-than-expected effects of past monetary tightening.
  - Upside inflation risks: stronger wage growth, stickier-than-expected services inflation, protracted increases in commodity prices, and a weakened koruna from narrowing policy rate differentials.
- Authorities’ views:
  - Authorities agree with staff on the growth outlook but expect inflation to converge to target later; CNB staff revised down their estimate of medium-term potential growth to 2.5 percent.

### Monetary policy: stance, guidance, and balance sheet
- Staff assessment and guidance:
  - Staff sees scope to continue lowering the policy rate; room exists for additional rate cuts to achieve by mid-2025 a neutral policy rate, which staff estimates at around 3 percent.
  - Further easing should be gradual and data-dependent.
  - Transition from data-dependent to forecast-based inflation targeting could occur as uncertainty recedes.
- Natural rate (r*) estimate:
  - The natural rate is currently estimated at around 1 percent, subject to significant uncertainty (range from 0 to 1.5 percent).
  - Implication: with inflation expectations at around 2 percent, a neutral policy rate of around 3 percent is implied.
- CNB balance sheet and FX reserves:
  - CNB holds foreign currency reserve assets of more than 40 percent of GDP.
  - CNB reached negative equity of more than 7 percent of GDP; in 2023 profitability and capital position were considerably improved via ad hoc cost rationalization and diversification into higher yielding assets, including gold and equities.
  - Staff recommends shifting focus from profit maximization to balance sheet reduction via a transparent, predictable mechanism of small, regular FX sales above the existing program.
  - Authorities prefer not to shrink reserves beyond the existing program now.

### Fiscal policy: 2025 budget, medium-term stance, and recommendations
- 2025 budget and near-term:
  - Commits to a broadly neutral fiscal policy.
  - Prioritizes spending in education, research and development, infrastructure, and defense financed by a 2-percentage point increase in the corporate income tax rate, and a 60 percent surcharge on excess profits of energy firms and banks.
  - Wage bill is expected to grow by 7 percent.
  - Budget entails a general government deficit of 2.3 percent of GDP.
  - Under staff’s baseline, possible cost overruns and revenue shortfalls are estimated to leave the deficit around ¼ percentage points above the authorities’ projection.
- Medium-term stance and recommended adjustment:
  - Staff’s baseline: structural deficit improves by only ½ percentage point over 2024-28 to around 2 percent of GDP.
  - Staff recommends a further adjustment of about ½ percentage points of GDP a year over 2027–28 to reach a structural deficit of less than 1 percent of GDP by 2028.
  - Productivity-enhancing spending should be safeguarded and automatic stabilizers should operate freely; absent a severe downside shock, discretionary stimulus should be avoided.
- Revenue and tax composition recommendations:
  - Revisit composition of tax revenue, including reversing large changes enacted in 2021 and reassessing personal income tax structure relative to progressivity goals.
  - Transition property tax from size-based to market-value basis and regularly update values.
  - Modernization of tax administration is ongoing.
- Expenditure recommendations:
  - Actions to improve pension sustainability are welcome but limiting the annual increase in the retirement age to one month reduces intended effects.
  - Contain sustained expansion of the public sector workforce, especially in fragmented local administrations.
  - Enhance collaboration between municipalities and consider more neutral tax-sharing.
  - Better targeting of social benefits and more efficient absorption of EU Cohesion funds and RRF funds recommended.

### Financial stability risks, macroprudential stance, and AML/CFT
- Financial stability risks and banking sector vulnerabilities:
  - Residential property prices have staged a moderate rebound since 2024Q2; affordability concerns persist, especially in Prague.
  - Real estate funds' role in commercial real estate has grown significantly.
  - Monitor loans secured by commercial property collateral, mark-to-market losses on securities portfolios, and impact of exchange rate fluctuations on corporate exposures.
  - Banks have high exposure to Czech sovereign debt and to euro loans to non-financial corporations.
- Macroprudential guidance on CCyB:
  - Staff assesses the current 1.25 percent CCyB rate as appropriate and urges caution on additional easing.
  - A further release of the CCyB would be advisable only in response to clear materialization of financial risks; an increase should be considered in case of rapid credit growth and rising asset prices.
  - Introduction of a general SyRB is welcome.
  - Monitor mortgage activity as potential early triggers for reactivation of DSTI and DTI limits.
- AML/CFT and real estate:
  - Continue efforts to safeguard the financial and real-estate sectors from money laundering risks and cross-border illicit financial flows.
  - Deepen cross-border flows analysis in entity-level ML/TF risk assessments.
  - Incorporate sectoral cross-border risk analysis into National Risk Assessment and National AML/CFT Strategy updates (scheduled in 2025).
  - Improve beneficial ownership data for real estate transactions and increase suspicion reporting by real estate intermediaries.

### Structural policy priorities for sustainable and inclusive growth
- Labor market and human capital:
  - More targeted active labor market policies to facilitate reallocation and enhance participation.
  - Adopt proposed amendments to the Labor Code to promote greater flexibility.
  - Use data on job mismatches to inform vocational training, upskilling and reskilling.
  - Address gender pay gap and increase affordable, high-quality childcare and eldercare to boost female labor participation.
- Business environment, digitalization, and innovation:
  - Ease restrictions, reduce administrative burden (especially among local municipalities), expedite spatial planning and construction permits, and enhance adoption of digital technologies.
  - Harmonize IT systems in public administration, upgrade online government services to businesses, and expand broadband.
  - Encourage use of existing tax credits for R&D and expand venture capital and equity financing.
- Energy and climate neutrality:
  - Authorities plan to expand nuclear power capacity; fossil fuels represented two thirds of gross available energy in 2023.
  - Authorities committed to phasing out dependence on coal by 2033 and aligned with EU net-zero by 2050, but at current policies the net-zero target is likely out of reach.
  - Investment in renewables remains low by international standards and could be scaled up.
  - Continue investment in adaptation to climate change.

### Annex I — potential growth, migration scenarios, and labor contributions
- Medium-term potential growth:
  - Potential growth estimated at around 2 percent in the medium term; downward trend since early 2000s.
  - TFP trend growth expected to remain below its historical rate going forward.
- Migration scenarios:
  - Different migration scenarios could increase or lower medium-term potential growth by around 0.25 percent from its medium-term estimate of 2 percent.
  - Higher migration could bring potential growth up by around 0.2-0.3 percent per year.

### Annex V — Sovereign Risk and Debt Sustainability Framework (selected figures)
- Final overall risk of sovereign stress: "low".
- Near-term assessment: "low"; Medium-term assessment: "low"; Long-term assessment: "moderate".
- Baseline public debt path (percent of GDP):
  - Actual 2023: 42.4
  - 2024: 43.5
  - 2025: 44.5
  - 2026: 45.4
  - 2027: 45.6
  - 2028: 45.9
  - 2029: 46.4
  - 2030: 46.8
  - 2031: 47.5
  - 2032: 48.3
  - 2033: 49.5
- Primary deficit (percent of GDP): 3.2 (2023), 1.6 (2024), 1.3 (2025), 0.6 (2026), 0.5 (2027), 0.7 (2028), 0.9 (2029), 1.0 (2030), 1.1 (2031), 1.2 (2032), 1.6 (2033).
- Gross financing needs (GFN; percent of GDP): 7.4 (2023), 7.8 (2024), 6.9 (2025), 8.5 (2026), 8.0 (2027), 9.1 (2028), 10.0 (2029), 10.6 (2030), 11.3 (2031), 11.5 (2032), 11.9 (2033).
- Staff commentary: "Public debt will rise in 2024 and 2025 and stabilize in the medium term. From 2029, public debt is projected to increase, driven by additional aging (healthcare and pension) spending pressures."
- Medium-term risk indices:
  - Debt fanchart index (DFI): 1.5 — Risk signal for fanchart: "Moderate".
  - GFN financeability index (GFI): 8.8 — Risk signal for GFN: "Moderate".

### Staff appraisal and summary policy priorities
- Growth and potential:
  - Economy slowly recovering; growth picking up but weak productivity growth and structural labor shortages weigh on medium-term potential (now estimated at around 2 percent).
- Monetary policy:
  - Inflation moderated; staff sees ground for continuing to lower the policy rate gradually and data-dependently with a neutral target around 3 percent by mid-2025.
- Central bank balance sheet:
  - Consider gradual balance sheet reduction through small, predictable FX sales to limit risks to CNB financial position while minimizing exchange rate impact.
- Fiscal policy:
  - A broadly neutral stance this year is appropriate, but additional measures will be needed over the medium term; staff recommends a further adjustment of ½ percentage points of GDP annually over 2027–28.
- Financial stability:
  - Risks contained and broadly unchanged but warrant vigilance; monitor real estate risks and bank exposures; continue AML/CFT efforts.
- Call for swift structural action:
  - Facilitate allocation of labor towards higher value-added sectors, address gender pay gap, reduce administrative burden and red tape, accelerate digitalization, and promote a more ambitious green transition.

*Source: IMF staff report — 1. Key Challenges to Sustained Productivity Growth (from provided PDF content).*

### 1. Key Challenges to Sustained Productivity Growth   ______________________________________________ 7

### 1. Key Challenges to Sustained Productivity Growth

### Context and recent performance
- Over the past two decades, the Czech Republic converged steadily towards the living standards of more advanced EU economies, supported by market-oriented policies, monetary and fiscal discipline, a sound financial system, and solid institutions.
- Since 2016, growth momentum has weakened as non-auto manufacturing, energy, and construction started running out of steam, hampered by decelerating productivity growth, high energy costs, and sluggish demand.
- After rebounding from the pandemic, the economy stagnated in 2022-23 due to large increases in commodity prices, a jump in the household saving rate, and a fall in real wages.
- The economy faces structural headwinds: significant integration in global value chains, concentration in trading partners/products/suppliers, high energy intensity, and adverse demographics.
- The Czech auto industry contributes to 10 percent of the country's value added and faces pressures from the transition to EVs and foreign competition (see Box 2).

### Main findings on productivity (Box 1)
- The post-pandemic underperformance only partly reflects exposure to specific markets or economic structure:
  - Counterfactual analysis indicates only a third of the output loss relative to the pre-pandemic trend can be attributed to the Czech Republic having the structure of an average EU country.
- Recent shocks exposed preexisting vulnerabilities:
  - Labor productivity fell considerably more than in the EU in 2022-23; labor hoarding and a sharper fall in real wages contributed.
- Declining trend in productivity growth:
  - Post-GFC productivity growth decelerated; lower capital deepening and a notable deceleration in total factor productivity (TFP) that never recovered to pre-GFC growth rates.
- Sectoral drags:
  - Construction sector output has shrunk by nearly 25 percent over the last ten years and underperformed in value added and productivity, hampered by shortages of skilled workers and administrative burdens.
  - Energy sector contracted significantly due to falling demand, phasing out of coal production, and limited investment in renewables.
  - Non-auto manufacturing has been stagnant for almost a decade.
  - Large and widening TFP gaps for the Czech energy and construction sectors from EU top performers.
- Misallocation of labor and capital:
  - High-productivity sectors (including manufacturing and financial services) have steadily reduced workforce while low-productivity public administration expanded considerably.
  - Bank credit growth concentrated to low-productivity sectors, including public administration, while credit and FDI to manufacturing have declined.

### Recent macro developments and indicators
- Growth:
  - GDP expanded in the first half of 2024 by an average 1.2 percent on a sequential annualized basis; recovery uneven with consumption strengthening and investment remaining weak.
- Labor market:
  - Unemployment rate at 2.6 percent in 24Q3 (lowest in the EU); labor force on a downward trend aside from temporary migration inflows of Ukrainian refugees.
- Inflation:
  - Headline inflation peaked at 18 percent in September 2022, reached the CNB 2 percent target in February 2024, and drifted to 2.8 percent by November 2024.
  - Core inflation stood at 2.3 percent.
  - Market-based 12- and 36-month ahead inflation expectations broadly anchored.
- Monetary policy:
  - CNB lowered the policy rate by a cumulative 300 basis points starting in December 2023 to 4 percent currently.
  - A simple Taylor rule suggests monetary policy is still tight.
- Fiscal policy:
  - Budget deficit estimated to have stayed below 3 percent of GDP in 2024.
  - Fiscal tightening measured as change in the cyclically adjusted balance of about 1.1 percent of GDP (with a structural balance alternative implying around 0.4 percent of GDP tightening after excluding one-offs).
  - Projected public debt ratio at 43.1 percent of GDP, some 14 percentage points above pre-pandemic levels.
- Housing and mortgages:
  - Flows of new mortgage loans year-to-date exceed 2014-20 levels, though number of loans below long-term averages.
  - Residential and commercial property prices bottomed out in late 2023 and posted a moderate rebound.
- Financial sector soundness:
  - Aggregate capital ratio at 22.6 percent of risk-weighted assets at mid-2024, with voluntary buffers of more than 6 percentage points.
  - Five systemic banks use internal ratings-based approaches with mortgage risk weights averaging around 18 percent (versus 35 percent under standardized approach).
  - NPLs at 1.8 percent of total loans; stage 2 loans around 12 percent.
  - Investment funds more than doubled assets in three years to around 18 percent of GDP.
- Macroprudential adjustments:
  - June 2024: CNB lowered the countercyclical capital buffer (CCyB) by 50 basis points to 1.25 percent and introduced a general systemic risk buffer (SyRB) at 0.5 percent effective January 2025.
  - LTV limit set at 80 percent (90 percent for applicants under 36 years); DSTI and DTI limits remain deactivated.
- External position:
  - Current account surplus widened from 0.4 percent of GDP in 2023 to 1.4 percent at end-September 2024.
  - Nominal exchange rate vs. the euro depreciated by around 2.5 percent in 2024.

### Policy recommendations to lift productivity (Box 1 and sectoral prescriptions)
- System-wide measures:
  - Faster digitalization to boost TFP.
  - Enhanced use of existing tax credits for R&D to support innovation and raise TFP growth.
- Sector-level measures:
  - Expedite administrative processes, especially at local administration level, to address construction sector bottlenecks.
  - Scale up renewable investments in the energy sector.
- Reallocation and financing:
  - More targeted active labor market policies to channel labor towards higher-productivity sectors.
  - Improve availability of venture capital and equity financing to support higher-productivity investment and firm scaling.
- For the auto industry (Box 2):
  - Incentivize innovation and support workforce retraining and development.
  - Expand infrastructure, including an adequate charging network.
  - Calibrate consumer incentives to facilitate EV transition and mitigate competitiveness pressure from China and other entrants.

### Outlook and risks
- Recovery is nascent but uneven: consumption has rebounded while investment remains weak due to global trade uncertainty, tight domestic policies, and slow absorption of EU funds; de-stocking continues to weigh on investment but supports exports.
- Persistent structural headwinds (geoeconomic fragmentation, decarbonization, demographic trends) and the required transition in the auto industry pose risks to future productivity and growth.
- Financial sector and macroprudential settings appear resilient under baseline scenarios but remain sensitive to adverse shocks (e.g., a severe GDP contraction could force buffer release per CNB stress tests).

*Source: IMF staff report — 1. Key Challenges to Sustained Productivity Growth (from provided PDF content).*

### 13.      The recovery is poised to continue. Driven by higher real disposable income, growth is

### 13–25: The recovery is poised to continue. Driven by higher real disposable income, growth is

### Near-term outlook and medium-term growth
- Growth is expected to accelerate to 2.4 percent in 2025 from a projected 1 percent a year earlier.
- Recovery in the second half of the year was supported by higher real disposable income, but near-term outcomes were dampened by a currently restrictive policy mix and a weak external environment.
- Medium-term potential growth is now estimated at around 2 percent (from 2.5 percent previously, Annex I).
- Wage moderation supports competitiveness of Czech manufacturers in export markets.

### Inflation outlook
- Inflation is expected to rise further above 3 percent in the near term on food price base effects, then converge back towards 2 percent by 2025H2.
- Convergence is aided by the lagged effect of tight monetary policy, macroeconomic slack, recent fiscal consolidation, and anchored inflation expectations.

### Risks
- Risks to growth are on the downside; risks to inflation appear balanced.
- Downside growth risks: further geoeconomic fragmentation; weaker-than-anticipated recovery among key European trading partners (especially Germany); stronger-than-expected effects of past monetary tightening.
- Downside inflation implications: the factors above would also weigh down on inflation.
- Upside inflation risks: stronger wage growth, stickier-than-expected services inflation, protracted increases in commodity prices, and a weakened koruna from narrowing policy rate differentials vis-à-vis major central banks.

### Authorities’ views on outlook
- Authorities agree with IMF staff on the growth outlook but expect inflation to converge to target later.
- CNB staff revised down their estimate of medium-term potential growth to 2.5 percent.
- They expect inflation to decline in early 2025 on lower growth in administered prices but only stabilize close to the 2 percent target in 2026 under their baseline.
- Authorities assess risks to inflation as modestly tilted to the upside due to potential inertia in services prices, lower-than-expected decrease in profit margins, and increased wage demands.

### Monetary policy — key findings and recommendations
- Staff sees scope to continue lowering the policy rate:
  - Monetary policy has been appropriately eased but remains tight given anchored inflation expectations and output below potential.
  - Room exists for additional rate cuts to achieve by mid-2025 a neutral policy rate, which staff estimates at around 3 percent, albeit subject to large uncertainty (Box 3).
  - Further easing should be gradual and data-dependent, weighing risks of core inflation persistence versus inflation undershooting the 2 percent target.
  - Sustained wage growth above productivity growth or protracted commodity price increases would warrant a more gradual decline in the policy rate.
  - Signs that inflation might undershoot the target would call for lowering the policy rate to neutral before mid-2025.
- Transition in operational framework:
  - The current risk-management, data-dependent approach could give way to a gradual return to forecast-based inflation targeting as uncertainty recedes and inflation stabilizes.
  - Clear and transparent communication and strong commitment to the inflation target remain critical.

### Box 3 — The Czech Republic’s Natural Rate of Interest (r*)
- The natural rate is currently estimated at around 1 percent, subject to significant uncertainty.
- This estimate is an approximate average of three approaches that provide a range from 0 to 1.5 percent.
- Implications:
  - With inflation expectations at around 2 percent, a neutral real rate of around 1 percent implies a terminal policy rate of 3 percent.
  - This implies the current policy stance is still tight and leaves room for rate cuts.
  - For fiscal policy, real rates of around 1 percent imply considerably larger debt payments than during 2016-23 when ex-post real yields on government bonds were negative.
- Factors that could push r* up or down include supply-chain reshoring, decarbonization, higher public investment (including for defense), higher global uncertainty, faster AI-led technological growth, and higher public debt.

### Box 4 — Costs of more data-dependent monetary policy
- Shift toward data-dependent, meeting-by-meeting approach has increased market volatility and asset price sensitivity to surprises.
- Empirical findings:
  - CNB rate decisions deviating from expectations raised EUR/CZK volatility post-2021 three times as much as before.
  - Surprise tightenings led to larger koruna appreciation post-2021.
  - Positive CPI and GDP surprises produced relatively larger increases in short-term interest rates (1x4 Forward Rate Agreements) post-2021.
  - Government bond spreads and domestic market interest rates have shown larger responses to domestic and foreign surprises post-2021/2022.
- Trade-off for central banks:
  - Option i) data-dependent approach: stronger response to realized data but greater financial market volatility.
  - Option ii) forecast-based approach: potentially reduced volatility but higher risk of deviation from the inflation target.
  - As uncertainty recedes and inflation aligns with target, the cost of higher volatility may outweigh benefits of heavy reliance on recent data.

### CNB balance sheet and FX reserves
- CNB balance sheet holds foreign currency reserve assets of more than 40 percent of GDP, a legacy of the FX floor (2013–17).
- In 2023, the CNB resumed a program of FX sales (limited to part of income generated by the reserves) to slow balance sheet growth.
- The CNB reached negative equity of more than 7 percent of GDP; in 2023 profitability and capital position were considerably improved via ad hoc cost rationalization and diversification into higher yielding assets, including gold and equities.
- The rate of the unremunerated minimum reserve requirement was raised by 2 percentage points to 4 percent.
- Staff recommendation: shift focus from profit maximization to balance sheet reduction via a transparent, predictable mechanism of small, regular FX sales above the existing program to limit risks to the CNB’s financial position while minimizing exchange rate impact.
- Authorities’ view: CNB does not consider shrinking reserves beyond the existing program appropriate now, citing that ample reserves provide a buffer against pressures on capital flows and the exchange rate in the current geopolitical environment.

### Fiscal policy — stance, risks, and recommendations
- 2025 budget:
  - Commits to a broadly neutral fiscal policy.
  - Prioritizes spending in education, research and development, infrastructure, and defense financed by:
    - a 2-percentage point increase in the corporate income tax rate, and
    - a 60 percent surcharge on excess profits of energy firms and banks.
  - Wage bill is expected to grow by 7 percent.
  - Budget entails a general government deficit of 2.3 percent of GDP.
  - Under staff’s baseline, possible cost overruns and revenue shortfalls are estimated to leave the deficit around ¼ percentage points above the authorities’ projection.
- Medium-term fiscal stance and risks:
  - Additional measures are required over the medium term to keep deficits at prudent levels.
  - Under staff’s baseline, the structural deficit improves by only ½ percentage point over 2024-28 to a deficit of around 2 percent of GDP.
  - Fiscal space is assessed as substantial and overall risk of sovereign stress low, but the debt ratio does not stabilize over the forecast horizon.
  - Significant long-term pressures related to pension, healthcare, defense, and energy security spending could erode buffers.
  - Staff’s recommended path, broadly aligned with the national fiscal rule, entails a further adjustment of about ½ percentage points of GDP a year over 2027–28 to reach a structural deficit of less than 1 percent of GDP by 2028.
  - Productivity-enhancing spending should be safeguarded and automatic stabilizers should operate freely; absent a severe downside shock, discretionary stimulus should be avoided.
- Revenue and expenditure composition:
  - Social security contributions account for nearly half of the revenue collected.
  - Revenue from property, environmental and consumption taxes is well below the EU average.
  - Staff encourages revisiting the composition of tax revenue, including reversing large changes enacted in 2021 and reassessing the personal income tax structure relative to progressivity goals.
  - Recommendation to transition property tax from size-based to market-value basis and regularly update values to increase revenue, efficiency, fairness, and to raise cost of unoccupied properties to encourage supply and alleviate house price pressures.
  - Modernization of tax administration is ongoing to strengthen revenue resilience.
- Expenditure-side measures:
  - Actions to improve pension sustainability are welcome but limiting the annual increase in the retirement age to one month reduces intended effects and may require future adjustments.
  - Contain sustained expansion of the public sector workforce, especially in fragmented local administrations and locally provided services, to limit costs and mitigate economy-wide labor shortages.
  - Enhance collaboration between municipalities to improve delivery of public services and investments; consider more neutral tax-sharing between the state and smaller municipalities.
  - Better targeting of social benefits and more efficient absorption of EU Cohesion funds and faster progress toward unlocking Recovery and Resilience Facility (RRF) funds could support productivity-enhancing capital spending.
- Authorities’ view:
  - Authorities agree on the need for additional fiscal consolidation over the medium term and prioritize action on the spending side, including containing public sector workforce expansion and improving local governments’ spending efficiency.

*Source: IMF staff report excerpt (sections 13–25) on the Czech Republic.*

### 26.      While remaining contained and broadly unchanged, financial stability risks warrant

### 1czeea2025001-print-pdf - 26.      While remaining contained and broadly unchanged, financial stability risks warrant

### Financial stability risks and banking sector vulnerabilities
- Residential property prices have staged a moderate rebound in recent months, adding to long-standing affordability concerns, especially for the Prague metropolitan area.
- Real estate funds are not systemic institutions, but their role in the domestic commercial real estate market has grown significantly.
- Close monitoring of risks stemming from loans secured by commercial property collateral should be pursued further.
- Given the relatively low risk weights on mortgage loans, supervisors should continue to review bank exposures and ensure that credit risks are accurately reflected in banks’ risk weights.
- Authorities should continue to regularly evaluate:
  - the effect of mark-to-market losses on securities portfolios, and
  - the impact of exchange rate fluctuations on corporate exposures.
- Banks have high exposure to Czech sovereign debt and to euro loans to non-financial corporations; these concentrations warrant continued vigilance.

### Macroprudential stance and guidance on the CCyB
- While the Czech Republic is the only EU country to have lowered the countercyclical capital buffer (CCyB) rate since 2020, the rate had been tightened comparatively more (up to 2.5 percent) during the upward phase of the financial cycle.
- Staff assesses the current 1.25 percent CCyB rate as appropriate and urges the authorities to exert caution in considering additional easing.
- Guidance on CCyB adjustments:
  - A further release of the CCyB would be advisable only in response to clear materialization of financial risks.
  - Conversely, an increase in the CCyB rate should be considered in case of rapid credit growth and rising asset prices.
- The introduction of a general systemic risk buffer is welcome, given the structural headwinds facing the economy.
- Mortgage activity should be monitored closely to identify potential early triggers for the reactivation of DSTI and DTI limits.

### AML/CFT, real estate, and cross-border illicit financial flows
- Continued efforts are needed to safeguard the financial and real-estate sectors from money laundering risks and cross-border illicit financial flows.
- The CNB, in its capacity of AML/CFT supervisor, uses cross-border financial flows data obtained from banks to conduct entity-level ML/TF risk assessments; they should continue to deepen such analysis and investigate the potential impact of such flows on the real estate sector.
- Recommendations for national frameworks and data:
  - Sectoral analysis focused on cross border risks could be incorporated into the National Risk Assessment and the National AML/CFT Strategy, whose updates are scheduled in 2025.
  - Obtaining timely and accurate information on beneficial ownership of Czech real estate transactions is crucial to prevent misuse by criminals.
  - While the latest amendments of the AML Act in 2024 are welcome, the authorities should continue to address any remaining gaps through legislative and regulatory reforms.
  - It is important to increase suspicion reporting by real estate intermediaries.
  - Efforts to reduce the transnational aspects of corruption need to continue from both the supply side and the facilitation side.

### Authorities’ views
- The CNB assessed the Czech financial sector to be sound and resilient to potential adverse shocks.
- The CNB noted mortgage market is gradually picking up and property prices are rising again but judged the risk of excessive growth in mortgage loans to remain low for now.
- The CNB deemed appropriate to leave all macroprudential rates unchanged and DSTI and DTI ratios deactivated, but would be ready to increase the CCyB rate should the financial cycle move into a new expansion phase.
- On AML/CFT, the authorities indicated they would continue efforts to reduce the transnational aspects of corruption and to safeguard the financial and real estate sectors from money laundering risks and cross-border illicit financial flows.

### Structural policies—priorities for sustainable and inclusive growth
- Decisive action is needed to support economic transformation; the newly adopted Economic Strategy identifies key focus areas.
- Labor market and human capital:
  - More targeted active labor market policies would facilitate labor reallocation and enhance participation.
  - Proposed amendments to the Labor Code promote greater flexibility and should be adopted swiftly.
  - Use of existing data on job mismatches could inform modernized vocational training and targeted upskilling and reskilling measures.
  - Aligning education programs with labor market needs could address skill shortages.
  - Recent migration flows have been successfully absorbed; policies should focus on integrating migrants in productivity-enhancing ways.
  - Addressing the gender pay gap and increasing availability of affordable and high-quality childcare and eldercare could encourage more women to enter the workforce.
- Business environment, digitalization, and innovation:
  - Ease restrictions, reduce administrative burden, and accelerate digitalization to attract capital and support growth.
  - Priority actions include reducing administrative burden and red tape (especially among local municipalities), expediting spatial planning and construction permit processes, and enhancing adoption of digital technologies.
  - Harmonizing IT systems in public administration, upgrading online government services to businesses, and expanding digital infrastructures, including broadband, are critical.
  - Encourage use of existing tax credits for research and development and expand availability of venture capital and equity financing.
- Energy and climate neutrality:
  - Authorities plan to expand nuclear power capacity; the energy mix remained dominated by fossil fuels, which still represented two thirds of gross available energy in 2023.
  - Authorities committed to phasing out dependence on coal by 2033 and aligned with the EU's goal of achieving net-zero greenhouse gas emissions by 2050.
  - At current policies, the net-zero target is likely out of reach; investment in renewables remains low by international standards and could be scaled up.
  - Adaptation policies have reduced potential damage from recent floods; staff encourages continued investment in adaptation to climate change.

### Staff appraisal, macroeconomic outlook, and policy recommendations
- Growth and potential:
  - The Czech economy is slowly recovering after an unprecedented combination of shocks; growth is picking up.
  - Staff assesses the external position to be moderately stronger than the level implied by fundamentals and desirable policy settings in 2024.
  - Weak productivity growth and structural labor shortages are set to weigh down medium-term potential growth, which is now estimated at around 2 percent.
- Inflation and monetary policy:
  - Inflation has moderated and, after drifting higher on volatile food prices in the near term, is expected to converge back to target.
  - Risks to growth are on the downside while risks to inflation appear balanced.
  - Staff sees ground for continuing to lower the policy rate. With inflation expectations broadly anchored and output below potential, there is room for additional rate cuts to achieve by mid-2025 a neutral policy rate, which staff estimates at around 3 percent, albeit subject to large uncertainty.
  - Further easing should be pursued in a gradual, data-dependent manner; once uncertainty recedes, the CNB could consider placing more weight on forecast-based inflation targeting.
- Central bank balance sheet:
  - Consideration should be given to reducing the size of the central bank’s balance sheet over time.
  - Aim to gradually reduce the size of the balance sheet to help limit risks to the CNB’s financial position.
  - To minimize any impact on the exchange rate, this could be done through a transparent and predictable mechanism of small, regular FX sales above and beyond the existing program.
- Fiscal policy and public finances:
  - A broadly neutral fiscal stance this year is appropriate, but additional measures will be needed over the medium term to counter spending pressures.
  - Staff recommends a further adjustment of ½ percentage points of GDP annually over 2027–28 to reach a structural deficit of less than 1 percent of GDP by 2028.
  - Productivity-enhancing spending should be safeguarded, and automatic stabilizers should operate freely.
  - Policy actions should be considered both on the revenue and the spending side; reassess composition of tax revenue.
  - On spending, the reform of the Czech pension system is welcome, but further adjustments may be required in the future.
  - Containing expansion of the public sector workforce (including in fragmented local administrations) and improving targeting of social benefits can limit costs; efficient absorption of EU funds could boost productivity.
- Reiteration on financial stability:
  - Financial stability risks are contained and broadly unchanged since the last Article IV Consultation but warrant vigilance.
  - Real estate risks should continue to be monitored closely.
  - Given relatively low risk weights on mortgage loans, supervisors should continue to review bank exposures and ensure credit risks are accurately reflected in risk weights.
  - Continue to regularly evaluate mark-to-market losses on banks’ securities portfolios and impact of exchange rate fluctuations on corporate exposures.
  - Continued efforts are needed to reduce transnational aspects of corruption and to safeguard the financial and real-estate sectors from money laundering risks and cross-border illicit financial flows.
- Macroprudential stance summary:
  - Staff assesses the current macroprudential stance as appropriate; caution should be exerted in considering additional easing.
  - A further release of the CCyB would be advisable only in response to clear materialization of financial risks; an increase should be considered in case of rapid credit growth and rising asset prices.
- Call for swift structural action:
  - Swift action is needed to support the ongoing economic transformation.
  - Structural policies should focus on facilitating allocation of labor towards higher value-added sectors and firms, addressing the gender pay gap to boost labor participation, reducing administrative burden and red tape, accelerating digitalization, and promoting a more ambitious green transition.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 44.      It is recommended that the next Article IV consultation be completed on the standard

### It is recommended that the next Article IV consultation be completed on the standard 12-month cycle.

### Growth Developments
- Growth slowed in 2023 due to a significant decline in private consumption.
- Falling real wages and a higher saving rate weighed on durable and non-durable consumption.
- Investment was a drag on growth amid a tight policy mix.
- Gross capital formation has been driven primarily by a fall in inventories as bottlenecks in gross value chains eased.
- Key projections and indicators (Table 1 / Table 4):
  - Real GDP: 2020 -5.34, 2021 4.0, 2022 2.8, 2023 -0.1, 2024 1.0, 2025 2.4, 2026 2.2, 2027 2.1, 2028 2.0, 2029 2.0.
  - Domestic demand: 2023 -2.6, 2024 0.3, 2025 2.3, 2026 2.1.
  - Investment (percent of GDP): 2020 25.5, 2021 26.2, 2022 27.7, 2023 27.3, 2024 26.9, 2025 25.8.

### Labor Market Developments
- Unemployment rate increased modestly as the economy stagnated but remains among the lowest in Europe.
- Labor force participation has been broadly stable after the pandemic.
- Vacancy rates have declined gradually since 2019 but remain relatively high in most sectors compared to other European countries.
- Capacity utilization has fluctuated but converged toward average levels; growth of unit labor costs is below pre-pandemic rates.
- Key labor statistics:
  - Unemployment rate (average, in percent): 2020 2.5, 2021 2.7, 2022 2.2, 2023 2.6, 2024 2.8, 2025 2.5, 2026 2.4, 2027 2.4, 2028 2.4, 2029 2.4.
  - Employment growth: 2023 1.5, 2024 0.7, 2025 0.1.

### Inflation Developments
- CPI inflation dropped to 2 percent in early 2024 on a sizable fall in the housing and energy components.
- Food prices contributed to disinflationary pressures but have rebounded lately.
- Regulated prices inflation remains elevated, driven by electricity prices.
- HICP inflation has come down to the euro area average while services inflation remains more elevated.
- Import price growth picked up again in 2024; food and metal prices exerted downward pressure on producer price inflation.
- Key price indicators:
  - Consumer prices (average): 2020 3.2, 2021 3.8, 2022 15.1, 2023 10.7, 2024 2.5, 2025 2.4, 2026 2.0, 2027 2.0, 2028 2.0, 2029 2.0.
  - Consumer prices (end-of-period): 2023 6.9, 2024 3.0, 2025 2.1, 2026 2.0.

### Monetary Policy
- Policy rates have been gradually lowered since December 2023, gradually easing the policy stance.
- The policy stance, however, remains somewhat tight according to simple Taylor rules and according to a natural rate estimate of around 1 percent.
- CNB FX reserves have remained at elevated levels since 2017, exerting negative pressure on CNB equity.
- Compared to peers, total reserve assets are very high at over 50 percent of GDP and stand at more than 300 percent of the ARA metric.
- Key monetary indicators:
  - Natural rate (nominal) estimate: around 1 percent.
  - Policy rate and related series are shown through Nov-24 in the figures (Policy Stance; Policy Rate; Inflation Expectations).

### Fiscal Sector
- In recent years, revenue dropped after the change in the PIT regime while spending increased reflecting policy measures in response to the pandemic.
- The fiscal surplus turned into a deficit and public debt increased.
- Bond yields decreased and spreads tightened as the CNB eased monetary policy; CDS spreads remained tight.
- Key fiscal metrics (Table 3 / Table 1):
  - General government revenue (percent of GDP): 2020 40.6, 2021 40.1, 2022 39.9, 2023 40.1, 2024 40.5.
  - General government expenditure (percent of GDP): 2020 46.3, 2021 45.0, 2022 43.0, 2023 43.9, 2024 43.3.
  - Net lending / Overall balance (percent of GDP): 2020 -5.6, 2021 -5.0, 2022 -3.1, 2023 -3.8, 2024 -2.9, 2025 -2.5.
  - General government debt (percent of GDP): 2020 36.9, 2021 40.7, 2022 42.5, 2023 42.4, 2024 43.5, 2025 44.5.

### Financial Sector
- Around one third of Czech government securities are held by foreign residents and another third by banks; for banks, government securities and claims on the CNB have increased as a share of assets from 2022 to 2023.
- Non-performing loan ratios for the housing segment remain historically low, although the share of stage 2 loans increased in 2023.
- Banks’ risk weights have decreased with mortgage risk weights at around 20 percent under the IRB approach.
- The share of euro loans to NFCs increased strongly over 2023 and stands at around 50 percent.
- Financial soundness indicators (Table 6):
  - Regulatory capital to risk-weighted assets: 2017 18.1, 2018 18.3, 2019 19.7, 2020 22.1, 2021 21.2, 2022 20.3, 2023 20.6, 2024Q1 20.2.
  - Nonperforming loans to total gross loans: 2017 3.7, 2018 3.1, 2019 1.7, 2020 1.9, 2021 1.7, 2022 1.5, 2023 1.2, 2024Q1 1.4.
  - Return on assets: 2017 1.4, 2018 1.3, 2019 1.4, 2020 0.7, 2021 1.1, 2022 1.3, 2023 1.3, 2024Q1 1.3.
  - Liquid assets to total assets: 2017 20.3, 2018 15.1, 2019 29.1, 2020 30.4, 2021 33.0, 2022 28.7, 2023 27.9, 2024Q1 28.5.

### Housing Loans and Property Prices
- After a period of stagnation at elevated levels, house prices started rising again since 2024Q2, along with the real value of housing loans.
- With decreasing mortgage rates, mortgage loan activity is picking up, but the household debt to income ratio remains lower than in recent years.

### Euroization of Corporate Loans
- The share of foreign currency denominated corporate loans increased strongly to around 50 percent.
- Net FX exposure has remained at zero, implying limited corporate risk from FX denominated loans.
- Gross asset and liability positions in financial derivatives have moderated compared to peers.

### Non-Financial Corporations
- Gross profitability fell in 2024 for the first time since 2020, driving down dividend payments while gross savings remained largely unchanged.
- NFCs gross savings rate remains historically high and is used almost completely for investment.
- Leverage has increased in recent years; NFCs net financial wealth has decreased significantly since 2021 as valuation effects disproportionately affected liabilities.

### External Position and Competitiveness
- The REER depreciation came to a halt in early 2024 at a still elevated level compared to others.
- Terms of trade improved above pre-energy shock levels.
- The current account bounced back to a surplus driven by goods exports; the exports share recovered to pre-pandemic levels.
- NIIP has improved gradually while external debt has picked up slightly.
- Key external statistics (Table 2 / Table 1):
  - Current account balance (percent of GDP): 2020 1.8, 2021 -2.1, 2022 -4.7, 2023 0.3, 2024 1.6, 2025 0.3, 2026 0.4.
  - Gross international reserves (billions of euros): 2020 135.4, 2021 153.3, 2022 131.3, 2023 134.3, 2024 143.3, 2025 152.3, 2026 160.3.
  - Gross official reserves (months of imports): 2024 7.9 (Table 1 lists series: 2020 12.1, 2021 11.2, 2022 7.7, 2023 7.9, 2024 8.2).

### Key Policy Recommendation
- It is recommended that the next Article IV consultation be completed on the standard 12-month cycle.

*International Monetary Fund — Czech Republic mission materials (figures, tables, and staff projections as presented).*

### Annex I. Estimating Potential Growth

### Annex I. Estimating Potential Growth

### Medium-term estimate and trend
- Potential growth is estimated to be at around 2 percent in the medium term.
- Potential growth has been on a decreasing trend since the early 2000s.
- Total Factor Productivity (TFP) trend growth is expected to remain below its historical rate going forward given several structural headwinds facing the economy.

### Contributions to potential growth
- A shrinking working age population is expected to contribute negatively to growth.
- Capital contribution and hours worked trends are analyzed via the production function approach (figures referenced in the source illustrate historical and forecast contributions of TFP, labor, and capital to potential growth).

### Migration scenarios and quantitative impacts
- Different migration scenarios could increase or lower medium-term potential growth by around 0.25 percent from its medium-term estimate of 2 percent.
- Higher migration could make up for the negative contribution from a shrinking working age population and bring potential growth up by around 0.2-0.3 percent per year.

### Labor market indicators highlighted
- Hours worked (number per worker per year) and labor force participation rate (total, male, female) are tracked historically and forecasted to contribute to labor input in the production function decomposition.

*Source: Annex I. Estimating Potential Growth (extracted from the supplied IMF content)*

### Annex V. Sovereign Risk and Debt Sustainability Framework

### Annex V. Sovereign Risk and Debt Sustainability Framework

### Overall Risk Assessment and DSA Summary
- Final overall risk of sovereign stress: "low".
- Near-term assessment: "low" (note: near-term assessment not applicable with a disbursing IMF arrangement; performed but not published in surveillance-only or precautionary cases).
- Medium-term assessment: "low" (against a mechanical low signal).
- Long-term assessment: "moderate".
- Commentary highlights:
  - "Czech Republic borrows from the market and there are no significant near term borrowing risks."
  - "The public debt ratio is projected to increase in the medium term."
  - "Most indicators have started to normalize as the recovery from the COVID-19 shock has proceeded well and support measures to the cost-of-living crisis (has been) phased out."
  - "Long term, the large amortization module shows an increase in GFN and debt relative to GDP. GFN relative to GDP is expected to increase with climate change mitigation."
- Note on concept: "The risk of sovereign stress is a broader concept than debt sustainability. Unsustainable debt can only be resolved through exceptional measures (such as debt restructuring). In contrast, a sovereign can face stress without its debt necessarily being unsustainable, and there can be various measures—that do not involve a debt restructuring—to remedy such a situation, such as fiscal adjustment and new financing."

### DSA Mechanical Signals and Publication Notes
- Sustainability assessment: optional for surveillance-only cases and mandatory with a Fund arrangement.
- "The mechanical signal of the debt sustainability assessment is deleted before publication."
- In surveillance-only cases or cases with IMF arrangements with normal access, qualifiers indicating probability of sustainable debt ("with high probability" or "but not with high probability") are deleted before publication.
- Mechanical signal and final assessment elements reported in the framework (mechanical signal / final assessment / horizon / comments).

### Debt Coverage and Disclosures (DSA Perimeter and Accounting Basis)
- Coverage used in SRDSA: general government.
- Subsector inclusion in baseline:
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): Yes
  - Social security funds (SSFs): Yes
  - State governments: Yes
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: No
  - Other public financial corporations: No
- DSA accounting principle: "The DSA is prepared on a cash basis so there is no significant other accounts payable."
- Reporting on intra-government debt holdings: consolidated/non-consolidated cells shown; commentary: "coverage in this SRDSA is for the general government."
- Abbreviations provided: CG=Central government; GG=General government; NFPS=Nonfinancial public sector; PS=Public sector.
- Notes on valuation and debt concepts included (nominal value, face value, market value, stock of arrears as proxy, IPSGSs definition).

### Public Debt Structure Indicators
- Perimeter shown: general government.
- Currency composition commentary:
  - "In Czech Republic, most debt is denominated in local currency, with moderate non-resident holdings."
  - "Currency risks are also minimal for Czechia."
- Maturity and issuance strategy commentary:
  - "In the medium term, more than half of the instruments will be matured after 5 years and public debt will be mainly in domestic currency."
  - "The authorities indicated that their debt issuance strategy focuses on issuing local currency debt with an average maturity ranging between 5-7 years."
- Residual maturity reported: "6. years" (label as shown).

### Baseline Scenario (Percent of GDP unless indicated otherwise)
- Public debt path (selected annual values):
  - Actual 2023: 42.4
  - 2024: 43.5
  - 2025: 44.5
  - 2026: 45.4
  - 2027: 45.6
  - 2028: 45.9
  - 2029: 46.4
  - 2030: 46.8
  - 2031: 47.5
  - 2032: 48.3
  - 2033: 49.5
- Change in public debt series (selected): -0.1 (2023), 1.0 (2024), 1.0 (2025), 0.9 (2026), 0.2 (2027), 0.4 (2028), 0.4 (2029), 0.5 (2030), 0.6 (2031), 0.8 (2032), 1.2 (2033).
- Contribution of identified flows mirrors change in public debt: -0.8 (2023), 0.9 (2024), 1.0 (2025), 0.9 (2026), 0.2 (2027), 0.4 (2028), 0.4 (2029), 0.5 (2030), 0.6 (2031), 0.8 (2032), 1.2 (2033).
- Primary deficit (percent of GDP): 3.2 (2023), 1.6 (2024), 1.3 (2025), 0.6 (2026), 0.5 (2027), 0.7 (2028), 0.9 (2029), 1.0 (2030), 1.1 (2031), 1.2 (2032), 1.6 (2033).
- Noninterest revenues (percent of GDP): 39.4 (2023), 40.1 (2024), 40.2 (2025), 40.1 (2026), 39.1 (2027), 38.9 (2028), 38.7 (2029), 38.7 (2030), 38.7 (2031), 38.7 (2032), 38.6 (2033).
- Noninterest expenditures (percent of GDP): 42.6 (2023), 41.8 (2024), 41.5 (2025), 40.7 (2026), 39.6 (2027), 39.6 (2028), 39.6 (2029), 39.7 (2030), 39.8 (2031), 39.9 (2032), 40.2 (2033).
- Automatic debt dynamics and components:
  - Automatic debt dynamics overall: -3.3 (2023), -0.4 (2024), 0.1 (2025), 0.6 (2026), 0.0 (2027), -0.1 (2028), -0.2 (2029), -0.2 (2030), -0.1 (2031), -0.1 (2032), -0.1 (2033).
  - Real interest rate and relative inflation: -3.1 (2023), 0.1 (2024), 1.0 (2025), 1.6 (2026), 0.9 (2027), 0.8 (2028), 0.7 (2029), 0.7 (2030), 0.8 (2031), 0.8 (2032), 0.8 (2033).
  - Real growth rate: 0.0 (2023), -0.4 (2024), -1.0 (2025), -0.9 (2026), -0.9 (2027), -0.9 (2028), -0.9 (2029), -0.9 (2030), -0.9 (2031), -0.9 (2032), -0.9 (2033).
- Gross financing needs (GFN; percent of GDP): 7.4 (2023), 7.8 (2024), 6.9 (2025), 8.5 (2026), 8.0 (2027), 9.1 (2028), 10.0 (2029), 10.6 (2030), 11.3 (2031), 11.5 (2032), 11.9 (2033).
  - Of which: debt service: 4.9 (2023), 6.5 (2024), 5.9 (2025), 8.2 (2026), 7.8 (2027), 8.7 (2028), 9.4 (2029), 9.9 (2030), 10.5 (2031), 10.6 (2032), 10.7 (2033).
  - Local currency financing (percent of GDP): 4.5 (2023), 6.0 (2024), 5.5 (2025), 7.8 (2026), 7.5 (2027), 8.4 (2028), 9.1 (2029), 9.7 (2030), 10.3 (2031), 10.4 (2032), 10.5 (2033).
  - Foreign currency financing (percent of GDP): 0.4 (2023), 0.5 (2024), 0.4 (2025), 0.4 (2026), 0.3 (2027), 0.3 (2028), 0.3 (2029), 0.3 (2030), 0.2 (2031), 0.2 (2032), 0.1 (2033).
- Memo indicators:
  - Real GDP growth (percent): -0.1 (2023), 1.1 (2024), 2.3 (2025), 2.2 (2026), 2.1 (2027), 2.0 (2028), 2.0 (2029), 2.0 (2030), 2.0 (2031), 2.0 (2032), 2.0 (2033).
  - Inflation (GDP deflator; percent): 8.2 (2023), 4.2 (2024), 2.6 (2025), 2.0 (2026), 2.0 (2027), 2.0 (2028), 2.0 (2029), 2.0 (2030), 2.0 (2031), 2.0 (2032), 2.0 (2033).
  - Nominal GDP growth (percent): 8.1 (2023), 5.3 (2024), 5.0 (2025), 4.2 (2026), 4.1 (2027), 4.0 (2028), 4.0 (2029), 4.0 (2030), 4.0 (2031), 4.0 (2032), 4.0 (2033).
  - Effective interest rate (percent): 0.0 (2023), 4.2 (2024), 5.1 (2025), 5.7 (2026), 4.1 (2027), 3.9 (2028), 3.7 (2029), 3.7 (2030), 3.7 (2031), 3.8 (2032), 3.8 (2033).
- Staff commentary: "Public debt will rise in 2024 and 2025 and stabilize in the medium term. From 2029, public debt is projected to increase, driven by additional aging (healthcare and pension) spending pressures."

### Realism of Baseline Assumptions and Fiscal Adjustment
- Forecast track record and comparator group: "Advanced Economies, Non-Commodity Exporter, Surveillance."
- Commentary: "The 3-year adjustment in the cyclically-adjusted primary balance is within the highest 75-percentile."
- Observations:
  - "The unwinding of COVID-19 related spending and energy support measures led to a decline in the cyclically adjusted primary balance."
  - "Following a sharp decline in 2023, staff is projecting a recovery in private consumption in 2024-25, despite the contractionary fiscal stance in 2024."
  - "Therefore, the growth projection is higher than the levels implied by the fiscal multipliers in 2024-25."
- Historical percentile references and Laubach (2009) rule note: "Laubach (2009) rule is a linear rule assuming bond spreads increase by about 4 bps in response to a 1 ppt increase in the projected debt-to-GDP ratio."
- 3-year adjustment indicators:
  - "3-year debt reduction above 75th percentile (5.9 ppts of GDP) percentile rank 44.1."
  - "3-year adjustment above 75th percentile (2 ppts of GDP) percentile rank 79."

### Medium-Term Risk Assessment (Indices and Signals)
- Debt fanchart module:
  - Fanchart width: 33.8 0.5 (as shown).
  - Probability of debt non-stabilization: 87.3 0.7 (percent).
  - Terminal debt-to-GDP x: 12.4 0.3 (institutions index).
  - Debt fanchart index (DFI): 1.5.
  - Risk signal for fanchart: "Moderate".
- Gross Financing Needs (GFN) module:
  - Average baseline GFN: 8.4 2.9 (percent of GDP).
  - Initial banks' claims on the general government (pct bank assets): 14.5 4.7.
  - Change in banks' claims in stress (pct banks' assets): 3.7 1.2.
  - GFN financeability index (GFI): 8.8.
  - Risk signal for GFN: "Moderate".
- Medium-term index: combination of Debt fanchart index (1.5) and GFI (8.8) yields a medium-term risk signal: "Moderate".
- Probabilities for 2024-2029:
  - "Prob. of missed crisis, 2024-2029, if stress not predicted: 9.1 pct."
  - "Prob. of false alarms, 2024-2029, if stress predicted: 42.0 pct."
- Commentary: "The fanchart risk score is moderate, given the relatively wide fanchart and probability of debt not stabilizing. Gross financing needs are manageable and staff assesses that the banking sector is broadly resilient, well capitalized, liquid, and profitable. It is expected that the banking sector will have ample borrowing space with vulnerabilities easing as the monetary stance is relaxed."

### Long-Term Risk Assessment: Large Amortization and Aging Pressures
- Triggered modules: Pensions; Health.
- Long-term baseline behavior:
  - Baseline with t+5 shows increases in both GFN-to-GDP and public debt-to-GDP ratios over the long term as spending pressures rise (healthcare and pension).
  - Baseline with t+5 and DSPB scenario shows an increase in long-term GFN-to-GDP ratio and stabilization of public debt ratio at lower levels than staff's baseline.
- Scenarios and factors modeled:
  - Medium-term extrapolation with debt stabilizing primary balance.
  - Large amortizations.
  - Climate change: Adaptation; Climate change: Mitigation.
- Visual indicators show long-run projections to 2052 (GFN and debt series), with historical 10-year averages as reference.

### Climate Change Scenarios (Mitigation) — Long Term
- Commentary: "Both the gross financing ratio to GDP and the public debt ratio to GDP increase higher than the baseline when climate mitigation is incorporated."
- Stress scenario outcomes:
  - "Under the stress scenarios, the GFN-to-GDP ratio will increase above 10 percent in the long-term and public debt-to-GDP will increase above 55 percent."
- Series presented for:
  - Baseline: "10-year historical average"
  - "With climate mitigation (standardized scenario)"
  - "With climate mitigation (customized scenario)"
- Visual timeline extends to 2052 showing higher trajectories under mitigation scenarios for both GFN-to-GDP and total public debt-to-GDP.

### Data Issues and Adequacy for Surveillance (Annex VI extracts)
- Data adequacy assessment summary:
  - "The data provided to the Fund are adequate for surveillance."
  - "The data provided to the Fund have some shortcomings that somewhat hamper surveillance." (contextual explanation in matrix).
- SDDS Plus participation: Czech Republic adheres to the Special Data Dissemination Standard (SDDS) Plus since April 2016 and publishes the data on its National Summary Data Page.
- Staff notes on data use: "Staff does not use any data and/or estimates in the staff report in lieu of official statistics."
- Other data gaps: "None."
- Changes since last Article IV consultation: "No changes."
- Corrective actions and capacity development priorities: "None."
- Rationale for staff assessment: "Data collection and dissemination is overall adequate for surveillance. Granularity of financial soundness indicators (FSI) could be improved by including data on non-bank financial institutions (NBFI), given their increasing share in total financial assets."
- Table of Common Indicators required for surveillance: "As of 12/9/2024" with series-specific frequency and timeliness reporting (dates and expected frequencies provided in Table 3).

*Source: IMF staff (Annex V. Sovereign Risk and Debt Sustainability Framework).*

### Annex VII. Authorities’ Response to Past IMF Policy

### Annex VII. Authorities’ Response to Past IMF Policy

### Monetary policy
- Recommendation: Staff recommended maintaining a sufficiently tight monetary policy stance until there was firm evidence that inflation was on course to converge to target.
- Authorities’ response / Actions:
  - As inflation steadily declined back towards the 2 percent target inflation expectations re-anchored, the CNB lowered the policy rate by a cumulative 275 basis points to 4.25 percent.
  - The monetary policy stance is still tight.

### Fiscal policy
- Recommendation: Staff recommended that the PIT and real estate related taxes delivered pre-pandemic tax revenue as a percent of GDP and the pension reforms was further advanced.
- Authorities’ response / Actions:
  - No changes were introduced on the PIT and real estate related taxes.
  - A Pension reform package was approved by the cabinet and passed the first reading in parliament.

### Financial sector policies
- Recommendation: Staff recommended reactivating the limits on the Debt-to-Income (DTI) and the Debt-Service-to-income (DSTI) to manage potential systemic risks.
- Authorities’ response / Actions:
  - The DTI and DSTI remain deactivated, reflecting light flows on new mortgage loans.
  - The LTV ratio limit is set at 80 percent.

### Structural policies
- Recommendation: Staff recommended stepping up policies to enhance employment prospects for disadvantaged groups and continuing efforts to effectively integrate refugees and facilitate the inflow of migrants. Staff also encouraged reforms to support technological innovation.
- Authorities’ response / Actions:
  - Some progress was made on increasing the number of childcare services in support of mothers with young children.
  - The 2025 draft state budget prioritizes spending in education, research and development, infrastructure, and defense.

### Fund relations and key financial statistics (As of November 30, 2024)
- Membership Status: Joined 01/01/1993; Article VIII.
- General Resources Account:
  - Quota: 2,180.20 SDR Million (100.00 percent Quota)
  - Fund Holdings of Currency: 1,616.67 SDR Million (74.15 percent)
  - Reserve Position: 563.54 SDR Million (25.85 percent)
- SDR Department:
  - Net cumulative allocation: 2,869.82 SDR Million (100.00 percent Allocation)
  - Holdings: 2,566.23 SDR Million (89.42 percent)
- Outstanding Purchases and Loans: None.
- Latest Financial Arrangements:
  - Stand-By: Approval Date March 17, 1993; Expiration Date March 16, 1994; Amount Approved (SDR Million) 177.00; Amount Drawn (SDR Million) 70.00
- Projected Payments to the Fund (Forthcoming SDR Million):
  - 2024: Principal — (blank), Charges/Interest 10.24, Total 10.24
  - 2025: Principal — (blank), Charges/Interest 10.23, Total 10.23
  - 2026: Principal — (blank), Charges/Interest 10.23, Total 10.23
  - 2027: Principal — (blank), Charges/Interest 10.24, Total 10.24
  - 2028: (no entries beyond Charges/Interest listed)
- Implementation of HIPC Initiative: Not applicable.
- Implementation of Multilateral Debt Relief Initiative (MDRI): Not applicable.
- Implementation of Catastrophe Containment and Relief (CCR): Not applicable.

### Exchange rate arrangement and institutional notes
- Exchange rate arrangement: The currency of the Czech Republic is the Czech koruna, created on February 8, 1993. The de jure exchange rate arrangement is free floating and the de facto exchange rate arrangement is floating.
- The external value of the koruna is solely determined by supply and demand in the interbank foreign exchange market, in which the Czech National Bank (CNB) might participate.
- The Czech Republic has accepted the obligations of Article VIII, Section 2(a), 3, and 4 of the IMF’s Articles of Agreement.
- The Czech Republic maintains exchange restrictions for security reasons, based on UN Security Council Resolutions and Council of the European Union Regulations that have been notified to the Fund.
- Last Article IV Consultation: Concluded on January 22, 2024 (IMF Country Report No. 24/28).

### Surveillance, FSAP, and technical assistance
- FSAP participation:
  - An FSAP was carried out in late 2000/early 2001. The Financial System Stability Assessment was considered by the Executive Board on July 16, 2001.
  - An FSAP update was carried out in 2011.
  - ROSCs on: banking supervision; data dissemination; fiscal transparency; securities market; and transparency of monetary and financial policies were published on July 1, 2000.
- Technical Assistance (last mission entries listed):
  - FAD June/July 1999 — Medium-term fiscal framework
  - MCM February/June 1999 — Integrated financial sector supervision (with WB)
  - RES June/August 2000 — Inflation targeting (financed by MFD)
  - STA November 2006 — GFSM 2001 implementation
  - FAD December 2024 — Tax Administration Diagnostic Assessment

*Annex VII. Authorities’ Response to Past IMF Policy — source content from the provided IMF document.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1czeea2025001-print-pdf.pdf_