IMF Executive Board Concludes 2022 Article IV Consultation with the Czech Republic
IMF News, January 20, 2023
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- Published: January 20, 2023
Outlook and recent developments
- Russia’s war in Ukraine has stifled the Czech Republic’s nascent recovery from the pandemic.
- Growth projections:
- Growth is projected to slow to 2.5 percent in 2022.
- Growth is projected to turn negative to around -0.5 percent in 2023.
- Growth is projected to significantly rebound by end 2024 mainly driven by consumption and exports.
- Labor market:
- Labor market remains tight; tightness is expected to ease as the economy cools and Ukrainian refugees integrate into the labor force.
- Inflation:
- Inflation is well above target.
- In the near term, inflationary pressures are expected to be driven by external and domestic factors.
- Barring additional shocks, headline inflation is projected to achieve the policy target range during 2024, as contractionary monetary policy actions taken by the CNB take effect.
- Uncertainty and balance of risks:
- Uncertainty is high due to the war with risks to economic activity tilted to the downside and risks to inflation tilted to the upside.
- The economy remains vulnerable to the availability of and further increases in energy and commodity prices.
- Depreciation pressures on the koruna could arise if the interest rate differential versus major central banks narrows as they tighten their monetary policies.
- An unexpected significant fall in global demand could cause a fall in external inflationary pressures.
Executive Board assessment
- The recovery from the pandemic is being hindered by the fallout from Russia’s war in Ukraine, likely turning 2023 into a recession year.
- Uncertainty around the outlook is very high with risks to economic activity titled to the downside and those for inflation to the upside.
- Policy stance recommendations:
- Staff recommends further hikes to the policy rate in the short term to above the current level of the policy rate.
- While a careful balance between high inflation and weakening economic activity needs to be taken, priority should be given to decisively quell inflation.
- If inflation expectations become untethered, this would require a significantly higher tightening to restore price stability and thus entail more costly economic adjustments.
- Fiscal stance:
- The contractionary fiscal stance is appropriate against the backdrop of high inflation and low unemployment.
- Previously-adopted untargeted support measures should be unwound to enhance policy space.
- The contractionary stance supports the overall policy mix by avoiding compounding inflationary pressures by adding to aggregate demand.
- Support for households and firms amidst the cost-of-living crisis should be targeted, temporary, and preserve price signals.
- The PIT regime as well as the property transfer tax should be reinstated to pre-pandemic levels as soon as conditions allow.
- If increasing taxes in the current environment is not feasible, once the acute cost of living crisis wanes, the reintroduction of taxes could be undertaken in phases, while increasing the progressivity of the PIT and stepping up transfers for the vulnerable.
- The windfall tax can help offset the cost-of-energy relief measures, but its ad-hoc nature could disincentivize investment by undermining tax certainty.
Financial stability and macroprudential stance
- Borrower-based measures:
- The retightening of borrower-based measures is welcome as these have helped to tame risk taking, but debt servicing capacity should be monitored.
- While retightened borrower-based measures are increasingly binding for a growing number of borrowers, close monitoring of debt-servicing is warranted, especially if further increases in interest rates materialize or continued increases in the cost of living further limit the ability to service debt.
- Further loosening or tightening of macroprudential measures may be needed conditional on market developments and risk-taking behavior.
- Risk measurement:
- Staff welcomes the CNB’s retightening of the countercyclical capital buffer rate and the development of models to assess sectoral risk weights.
- Staff recommends further enhance models to improve the measurement of risk at the individual exposure level, including leveraging information for corporates.
- Vulnerabilities:
- In the unlikely event of a disorderly house price correction, financial disruptions could impair banks’ and households’ balance sheets, potentially suppressing aggregate demand.
- The risk of inflation expectations becoming untethered or wage-price spirals forming are high.
Structural policies and labor market measures
- Labor supply and inclusion:
- Structural policies should enhance labor supply while facilitating the green-digital transition and preserving long-term fiscal sustainability.
- Employment prospects for disadvantaged groups should be stepped up, while further integrating migrants, and Ukrainian refugees.
- Spending on Active Labor Market Policies (ALMPs), including reskilling and vocational training should be increased to facilitate job matching, and the cross-sectoral reallocation of workers.
- Green-digital transition and regulatory reform:
- The implementation of the RRP would help build digital skills, while supporting the green transition, which would bolster energy security by increasing energy efficiency and the supply of renewables.
- Streamlining the business regulatory framework and simplifying construction permitting remain essential.
- Fiscal sustainability:
- Strengthening long-term fiscal sustainability hinges on linking the retirement age to life expectancy.
Key macroeconomic projections and indicators (selected)
- Real GDP (expenditure):
- 2019: 3.0
- 2020: -5.5
- 2021: 3.5
- 2022: 2.5
- 2023: -0.5
- 2024: 3.4
- 2025: 2.8
- Domestic demand:
- 2019: 3.2
- 2020: -5.6
- 2021: 7.8
- 2022: 3.1
- 2023: -4.4
- 2024: 1.2
- 2025: 2.6
- Consumption:
- 2019: -4.1
- 2020: 3.3
- 2021: -0.7
- 2022: -1.4
- 2023: 3.8
- 2024: 2.2
- Investment:
- 2019: -9.3
- 2020: 19.0
- 2021: 11.5
- 2022: -10.2
- 2023: -4.0
- Exports:
- 2019: -8.0
- 2020: 6.9
- 2021: 5.1
- 2022: 4.7
- 2023: 6.4
- 2024: 2.9
- Imports:
- 2019: -8.2
- 2020: 13.3
- 2021: 4.4
- 2022: 5.2
- 2023: (not separately listed in source for projection)
- Investment (percent of GDP):
- 2019: 27.1
- 2020: 26.5
- 2021: 26.0
- 2022: 24.4
- 2023: 25.1
- 2024: 25.3
- 2025: 25.4
- Gross domestic investments (percent of GDP):
- 2019: 27.6
- 2020: 26.2
- 2021: 30.2
- 2022: 33.6
- 2023: 29.1
- 2024: 26.8
- 2025: 26.7
- 2026: 27.0
- Gross national savings (percent of GDP):
- 2019: 27.9
- 2020: 28.1
- 2021: 29.3
- 2022: 29.6
- 2023: 28.2
- 2024: 28.0
- 2025: 29.0
- 2026: 29.2
- 2027: 29.5
- Output gap (percent of potential output):
- 2019: -0.6
- 2020: 1.0
- 2021: -1.0
- Potential growth:
- 2019: -2.2
- 2020: 0.7
- Consumer prices (average):
- 2021: 16.0
- 2022: 9.3
- Consumer prices (end-of-period):
- 2021: 6.6
- Producer price index (average):
- 2019: 0.1
- 2020: 7.2
- GDP deflator (average):
- 2019: 3.9
- 2020: 4.3
- 2021: 9.7
- 2022: 8.4
- 2023: 1.8
- Money and credit (end of year, percent change):
- Broad money (M3): 2019: 10.0; 2020: 6.8
- Private sector credit: 2019: 3.6; 2020: 8.9
- Public finance (percent of GDP):
- General government revenue: 2019: 41.3; 2020: 41.5; 2021: 41.4; 2022: 41.7; 2023: 42.9; 2024: 40.8; 2025: 40.7
- General government expenditure: 2019: 41.1; 2020: 47.2; 2021: 46.5; 2022: 46.0; 2023: 44.2; 2024: 43.2
- Net lending / Overall balance: 2019: 0.3; 2020: -5.8; 2021: -2.7; 2022: -2.5
- Primary balance: 2019: 0.8; 2020: -5.2; 2021: -4.5; 2022: -3.4; 2023: -1.5
- Structural balance (percent of potential GDP): 2019: -0.8; 2020: -3.9
- General government debt:
- 2019: 30.0
- 2020: 37.7
- 2021: 42.0
- 2022: 41.8
- 2023: 43.7
- 2024: 44.1
- 2025: 44.9
- 2026: 45.9
- Balance of Payments (percent of GDP):
- Trade balance (goods and services): 2019: 6.0; 2020: 6.7; 2021: -1.9; 2022: 5.5; 2023: 5.8; 2024: 5.4
- Gross international reserves (billions of euros):
- 2019: 133.4
- 2020: 135.4
- 2021: 153.3
- 2022: 151.3
- 2023: 160.3
- 2024: 169.3
- 2025: 178.3
- 2026: 186.3
- 2027: 192.3
- Gross international reserves (in months of imports of goods and services):
- 2019: 10.5
- 2020: 11.9
- 2021: 11.1
- 2022: 8.7
- 2023: 9.1
- 2024: 9.4
- Gross international reserves (in percent of short term debt, remaining maturity):
- 2019: 129.9
- 2020: 142.8
- 2021: 139.7
- 2022: 128.7
- 2023: 129.5
- 2024: 133.6
- 2025: 139.6
- 2026: 145.1
- 2027: 150.3
- Memorandum items:
- Nominal GDP (USD billions):
- 2019: 252.5
- 2020: 246.0
- 2021: 281.8
- 2022: 293.08
- 2023: 309.08
- 2024: 325.81
- 2025: 339.00
- 2026: 346.89
- 2027: 350.65
- Population (millions): 10.6; 10.7 (years not specified)
- GDP per capita (USD thousands):
- 2019: 23.71
- 2020: 23.00
- 2021: 26.85
- 2022: 27.85
- 2023: 29.32
- 2024: 30.88
- 2025: 32.12
- 2026: 32.87
- 2027: 33.24
Key recommendations and near-term priorities
- Monetary policy:
- Further hikes to the policy rate in the short term to above the current level of the policy rate are recommended to decisively quell inflation.
- Fiscal policy:
- Maintain a contractionary fiscal stance to avoid compounding inflationary pressures.
- Unwind previously-adopted untargeted support measures; design support to be targeted, temporary, and preserve price signals.
- Reinstatement of the PIT regime and the property transfer tax to pre-pandemic levels as soon as conditions allow; consider phased reintroduction if immediate increases are infeasible.
- Increase progressivity of the PIT and step up transfers for the vulnerable when feasible.
- Use of windfall tax can offset energy relief costs but beware of undermining tax certainty.
- Macroprudential and financial sector:
- Continue monitoring debt-servicing capacity and adjust macroprudential measures as needed.
- Improve risk measurement across the cycle and at individual exposure levels.
- Structural reforms:
- Enhance labor supply, integrate migrants and Ukrainian refugees, increase ALMP spending, implement RRP to support digital skills and green transition, and streamline business and permitting regulations.
- Link retirement age to life expectancy to strengthen long-term fiscal sustainability.
Administrative note
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.
IMF Executive Board Concludes 2022 Article IV Consultation with the Czech Republic — Press Release No. 23/07