IMF Executive Board Concludes 2024 Article IV Consultation with the Czech Republic
IMF News, January 29, 2025
Source details
- Canonical URL
- IMF Executive Board Concludes 2024 Article IV Consultation with the Czech Republic
Other formats
Bibliographic details
- Published: January 29, 2025
Overview
- On January 24, 2025, the Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation with Czech Republic and endorsed the staff appraisal on a lapse-of-time basis without a meeting.
- After a period of stagnation, growth has picked up since late 2023, but the recovery has been slow and uneven.
- Consumer spending has strengthened, sustained by a rebound in real wages and early signs of a decline in the household saving rate. Investment remains weak, hampered by uncertainty about global trade, the effects of tight domestic policies and a slow absorption of EU funds.
- The labor market: despite subdued economic activity and a decline in job vacancies, structural job shortages persist—particularly among skilled workers—and labor hoarding continues.
Inflation, Monetary Policy, and Central Bank Balance Sheet
- Headline inflation dynamics:
- Headline inflation reached the CNB’s 2 percent target and remained close to it over the past summer.
- Headline inflation drifted to 2.8 percent by October 2024, mainly reflecting volatile food prices and administered prices base effects.
- Core inflation stood at 2.4 percent.
- Staff assessment and recommendations:
- 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 and inflation stabilizes more closely to target, 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.
- Profitability has been considerably improved through various ad hoc cost rationalization measures and diversification towards higher yielding assets, but focus should shift from profit maximization to balance sheet reduction.
- Aiming to gradually reduce the size of the balance sheet would 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.
Growth Outlook and Risks
- Near-term and 2025 outlook:
- Growth is expected to have extended its recovery in the second half of 2024, driven by higher real disposable income, but the currently restrictive policy mix and a weak external environment likely dampened near-term outcomes.
- Growth is expected to accelerate to 2.4 percent in 2025 from a projected 1 percent in 2024.
- Wage moderation supports competitiveness of Czech manufacturers in export markets.
- Executive Board assessment:
- The Czech economy is slowly recovering after an unprecedented combination of shocks but faces structural headwinds.
- Staff assesses the external position to be moderately stronger than the level implied by fundamentals and desirable policy settings in 2024 (Annex IV).
- 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 has moderated and, after drifting higher on volatile food prices in the near term, is expected to converge back to target.
- Risks:
- Downside risks to growth: further geoeconomic fragmentation and a weaker than anticipated recovery among key European trading partners, especially Germany.
- Balanced or upside inflation risks: stronger wage growth, stickier than expected services inflation, and protracted increases in commodity prices could exert upward pressure on inflation.
Fiscal Policy and Public Finances
- Near-term stance and medium-term needs:
- In 2025, fiscal policy is set to turn neutral.
- 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.
- Revenue and spending policy guidance:
- Policy actions should be considered both on the revenue and the spending side.
- Staff encourages the authorities to reassess the composition of tax revenue.
- On the spending side, the reform of the Czech pension system is welcome, but further adjustments may be required in the future.
- Containing the expansion of the public sector workforce, including in fragmented local administrations, and improving targeting of social benefit can limit costs.
- Efficient absorption of EU funds could boost productivity.
Financial Stability and Macroprudential Policy
- Overall assessment:
- 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.
- Supervisory and risk-monitoring recommendations:
- 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 banks’ securities portfolios and the impact of exchange rate fluctuations on their corporate exposures.
- Continued efforts are needed 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.
- Macroprudential stance:
- 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.
- Conversely, an increase in the CCyB rate should be considered in case of rapid credit growth and rising asset prices.
Structural Reforms and Policy Priorities
- Swift action is needed to support the ongoing economic transformation. Building on the newly adopted Economic Strategy, the authorities are urged to undertake concrete policy measures.
- Recommended structural policy priorities:
- Facilitate the allocation of labor towards higher value-added sectors and firms.
- Address the gender pay gap to boost labor participation.
- Reduce administrative burden and red tape.
- Accelerate digitalization.
- Promote a more ambitious green transition.
Key Economic Indicators (2023–2025, as reported)
- NATIONAL ACCOUNTS
- Real GDP (expenditure): 2023: -0.1; 2024: 1.0; 2025 (Projections): 2.4
- Domestic demand: 2023: -2.6; 2024: 0.3; 2025: 2.3
- Output gap (percent of potential output): 2023: -1.0; 2024: -1.4; 2025: -0.6
- LABOR MARKET
- Employment: 2023: 1.5; 2024: 0.7; 2025: 0.1
- Unemployment rate (average, in percent): 2023: 2.6; 2024: 2.8; 2025: 2.5
- PRICES
- Consumer prices (average): 2023: 10.7
- Consumer prices (end-of-period): 2023: 6.9; 2024: 3.0; 2025: 2.1
- MACRO-FINANCIAL
- Broad money (M3): 2023: 8.1; 2024: 5.3; 2025: 5.0
- Private sector credit: 2023: 6.5; 2024: 4.0; 2025: 3.5
- Ten-year government bond: 2023: 4.4; 2024: 3.6
- Nominal effective exchange rate (index, 2005=100): 2023: 112.6
- Real effective exchange rate (index, CPI-based; 2005=100): 2023: 125.4
- PUBLIC FINANCE (percent of GDP)
- General government revenue: 2023: 40.1; 2024: 40.5
- General government expenditure: 2023: 43.9; 2024: 43.3; 2025: 43.0
- Net lending / Overall balance: 2023: -3.8; 2024: -2.9; 2025: -2.5
- Primary balance: 2023: -3.2; 2024: -1.6; 2025: -1.3
- Structural balance (percent of potential GDP): 2023: -2.2
- General government debt: 2023: 42.4; 2024: 43.5; 2025: 44.5
- BALANCE OF PAYMENTS (percent of GDP)
- Trade balance (goods and services): 2023: 6.4
- Current account balance: 2023: 1.6
- Gross international reserves (billions of euros): 2023: 134.3; 2024: 143.3; 2025: 152.3
- (in months of imports of goods and services): 2023: 7.9; 2024: 8.2; 2025: 8.0
- (in percent of short-term debt, remaining maturity): 2023: 119.1; 2024: 121.9; 2025: 123.3
Source: IMF press release — January 29, 2025.