IMF Executive Board Concludes 2012 Article IV Consultation with the Czech Republic

Public Information Notice (PIN) No. 12/52
May 18, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with the Czech Republic is also available.

On May 4, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Czech Republic.1


The post-crisis recovery stalled in the second half of 2011 as exports lost momentum. The expansion since the 2009 recession was almost exclusively driven by exports, whereas domestic demand stagnated and remains about 7 percent below its peak. Economic activity is expected to remain flat in 2012 and gradually gain momentum as external conditions improve. Inflation has risen, and is expected to overshoot the target in 2012 before coming down in 2013, buoyed by the one-off impact of the VAT adjustment and food and energy prices. The combination of robust export performance and restrained imports kept the external deficit unchanged from the previous year at 3 percent of GDP in 2011 despite an increase in the income deficit.

The fiscal consolidation has continued apace. The overall deficit in 2011 is estimated to be 3.1 percent of GDP, significantly better than the previous year. The structural balance also improved by about one percentage point, mainly reflecting expenditure measures such as reductions in the central government wage bill and better targeting of social assistance. The public debt to GDP ratio at 41.2 percent at end-2011 remains manageable and attests to a strong fiscal position.

Monetary conditions have been appropriately supportive of economic activity. The policy rate was cut aggressively during the crisis, and remains at 0.75 percent since May 2010. Despite the recent inflation spike, inflation expectations remain well-contained, while the yield curve is consistent with a stable policy rate in the next several months. The floating exchange rate remains the main shock absorber.

The Czech financial system has proved resilient to the effects of the global crisis. Czech banks do not depend on wholesale or external funding (rather, the Czech banking sector is a net external creditor); credit growth is funded mainly by domestic deposits with the loan-to-deposit ratio of around 70 percent.

Heightened global risk aversion has not led to dislocations in domestic markets. The sovereign risk premium increased somewhat in the second half of 2011, but remained well below the highs seen during the 2009 crisis, and compares favorably with regional peers as well as most euro area countries. Reflecting the strong fiscal position, long-term government bond yields in local currency have remained below 4.5 percent even during the episode of global risk aversion in late 2011, and have averaged 3.5 percent in March.

Executive Board Assessment

Executive Directors noted that the Czech economy is well positioned in the current global economic climate, underpinned by prudent policies and strong fundamentals. Directors commended the significant progress made in consolidating public finances and the authorities’ strong commitment to long-term fiscal sustainability. Against the backdrop of an uncertain external environment, Directors encouraged the authorities to remain vigilant to the growth outlook, continue to strengthen the policy framework for financial stability, and accelerate structural reforms to enhance competitiveness and potential growth.

Directors discussed the appropriate fiscal policy stance in light of the weaker economic outlook for 2012. A number of Directors emphasized the importance of adhering to the fiscal targets to preserve the credibility of economic policies and market confidence, while not ruling out the role of automatic stabilizers if the situation deteriorates further. Other Directors saw merit in allowing automatic stabilizers to operate fully in 2012, and in the event that the growth outlook worsens significantly, in repacing the fiscal consolidation path without jeopardizing the medium-term objectives. Directors welcomed the government’s plan to improve the fiscal framework, including through introducing a fiscal rule and an independent fiscal council. They encouraged further efforts to reform the pension, health care, and tax systems, with a view to safeguarding the long-term sustainability of public finances.

Directors broadly agreed that the current monetary policy stance is appropriate and that the inflation-targeting framework continues to serve the economy well. A number of Directors considered that risks to inflation are broadly balanced, warranting a neutral bias. Directors welcomed the monetary authorities’ intention to remain flexible. A few Directors, noting that inflation expectations are well anchored, saw scope for adopting a more accommodative policy stance in light of deteriorating growth prospects. Additional policy options could be explored to prepare for a possible disinflationary scenario.

Directors observed that the Czech financial system remains profitable and resilient, reflecting a conservative structure of bank balance sheets and the low indebtedness of the corporate and household sectors. They welcomed recent steps to strengthen the macroprudential framework and reporting requirements for banks’ liquidity positions and intra-group exposures. Directors looked forward to further progress in implementing the FSAP recommendations, particularly on bank supervision and crisis management.

Directors stressed that steady implementation of structural reforms is key to boost potential growth. The government’s comprehensive reform strategy is a welcome step toward improving international competitiveness. Key priorities include developing infrastructure, improving labor market flexibility, and strengthening institutions and governance.

Czech Republic: Selected Economic Indicators, 2007–13
  2007 2008 2009 2010 2011 2012 2013



      Est. Staff Proj.

Real economy (change in percent, unless stated otherwise)


Real GDP

5.7 3.1 -4.7 2.7 1.7 0.1 2.1

Domestic demand

6.6 2.2 -5.9 2.0 -1.0 -1.4 1.4

CPI (average)

2.9 6.3 1.0 1.5 1.9 3.5 1.9

PPI (average)

4.1 4.5 -3.1 1.3

Unemployment rate (in percent)

5.3 4.4 6.7 7.3 6.7 7.0 7.4

Gross national savings (percent of GDP)

25.4 26.8 21.6 22.1 21.5 21.3 21.8

Gross domestic investments (percent of GDP)

29.8 28.9 24.0 25.1 24.5 23.4 23.7

Public finance (percent of GDP) 1/


General government revenue

40.3 38.9 39.1 39.3 40.7 41.3 41.2

General government expenditure

41.0 41.1 44.9 44.1 44.5 44.9 44.6

Net lending / Overall balance

-0.7 -2.2 -5.8 -4.8 -3.8 -3.5 -3.4

General government debt

28.0 28.7 34.3 37.6 41.5 43.9 45.4

Money and credit (end of year, percent change)


Broad money (M3)

16.1 13.6 0.2 1.9 2.7

Private sector credit

26.6 16.1 0.8 3.0 5.5

Interest rates (in percent, year average)


Three-month interbank rate

3.1 4.0 2.2 1.3 1.2

Ten-year government bond

4.3 4.6 4.7 3.7 3.5

Balance of payments (percent of GDP)


Trade balance (goods and services)

2.9 2.7 4.3 3.4 4.2 5.0 5.2

Current account balance

-4.4 -2.1 -2.5 -3.0 -2.9 -2.1 -1.9

Gross international reserves (US$ billions)

34.9 37.0 41.6 42.5 40.3 42.9 44.9

Reserve cover (in months of imports of goods and services)

3.5 3.2 4.5 3.9 3.2 3.8 3.9

Exchange rate


Nominal effective exchange rate (index, 2000=100)

108.1 121.6 116.3 118.7 122.4 n.a. n.a.

Real effective exchange rate (index, CPI-based; 2000=100)

108.8 125.5 120.5 122.5 125.0 n.a. n.a.

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

1/ Public finance numbers reflect data available at the time of the Article IV Consultation mission. After the mission, the authorities have published the new estimates of net lending/ overall balance of 3.1 percent, and general government debt of 41.2 percent for 2011.

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. 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:


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