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IMF Executive Board Concludes Article IV Consultation with Czech Republic

June 13, 2019

On June 12, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Czech Republic and considered and endorsed the staff appraisal without a meeting. [2]

The economy is doing well, but supply constraints are biting. Growth has slowed as the economy has reached capacity limits, with very low unemployment even as participation has increased. Recent wage increases have been very strong, ahead of productivity. So far, inflation remains contained. The economy continues to run a current account surplus, even though domestic absorption has picked up. But the housing market is pressured, especially in metropolitan areas.

Growth is forecast to moderate. In the near term, domestic demand is expected to remain strong but slow down; external demand is expected to slow in the first half of the year and recover in the second, causing growth to moderate to 2.5 percent for 2019 and continue around that rate over the medium term. Risks to this outlook are mainly external and to the downside, such as from a disorderly Brexit or further weakness in Germany. The outlook for inflation—and hence the monetary stance—is uncertain, as the outcome will depend on which of domestic inflationary and imported disinflationary pressures will dominate.

Executive Board Assessment

In concluding the 2019 Article IV Consultation with the Czech Republic, Executive Directors endorsed staff’s appraisal as follows:

The economy is doing well but is up against capacity constraints. There are no major imbalances, but growth is expected to slow as supply pressures bite.

The real exchange rate is moderately undervalued, and likely to appreciate over the medium term. The REER has appreciated steadily since 2016, but the external position in 2018 was nonetheless moderately stronger than the level consistent with fundamentals and medium-term policies. The current account balance is expected to converge to a small deficit over the medium term, supported by household income growth and small fiscal deficits.

The current policy mix is appropriate. Staff favors holding policy conditions as present, with a bias to raising policy interest rates rather than tightening the fiscal stance if inflation pressures were to continue, which would be more consistent with gradual exchange rate appreciation. Macroprudential measures can help insure that households do not take on too much debt. But they should be complemented with measures to enhance housing supply. If external conditions were to be substantially worse than expected, the first response would be to ease policy rates and allow automatic fiscal stabilizers to work; if shocks are persistent, there is ample space for discretionary fiscal easing.

Over the longer term, a durable and coordinated policy agenda that facilitates higher productivity is crucial for staying on a path of increasing living standards. Coordination across government—among ministries, and across the layers of central, regional, and municipal bodies—needs improvement, so that plans are implemented effectively and bottlenecks in labor supply, housing, and infrastructure are addressed.

The focus for fiscal policy should be on spending and revenue choices that are as friendly as possible to raising growth. The obvious—albeit constrained by the fiscal rules—would be investment in public goods that boosts productive potential, especially given that public debt, already low, will decrease further over the next few years and the costs of funding such investment are still low. This investment includes not just major physical structures—roads, for example—but resources such as child care and “intangibles” such as education and digital access. Hard choices will also need to be made over social spending ahead of further population aging; otherwise, policy should seek efficiency gains. Targeting extra taxes at particular sectors risks distorting economic incentives for potentially little return in revenues.

The banking system is stable, well capitalized, and well placed to direct credit toward investment. Recent cases of money laundering (ML) in several EU countries, however, have revealed weaknesses in AML/CFT regimes across Europe, heightening concerns about cross-border flows. The authorities should continue their AML/CFT efforts, monitoring financial flows coming into and going out of the Czech Republic, especially those associated with non-resident accounts, and identifying sources of foreign funds. The authorities should also continue to monitor ML risks associated with the real estate sector, including by enhancing data collection on non-residents and beneficial owners.

Czech Republic: Selected Economic Indicators, 2014–24

(Annual percent change, unless otherwise indicated)

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

Staff projections

NATIONAL ACCOUNTS

Real GDP (expenditure)

2.7

5.3

2.5

4.4

2.9

2.5

2.6

2.6

2.5

2.5

2.5

Domestic demand

3.4

5.9

1.1

3.5

3.9

3.1

3.2

3.0

2.9

2.9

2.9

Consumption

1.6

3.2

3.4

3.4

3.3

2.7

2.7

2.6

2.4

2.4

2.4

Public

1.1

1.9

2.7

1.3

3.7

2.4

2.5

1.8

1.7

1.7

1.7

Private

1.8

3.7

3.6

4.3

3.2

2.8

2.8

2.9

2.8

2.8

2.8

Investment

8.6

13.0

-4.3

4.0

5.5

4.2

4.3

4.0

3.9

3.9

3.9

Exports

8.7

6.0

4.3

6.7

4.5

4.0

4.1

4.2

4.2

4.2

4.2

Imports

10.1

6.8

2.8

5.9

6.0

5.0

4.9

4.7

4.7

4.7

4.7

Contribution to GDP

Domestic demand

3.1

5.5

1.1

3.3

3.7

3.0

3.0

2.8

2.7

2.7

2.8

Net exports

-0.4

-0.2

1.4

1.0

-0.8

-0.5

-0.4

-0.2

-0.2

-0.2

-0.2

Investment (percent of GDP)

25.1

26.5

24.9

24.8

26.2

26.4

26.6

26.8

26.9

27.0

27.1

Gross domestic investments (percent of GDP)

25.9

28.0

26.0

25.9

26.2

26.3

26.6

26.7

26.8

27.0

27.1

Gross national savings (percent of GDP)

26.1

28.2

27.5

27.5

26.5

26.4

26.4

26.5

26.5

26.6

26.6

LABOR MARKET

Employment

0.7

1.4

1.9

1.6

1.4

0.0

0.0

0.0

0.0

-0.2

-0.2

Total labor compensation

3.5

5.0

5.9

8.3

9.5

7.2

5.1

4.7

4.6

4.5

4.5

Unemployment rate (in percent)

6.1

5.0

3.9

2.9

2.2

2.2

2.3

2.5

2.8

3.0

3.2

PRICES

Consumer prices (average)

0.4

0.3

0.7

2.5

2.2

2.5

2.3

2.0

2.0

2.0

2.0

Consumer prices (end-of-period)

0.1

0.0

2.0

2.4

2.0

2.3

2.0

2.0

2.0

2.0

2.0

Producer price index (average)

-0.8

-3.2

-3.2

1.8

2.0

GDP deflator (average)

2.5

1.2

1.3

1.4

2.1

2.8

2.4

2.0

2.0

1.9

1.9

MACRO-FINANCIAL

Money and credit (end of year, percent change)

Broad money (M3)

5.9

8.0

6.5

10.4

6.3

Private sector credit

3.6

6.5

7.8

5.9

6.9

Interest rates (in percent, year average)

Three-month interbank rate

0.4

0.3

0.3

0.4

1.3

Ten-year government bond

1.6

0.6

0.4

1.0

2.0

Exchange rate

Nominal effective exchange rate (index, 2005=100)

111.5

110.1

112.9

117.1

122.4

Real effective exchange rate (index, CPI-based; 2005=100)

110.2

108.2

110.7

115.3

121.1

PUBLIC FINANCE (percent of GDP)

General government revenue

40.3

41.1

40.2

40.5

41.7

41.8

41.6

41.5

41.4

41.3

41.2

General government expenditure

42.4

41.7

39.5

38.9

40.8

41.6

41.7

41.7

41.8

41.7

41.6

Net lending / Overall balance

-2.1

-0.6

0.7

1.6

0.9

0.2

-0.1

-0.2

-0.4

-0.4

-0.4

Primary balance

-1.0

0.3

1.5

2.2

1.5

0.8

0.4

0.3

0.1

0.1

0.1

Structural balance (percent of potential GDP)

-1.5

-0.8

0.7

1.2

0.5

0.2

-0.1

-0.2

-0.4

-0.4

-0.4

General government debt

42.2

40.0

36.8

34.7

32.7

31.7

30.6

29.8

29.1

28.2

27.4

BALANCE OF PAYMENTS (percent of GDP)

Trade balance (goods and services)

6.4

5.8

7.4

7.7

6.4

5.9

5.4

5.1

4.9

4.7

4.5

Current account balance

0.2

0.2

1.6

1.7

0.3

0.1

-0.2

-0.2

-0.3

-0.4

-0.4

Gross international reserves (billions of euros)

44.9

59.2

81.3

123.4

124.5

126.8

129.2

132.1

135.4

139.2

143.3

(in months of imports of goods and services)

4.1

5.6

7.7

10.7

10.0

9.7

9.5

9.2

8.9

8.7

8.4

(in percent of short term debt, remaining maturity)

88.0

105.6

121.2

121.7

122.7

124.4

126.4

128.6

131.3

134.3

137.5

MEMORANDUM ITEMS

Nominal GDP (USD billions)

207.8

186.8

195.1

215.9

244.1

248.4

263.7

277.7

292.4

306.8

322.8

Population (millions)

10.5

10.5

10.6

10.6

10.6

10.6

10.6

10.6

10.7

10.7

10.7

GDP per capita (USD)

19,769

17,729

18,485

20,410

23,007

23,382

24,794

26,082

27,432

28,762

30,245

Real GDP per capita

2.8

5.1

2.3

4.1

2.6

2.3

2.5

2.5

2.5

2.5

2.5

Output gap (percent of potential output)

-3.0

-0.1

-0.3

1.1

0.7

0.1

0.1

0.0

0.0

0.0

0.0

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


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

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