IMF Concludes 2021 Article IV Consultation with Czech Republic

Washington, DC : On January 24, 2022, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with Czech Republic.

The Czech Republic entered the pandemic on a solid economic footing with significant policy space. Real GDP declined by 5.8 percent in 2020 and is estimated to have rebounded by about 3 percent in 2021. Strong and swift policy support softened the downturn and helped protect people, businesses, and jobs. Inflation in 2021 reached elevated levels on the back of high energy prices, supply chain disruptions, and tight labor and housing markets. Macro-financial vulnerabilities stem largely from record house price and mortgage credit growth.

The risks to the outlook are tilted to the downside and clouded by unusually high uncertainty due to the ongoing spread of the Omicron variant and high infection rates. Nevertheless, the economy is projected to recover further in the coming years and growth is estimated to converge to about 2½ percent in the medium term. After significantly increasing in the first half of 2022, inflation is projected to converge back to the Czech National Bank’s (CNB) 2 percent target by late 2023, assuming energy prices stabilize, supply disruptions ease, and higher policy rates reduce demand pressures.

Executive Board Assessment[2]

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ comprehensive policy response to the pandemic, assisted by strong policy frameworks and prudently accumulated buffers. An economic recovery is underway, but the outlook remains clouded by elevated uncertainty and risks. While support to the economy should remain flexible until the recovery is broadly entrenched, sound policies are needed over the medium-term to support macro-financial stability and promote sustainable, greener and inclusive growth.

Directors agreed that the monetary policy stance is appropriate to counteract inflation pressures and manage inflation expectations. Looking forward, they underscored that policy action should remain data dependent and carefully weighing risks from raising rates too quickly against those from overshooting inflation.

Directors agreed that ample fiscal space had served the Czech Republic well during the crisis. While a flexible fiscal stance should be maintained in the near-term, they saw merit in a more ambitious consolidation path over the medium-term, including both expenditure and growth-friendly revenue measures, to regain policy space. To that effect, recently-adopted measures with permanent budgetary implications should be unwound as the recovery takes hold. Directors also urged the authorities to address long-run spending issues related to growing demographic pressures. In this regard, they welcomed the authorities’ commitment to put forward a pension system reform by end-2023.

Directors welcomed the resilience of the banking sector during the pandemic. They noted that the increased concentration of the banking system in residential mortgages amid declining risk weights may pose risks going forward. In this regard, Directors saw scope to enhance the existing risk-based prudential policy framework and to tighten macroprudential policy as needed to address household vulnerabilities.

Directors agreed that the recovery offers an opportunity to increase productivity growth, labor participation and investment. They highlighted that policies should ensure that workers are equipped with technical and digital skills, encouraging broad-based innovation. They also noted that well-targeted measures to capitalize on SMEs’ potential and to improve the implementation of insolvency procedures can minimize barriers to corporate restructuring, spur capital reallocation and improve recovery rates. A strategy based on enhanced carbon pricing, reinforced by broader incentives across sectors, will help achieve the country’s climate goals. Continued efforts to enhance governance and upgrade the AML/CFT framework are also important.

Table 1. Czech Republic: Selected Economic Indicators, 2018–26

(Annual percent change, unless otherwise indicated

2018

2019

2020

2021

2022

2023

2024

2025

2026

Staff projections

NATIONAL ACCOUNTS

Real GDP (expenditure)

3.2

3.0

-5.8

2.9

3.6

4.4

3.5

3.1

2.5

Domestic demand

4.8

3.2

-5.8

6.7

-0.3

4.0

3.6

3.2

2.6

Consumption

3.6

2.6

-4.0

4.4

3.6

2.8

2.6

2.6

2.2

Public

3.8

2.5

3.4

3.2

2.7

2.2

2.2

2.2

2.0

Private

3.5

2.7

-6.8

4.9

4.0

3.1

2.8

2.8

2.3

Investment

7.7

4.5

-10.2

12.6

-9.4

7.0

6.0

4.5

3.5

Exports

3.7

1.5

-6.9

5.2

9.3

3.2

2.6

2.6

2.5

Imports

5.8

1.5

-6.9

10.3

4.4

2.6

2.6

2.6

2.6

Contribution to GDP

Domestic demand

4.5

3.0

-5.3

6.4

-0.6

3.7

3.3

2.9

2.4

Net exports

-1.3

0.0

-0.5

-3.5

4.2

0.7

0.2

0.2

0.1

Investment (percent of GDP)

26.3

27.1

26.2

28.9

25.3

25.8

26.2

26.5

26.6

Gross domestic investments (percent of GDP)

27.2

27.6

25.9

28.6

25.0

25.6

26.0

26.3

26.4

Gross national savings (percent of GDP)

27.6

27.9

29.5

28.4

25.9

26.4

26.8

27.1

27.2

Output gap (percent of potential output)

2.0

2.8

-1.0

0.0

0.3

0.2

0.1

0.0

0.0

Potential growth

3.1

2.2

(2.3)

1.9

3.3

4.6

3.6

3.3

2.5

LABOR MARKET

Employment

1.4

0.2

-1.3

0.0

0.5

0.3

0.0

0.0

0.0

Total labor compensation

9.8

7.8

1.4

5.6

9.7

7.0

5.5

5.1

4.5

Unemployment rate (average, in percent)

2.2

2.0

2.5

2.9

2.5

2.3

2.3

2.3

2.3

PRICES

Consumer prices (average)

2.1

2.8

3.2

3.6

5.6

2.3

2.0

2.0

2.0

Consumer prices (end-of-period)

2.0

3.2

2.3

5.3

4.1

2.0

2.0

2.0

2.0

Producer price index (average)

2.0

2.6

0.1

GDP deflator (average)

2.6

3.9

4.4

3.4

4.1

1.7

1.7

1.7

2.0

MACRO-FINANCIAL

Money and credit (end of year, percent change)

Broad money (M3)

6.3

6.4

10.0

Private sector credit

6.9

4.9

3.6

Interest rates (in percent, year average)

Three-month interbank rate

1.3

2.1

0.9

Ten-year government bond

2.0

1.5

1.1

Exchange rate

Nominal effective exchange rate (index, 2005=100)

101.5

100.9

99.7

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

99.1

99.4

100.0

PUBLIC FINANCE (percent of GDP)

General government revenue

41.5

41.4

41.6

40.2

40.3

40.3

39.8

39.5

39.4

General government expenditure

40.6

41.1

47.2

47.4

44.6

44.3

43.3

42.5

41.9

Net lending / Overall balance

0.9

0.3

-5.6

-7.2

-4.4

-3.9

-3.5

-3.0

-2.5

Primary balance

1.5

0.8

-5.0

-6.5

-3.6

-3.2

-2.7

-2.2

-1.8

Structural balance (percent of potential GDP)

0.2

-0.8

-5.1

-7.2

-4.5

-4.0

-3.5

-3.0

-2.5

General government debt

32.1

30.0

37.7

43.5

45.0

46.6

48.0

48.7

49.1

BALANCE OF PAYMENTS (percent of GDP)

Trade balance (goods and services)

5.9

6.0

6.8

3.1

5.7

5.8

5.8

5.8

5.8

Current account balance

0.4

0.3

3.6

-0.2

0.8

0.8

0.8

0.8

0.8

Gross international reserves (billions of euros)

124.5

133.4

135.4

142.9

154.9

163.9

172.9

181.9

190.9

(in months of imports of goods and services)

10.0

10.5

11.8

10.3

10.3

10.5

10.7

10.7

10.9

(in percent of short term debt, remaining maturity)

118.9

129.9

141.1

140.9

144.6

150.2

154.0

156.8

158.4

MEMORANDUM ITEMS

Nominal GDP (USD billions)

249.0

252.5

245.3

281.90

310.00

334.20

356.00

378.30

398.50

Population (millions)

10.6

10.6

10.7

10.7

10.8

10.8

10.8

10.8

10.8

Real GDP per capita

2.9

2.6

-6.2

2.5

3.3

4.3

3.4

3.1

2.5

GDP per capita (USD)

23,464

23,709

22,943

26,271

28816.56

31006.45

33001.00

35062.62

36932.12

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

Structural balances are net of temporary fluctuations in some revenues and one-offs. COVID-related one-offs are however included.


[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]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:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.


[AR1]Wondering if people outside the Fund will understand what is meant by policy space?

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