Czech economic policy mix gets IMF seal of approval

Photo: Klára Stejskalová

‘IMF approved’ is probably a badge that the Czech government ministers, finance ministry officials, and central bank policy setters could wear with pride after the latest visit and assessment from the international economic watchdog and advisor. The latest report is broadly upbeat but contains the customary dose of caution and advice.

“Overall we see the Czech economy growing very strongly. This is based on good growth, a good increase in domestic demands and exports. Regarding domestic demand, both investment and consumption are picking up. This is a welcome development. So, for this year we expect output growth of 3.0 percent.”

Head of the International Monetary Fund (IMF) delegation Costas Christou in Prague on Wednesday sharing the news and views from the regular evaluation of how the Czech economy is shaping up.

And it was a generally upbeat report on an economy which is clearly rebounding strongly after a long and painful recession. Sitting alongside the IMF mission head were officials from the Czech Finance Ministry and the governor of the Czech National Bank, Miroslav Singer. And they came in for a fair share of the praise as well.

The IMF’s latest growth prediction is an increase from the previous forecast of 2.5 percent growth this year. But for the middle term, the economic advisor and watchdog sees the pace slipping slightly to 2.25 percent.

Miroslav Singer,  photo: Filip Jandourek
But 3.0 percent growth this year is still an optimistic figure from a traditionally fairly conservative institution. It compares with the Ministry of Finance’s own forecast of 2.7 percent and the national bank’s figure of 2.6 percent.

Prices should hover just above zero this year says the IMF, avoiding the danger of falling into negative territory and running the risks of deflation, before strengthening towards the national bank’s 2.0 target in 2016.

The central bank was praised for its controversial low crown policy and urged to keep it in place until inflation is clearly back on target. And the government too was applauded for its role boosting the economy through a relaxation of the fiscal squeeze.

But an IMF report would be worth its salt without a few recommendations where the country could do better and should make some adjustments. While Czech banks are in robust health, the IMF points out that borrowing by companies for future investment is still very low. One reason is probably that Czech companies are still largely financing expansion from their own resources.

Although the government has done its bit to boost growth by pushing investment in infrastructure projects, it could still do more to tip the balance in favour of long term investments, the IMF says. It points out that there are still big gaps in Czech transport infrastructure which make costs of shipping goods higher than in many other countries. And it adds that spending on social benefits and health are relatively high with the controversial accompanying recommendation that means testing of some benefits might be considered.

Photo: Klára Stejskalová
It also says the country could do more to deal with brakes on higher growth, such as the low rate of employment of women with children due to inadequate childcare ; continued lack of workers in some high technology sectors and the inability of the education, training, and jobs finding infrastructure to get the right people into work.

And the IMF is also adamant that the Czech government enshrines its commitment to curbing future public deficits by getting its pledge that the basic state annual overspend will not exceed 1.0 percent of GDP s written into the constitution with all the brakes and other machinery attached.