IMF endorses Czech economic policies but sees some room for improvements

Illustrative photo: OmirOnia / freeimages

The latest ongoing report by the International Monetary Fund (IMF) should be music the to ears of the Czech government, Ministry of Finance, and Czech National Bank. It gives broad backing to current government and bank policy and only a few pointers where the performance could be better.

Illustrative photo: OmirOnia / freeimages
So called Article 4 IMF reports on countries are the equivalent of end of year school reports. In the case of the latest IMF report on the Czech Republic released on June 30 the final message could be ‘on the right track could improve in certain subjects.’

The report, couched in the normal diplomatic language, ticks almost all the boxes as regards government and central bank macroeconomic policies. It shares the belief that the Czech economy is emerging strongly from a deep and long recession with economic growth expected to reach 2.5 percent this year. What’s perhaps more important is that the growth is now being fuelled by both domestic demand and exports with the latter expected to be in positive territory for the first time since 2010.

The IMF says there is still slack in the economy from the point of view of unemployed labour and productive capacity which are still not being fully used. Supportive economic policies, a continued upturn in the worldwide auto market, and greater demand from also recovering trade partners, could push growth even higher, it says. But the growth picture could be burst, it warns, if the euro-zone recovery falters or if the regional tension, read Ukraine-Russia, starts to have a serious impact on trade and energy supplies.

In that vein, a temporary increase in the government deficit in the next two years is not regarded as a big deal for the IMF, though it warns the government not to go on a spending spree if government revenues turn out to be much stronger than expected because of the recovery.

The Czech National Bank’s weak crown policy was fully endorsed in the report as well as the bank’s intention to follow through with the policy until inflation starts reaching the target of around 2.0 percent. Higher consumption and wages are already signs that the main risk of deflation has been averted, the report adds. It’s not much of a surprise that the central bank shot out a press release in the wake of the report welcoming its findings.

On the critical side, the IMF probably struck a bit of a sour note for the main government Social Democrat party of prime minister Bohuslav Sobotka by attacking the new reduced Value Added Tax regime for books, drugs, and children’s items. The financial watchdog said that this is an untargeted way to realise social goals and said it would make the tax system even more complicated.

It also criticized the ongoing structural problems in the Czech economy based on the fact that many of the unemployed can be found jobs even in an economic upturn because they have not got the required skills and that some significant sectors of the population, read the Roma though they are not specifically mentioned, are largely excluded from the jobs market. Ever changing tax policies are also increasing uncertainty for business, it adds.