IMF mission warns time running out for economic reforms

A delegation from the global financial and economic watchdog, the International Monetary Fund, has delivered a mixed message to the Czech Republic. The good news is that the economic crisis appears to be over. The bad news comes in a clear warning that the next government must act to curb a ballooning public deficit and debt burden and start other reforms or face the consequences.

The IMF’s annual missions to the Czech Republic over the last decade have resulted in a fairly predictable report card. “Good, but could do better” has been the tone of most of them. Most have bemoaned the failure to curb steadily rising government spending and reluctance to push through reforms of the health, pensions, education and welfare systems.

Monday’s report card contained all the old criticisms combined with a new ingredient: urgency. The Czech Republic appears to have come out of the economic crisis, but is far from unscathed. The price has been a sharp rise in the state deficit and overall government debt with hesitant recovery offering no prospect of just waiting for higher tax revenues to start piling in or social spending to drop off.

In between the institutional and diplomatic language that such international agencies favour is the stark warning that the next government will be very much in the last chance saloon.

Zuzana Murgašová, photo: CTK
Zuzana Murgašová headed the IMF mission examining the state of the Czech economy since January 14. She identified the higher deficit and debt as new factors in the overall picture and ones that need to be addressed.

“It is important to implement broad-based policies both in terms of fiscal consolidation and structural growth promoting steps to ensure that the public debt remains sustainable in the long-term.”

Basically, that is a call for curbs in public spending or tax increases so that the government can pay its way without excessive borrowing. The IMF tends to prefer cuts in spending because it reckons they are more durable. One suggestion is for more means-based welfare benefits. Another is for a single higher rate of Value Added Tax, hikes in fairly low real estate taxes in the Czech Republic and a clampdown on tax loopholes.

That demand for action comes with a warning that the next government will have to bite the bullet and take steps that politicians have preferred to put off.

“It will be important for the new government that will be in place after the elections in May to develop a medium term plan with respect to fiscal adjustment. The health and pension reforms normally take some time to prepare and hence the preparation of them really needs to start now. The structural reforms also take a long time to implement and hence their implementation should not be delayed.”

Foto: Štěpánka Budková
The IMF report warns that international confidence in the Czech economy could deteriorate without these steps, resulting in higher interest rates to borrow money and braking a hesitant recovery.

The fragility of that recovery can be seen in the IMF forecast of 1.5 percent growth this year with a fresh recession, a so-called double-dip, not ruled out if export demand in key sectors falters.