IMF urges the Czech Republic to consolidate public finance

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The International Monetary Fund has just released the results of a detailed probe into the Czech economy. While praising economic recovery in the Czech Republic, it has identified certain problems that could jeopardize the positive developments in the future. Vladimir Tax reports:

According to the IMF, the main problem it has identified in the Czech Republic is a widening deficit in public finance. It has therefore urged the Czech government to take immediate steps to close this widening gap and start consolidating public finances in 2001, through structural reform measures that will have a lasting effect on the fiscal deficit. Otherwise, the deficit could have an adverse impact on the economy as a whole.

Economic analyst Radomir Jac of Commerzbank believes the IMF's warning is quite serious, but warns that any measures taken in this respect are really long-term in nature: Unfortunately, according to the IMF mission, the state budget for 2001 contains no significant reform measures. The mission estimates that the budget represents a further increase in the country's structural deficit, and says it is regrettable, as recent favourable economic developments provided the opportunity to embark on medium-term fiscal reforms. The failure to take action now will add to demand pressures, and may necessitate fiscal restrictions just as recovery gathers momentum, which could in effect undermine economic recovery.

The Czech government, says the IMF report, has missed an opportunity to begin implementing the necessary steps next year, although Finance Minister Pavel Mertlik admits that the current situation is unsustainable. Radomir Jac of Commerzbank is convinced that although the government is aware of the need to take action, such urgent calls from outside are not pointless: In order to reduce the structural fiscal deficit in the near term, the IMF suggests that low priority expenditures should be cut and tax reforms implemented. In the short term, potential candidates for cutting include support for state enterprises, and infrastructure investments that are likely to yield low returns, and social assistance which--due to the generosity of some benefits--discourages people from seeking jobs. On the revenue side, the IMF recommends changes to tax rates, and in the long term, it stresses that further reform of the social security system is unavoidable.