IMF warns Czech Republic failure to implement reforms could result in economic slowdown

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The International Monetary Fund has warned the Czech Republic that failure to implement much needed reform of its public finances could result in an economic slowdown. But, given the prospect of a broad coalition government involving the country's two biggest parties and early elections on the horizon, will Czech politicians heed this warning?

A team of experts from the International Monetary Fund who visited the Czech Republic this week said in no uncertain terms that it was high time for action. The head of the IMF mission Subhash Thakur said the Czech Republic could not expect to sustain its steady economic growth for much longer unless it implemented an effective reform of its public finances, particularly reforms in pension and health spending. Economist David Marek says this is not the only warning the Czech Republic has received lately.

"Just a day before the IMF issued this warning the rating agency Standard and Poor warned that the Czech Republic's rating could be changed from positive to negative."

And what impact would such a change have?

"The immediate impact would be - higher interest rates in the Czech Republic, higher premium for Czech assets, a higher cost of financing economic activities in the Czech Republic and inevitably - an economic slowdown."

How much time do you think the country has -in order to try to avoid this?

"It is quite urgent. These reforms should have been launched several years ago. Right now every year counts."

Jiri Paroubek (left) and Mirek Topolanek (right), photo: CTK
The fact that the Czech Republic badly needs reforms was the pivotal message in the Civic Democratic Party's election campaign. Prime Minister Mirek Topolanek promised a strong reform programme, but now it seems that he will have to govern hand in hand with the Social Democrats. And Social Democrat leader Jiri Paroubek has repeatedly stated that he will not allow the socially weaker groups to suffer the effects of radical reform. So what are the chances of these two rival parties implementing far-reaching reforms? Many political analysts are skeptical -especially in view of the debated two year mandate - but Jiri Pehe says the Social Democrats could be ready to make concessions.

"I think that some kind of reform programme is possible. It seems to me that Mr. Paroubek has realized that early elections would be a disaster for his party and that if he wants to be in government with the Civic Democrats he needs to make concessions. And, in fact, I think this could be a good smoke screen for the Social Democrats because in my opinion many top Social Democrats realize that the country needs reforms but because of the electorate of the Social Democratic Party the party has not been willing to go ahead with them. Now the Social Democrat leadership has a good excuse - they can say this is something we had to do for the sake of the country."