IMF says Czech economy survives crisis, sees mounting policy challenges.

By bne IntelliNews February 25, 2011
The Czech economy has rebounded from the downturn owing to its strong fundamentals and the global recovery, but policy challenges linked to public finances are mounting, the IMF said in a statement. Large structural deficits and population aging fiscal pressures will be rising and, in the absence of additional consolidation beyond 2011, public debt would continue growing, the fund said. The monetary policy is constrained by the contrasting influence on inflation stemming from the growing world commodity prices and the still slow economic recovery. Moreover, the IMF said that preserving the productivity and GDP growth in the long-run would require additional significant policy efforts. Therefore, the IMF recommends that the authorities should above all ensure debt sustainability and promote stable GDP growth in the long-term by defining additional fiscal consolidation measures after 2011 including through pension and healthcare reform and social benefits reform. It also recommends maintaining accommodative monetary policy until the negative output gap narrows considerably, unless a spike in inflation expectations, substantial widening of the interest rate differential against other advanced countries, or rapid tightening of labour market slack necessitate earlier action. The pursuing of productivity-enhancing structural reforms, as well as the continuing monitoring of the main risks for the banking sector, which might arise from further deterioration of credit portfolios, are also required. The IMF expects the economy to grow by 1.75% in 2011 on the back of net exports and fixed investment, while private consumption growth is to remain modest. Downside risks to the forecast might come from tensions in the euro area periphery eventually spreading to core Europe. The fund recommends that growth-enhancing measures focused on increasing labour participation and labour market flexibility, enhancing the efficiency of high education, R&D and the public sector, improving the business environment to attract FDI, should be pursued without delay. The IMF assesses that the approved and implemented by the government budget austerity measures would be able to reduce the general government deficit to 4% of GDP in 2011, down from 4.8% of GDP in 2010 and below government target of 4.6% of GDP. The fund assesses that the unification of the VAT rate at 20% would be able to cover the costs of the planned pension reform in the short-term, but would not be enough to achieve a balanced budget in 2016 as the government wants and therefore additional measures are to be implemented. Improving fiscal institutions is to have additional positive effect on market confidence in the durability of fiscal adjustment. Albeit being stable and well prepared to support the recovery, the fund still sees downside risks in the banking sector from further deterioration of credit portfolio following eventual sharp slowdown in Europe. The IMF assesses as positive the recent reduction of state subsidies for deposits in building societies. At the same time, preserving sound financial supervision and strong governance framework for local banks remains crucial, the IMF concludes. Under the IMFs articles IV, a mission of IMF experts conducts consultations with all its member countries once a year.

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