The IMF has said external uncertainties, such as growth prospects and geopolitical tensions in the region, continue to cloud the near-term outlook for the Czech economy and urged the authorities to adopt a fiscal strategy that is growth friendly and includes supportive macroeconomic policies and accelerated structural reforms, the fund said after concluding the Article IV consultations with the Czech Republic.

The fund has welcomed the recent rebound and broad-based recovery of the Czech economy that exited a record-long recession in 2013. The recovery was driven by exports, but has been increasingly supported by domestic demand, with contributions from investment and household consumption. Unemployment has been falling on the back of rise of employment. Inflation, however, is moving just over zero remaining well below the central bank’s 2% target. The IMF expects inflation to rise gradually toward the central bank’s target but warned that there remain a sizable output gap and considerable risks to the economic recovery. Therefore it considers appropriate the central bank’s weak-koruna regime but recommended a timely exit once deflation risks recede and the inflation forecast and inflation expectations become entrenched around the inflation target.

On fiscal policy, the fund welcomed the authorities’ commitment to the medium-term structural deficit target and recommended the adoption of a new medium-term fiscal framework, comprising fiscal rules, a debt brake, and an independent fiscal council.

The IMF said the Czech financial system is sound and resilient. Banks, the majority of which are foreign-owned, are self-financed with a low average loan-to-deposit ratio and strong capital and liquidity buffers.