IMF says Czech economy survived crisis, but sees mounting policy challenges.

By bne IntelliNews April 8, 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 create fiscal pressures 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, to be largely offset by appreciating exchange rate and big output gap, 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 maintain 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. Moreover, pursuing productivity-enhancing structural reforms like increasing labour participation and labour market flexibility; enhancing efficiency in higher education, research and development, and the public sector; and further improving the business climate, 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 sees the countrys medium-term fiscal targets as appropriate, but recommends that further reforms in the pension system, including introducing second pillar without accumulation of additional debt, and in the healthcare system both to ensure the long-term sustainability of the public finances, as well as rationalising the welfare system are needed in order to take full advantage of the implemented structural reforms. The IMF expects Czech economy to grow by 1.7% in 2011, down from 2.3% in 2010, 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 economic growth is to speed up to 2.9% in 2012 on the back of reviving economies of main trading partners. The general government debt is seen decreasing from estimated 4.9% of GDP to 3.7% of GDP in 2011 and 3.6% of GDP in 2012. The IMF statement was published after a mission of the funds experts visited the Czech Republic earlier this year to conduct the Article IV consultations. Under the IMF's articles, a mission of IMF experts conducts consultations with all its member countries once a year.

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