Via IMF (Den Internationale Valutafond)

Czech Republic: Staff Concluding Statement of the 2019 Article IV Mission

May 14, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The economy is doing well but is running at full capacity. Now is
the time for a durable policy agenda to boost potential growth over
the long term.

The Czech economy has been doing well. Wages are higher. Unemployment rates
have reached record lows, being the lowest in the EU. Nonetheless, it is
widely recognized that more will be needed to maintain strong growth.

It is particularly important to act now. The workforce is already just
about fully employed—currently, for every person seeking work, there is
more than one job available. The economy is slowing—we expect growth of 2½
percent in 2019—and could slow more if the external environment worsens.
And holding a steady 2½ percent annual growth rate over the medium term
will require high employment and productivity growth as the population ages
and the workforce shrinks.

Needed: a durable and coordinated policy agenda

Sound and coordinated policies that encourage innovation and efficiency are
crucial for staying on a path of increasing living standards. After
consulting with industry, the government has published an ambitious
strategy to boost innovation over the next decade with efforts in R&D,
skills, and infrastructure. This plan could make a valuable contribution to
boosting potential growth—but only if it is implemented. So the first step
is to ensure that strategies are practical and carried through.

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There are other bottlenecks—such as the labor force, infrastructure, and
housing—that need attention. Exporters cite incomplete transport networks
that make moving goods expensive. Construction companies cite long delays
in planning and getting construction approval for improvements and new
buildings. A new Act that is being prepared that aims to simplify the
construction code would be a step in the right direction, if it is
delivered. More generally, coordination across government—among ministries,
and across the layers of central, regional, and municipal bodies—needs
improvement, so that plans are implemented effectively.

Nor should the emphasis be only on glamorous innovations, such as
digitalization. The demand for employee cards—which grant work permits for
up to two years to migrant workers who have employment offers—often exceeds
the limited capacity to process applications. A sustainable medium-term
immigration strategy that makes it easier for firms to fill vacancies—under
discussion—would pay for itself many times over.

Implications for fiscal policy

The focus should be on spending and revenue choices that are as friendly as
possible to raising growth. Investment in public goods that boosts
productive potential should be preferred—subject to the fiscal
rules—especially given that public debt, already low, will decrease further
over the next few years and the costs of funding such investment are still
low. This investment includes not just major physical structures—roads, for
example—but resources such as child care and “intangibles” such as
education and training.

Hard choices will also need to be made over social spending. As the
population ages, demands on healthcare will increase, and there will be
fewer people working to pay for the pensions of those retired. Of options
to ensure pension sustainability, reducing pensions themselves could create
hardship, and firms and workers already pay substantial contributions into
the system. Hence, raising the statutory retirement age as life
expectancies increase will be needed.

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Otherwise, policy should seek efficiency gains. Some spending could be
trimmed without harming social outcomes—through better gate-keeping of
healthcare resources, for example. Some spending could be redirected to
better outcomes—at a time when unemployment is so low, direct job subsidies
(unless for disadvantaged groups such as the disabled) would be better
directed toward training the workforce.

It can be tempting to target extra taxes at particular sectors, such as
banks or foreign companies. Caution is needed: such taxes are often easily
evaded, and they can lead to “double taxation” and distort incentives.
Applied extensively, they could damage the attractiveness of the Czech
economy as a place for foreign firms to invest. The IMF supports
internationally-coordinated reform to corporate income taxes to address tax
avoidance by multinational enterprises, including digital companies. But
unilateral actions by countries might only succeed in harming the economy,
for little in the way of extra revenues.

The role of the financial system

Underpinning growth will be a well-functioning financial system. The
banking system is stable, well capitalized, and well placed to direct
credit toward investment. Recent cases of money laundering in several EU
countries, however, have revealed weaknesses in Anti-Money
Laundering/Combatting the Financing of Terrorism (AML/CFT) regimes across
Europe, heightening concerns about cross-border flows. The authorities
should therefore continue their AML/CFT efforts, monitoring financial flows
coming into and going out of the Czech Republic, especially those
associated with non-resident accounts, and identifying sources of foreign
funds. Regarding the real estate sector, the authorities should also
continue to monitor money laundering risks, including by enhancing data
collection on non-residents and beneficial owners.

Navigating the near term

While the domestic economy has been growing strongly, uncertainty has
persisted about the outlook for many of the Czech Republic’s trading
partners. The Czech National Bank has balanced domestic pressures and
external risks with gradual increases in interest rates. With the economy
slowing, and the threats of disruption to trade still present, a pause in
interest rate increases—as indicated by the Czech National Bank—is the
right approach.

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More challenging is the pressure on housing, which is very striking in
Prague. So-called “macroprudential” measures can help insure that
households do not take on too much debt. To this end, the Czech National
Bank has recommended that banks limit mortgages and mortgage interest
servicing according to the incomes of borrowers. These will support
existing recommendations on the maximum amounts households can borrow
relative to the value of the property. The values of these new caps are not
tight by international standards and might yet have to be adjusted, but, as
with interest rates, should be assessed after they have had some time to
pass through fully to lending conditions. It would be better if the Czech
National Bank had legal powers to set these limits, to ensure that
conditions are the same across all lenders.

However, macroprudential policies cannot “solve” the problems in the
housing market. Housing demand has consistently exceeded supply for many
years, owing not just to the high growth in the economy, but also changes
in demographics and preferences for type and location of housing.
Construction firms have struggled to meet demand, because of labor
shortages and lengthy planning and construction permit processes. As noted
above, this is a crucial bottleneck that needs to be addressed. Lack of
action on policies to raise the numbers of houses—especially of affordable
rental accommodations—would particularly exclude those from poorer regions,
by restricting their ability to move to where incomes are higher.
Meanwhile, with the supply of housing so inflexible, introducing extensive
exemptions to macroprudential limits to “support” people to get on the
housing ladder risks creating a generation of households burdened by high

Discussions for the 2019 Czech Republic Article IV consultation took
place in Prague from April 29 to May 14. The mission would like to
thank the authorities and other interlocutors for the constructive
dialogue and kind hospitality.

IMF Communications Department

PRESS OFFICER: Gediminas Vilkas

Phone: +1 202 623-7100Email: