IMF Executive Board Concludes Article IV Consultation with Czech Republic
June 13, 2019
On June 12, 2019, the Executive Board of the International Monetary Fund
(IMF) concluded the Article IV consultation
with the Czech Republic and considered and endorsed the staff appraisal
without a meeting.
The economy is doing well, but supply constraints are biting. Growth has
slowed as the economy has reached capacity limits, with very low
unemployment even as participation has increased. Recent wage increases
have been very strong, ahead of productivity. So far, inflation remains
contained. The economy continues to run a current account surplus, even
though domestic absorption has picked up. But the housing market is
pressured, especially in metropolitan areas.
Growth is forecast to moderate. In the near term, domestic demand is
expected to remain strong but slow down; external demand is expected to
slow in the first half of the year and recover in the second, causing
growth to moderate to 2.5 percent for 2019 and continue around that rate
over the medium term. Risks to this outlook are mainly external and to the
downside, such as from a disorderly Brexit or further weakness in Germany.
The outlook for inflation—and hence the monetary stance—is uncertain, as
the outcome will depend on which of domestic inflationary and imported
disinflationary pressures will dominate.
Executive Board Assessment
The economy is doing well but is up against capacity constraints. There are
no major imbalances, but growth is expected to slow as supply pressures
The real exchange rate is moderately undervalued, and likely to appreciate
over the medium term. The REER has appreciated steadily since 2016, but the
external position in 2018 was nonetheless moderately stronger than the
level consistent with fundamentals and medium-term policies. The current
account balance is expected to converge to a small deficit over the medium
term, supported by household income growth and small fiscal deficits.
The current policy mix is appropriate. Staff favors holding policy
conditions as present, with a bias to raising policy interest rates rather
than tightening the fiscal stance if inflation pressures were to continue,
which would be more consistent with gradual exchange rate appreciation.
Macroprudential measures can help insure that households do not take on too
much debt. But they should be complemented with measures to enhance housing
supply. If external conditions were to be substantially worse than
expected, the first response would be to ease policy rates and allow
automatic fiscal stabilizers to work; if shocks are persistent, there is
ample space for discretionary fiscal easing.
Over the longer term, a durable and coordinated policy agenda that
facilitates higher productivity is crucial for staying on a path of
increasing living standards. Coordination across government—among
ministries, and across the layers of central, regional, and municipal
bodies—needs improvement, so that plans are implemented effectively and
bottlenecks in labor supply, housing, and infrastructure are addressed.
The focus for fiscal policy should be on spending and revenue choices that
are as friendly as possible to raising growth. The obvious—albeit
constrained by the fiscal rules—would be investment in public goods that
boosts productive potential, 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 digital access. Hard choices will also
need to be made over social spending ahead of further population aging;
otherwise, policy should seek efficiency gains. Targeting extra taxes at
particular sectors risks distorting economic incentives for potentially
little return in revenues.
The banking system is stable, well capitalized, and well placed to direct
credit toward investment. Recent cases of money laundering (ML) in several
EU countries, however, have revealed weaknesses in AML/CFT regimes across
Europe, heightening concerns about cross-border flows. The authorities
should 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. The
authorities should also continue to monitor ML risks associated with the
real estate sector, including by enhancing data collection on non-residents
and beneficial owners.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds
bilateral discussions with members, usually every year. A staff
team visits the country, collects economic and financial
information, and discusses with officials the country’s economic
developments and policies. On return to headquarters, the staff
prepares a report, which forms the basis for discussion by the
The Executive Board takes decisions under its lapse-of-time
procedure when the Board agrees that a proposal can be considered
without convening formal discussions.
IMF Communications Department
PRESS OFFICER: Meera Louis
Phone: +1 202 623-7100Email: MEDIA@IMF.org