Country brief 2006 Updated September 2006
The Czech Republic is a high income country with a gross national income per capita of $11,110 (GNI, Atlas method). The country has one of the highest income levels among the new member states of the European Union (EU). With the country's accession to the EU in May 2004, the economy’s transition from centrally planned to market driven was complete. This has set the stage for further convergence with EU income levels.
Recent economic developments have been favorable, with a strong recovery in growth, significant fiscal consolidation, low inflation, and strong balance of payments. Inflows of foreign direct investment (FDI), among the highest in the region, have contributed significantly to the economy’s strength. The stock of FDI in the country amounts to around 50 percent of GDP. Despite this broadly favorable economic performance, long-term unemployment remains high. Thus, the Czech Republic must continue to address the structural problems in the labor market. Moreover, momentum on pension and health reforms needs to be boosted to counter spending pressures and to prepare for population aging.
Since the Czech Republic joined the World Bank in 1993, the Bank has supported key structural reforms in the country by providing financial and technical assistance. Since the inception of the World Bank’s program in the country, three loans for a total amount of $776 million were approved by the Board of Directors.
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Economy
Developments since independence
The Czech Republic gained independence in 1993 following the breakup of Czechoslovakia. Until 1996 it was perceived as the most successful transition economy in Central and Eastern Europe as it achieved economic transformation with minimal unemployment and no hyperinflation.
At the end of 1995, macroeconomic policy was well supported by important structural reforms, including the liberalization of wages, prices, and foreign trade. By 1996, the private sector’s share of GDP was 74 percent, the highest in the region.
The “Czech miracle,” however, came to a halt in May 1997. At that time, a speculative attack on the Czech currency “koruna” forced authorities to abandon the exchange rate policy regime maintained since 1991 and introduce a strict austerity program.
Growth, characterized by considerable FDI inflows, resumed in 2000 following significant and costly financial and enterprise reforms. Between 2002 and 2005, annual GDP growth rose from almost 2 percent to 6 percent, fueled by the expansion of export-driven manufacturing production, backed by foreign direct investment.
Recent economic performance
Real GDP growth exceeded 6 percent in 2005, driven mainly by very strong net exports, coming largely on the back of foreign direct investment in the automotive sector. Private consumption growth remained weak, in line with the moderate growth of real gross disposable income. In the first quarter of 2006, output expansion accelerated further to a record 7.4 percent year on year.
An upswing in economic activity has boosted the labor market and lowered the unemployment rate, which fell to less than 8 percent in 2005. Despite this, long-term unemployment persists.
The fiscal deficit was reduced to below 3 percent of GDP in 2004-05, but looks set to increase in 2006-07. The general government deficit declined to 2.6 percent of GDP in 2005 on the back of strong revenues (corporate income taxes and excises), low absorption of EU funds, and carry-over of unspent funds to the following year. However, tax cuts and increased social spending are likely to raise the deficit in 2006 to 3.6 percent of GDP. Moreover medium-term spending pressures look likely to grow without reform of generous social entitlements, healthcare, and the pay-as-you-go pension scheme.
The current account deficit, which fell to 2.3 percent of GDP in 2005, is more than covered by foreign direct investment (FDI). In 2005, the Czech Republic attracted record FDI, with gross inflows reaching about 9 percent of GDP.
Challenges ahead
Important remaining issues that still need to be addressed include:
Restoring the long-term sustainability of public finance through reforms in health and pension systems
Improving the functioning of the labor market to increase labor mobility
Continually improving the business environment
Completing the restructuring and privatization of major enterprises.
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Program to date
- Landmark Projects
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Through financial and technical assistance, the World Bank has supported key structural reforms and the modernization of sectors such as the financial sector, energy and telecommunications. In addition, through Global Environment Facility grants, the Bank helped phase out ozone-depleting substances, protect biodiversity, and improve district heating.
From 1998 onward, the World Bank’s assistance evolved toward a focus on advisory services to support the country’s EU accession process, capital and financial market reform, enterprise restructuring and fiscal management improvement. Efforts also focused on corporate governance, the regulatory framework, and pension reform, with some activities continuing in the energy and environment sectors.
Going forward
The Czech Republic is also benefiting from a number of cross-country analytical and advisory activities, including a programmatic study of public finance reform issues in the EU8 group of countries, a social inclusion report, EU8 Quarterly Economic Reports , and planned EU8 conferences and seminars on accounting, auditing and public private partnerships.
In line with rising prosperity, the Czech Republic decided in April 2005 to stop borrowing from the World Bank. As a development partner, the country contributes to the International Development Association (IDA), the Bank’s concessional window, and plays an active role in regional and multilateral institutions.
World Bank Group President Paul Wolfowitz visited Prague on February 28, 2006 to celebrate the Czech Republic’s “graduation” from World Bank borrower status. The event marked the successful evolution of the country from beneficiary of international assistance to active partner in development cooperation.
Impact on the ground
Evaluation of the partnership between the Czech Republic and the World Bank 1998-2005.
Read moreThe benefits of the collaborative relationship between the Czech Republic and the World Bank have provided opportunities to learn lessons and develop analytical instruments which also benefited other countries in the Region that started their transitions later.
As part of the Bank’s technical assistance program, the Czech Republic was a frontrunner in piloting initiatives in the financial sector, including a system of diagnosing financial sector vulnerability, which strengthened the Czech Republic’s regulation and supervision of financial markets. In addition, our collaboration in the area of management of contingent fiscal liabilities helped the Government improve their budgetary process and better management of fiscal risks. The jointly organized public-private partnerships forum for countries in central and south-eastern Europe is another example of the Czech Republic’s pioneering initiatives.
The Bank’s technical assistance in the areas of fiscal expenditure and insolvency and creditor rights continue to support the country’s ongoing fiscal and insolvency reforms.
The Country Aggregate Report provides lending data for the Czech Republic
NB: Lending is per fiscal year, July 1–June 30
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World Bank office in Slovakia:
Petra Vehovska
pvehovska@worldbank.org
Tel: (421-2) 5752 6724
Fax: (421-2) 5752 6701
Website: www.worldbank.org/cz
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