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 rose from 1.9 percent in 2002 to over 6 percent in the years 2005-7, 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. However, growth moderated somewhat in 2008 due to lower growth forecasts for key trading partners in Europe and appreciation of the Czech crown. 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 and now stands at 1.9 percent of GDP. A new fiscal reform program was introduced in January 2008. 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 is likely to remain under 4% of GDP in 2008 and should be covered by strong foreign direct investment (FDI). 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.
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