Czech Republic: Staff Report for the 2008 Article IV Consultation—Informational Annex

Growth in the Czech Republic is projected to slow sharply in 2009 amid a gathering recession abroad and tightening credit at home. This 2008 Article IV Consultation highlights that the shrinking demand from the euro area, especially Germany, will curtail exports and direct investment inflows. Executive Directors have praised the generally strong fundamentals that have helped the Czech economy weather the initial spillover effects of the global financial crisis relatively well. Directors have supported the Czech National Bank’s recent decisions to cut the policy interest rate.

Abstract

Growth in the Czech Republic is projected to slow sharply in 2009 amid a gathering recession abroad and tightening credit at home. This 2008 Article IV Consultation highlights that the shrinking demand from the euro area, especially Germany, will curtail exports and direct investment inflows. Executive Directors have praised the generally strong fundamentals that have helped the Czech economy weather the initial spillover effects of the global financial crisis relatively well. Directors have supported the Czech National Bank’s recent decisions to cut the policy interest rate.

Appendix I. Czech Republic: Fund Relations

(As of November 30, 2008; unless specified otherwise)

I. Membership Status: Joined 1/01/1993; Article VIII

II. General Resources Account

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Financial Arrangements:

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VI. Projected Obligations to Fund: None

VII. Exchange Rate Arrangement:

The currency of the Czech Republic is the Czech koruna, created on February 8, 1993 upon the dissolution of the currency union with the Slovak Republic, which had used the Czechoslovak koruna as its currency. From May 3, 1993 to May 27, 1997, the exchange rate was pegged to a basket of two currencies: the deutsche mark (65 percent) and the U.S. dollar (35 percent). On February 28, 1996, the Czech National Bank widened the exchange rate band from ±0.5 percent to ±7.5 percent around the central rate. On May 27, 1997, managed floating was introduced. In the Annual Report on Exchange Arrangements and Exchange Restrictions, the de facto exchange rate regime of the Czech Republic is classified as an independent float. Since 2002, the CNB has not engaged in direct interventions in the foreign exchange market. International reserves have been affected by the off-market purchases of large privatization receipts and EU transfers and the sales of the accumulated interest. On December 8, 2008, the exchange rate of the Czech koruna stood at CZK 19.895 per U.S. dollar.

The Czech Republic has accepted the obligations of Article VIII and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions. The Czech Republic maintains exchange restrictions for security reasons, based on UN Security Council Resolutions and Council of the European Union Regulations, that have been notified to the Fund for approval under the procedures set forth in Executive Board Decision No. 144-(52/51).

VIII. Last Article IV Consultation:

The last Article IV consultation with the Czech Republic was concluded on January 23, 2008. The staff report and PIN were published on January 28, 2008.

IX. Technical Assistance: See attached table.

X. Implementation of HIPC Initiative: Not Applicable

XI. Safeguards Assessments: Not Applicable

Czech Republic: Technical Assistance, 1991–2005

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Appendix II: Statistical Issues

Data provision is adequate for surveillance. The Czech Republic subscribed to the Special Data Dissemination Standard in April 1998, and metadata and annual observance reports for 2006 and 2007 are posted on the Fund’s Dissemination Standards Bulletin Board.

Data on core surveillance variables are available to the Fund regularly and with minimal lags (reporting to STA is less current, especially for foreign trade and the national accounts). Exchange rates and interest rates, set by the Czech National Bank (CNB), are reported daily with no lag. Gross and net international reserves are reported on a monthly basis with a one-week lag, as well as on a 10-day basis (with the CNB’s balance sheet) with a one-week lag. Consumer prices, reserve money, broad money, borrowing and lending interest rates, central government fiscal accounts, and foreign trade are reported monthly with a lag of between one and four weeks. Final monetary survey data are available with a lag of about one month. GDP and balance of payments data are made available on a quarterly basis with a lag of two to three months. Since 2003, the main components of the balance of payments are also available monthly. Annual data published in the Government Finance Statistics Yearbook cover all operations of the general government, including the extrabudgetary funds excluded from the monthly data. These annual data are available on a timely basis. Monthly fiscal data published in International Financial Statistics (IFS) cover state budget accounts and are available with a two- to three-month lag.

While data quality is generally high, some deficiencies remain in certain areas, and the authorities are taking measures to improve data accuracy.

  • National accounts data are subject to certain weaknesses. Value added in the small-scale private sector is likely to be underestimated, as the mechanisms for data collection on this sector are not yet fully developed and a significant proportion of unrecorded activity stems from tax evasion. Discrepancies between GDP estimates based on the production method and the expenditure method are large and are subsumed under change in stocks. Quarterly estimates of national accounts are derived from quarterly reports of enterprises and surveys. The estimates are subject to bias because of nonresponse (while annual reporting of bookkeeping accounts is mandatory for enterprises, quarterly reporting is not) and lumping of several expenditure categories in particular quarters by respondents. Large swings in individual components of spending and the overall GDP from quarter to quarter bring into question the reliability of the quarterly data and hamper business cycle analysis.

  • Recently, revisions to procedures for processing export data have brought external trade statistics close to the practice in the EU. However, a continued weakness of foreign trade statistics is the unavailability of fixed base price indices for exports and imports; these indices are currently presented on the basis of the same month of the previous year.

  • Monetary survey data provided to the European Department are generally adequate for policy purposes. However, large variations in the interbank clearing account float, especially at the end of the year, require caution in interpreting monetary developments. The CNB has made a major effort to identify the causes of these variations and adjust the data. In 2002, to meet EU statistical conventions, the CNB implemented the European Central Bank’s (ECB) framework for collecting, compiling, and reporting monetary data. The data published in IFS are based on monetary accounts derived from the ECB’s framework. The same set of accounts also forms the basis for monetary statistics published in the CNB’s bulletins and on the website, which are thereby effectively harmonized with the monetary statistics published in IFS, although the presentation in IFS differs somewhat from the CNB’s.

  • Annual fiscal data on ESA-95 basis has been prepared by the Czech Statistical Office. Quarterly data for non-financial accounts have also been compiled and quarterly financial accounts are being prepared. The Ministry of Finance uses the ESA-95 methodology for the Convergence Program targets. The ESA-95 methodology differs from the national (fiscal targeting methodology) in terms of the coverage of the institutions (for example, the Czech Consolidation Agency is included in the central government under ESA definition) and inclusion of financial transactions and other accrual items (for example, called guarantees). The Ministry of Finance participated in the Fund’s pilot project to transition to the statistical methodologies outlined in Government Finance Statistics Manual, 2001.

Czech Republic: Table of Common Indicators Required for Surveillance: As of October 27, 2008

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments. Data for the state budget are available with monthly frequency and timeliness, while data on extra budgetary funds are available only on an annual basis.

Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Czech Republic: 2008 Article IV Consultation: Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Czech Republic
Author: International Monetary Fund