Czech Republic: Staff Report for the 2010 Article IV Consultation—Informational Annex

The key findings of the Czech Republic’s 2010 Article IV Consultation are discussed. Large foreign direct investment inflows fostered trade integration, underpinning an export-led expansion. Higher initial standard of living contained consumption convergence pressures. An improved fiscal performance contributed to the comfortable external position. This, combined with credible inflation targeting, resulted in generally low inflation and interest rates. A liquid and conservative banking sector limited the build-up of balance sheet vulnerabilities.

Abstract

The key findings of the Czech Republic’s 2010 Article IV Consultation are discussed. Large foreign direct investment inflows fostered trade integration, underpinning an export-led expansion. Higher initial standard of living contained consumption convergence pressures. An improved fiscal performance contributed to the comfortable external position. This, combined with credible inflation targeting, resulted in generally low inflation and interest rates. A liquid and conservative banking sector limited the build-up of balance sheet vulnerabilities.

Appendix I. Czech Republic: Fund Relations

(As of December 31, 2009; unless specified otherwise)

I. Membership Status: Joined 1/1/1993; 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 a free 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 31, 2009, the exchange rate of the Czech koruna stood at CZK 18.368 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 2008 Article IV consultation with the Czech Republic was concluded on February 6, 2009. The staff report and PIN were published on April 14, 2009.

IX. FSAP Participation and ROSCs: An FSAP was carried out in late 2000/early 2001. The Financial System Stability Assessment was considered by the Executive Board on July 16, 2001, concurrently with the staff report for the 2001 Article IV Consultation. ROSCs on: banking supervision; data dissemination; fiscal transparency; securities market; and transparency of monetary and financial policies were published on the Fund’s external website on July 1, 2000.

X. Technical Assistance: See attached table.

XI. Implementation of HIPC Initiative: Not Applicable

XII. 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 2006–2008 are posted on the Fund’s Dissemination Standards Bulletin Board (http://dsbb.imf.org).

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; trade balance data are available monthly, with a two–month lag. 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. However, quarterly estimates for small enterprises (less than 20 employees) have been improved recently using administrative data on social insurance. Discrepancies between GDP estimates based on the production method and the expenditure method are large and are subsumed under change in stocks. There are swings from quarter to quarter in some seasonally adjusted series that need to be corrected by smoother trend-cycle data.

  • Recently, revisions to procedures for processing export data have brought external trade statistics close to the practice in the EU.

  • 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 January 26, 2010

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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).