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Czech Watch - 10 July 2001

10.7.2001 10:00

Finance Minister Rusnok admitted that the growing deficit of Czech public finances posed a problem during his talks with EU officials in Brussels on Monday that would be reflected in the EC's annual report assessing the Czech Republic's progress towards EU. Rusnok noticed that high mandatory spending was a particularly discussed issue. "The matter cannot be resolved quickly and easily now, in the pre-election time," Rusnok said in Brussels. "After the elections, … it will be necessary to reconsider some mandatory expenditures” continued the Finance Minister. He quoted planned tax changes, falling costs linked to KoB or positive fiscal impact of economic recovery among factors that should help minimize future gap between public finance revenues and expenditures.

Czech Republic is asking EU for a transition period for the implementation of higher value added tax (VAT) and consumption tax. Finance Minister Rusnok said that an immediate introduction of higher taxes on some products and services (household heating, construction works, cigarettes and so forth) would affect negatively the general level of prices and people's attitude to the process of integration with the EU.

The Czech cabinet discussed and approved a progress report on the slowdown and liquidation of mines in 2000 and 2001, submitted by Industry and Trade Minister Gregr. According to the document, the process consumed CZK 4.9bn in 2000 and should require another CZK 5.2bn this year. Ministers also decided to spend further CZK 26.7bn from the state budget and from the relevant companies' resources for the slowdown and liquidation of coal, ore and uranium mines in 2002-2005. Cyril Zapletal, the head of the miners' trade unions, said the government was not spending enough.

The government approved Miroslav Gregr's "big bang" plan. According to the final version of the document, a total of CZK 166bn should be spent this and next year in various economic sectors thanks to which the growth in Czech GDP should reach 4 % in 2001 and 5-6 % in 2002. Money that will be drawn from the state budget, off-budget funds, privatization proceeds, bank loans and EU funds should stream first of all to housing construction, transport infrastructure, industrial parks and restructuring of the mining and steel sectors. In 2001 the "big bang" plan counts on CZK 81.1bn, out of which 17.2bn will come from the state budget. In 2002, the plan reckons with CZK 85.3bn, out of which 21.8bn should arrive from the state budget. Industry and Trade Minister Gregr claims that his plan, designed to boost Czech economic growth, does not put any additional burden on the country’s troubled public finances.

Trading in the Czech crown was volatile on Monday, hit by negative emerging market sentiment. Late on Monday the crown was up to 33.94/97 to the euro from 34.10 late on Friday (when the currency was traded only abroad due to state holidays in the Czech Republic). The crown/dollar was up to 40.06/08 from 40.38 late Friday. Dealers said the crown did not fall as many other emerging markets currencies, mainly because there were few short-term speculators in the low-yielding Czech assets.

Bond prices fell on Monday. The state 6.95/16 bond lost 50bps to 99.50/80 from late Wednesday, yielding 7.00/97 %. The state 6.75/05 fell 24bps to 101.80/10, yielding 6.16/07 %. Dealers said the main reason for the decrease in the early phase of the trading was news about political instability in other emerging markets.

late July 9 bond yield late July 4
State 6.75/05101.80/106.16/07102.04/34
State 6.95/1699.50/807.00/97100.00/30


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