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Czech Watch - 26 March 2001

26.3.2001 8:30

In a study commissioned by the Czech government, the World Bank (WB) urges the Czech Republic to cut public expenditures in order to change bad fiscal outlook. WB calculated the structural budget deficit equal to 4.8 % of GDP in 2000 and predicts it close to 6 % in 2001. According to WB, the appropriate mid-term structural deficit target should be only 1-2 % (with regard to perspective adherence to EU Stability and Growth Pact). Czech Finance Ministry expects this year’s overall public deficit to peak at 9.4 %. To restore fiscal balance, WB recommends focusing on the expenditure side of the public finance. A good reason for that is growing proportion of government spending to GDP. The ratio equals 46 %, which is more than other EU candidates or poorer EU countries show. WB would favor a less generous pay-as-you-go pension system and, in the longer run, introduction of a notional defined contribution system and/or a fully funded pension pillar. Other WB recommendations include, for instance, redesigned minimum living standards in welfare programs, expansion of co-payments in healthcare, introduction of tuition fees on the tertiary education level, or lengthening of the horizon for fiscal decision-making. Most concerned members (Špidla, Fišer, Zeman) rejected WB prescriptions calling for unpopular reforms in their respective areas of responsibility. Representatives of the Finance Ministry acknowledged necessity of an overall reform of public spending, but admitted that crucial changes can hardly happen before general elections in 2002.

In order to strengthen central bank’s independence, the Constitution Commission of the Czech Senate proposes Governor of the central bank to be picked up by the Senate out of candidates submitted by Mr. President. At present, appointment of the Governor is solely within discretion of the Head of State. Another constitutional change suggested by the Commission requires agreement of both Chambers of the Parliament on any draft amendment to the Czech National Bank Act. At present, the Lower Chamber can reject modifications of draft amendments proposed by the Senate and push through its own version.

On March 26, Industry and Trade Minister Miroslav Grégr discusses next steps of Czech steel industry restructuring with Paul of Marylebone, Chairman of Caparo Group, a supranational steel and engineering company. EU resistance to prolong the exception allowing governmental assistance to the Czech steel sector should be the key topic in the discussion. EU says that the Chapter concerning economic competition will not be closed until European Commission receives a Program of metallurgy restructuring in the Czech Republic (which hardly happens before this September). The Czech government estimates total cost of the metallurgy restructuring to reach roughly CZK 82bn.

The Czech crown lost against EUR during Friday but firmed against the USD. Dealers said the crown first rose due to the 3.9 % GDP growth in 2000Q4 announced on Thursday but later was hit by a round of profit taking. Dealers guess that the crown should maintain its present level next week, being influenced first of all by EUR/USD movements.

Bonds continued recovering. Investors refocused their attention on Škoda Auto 7,25/05 and mortgage-backed KB 8,125/04, which rose 50bps and 65bps, respectively. Despite some expected profit-taking dealers believe in continuing gradual growth of bond prices.

late March 23 bond yield late March 22
State 6.75/05104.12/425.54/45103.77/07
State 6.95/16105.99/296.31/28105.28/58

(Martin Kupka)

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