Public finances are still an unfinished task

Czechoslovakia began its economic reform process after the "velvet revolution" and the subsequent separation from the Soviet bloc in 1989, with very favorable initial conditions resulting from the prudent macroeconomic policy maintained by the communist regime.
In 1993, following Slovakia's independence, the Czech Republic began a rapid and successful transformation towards a market economy and a Euro-Atlantic foreign policy that led the country to become a member of NATO in 1999 and to anticipate its imminent integration into the European Union by May 2004.

Current economic outlook

The Czech Republic's economic growth was hampered in 2002 by the international crisis and the floods that affected the entire country in August. In this regard, a report by the Euler Hermes group, specialists in credit insurance, indicates that while private consumption growth remained stable, investment and exports declined, making it likely that GDP growth for 2003 will be slightly lower than the 2% of the previous year.

However, María Isabel Pardos, spokesperson for the board of directors of the investment group Litexco, explained that the Czech economy "has rebounded modestly during the first half of this year, mainly due to private consumption and increased public demand." This positive result has also been aided by the country's government economic policy, which has maintained low inflation for the past year and a half (0,6%).

Among the main outstanding issues facing the Czech Republic is the high deficit (over 8% of GDP), which could worsen in the coming years due to declining funding from privatization. In this regard, it is essential to continue and encourage foreign investment in the country, as well as implement a sound fiscal policy to stabilize the situation.

Coface Ibérica, in its country risk analysis, points to this last aspect as one of the Czech Republic's weaknesses. "The public finance deficit, already aggravated after the banking restructuring and at risk of further exacerbation due to the weight of social spending, could become unsustainable," they assert.

Comercial activity

Exports and foreign direct investment have led the Czech economy to a recovery from the recession that took place from 1997 to 1999. After three years of negative growth, GDP increased by 2,9% in 2000, according to a report by the World Trade Organization.

Currently, 70% of Czech exports go to the European Union, of which Germany alone accounts for 37%. This percentage is increasing year after year and, once the European enlargement takes effect, will increase even further due to the elimination of all trade barriers.

This data denotes, on the one hand, a significant integration of the country into the European market, but on the other hand, it could pose a threat in the event of economic crises in countries such as Germany, the Netherlands or the United Kingdom, which are the country's main trading partners and foreign investors.

Thus, only 20% of Czech exports are concentrated in countries with transition economies.