Ivan Pilip

Politics and the economy in the Czech Republic

Ivan Pilip
Minister of Finance

Both the political scene and the Czech economy have been going through a difficult time recently. The mid-1996 elections resulted in a coalition government without a clear majority entering Parliament. The economic growth slowed down markedly at the beginning of 1997 (from over five per cent in real terms in 1995 to only 1.2 per cent in the second quarter of 1997); the external position was rapidly deteriorating and the current account deficit reached 8.6 per cent of Gross Domestic Product (GDP) by the end of 1996. Meanwhile, necessary reforms and privatisation were being postponed. At the same time, a fall of confidence was witnessed among foreign investors in the capital market, as well as a currency turmoil resulting in a transition to the floating of the Czech currency.

Undoubtedly, some of the problems may be attributed to the specifics of the transition process, to a degree and depth of systemic and structural change that our economy and society as a whole is undergoing. However, some problems could have been avoided had the Government reacted faster. The Government has reacted to the changed macroeconomic conditions with two rounds of fiscal tightening in the spring of 1997, coupled with a strong impetus to a continuation of the reform process. In the months following this corrective decision there appeared to be some positive signals concerning the macroeconomic situation - the GDP growth reached 2.2 per cent in real terms by the fourth quarter of 1997, and both industrial production, and especially exports, continued to show a very strong performance in the first months of 1998. Growth is expected to hover around 2.5 - 2.7 per cent in 1998, with the average yearly inflation remaining within a single digit range by the end of the year. It is believed that the stabilisation and reform effort will lead to faster, sustainable growth from 1999 onwards. As faster reforms and deregulation of controlled prices (energy, housing, etc.) squeeze out inflationary expectations, the average inflation is expected to decrease to some five to six per cent by the turn of the century, in keeping with the inflation target announced by the Central Bank.

The Government is currently working on a medium-term prospect of the economic policy. Transparency and predictability of Government measures is expected to be an extremely important contribution to building investor and public confidence in the economy. A priority is the improvement of the legal environment, a decisive fight against all forms of criminal behaviour, and greater transparency of the 'rules of the game', particularly regarding the capital market. The Securities and Exchange Commission, empowered for effective supervision of the capital market, started functioning on 1 April 1998, and an amendment to the legislation regulated by the investment funds behaviour has been approved by Parliament. The enforcement of these new laws and amendments was crucial, and there was a will by the Government to pursue these more energetically than has been the case in the past.

Efficient banks are vital for any modern economy. The Czech Government regards privatisation of the remaining state stakes in major banks as an important impetus for recovering the momentum of the whole transformation process; as a pre-condition for the re-structure and further development of banking and financial services in this country. Preparation for the privatisation of remaining state owned banks is in full swing, including signed contracts with leading investment banks that will advise the Government in the course of privatisation. It is expected that the tender advertisement stipulating fundamental parameters of the transaction will reach the investor community this summer.

I am positive that the best way to achieve effective re-structuring of the economy is via the pressure of real owners of privatised enterprises in the framework of standard shareholder rights. This pressure cannot be substituted by any government policy. Privatisation of the remaining state stakes in strategic enterprises, improvements of the capital market functioning, consistent protection of ownership rights and enforceability of the law are necessary pre-conditions for that. I believe that recent government policies go far towards reaching these objectives.

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