Economy and Trade
Following the First World War, the closely related Czechs and Slovaks of the former Austro-Hungarian Empire merged to form Czechoslovakia. With the collapse of Soviet authority in 1989, Czechoslovakia regained its freedom, and, on January 1, 1993, the country underwent a “velvet divorce” into its two national components, the Czech Republic and Slovakia. The Czech Republic joined NATO in 1999, and the European Union in 2004. The country has one of the most stable and prosperous economies in Central and Eastern Europe. Maintaining an open investment climate has been a key element of the Czech Republic’s transition from a Communist, centrally planned economy to a functioning market economy. Its strong industrial tradition dates to the 19th century, when Bohemia and Moravia were the industrial heartland of the Austro-Hungarian Empire. Strong foreign direct investment (FDI) inflows are rapidly modernizing the country’s industrial base and increasing productivity.
The principal industries are motor vehicles, machine-building, iron and steel production, metalworking, chemicals, electronics, transportation equipment, textiles, glass, brewing, china, ceramics, and pharmaceuticals. The main agricultural products are sugar beet, fodder roots, potatoes, wheat, and hops.
Economic Policy over 12 Months
As a member of the European Union, with an advantageous location in the center of Europe, a relatively low cost structure, and a well-qualified labor force, the Czech Republic is an attractive destination for foreign investment. Prior to its EU accession in 2004, the Czech government harmonized its laws and regulations with those of the European Union. The government plans to meet the criteria for joining the Eurozone around 2012.
The small, open, export-driven Czech economy grew by more than 6% annually in the period 2005–2007, and the strong growth continued throughout the first three quarters of 2008. Despite the global financial crisis, the conservative Czech financial system has remained relatively healthy. The rate of Czech economic growth, however, began to fall in the fourth quarter of 2008, mainly due to a significant drop in demand for Czech exports in Western Europe. This trend is expected to continue, with many analysts predicting that the Czech economy will contract slightly in 2009. An International Monetary Fund (IMF) country mission to the Czech Republic in November 2008 concluded that robust productivity growth, improved fiscal performances, and strong FDI inflows had put the Czech economy in a relatively comfortable position to see out the global downturn. The strong currency, the koruna, has helped to contain inflation despite sharp rises in food, fuel, and utility costs.
However, the IMF warned that the Czech economy would not escape unscathed from the global downturn, and the Czech authorities would have to be ready to stimulate the economy as required. Economic growth fell to 8% in 2008, and would slow sharply through 2009 to around 1.5%, the IMF said. The shrinking demand from the Eurozone, and from Germany in particular, would severely curtail both Czech exports and FDI flows into the country. At the same time, tightening credit conditions at home would affect consumer spending and corporate investment.
The country benefited from the fact that the Czech Central Bank was the first central bank in Europe to switch from a monetary tightening policy to combat inflation, to a stimulus-based approach aimed at keeping the economy moving. The bank’s 75 basis-point cut in November 2008 was sharper than most commentators had expected. At the same time, falling inflation and falling commodity prices (as a result of the downturn) are projected to reduce both core and headline inflation through 2009, with headline inflation projected to fall as low as 2.5% in 2009.
Economic Performance over 12 Months
The higher economic growth in the Czech Republic in 2007, of 6.5%, as against the EU average of 2.9%, boosted the country’s per capita GDP to 82% of the EU-27 average. The GDP figure of CZK3,558 billion was more than twice as high as the GDP achieved in the mid-1990s. FDI amounted to some €7.4 billion in 2007, with most investment going into areas of industry with a high-value-added content. Around 90% of all the inward FDI received by the Czech Republic comes from the EU-25.
Although FDI inflows will fall back in 2009, the IMF expects a sufficient inward flow to largely offset the country’s modest current-account deficit. The koruna appreciated in the first half of 2008, which started to threaten Czech exports into the Eurozone, but it weakened sufficiently in the first months of 2009 to prevent too much damage. The main barrier to exports now is weak demand in the economies of the Czech Republic’s main trading partners. In the IMF’s view, at the exchange rates prevailing in November 2008 the koruna was broadly in line with market fundamentals, and consistent with external stability.
The Czech structural fiscal balance improved significantly in 2007, with the government’s commitment to running a budget deficit of no more than 1% of GDP by 2012. As the global downturn constrains growth across Europe, the Czech Republic looks to be in a good position to stay within the Stability and Growth Pact threshold deficit of no more than 3% of GDP (although some major European countries are breaching this limit substantially as part of their economic stimulus packages). Because the government streamlined social spending very substantially in 2007, the target of a budget deficit of just 1.6% in 2009, along with cuts in corporate income tax and social security contribution rates looks achievable, the IMF says. However, it anticipates the deficit rising to 2.5% by the end of 2009. While the Czech Republic gains some benefits from having its own currency, which can devalue and, therefore, improve its export position, a considerable body of opinion is building up which favors expediting a rapid entry into the euro by the Czech Republic, Hungary, and Romania. In March 2009, World Bank President, Robert Zoellick, called for an EU-led and coordinated global support program for the economies of Central and Eastern Europe. Discussing conditions for shortening the two-year entry requirement to join the euro is one option on the table.
If the Czech government wants to stimulate the economy, its best course of action would be to bring forward planned infrastructure projects, and to work with the European Union to bring forward EU-funded projects that could help boost demand, while safeguarding the long-term fiscal position.
Support for Inward Investment and Imports
CzechInvest is the investment and business development agency that aims to help potential foreign investors understand both the scope of investment opportunities in the country, and what is required. There are more than 70 municipal industrial zones, and investors locating in one of these gain access to fully serviced land at favorable prices. Tax breaks, job-creation grants, and other incentives can be applied for where greenfield projects are being initiated.
There is a range of incentives for investors, depending on the nature of the business being set up. Further information is available from CzechInvest and the Ministry of Industry and Trade.
GDP growth: 1.5% (2009, IMF)
GDP per capita: US$26,800
CPI: 3.6% (2008)
Key interest rate: 5.79% (December 31, 2008)
Exchange rate versus dollar: koruna per US dollar—17.064 (2008)
Unemployment: 6% (2008)
FDI: US$107.6 billion
Current account deficit/surplus: −US$6.46 billion (2008)
Population: 10,220,911 (July 2008)
Source: CIA World Factbook except where stated