RESTRICTED
WORLD TRADE WT/BOP/S/3
27June1997
ORGANIZATION(97-2637)
Committee onBalance-of-Payments Restrictions
1997 CONSULTATIONS WITH THE CZECH REPUBLIC
Background Paper bytheSecretariat
1. Thispaper hasbeenprepared inaccordance withparagraph 12oftheUnderstanding onthe
Balance-of-Payments Provisions oftheGATT 1994.
I. Previous consultations withtheCzech Republic
2. On17December 1990, theGovernment oftheCzech andSlovak Federal Republic introduced
a20percentimport surcharge onimports ofconsumer goods andfoodstuffs; therateofsurcharge
wasreduced from20to18percenton1May1991 andto15percenton1June1991.1TheGATT
Committee onBalance-of-Payments Restrictions consulted withtheCzech andSlovak Federal Republic
on9July1991. TheCommittee considered thatthetransparent, price-based measure wasjustified
according toArticle XIIandencouraged theGovernment initsintention toeliminate thesurcharge
bytheendoftheyear.2Thesurcharge waslowered to10percentinmid-1992 andeliminated on
31December 1992.
II. Trade andExchange System oftheCzech Republic
3. Since thefounding oftheCzech Republic on1January 1993, thesteady paceofmarket-oriented
reform, begun in1991, hascontinued withnotably thedecontrol ofprices, privatization ofstate
enterprises, theopening oftheeconomy toforeign investment andtrade andtheliberalization ofthe
foreign exchange regime. From 17percentin1991 thecontribution oftheprivate sector toGDP
rosetoapproximately 80percentbymid-1996.
(1) Import regime
4. Members ofregional tradeagreements account for80percentoftradewiththeCzech Republic;
inthelastfewyears, theshare ofimports fromtheEUhasrisenwithacorresponding decline inimports
from central Europe.3Acustoms union between theSlovak andCzech Republics hasbeeninforce
since 1January 1993; theparties share acommon external tariff although goods fromthirdcountries
donotcirculate freely between thetwopartners.
1BOP/W/140, 26June 1991.
2BOP/R/193, 24July1991.
3Asof1January 1997, roughly 80percentoftariff lines were rated duty-free forEUimports.WT/BOP/S/3
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5. Tariffs,theprimarymeansofprotection,arelowtomoderate,averaging8percent(unweighted)
and5.5percent(weighted) onanm.f.n. basisin1995, andbindings arecomprehensive. Tariffs vary
across economic sectors, withprocessed goods generally receiving greater protection. Maximum tariffs
willbehalved withtheimplementation oftheUruguay Round commitments. Theimport regime is
relatively freeofnon-tariff barriers, export restrictions andnoanti-dumping orsafeguard actions have
beenadopted.4
6. On21April 1997, theGovernment oftheCzech Republic introduced asix-month non-interest
bearing import deposit equivalent to20percentoftheinvoiced price ofthegoods tobeimported.
Thedeposit scheme, designed tostemthefallinreserves, applies onanon-discriminatory basis to
mostconsumer goods andfoodstuffs andcovers products which account forsome 30percentoftotal
imports.5
(2) Exchange RatePolicy
7. From 1January 1991, thekoruna waspegged toabasket ofcurrencies. Higher inflation than
thatoftrading partners 'ledtoasteady appreciation oftherealeffective exchange rate. Thenarrow
bandof+/-0.5percentwaswidened to+/-7.5percenton28February 1996. On27May1997,
thekoruna wassettoamanaged float.
8. Following thetermination ofabilateral payments agreement withtheSlovak Republic and
theintroduction offullcurrent account convertibility, theCzech Republic accepted theobligations of
Article VIIIoftheIMF'sArticles ofAgreement witheffect from 1October 1995.
III. Macroeconomic developments
9. TheCzechRepublic’searlyreformsintransitiontoamarketeconomyhavebeenverysuccessful.
Over the1994-96 period, however, strong realwage growth andexpansionary monetary policies
stimulated aggregate demand withadverse effects onpricestability, competitiveness, andtheexternal
current account. Thegrowing deficit ofthelatter wasinitially financed bycapital inflows. Areduction
insuchfinancing in1996, astheexchange ratebanwaswidened, caused adecline inofficial reserves.
Supply constraints arising fromslowprogress instructural reforms andtightlabour market conditions
alsocontributed totheemerging external imbalances.
(1) Output andprices
10. After arelatively short period ofnegative growth intheearly 1990s, output growth reached
almost 5percentin1995 (Chart 1).Expansion inthemanufacturing sector wasparticularly strong.
In1996, however, realGDP growth started toslowdown assluggish investment inmanufacturing
andatightlabour market constrained thesupply response oftheeconomy. Bycontrast, aggregate
demand expanded atanaverage of10percentperyearoverthe1995-96 period. Initially thisreflected
increased fixed investment, butin1996 private consumption alsoexpanded rapidly.
4WTO, Trade Policy Review oftheCzech Republic, 1996.
5WT/BOP/N/19, 29April 1997.WT/BOP/S/3
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11. Inflation wasalmost unchanged overthepastthree years. Therateofincrease inconsumer
prices declined marginally from10percentin1994to8.8percentin1996(Chart 2).Wage increases
averaging about 18percentduring the1994-96 period, however, exceeded inflation andproductivity
gains (about 2percentperyear). Asaresult, realwages rosebyover7percentperyearoverthis
period which inturnincreased unitlabour costs byabout 20percent(Chart 3).
(2) External sector developments
12. Since 1994, thecurrent account position hasdeteriorated rapidly. After abalanced current
account in1994, adeficit of8.6percentofGDP hademerged by1996 (Chart 4).Strong demand
forconsumer andinvestment goods andarelatively weakexport performance resulted inarapidincrease
inthetrade deficit in1995 and1996; theservice balance improved in1995 andremained virtually
unchanged in1996 (Table 1).Thedeterioration inthecurrent account coincided withamarked
appreciation oftherealexchange rateonaunitlabour costbasis, asproductivity-adjusted labour costs
increased much faster thaninGermany andtheU.S., against whose currencies theCzech koruna was
pegged in1991.
13. Upto1995, capital inflows financed thegrowing current account deficit andevenallowed
asignificant expansion ofofficial reserves. Thelatter hadincreased from lessthanthree months of
imports in1993 tooverfivemonths bytheendof1995 (Chart 5).However, in1996, inflows of
portfolio investment andforeign direct investment declined andnetshort termcapital flows became
negative. Consequently, thecurrent account deficit waspartly financed fromreserves which decreasedWT/BOP/S/3
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toabout fourmonths ofimports attheendof1996. Further reserve losses wererecorded inthefirst
months of1997.
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Table 1
Balance ofPayments, 1993-19961
1993 1994 19952Prel.
19962
(US$ million)
Trade balance -312 -889 -3,678 -5,972
Exports 12,997 14,016 21,462 21,703
Imports 13,309 14,905 25,140 27,674
Services balance 1,011 733 1,843 1,785
Receipts 4,723 4,892 6,719 7,952
Payments 3,712 4,159 4,876 6,167
Factor income andunrequited transfers -18 180 473 -289
Current account 681 -50 -1,362 -4,476
Direct investment 552 749 2,526 1,388
Portfolio investment31,034 855 1,362 726
Other long-term capital 816 1,109 3,367 2,716
Short-term capital 56 659 971 -758
Capital account 2,458 3,371 8,226 4,072
Errors andomissions -110 -950 595 -424
OVERALL BALANCE 3,029 3,483 7,458 -828
Gross official reserves (-=increase) -3,029 -2,3724-7,458 828
Memorandum items
Export volume
(in%change overprevious year)11.4 2.6 2.8 2.4
Import volume
(in%change overprevious year)13.4 14.2 21.7 11.1
Current account balance
(in%ofGDP)2.2 0.0 -3.0 -8.6
Official reserves
(inUS$billions)3.9 6.2 14.0 12.4
External debt(inUS$billions) 8.5 10.7 16.5 20.4
Debt service (in%ofexports ofgoods andnon-
factor services) 8.4 13.1 9.0 14.8
1 Includes transactions inconvertible andnonconvertible currencies, andtransactions withSlovakia.
2 Merchandise trade datafor1995 and1996 isbased onanewcustoms methodology, andisnotdirectly comparable withearlier
years.
3 Thetransfer toSlovak citizens ofshares inenterprises privatized inthefirstwave ofvoucher privatization andthecorresponding
offsetting portfolio investment havebeennetted out.
4 Difference tooverall balance isrepayments totheIMF.
Source: International Monetary Fund.
14. TheCzech Republic ’sforeign debtanddebtservice obligations increased inthepastthreeyears
withcapital inflows contributing tothisdevelopment. External debtgrewfromabout 30to40percent
ofGDP, andthedebtservice ratioreached 15percentofexports ofgoods andnon-factor services
in1996.
(3) Savings andinvestment
15. Since thesavings andinvestment balance isthemirror image ofthecurrent account balance,
changes insavings andinvestment provide animportant cluetounderstanding thechanges inthebalance
ofpayments. Gross domestic investment increased considerably to30.9percentofGDP betweenWT/BOP/S/3
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1994 and1996 (Chart 6).6Gross national savings alsoincreased in1995 albeit more slowly than
investment, before reverting tothe1994 level in1996. Therising savings-investment gapreflects
therecent rapid growth ofaggregate demand andtheexpansion ofprivate consumption andinvestment;
government savings andinvestment asashare ofGDP remained almost constant.
(4) Policy stance
16. Inthefirsthalfofthe1990s, theCzech Republic achieved macroeconomic stability andmade
considerable progress inthetransition towards amarket economy. Nevertheless, anumber offactors
contributed totherecent deterioration ofthecountry ’sexternal position:
- Average wage increases much inexcess ofinflation andproductivity gains haveresulted in
aconsiderable lossincompetitiveness andalsoboosted demand forimported consumer goods.
However, theappreciation oftherealeffective exchange rateandthelossofcompetitiveness
haveprobably beencorrected inpartbytheflotation oftheCzech koruna on27May1997.
- Expansionary monetary policies contributed tothepersistence ofinflation andtherapid rise
inaggregate demand andwages. Following large capital inflows in1994-95, anddomestic
credit expansion inearly1996, annual broad money growth stayed closeto20percentbetween
1994 andthemiddle of1996. Forfearofpressure ontheexchange rateandrising interest
6Includes astatistical discrepancy overstating theincrease ininvestment.WT/BOP/S/3
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rates(andtheirnegative effects onthedomestic economy, enterprises andsome struggling
banks) monetary tightening wasdelayed untilJune1996. Since then, broad money growth
hasslowed down tolessthan10percent,tohelpdecrease inflation andtemper demand growth.
- Fiscal policies were relatively prudent, withthedeficit reaching only1percentofGDP in
1996(Table 2).However, thefiscal stance wasnottightened further, thereby providing only
limited support formonetary policies inthesecond halfof1996.
- Capacity constraints inthedomestic economy, asmentioned above, andweak demand inthe
Czech Republic ’smainexport markets depressed export growth. Aggregate supply andgrowth
wereconstrained, forexample, through relatively large spreads between lending anddeposit
ratesinthefinancial sector, slowprogress infurther enterprise restructuring, andthewage
setting process.
Table 2
Operations oftheGeneral Government, 1993-1996
1993 1994 1995 Prel.
1996
(PercentofGDP)
Total Revenue 50.5 49.4 46.9 46.0
Total Expenditure 50.0 50.7 48.8 47.3
Current expenditure 43.2 43.6 40.9 40.2
Capital expenditure (excluding netlending) 6.7 7.3 7.7 7.2
Balance without privatization revenue 0.6 -1.3 -2.0 -1.3
Privatization revenue 0.8 1.8 1.2 0.2
Balance withprivatization revenue 1.4 0.5 -0.8 -1.1
Source: International Monetary Fund.
IV. Trade Developments
17. Export andimport growth wasrelatively unbalanced overthe1994-96 period, giving rise
toaconsiderable trade deficit. Export volume growth wasrelatively lowat2-3percentduring this
period (Table 1).Bycontrast, annual import volume growth exceeded 10percentduring every year
overthe1994-96 period.7Trade inservices developed favourably andreceipts increased more rapidly
thanthevalue ofmanufacturing exports. Theservices balance improved asa60percentincrease
inreceipts outweighed a50percentincrease inpayments.
18. Thetrade composition hasnotchanged much since theearly 1990s. Ontheexport side,
manufactured goods andmachinery plustransportation equipment accounted for44and34percent
ofexports, respectively, inthefirsthalfof1996(Table 3).Chemicals, rawmaterials, fuels, minerals
andfoodcontributed theremaining 20percentofexports. Ontheimport side,manufactured goods
accounted for30percentoftheimport value whereas machinery andtransportation equipment
represented almost 40percentofimports. Theremaining 30percentofimports comprised food,
rawmaterials andchemicals.
7The20percentincrease inimport volume in1995 ispartly duetotheintroduction ofanewmethodology
formeasuring trade data.WT/BOP/S/3
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Table 3
Commodity Composition ofTrade, 1996
Exports (f.o.b.) Imports (c.i.f.)
(Percentoftotal)
Food andrelated products 4.6 7.2
Rawmaterials, fuels, minerals 9.2 12.5
Chemicals 8.6 11.4
Manufactured goods 43.9 29.0
Machinery andtransport equipment
Total 33.6
100.039.8
100.0
Source: International Monetary Fund.
19. Thegeographical composition oftrade haschanged further towards trade withindustrial
countries inrecent years. Theshare ofexports toindustrial countries increased from54to64percent
between 1993 and1996, withGermany being byfarthemost important customer. Incomparison,
in1993, 37percentofexports wenttoformer planned economies, andby1996thisshare haddeclined
to30percent. TheSlovak Republic wasthemostimportant trading partner fromtheformer planned
economies purchasing 14.3percentoftheCzech Republic ’sexports (Chart 7).Theimport composition
changedinasimilarfashion.In1996,industrialcountriestogetherprovidedover70percentofimports,
andGermany accounted foralmost halfofthese. Inthesame year, lessthanonequarter ofimports
werepurchased intheformer planned economies, withtheSlovak Republic being themostimportant
supplier from thiscountry group.