The Czech Republic is an upper middle income country with Gross National Income (GNI) per capita of US$ 5,560. The country is strategically situated in the heart of Central Europe and enjoys political and economic stability. Over the past twelve years, the Czech economy has been through a process of rapid transformation bringing it closer to its goal of European Union (EU) accession. Negotiations for European Union membership were completed in December 2002, and 77 percent of the Czech population voted in favor of accession in a referendum in June, 2003. The country will join the EU in May 2004.

Following the failure to complete structural reforms in the mid-1990s, the Czech economy experienced a delayed transformational recession from 1997, with growth resuming in 2000. Recovery followed significant and costly financial and enterprise reforms and was characterized by significant foreign direct investment (FDI) inflows. Despite the growing reliance on exports, and the large trade and investment links with the EU, the Czech economy has weathered the global slowdown well.

Real GDP growth remained subdued at around 2 percent in 2002 and is projected at about 1.7 percent for 2003. FDI inflows, at 13 percent of GDP in 2002, were the highest in the region and have been an important contributor to the economy’s strength. FDI stock is over US$40 billion, or about 52 percent of GDP. The combination of a well-educated and disciplined work force, relatively low wages, and prospects for EU accession make the Czech Republic an attractive destination for greenfield FDI. Privatization has also attracted considerable FDI.

Focus of World Bank Assistance

Through financial and technical assistance, the Bank has supported key structural reforms, and the modernization of individual sectors, including the energy and telecommunication sectors. In addition, through Global Environment Facility (GEF) grants, the Bank has helped phase out ozone-depleting substances, protect biodiversity, and improve district heating through industrial cogeneration.

From 1998 onwards, the areas of Bank involvement increased with assistance provided mainly through analytical and advisory services. Bank assistance has supported the EU accession process, capital and financial market reform, enterprise restructuring and fiscal management, corporate governance, the regulatory framework, and pension reform options, with some activities continuing in the energy and environment sectors.

The Czech Republic’s per capita income is slightly above the graduation threshold at which discussions to initiate formal graduation would normally commence. In light of the progress the Czech Republic has made in completing the transition agenda, the authorities have informed the World Bank of the Czech Republic’s intention to enter into pre-graduation arrangements with the Bank and they do not foresee borrowing from the Bank during the pre-graduation period. Bank analytical and advisory assistance to the Czech Republic during this period will continue to be demand-driven and the graduation process will be based on the Bank’s framework for support to EU Accession candidate countries.

Impact on the Ground

District heating improved. With Bank assistance, a combined heat and power plant has been built in Kyjov to use the waste heat of the Vetropak Moravian Glass Factory for both heat and electricity production.

Ozone-depleting substances eliminated. Some 50 percent of Ozone Depleting Substances (ODS) in the refrigerator sector, and 30 percent in the foam sector, have been phased out as a result of the Ozone Depleting Substance (ODS) Phase-out program through Global Environment Facility (GEF) grants. The Biodiversity Conservation Program has developed revenue generation mechanisms for protected areas and increased the participation of local communities and land managers.

Public sector being revamped. With Bank assistance, the Government has put in place a system for identifying and managing contingent liabilities of the public sector.

Enterprise restructuring progressed. The Government is promoting enterprise restructuring particularly through the revamping of the bankruptcy framework.

Challenges Ahead

• Restoring fiscal sustainability. Since 1997, the general government deficit has been growing steadily. It reached 6.7 percent in 2002 and is projected to reach 7.6 percent of GDP in 2003. Although its financing has been facilitated by privatization, the few assets that remain , including the telecom and power sectors, and the uncertain timing of their privatization makes fiscal consolidation a high priority. To reduce the fiscal deficit, structural reforms are needed in key areas including in health, pensions, and social protection.

• Restoring growth. Since 1997, annual growth -- at 1.1 percent of GDP -- has been slow. Growth of 2 percent in 2002 was based on domestic demand and was negatively influenced by the foreign trade balance. Prospects for growth remain weak and will depend on the depth of reforms.

• Improving the legal and regulatory framework to promote private sector led growth.

• Reducing unemployment. Despite the resumption of growth in the aftermath of the 1997 crisis, unemployment rates have not fallen to pre-crisis levels. Given the characteristics of unemployment in the Czech Republic, with a rising share of long-term unemployment and large disparities across regions, reducing unemployment will require greater flexibility in the labor market, and changes to social benefits that address the underlying incentive structure.

• Reducing regional disparities and differences in unemployment levels across the country.

• Finalizing the resolution of bad assets which were transferred from the banking sector to the portfolio of the Czech Consolidation Agency.

• Completing the restructuring and privatization of major enterprises, particularly in the power and steel sectors.

• Completing the reform of the pension and social benefit systems.

	up to 1996	1997	1998	1999	2000	2001	2002	2003	Total
Commitments	626	-	-	-	-	-	-	-	626
Disbursements	417	37	25	27	4	-	-	-	510