This year, the Czech Republic entered a phase distinguished by a strengthening of the macroeconomic stability achieved earlier, an improving and further reinforcing of the market environment, while expecting a turning point in the development of economic performance.
The first nine months of 1994 were marked by the fact that, in contrast to the three previous years of transformation, this period was free of any fundamental changes to the system and the Czech economy developed in a relatively stable internal environment. Neither did the external economic environment experience any significant changes. The influence of the recovery beginning in western industrial countries and the prospects of more liberal access to foreign markets can be expected only on the long-term horizon. Problems continued in trade with the Slovak Republic, which further declined.
The basic objective of the CNB monetary policy, a stable currency, was accomplished during the period under review. The inflation rate measured by the consumer price index corresponds essentially to 1994's intentions. The year-to-year change in price levels amounted to 10.5% at the close-September. The month-to-month increase in price level following the usual more rapid growth in January was moderate until July, accelerating, however, in August and September, when the month-to-month index exceeded 1%. Consumer prices in September this year, against December 1993, rose by 7.9%. The inflationary growth has especially affected the price of foodstuffs (particularly meat and meat products) which, against the end of last year, increased by 11.2%, and prices for services which rose by 12.4% (influenced by prices for rent, heat, water and sewage, gas, electric power and bus transport).
The development thus far of the balance of payments allows the continuation of the policy of a stable nominal exchange rate of the Czech crown which, vis-a-vis freely-convertible currencies, has been stable since the beginning of 1991. CNB foreign exchange reserves and those of the entire banking system had an upward trend. Favorable development in the foreign exchange position enabled repayment ahead of schedule of all CR credits from the IMF. The position of CNB foreign exchange reserves at the close-September is sufficient to cover imports of goods and services for four months in freely convertible currencies.
Money supply measured by the monetary aggregate M2 further increased, affected especially by a rapid inflow of foreign resources. Credits drawn by Czech firms directly from foreign subjects, and portfolio investments, are the dominant forms of capital inflow. The drawing of credits abroad is significantly stimulated by positive ratings of the CR (investment grade ratings of Baa2 or BBB+) manifested in more advantageous conditions for entrepreneurial credits from abroad. Domestic enterprises thus utilize the possibilities of acquiring long-term resources which, with lower interest rates, are better than those from domestic banks. The large demand for credits by commercial banks' clientele continued. An increase in domestic credits, compared to the end of 1993, was the result of an increased number of credits to the enterprise sector, since the net credit to government fell (particularly due to the favorable state budget current performance). From a sectoral and time point of view, changes continue in the structure of credits to enterprises (an increase in credits to the private sector and a decline in credits to the state sector). Short-term credits made up almost 3/4 of newly granted credits in the first half. The CNB resisted this development by continuing free-market operations and issuing its own bills. In addition to these operations, the CNB increased in July the minimum reserves requirement for demand deposits of commercial banks from 9% to 12%, and in October, the discount rate from 8% to 8.5% and the Lombard rate from 10.5% to 11%. Money supply growth slowed in Q3.
A certain stabilisation or slight decline in money market interest rates in the first six months was followed by gradual growth in interest rates in the inter-bank deposit market. In September, interest rates on credits extended to clients increased.
The capital market continued to develop rapidly. The Prague Stock Exchange and the RM-System began to offer new services and greater convenience. However, some retarding influences, particularly the lower liquidity of the capital market, remained in the period under review. Trading volumes and prices of securities were marked by fluctuations in particular periods for reasons both external (smaller interest of foreign investors) and internal (investor preparation for the second wave of voucher privatization, mobilization of means for the subscription of new KB and IPB shares).
Bonds, as an alternative source of financing, especially the needs of the entrepreneurial sphere, enjoy greater interest. This reduces the shortage of good quality securities with sufficient liquidity on the capital market, thereby creating the preconditions for growth in trading in bonds which as yet constitutes a smaller part of the capital market.
The results achieved document unequivocally the positive influence of the ownership transformation on the economic performance. In terms of demand, growing consumer demand accompanied by an increased investment demand was apparent. Production by individual economic industries documents the beginning of growth tendencies. The
figure of 2.1% growth in the gross domestic product, in constant prices, in January to September this year against the same period of last year, is based on the ongoing increase in services, construction and industry (from January to September industrial production rose by 2.0% and construction by 6.0% compared to the same period last year).
Changes in the structure of the labour force denoting progressive movements accompanying the restructuring of the economy, continued in the labour market (development of the private and non-state sectors, increasing importance of the service sector, etc.). Employment in industry continues to decline. The unemployment rate remains very low and at the close-September, amounted to 3.2% (3.5% a year ago). The situation on the labour market is documented by the fact that more than 50 thousand foreigners are working in the CR.
The problems in which some small banks found themselves due to the loss of liquidity; i.e. problems with risky credits which became critical, the unbalanced time structure of assets and liabilities and, last but not least, incompetent and unprofessional management, were tackled in the banking sector during the first months of the year. The period starting June was a phase of implementing significant systemic elements into the life of the banking system - an amendment to the Act on Banks and CNB provisions which introduced a unified classification of credit portfolios. The amended Act on Banks helped stabilize the banking sector by facilitating a more efficient solving of unfavorable development in banks, and increased public confidence in the banking sector through the introduction of deposit insurance. Stricter credit classification contributes to a more precise and realistic view of risky credits as one of the most serious problems in the Czech banking system, a problem emerging from both the inheritance of the past and the lack of experience or limited competence of management, particularly in newly established small banks. These moves made by the central bank led to a consolidation of the situation and were positively reflected throughout the entire banking system which presently can be characterized as stable.
Economic and monetary developments in the first nine months of this year can be assessed as positive. The phase of gradual recovery in which the Czech economy finds itself, accompanied by a growing demand for money, and persisting foreign capital inflow, increase demands on a stabilizing character of the CNB monetary policy.