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Vol 2, No 31
18 September 2000
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Old Friends
The IMF and the
Czech Republic

Tiffany G Petros

It all started with a walk in the woods...

The International Monetary Fund (IMF) and the World Bank Group (WB) were first discussed at the Bretton Woods Conference of 1944. At that time, 44 countries came together to set forth a plan for future international economic cooperation. As part of that plan, the IMF/WB were created for the purpose of promoting liberal economic policies in the post-war period. International cooperation based on free market principles was viewed as necessary for ensuring future economic stability and security in the new world order.

Czechoslovakia's government in exile participated as one of the founding members of the IMF, which began officially operating in 1947. Although Czechoslovakia was active in the creation of both the IMF and World Bank Group, its membership in the organizations was threatened soon after the Communists came to power in 1948. As Czechoslovakia became more firmly entrenched in the Eastern bloc, the country was required to follow economic initiatives approved of by the Soviet Union, which were inconsistent with economic liberalism as advanced by the IMF. As a result, Czechoslovakia was forced to officially sever ties with both the IMF and World Bank Group in 1955.

35 years later, following the collapse of Communism, Czechoslovakia officially rejoined the IMF/WB in September 1990. This marked a radical departure from the past, since Czechoslovakia's pre-1989 economic system had become one of the most rigid within the Eastern bloc. Unlike Czechoslovakia, other Central and East European countries, such as Romania, Hungary and Poland, had already begun to renew ties with the IMF/WB in 1972, 1982 and 1986, respectively. While these countries were able to institute small economic changes under Communism, the Soviet-led invasion of Czechoslovakia in 1968 put an end to the country's attempts at economic reform until after the Velvet Revolution of 1989.

Czechoslovakia's re-admission to the IMF/WB was unfortunately short-lived. For the second time in history, ties between Czechoslovakia and these institutions were severed, this time as a result of the break-up of the country. On 1 January 1993, Czechoslovakia ceased to exist and was replaced by the Czech Republic and Slovakia, both of which received automatic membership in the IMF/WB following the "Velvet Divorce."

What is it there for anyway?

Since the creation of the IMF, the organization has grown to include 182 member states. Several of these new members are countries in transition (CITs), similar to the Czech Republic and Slovakia. Just as the number of members has grown so, too, have the functions of this intergovernmental organization.

The original function of the IMF was to encourage exchange rate stability through short-term loans to states experiencing balance of payment difficulties. Since the early 1980s, the IMF has taken on the additional roles of providing longer-term loans and offering its "seal of approval" to private financiers.

In order to promote economic liberalism, loans granted by the IMF are subject to conditionality. In other words, the borrowing country must advance economic policies or achieve economic conditions consistent with IMF regulations in order to be eligible for financial assistance. Examples of structural adjustment policies encouraged by the IMF include currency devaluation, financial reform, elimination of subsidies, trade liberalization and decreased government spending. Each of the programs proposed follow the liberal economic principles that non-government interference in the domestic economy and the opening of that economy to the world market will improve the economic conditions at both the state and international levels.

CITs, EDCs and IOUs

Following the collapse of Communism, the CITs looked to the IMF to help them make the transition from a fixed to a free-market economy. After the split with Slovakia, the Czech Republic almost immediately began independent cooperation with the IMF. Once the Czech Republic gained the IMF's confidence that it was pursuing economic policies consistent with a market economy and would be able to combat its balance of payment difficulties, the country was awarded a normal stand-by loan equal to USD 471 million. By 1995, the Czech Republic had already repaid its entire IMF debt ahead of schedule, making it the first post-Communist country to do so [1].

Although the Czech Republic has repaid its debt to the IMF, as a member of the organization it continues to work on completing its economic transition consistent with IMF goals. For example, the Czech Republic has not yet brought its trade into balance, although progress has been made. In 1996, the Czech Republic had the largest trade deficit in Central Europe, meaning imports were outpacing exports by a considerable margin. Whereas the trade deficit had grown to CZK 162 billion (USD 5.7 billion) in 1996, the gap in trade decreased to USD 2.0 billion by 1999 [2]. Efforts are ongoing to further decrease the trade deficit that has plagued the Czech Republic since it gained independence.

Another area of IMF concern is currency stability. Under Czechoslovakia the crown was devalued in accordance with IMF structural adjustments and tied to a basket of Western currencies. The Czech Republic inherited a stable currency from Czechoslovakia, and the Czech National Bank intervened daily to ensure that the crown did not fluctuate. In 1997, after maintaining currency stability for eight years, the Czech National Bank agreed to let the crown float. This led to an immediate monetary crisis but did not devalue the crown to the extent expected. In 1999, the Czech National Bank occasionally intervened to prevent the appreciation of the crown and is expected to do so in the future if the currency continues to strengthen.

Another aspect of the structural adjustments identified by the IMF is privatization. This is especially important in the Czech Republic where privatization reforms have been ongoing. The Czech Republic has followed a three-part privatization scheme, which includes restitution, small-scale privatization and large-scale privatization. Although privatization has moved forward in all three areas, the privatization process has continued to be threatened by wide-scale corruption. This is particularly true in the context of large-scale privatization, where investment funds have been accused of tunneling or skimming off assets from companies under their jurisdiction. This is not only a problem of privatization but also brings to light the remaining inefficiency in the Czech judicial system, which has not yet effectively dealt with such economic crimes.

Since the IMF is concerned with economic liberalism, it wants to see the opening of economies to outside influences, including foreign investment. In the case of the Czech lands, total foreign investment between 1990 and 1999 reached USD 10.9 billion [3]. The largest percentage of investment during this time period could be seen in the areas of transportation and communication. The largest investor, Germany, has been responsible for 26 percent of total investment to the Czech Republic [4].

While these are just a few examples of economic policies pursued by the Czech Republic with the support and approval of the IMF, compliance with these liberal economic policies is important for reasons other than future IMF cooperation. The transition of the Czech economy from a fixed to a free market is a necessary requirement for future membership in the European Union. If the Czech Republic can successfully promote the free-market policies advanced by the IMF, this will strengthen its application for EU membership, currently one of the country's top foreign policy goals.

Cooperation between the IMF and the Czech Republic is ongoing. Under the IMF's Articles of Agreement, bilateral discussions between the IMF and member states are held each year. During these meetings, an IMF team visits the country and officials discuss the economic policies and developments taking place in the member state. Later, a report is prepared by the IMF to be first discussed by the organization's Executive Board and then distributed to the country's authorities. The most recent consultation between the IMF and the Czech Republic was concluded on 26 July 2000, with the report or Public Information Notice being made available as of 9 August 2000.

The results of the report indicate that the Czech Republic has made recent strides towards economic recovery, increased demands for trade from the EU, increased privatization and encouraged low inflation. Areas of continued concern include banking and corporate restructuring, maintaining price stability and reforming social benefits [5].

So why all the fuss?

Various criticisms of the IMF have plagued the organization in recent years. One important criticism is that voting in the organization is based on the amount of member contributions to IMF funds. The less developed countries (LDCs) and the countries in transition, to which the Czech Republic belongs, have less than 40 percent of the votes combined. Thus, it is argued that these countries are put at a disadvantage relative to the economically developed countries (EDCs) when it comes to decision-making within the organization.

A second criticism is that the conditions for receiving IMF assistance are unfair or even harmful to the borrowing country. By requiring states to implement policies such as opening the country to foreign trade and investment, devaluing the currency and privatizing state-run enterprises, for example, the local populations may suffer. It is also argued that by requiring such action the IMF is, in fact, infringing on the sovereignty of the state. In the case of the Czech Republic, the above-mentioned policies to implement reform were being formulated by the local government at the time when IMF talks began. While the way in which such reforms were conducted may have been influenced to some extent by the IMF, the Czech Republic was itself working to make these changes and move from a fixed to a free-market economy. Thus, the IMF has not infringed on the sovereignty of the Czech Republic to the extent that it may have in other countries.

Another criticism of the IMF is that the structural funds or conditionality required for assistance are set up to maintain a dependent relationship between the economically developed countries and others. As a country in transition, the Czech Republic has found itself better placed in the international economy than many less developed countries. Not only is the Czech Republic trying to meet IMF conditions to advance its own economic transition, but it is doing so in an attempt to join the European Union. As a member of the EU, the Czech Republic will rise to EDC economic standards and not be in the position of dependency which is often associated with less developed countries.

Another oft-cited criticism of the IMF is that the organization violates its own principles of economic liberalism. In other words, the market should decide the success or failure of the domestic economy. Intervention should not be used to rescue failing economies, since it goes against liberal economic principles. The critics citing these points argue that IMF assistance benefits elites, corporations or banking institutions and not the masses in need. In the case of the Czech Republic, it can be argued that the history of Communism and the fixed economy have encouraged the international community to become involved in the affairs of the CITs. It is not only economics at stake but ideology.

A welcome visit

Since the Czech Republic was able to repay its IMF loans ahead of schedule, it can be argued that the country's cooperation with the institution is as much symbolic as driven by a desire for financial assistance. The policies advocated by the IMF have not differed substantially from those supported by Czech politicians in the early stages of transition. It is likely that the Czech Republic will continue to maintain positive relations with the IMF and use its continued cooperation to its advantage in joining the European Union.

From 26 to 28 September 2000, Prague will become only the 20th city to host the Annual Session of the Council of Governors of the IMF/WB since its inception. This is a historic event for the Czech Republic since it will not only bring international attention to the country but will again emphasize the Czech Republic's affiliation with the West and economic liberalism, which it was denied under Communism.

Tiffany G Petros, 15 September 2000

For more information on the September IMF/WB meetings in Prague and their non-governmental counterparts see:

Moving on:


1. Echikson, William, "Czechs Spurn Western Mates," 1994, Fortune, 130 (6): 18, 22

2."Czech Republic: Statistics," September 2000, Business Central Europe

3. "Country Commercial Guide FY 2000: Czech Republic," July 1999, US Embassy, Prague

4. "Inflow of Foreign Direct Investment into the Czech Republic," December 1998, CzechInvest Fact Sheet no 2

5. "IMF Concludes Article IV Consultation with Czech Republic," August 2000, International Monetary Fund: Public Information Notice (PIN) No 00/60


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