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Czech Republic: From Economic Miracle To Problem Child

Prague, 1 September 1997 (RFE/RL) -- A leading firm of Japanese investment advisers and market researchers has some gloomy things to say about economic prospects for the Czech Republic.

In an analysis just issued, the Daiwa Research Institute-Europe says that foreign investors still have doubts about whether the current Czech government is sufficiently committed to implementing the required changes in economic policy.

The analysis, compiled by a London-based senior Daiwa economist, Vlad Sobell, says that recent months have seen a sudden loss of confidence stemming this perceived weakness of the centre-right coalition led by Prime Minister Vaclav Klaus, and from increasingly unfavourable macro-economic trends. Systematic problems such as the lack of regulation in the financial market have also contributed to the crisis.

Sobell argues that the Czech Republic can regain its early position only if the authorities succeed in implementing their announced austerity program, and in moving decisively on the issue of capital market regulation.

Looking at the background, the report notes that post-communist Czechoslovakia, and later the Czech Republic, had embraced market reforms and democracy with enthusiasm. The coalition headed by Klaus was able to draw on pent-up desire for change.

But what was initially praised as the "Czech economic miracle" foundered: the initial years of rapid advance lost much of their early dynamism, and the country is now caught in an unfinished transition.

The analysis notes that after the 1996 election, internal tensions in the coalition intensified, resulting in government paralysis and complacence at a time when economic problems were deepening. The report say the government lost further credibility following the run earlier this year on the national currency, the koruna, and that early elections in 1998 cannot be ruled out, nor can re-alignment inside the coalition.

Economic growth has now slowed sharply, with real Gross Domestic Product rising only modestly, while inflation is accelerating and should peak in the first half of 1998. Unemployment too looks like it is rising after long remaining at very low levels. The serious flooding in July has contributed to serious budget revenue shortfalls, and a budget deficit is expected this year. Bank privatisation is still proceeding too slowly, and the remainder of the privatisation program, as implemented, has not led to the desired rapid restructuring on the micro-economic level.

The Daiwa report says the necessary fiscal tightening and high interest rates will depress demand, although some relief will be provided by a surge in growth in the European Union as a Czech export market, assisted by the low Koruna.

It says foreign investors will be watching the cabinet closely to see if it is carrying through on its promises. And ending on a reassuring note, the analysis says that the market economy in the Czech Republic has taken sufficiently deep root, so that even a change of government would not be disconcerting to investors in the long run. The credentials of Czech democracy would also be strengthened once put to the test of actual change of the government's complexion.