SEED Assistance Summary 1995
SEED Act
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Economic Developments
The Czech Republic has made remarkable progress in reforming and stabilizing its economy since 1991. Tight fiscal and monetary policies, the liberalization of trade and prices and excellent progress on the privatization of state-owned enterprises have gradually overcome the initial shocks of the transformation from a centrally-planned economy, the collapse of the CMEA trading system and Czechoslovakia's own split into two nations.
As a result, after sharp contractions in 1990-92, the decline in real domestic production leveled off in 1993. GDP grew by 2.6 percent in 1994, and should post 4.0 percent growth in 1995. Inflation, which peaked in 1993 at an annual rate of 20 percent, according to EBRD figures, in the context of the imposition of a new value-added tax, is now settling down to about 10 percent for 1995 as a whole. Unemployment remains low at about 3 percent, compared to double-digit rates in the rest of Central Europe.
Performance of the Czech Republic's external account has been equally good. In 1993, a solid export performance, increasing tourism receipts and private capital inflows (largely in the form of loans to Czech enterprises) helped boost gross official reserves by more than $3 billion to five times their prior year level. By year-end 1994, gross official reserves reached $6.2 billion, which helped set the stage for the elimination of all restrictions on current account transactions in 1995. Official reserves stood at $11 billion in August 1995, despite its first current account deficit since 1990.
The Czech Republic's integration into the world economy has moved forward rapidly. Among its most recent achievements, the Czech Republic entered the OECD in November 1995 as the first former communist country to do so. It has already concluded an Association Agreement with the EU, free trade agreements with the members of the European Free Trade Area (EFTA) and its partners in the Central European Free Trade Area (CEFTA). It is a member of WTO, the 1MF, the World Bank, the EBRD and other international institutions. Underpinning these successes, Czech exports to OECD nations rose to more than half of its total exports beginning in 1993; and foreign private capital inflows have been substantial.
Looking ahead, prospects for the Czech Republic are excellent. A strong industrial tradition, progress in privatization and prudent fiscal and monetary policies augur well for strong, non-inflationary growth. Real GDP growth in 1996 is expected to hit 5 percent; inflation to remain steady at about 10 percent and unemployment somewhat higher at approximately 4 percent.
However, there are potential problems. Fiscal adjustment is still incomplete. Overall government expenditures (at 50 percent of GDP) are excessive; corporate and individual income tax rates are among the highest in Europe; and the forecast 1995 fiscal deficit reflects privatization proceeds that still leave an underlying deficit equivalent to 2.4 percent of GDP. In addition, serious moves on enterprise restructuring have yet to begin. The low rate of unemployment, low number of bankruptcies, and the poor or deteriorating financial situation of many Czech enterprises, testify to the limited effect on enterprise performance of the widespread privatizations that have taken place in recent years. Finally, there may be problems buried within the Czech banking system and elsewhere in Czech financial markets. The reluctance of Czech banks to exercise their rights under bankruptcy laws hint at problems, as does the pricing of Czech investment funds, which traded at a discount to the value of their underlying stocks throughout most of 1995.
Political Developments
In the six years since the Velvet Revolution that ended communist rule, the Czech Republic has undergone a radical political and economic transformation and returned to the ranks of free-market democracies. Given the success and strength of this transition, the Republic will phase out of the SEED assistance program in 1997.
The Czech Republic is a fully functioning parliamentary democracy whose citizens enjoy the rights of free speech and free assembly. It has an independent legislature and a vigorous, free press.
Prime Minister Vaclav Klaus's ruling four-party, center-right coalition was elected in June 1992. There are also four left-of-center opposition parties and one radical right-wing party in the Parliament. The Czech Constitution mandates elections at least every four years to the Parliament; Klaus' coalition appears to be in a strong position to win the parliamentary elections scheduled for June, 1996.
Independent candidates won a majority of local council seats in nationwide local elections held in November 1994; among the national parties, Prime Minister Klaus's Civic Democratic Party (ODS) garnered the most votes, followed by the Communists (KSCM) and Christian Democrats (KDU-CSL).
The Constitution also calls for an upper house of Parliament, the Senate, which has not yet been constituted. Elections for the Senate will be held in 1996.
President Vaclav Havel, elected by the Parliament in 1993 to a five-year term, has limited constitutional authority but can veto legislation and return it to Parliament. The Parliament has the power to override the veto by simple majority.
Opposition groups, including political parties, function openly and without hindrance. Individuals speak out on political and other issues and freely criticize the Government and public figures.
Print and electronic media publish without censorship or fear of government persecution, though the Constitutional Court in December 1993 upheld a provision in the Criminal Code forbidding defamation of the state or presidency. One person was tried and sentenced under this law in 1995.
The government is continuing a thoroughgoing reform of the judiciary and law enforcement bodies and has reasserted civilian control over military and intelligence organizations. The judiciary is impartial and independent.
The Czech Republic does not discourage the activities of domestic and international human rights organizations. The presidency of Vaclav Havel, former dissident and human rights monitor, serves as an important symbol for these groups, which work without government restriction or interference.
Nonetheless, some areas of concern remain. The main human rights problem continues to be discrimination against the significant Roma minority, estimated at around 200,000, which suffers disproportionally from poverty, crime, and disease. The citizenship law adopted after the separation from Slovakia has denied Czech citizenship to large numbers of Roma. Since the
adoption of the 1992 citizenship law, which took effect after the dissolution of the Czechoslovak Federation, an estimated 10,000-25,000 Czech Roma have remained without citizenship.
The 1991 Lustration Law bars former Communist officials, secret police and collaborators from holding a wide range of elected and appointed positions for 5 years. Still, observers continue to criticize it in principle for embracing employment discrimination and the concept of collective guilt. In the fall of 1995, the center-right government extended the provisions of the law until the year 2000; parliament upheld the extension over Havel's objections, overriding his veto.
SEED ASSISTANCE SUMMARY
Program Overview
U.S. assistance to Czechoslovakia to support the rapid pace of economic and democratic reforms began in August 1990. This assistance was delivered to both Republics, contributing to the minimal level of disruption when the Czech Republic and Slovakia became independent nations in January 1993. Since the inception of the SEED program, the U.S. has helped the Government of the Czech Republic (GOCR) transfer state-owned assets to the private sector; put in place a policy, legal and regulatory framework for private sector development; create a competitive, efficient, private financial sector; promote self-sustainable use of natural resources; and enact legislative reforms that support democratic processes. The U.S. has also encouraged the active participation of citizens and NGOs in the political and economic decision-making process. Concurrently, USAID has helped strengthen local governments and municipalities to make them effective, responsive, and accountable. The U.S. has supported reducing environmental risks to public health and improving the sustainability of social benefits and services.
The U.S. has played a key role in the success of the Czech economic and political transformation, but credit should be given foremost to the Czech leadership for its vision and commitment to successful policies. The U.S. has provided targeted, demand-driven assistance throughout the transition process. Of the emerging European democracies, the Czech Republic has one of the most developed industrial economies. It is viewed as a model of successful transition, and there is general optimism about the medium-term and long-term outlook. Over the past year, U.S. assistance has had a tighter focus. Assuming that economic and institutional reforms continue at their present pace, the USG will complete its assistance program by September 30, 1997.
Five priorities remain to enhance the likelihood of consolidating the transition: 1) furthering economic transformation, including privatization and restructuring; 2) strengthening local governments through public administration reform, municipal financing and management; 3) supporting civil society development; 4) improving the quality of fife through work in energy, environment, and health; and 5) bolstering human capital, focusing on financial and managerial skills.
The U.S. contributed nearly $145 million in SEED assistance to the Czech Republic as of September 30, 1995. The FY 1995 portion of the aggregate was a little over $19 million.
Program Impact
Economic Growth:
In 1995, the Czech Republic continued to experience significant progress in transforming its economy. The economy expanded at a 4% rate, the second consecutive year of positive growth following the downturn of 1990-1993. Further confirmation of the Czech Republic's rapid progress in reform arrived with the introduction of a new exchange rate policy on October 1, 1995, which allows for full current account convertibility and further liberalization of the capital account. This move, along with the abolition of the bilateral clearing agreement with Slovakia, opened the door for the country's accession to the OECD in November 1995.
Private Sector Gains: In general, the Czech Republic is a good place to do business. The private sector contributed about 65%-75% of the GDP in 1995. Wages continue to grow, and inflation has stabilized. The demand for services remains strong and stimulated the growth of thousands of small businesses in the past five years. The GOCR continued to reduce corporate and individual tax rates. It worked hard to modify transactions policy and tax law to meet OECD membership criteria. SEED assistance helped the GOCR establish a free-market legal and regulatory framework and private sector growth by (1) promoting bank restructuring and resolution of enterprise debts; (2) supporting the acceleration of the mass privatization program; (3) encouraging the application of modern tax laws and competitive regulatory frameworks for business, including the energy and telecommunications sectors; and (4) supporting the transfer of market economy knowledge to Czech entrepreneurs through business and economics training.
Privatization: In 1993 and 1994, privatization of approximately 3,200 state-owned enterprises occurred. Virtually all small and medium enterprises are in private hands. In 1995, the GOCR selected a foreign investor for a stake in the telecommunications sector, bringing in over $1 billion, and gaining partners with strategic plans for modernization and improved services. Direct foreign investment has continued to grow and the largest banks began to air plans for privatization and foreign partnerships. SEED-funded experts made a significant contribution to the process by helping to privatize over 130 enterprises through identifying and negotiating with foreign investors, who have invested $3.4 billion since 1992 (over 20% from U.S. sources). Compliance work for the National Property Fund ensured that foreign investors abide by the terms of their purchase contracts, including commitments on restructuring and investment, thereby strengthening public confidence in the free market economy.
Private Enterprise Development: Training opportunities in business and management, direct foreign investment, and foreign know-how have contributed to entrepreneurship and profitability in new firms. Privatized and new small and medium enterprises (SME) have created thousands of new jobs, absorbing a large portion of the shifting labor force. USAID advisors helped Czech businesses rationalize operations, market goods, manage personnel, and improve profitability. U.S. volunteer organizations greatly contributed to enterprise development by providing essential business advisory services. The U.S. provided local businessmen the opportunity to enhance skills through practical management training with the American business community. Over 1000 SME owners and managers were trained to apply market economics, financial management, and marketing in their business activities. The Czech Management Center and the Center for Economic Research and Graduate Education (CERGE) continue to produce a local pool of business-oriented graduates for employment in the private sector. Both institutions now train students from the NIS and other CEE countries. In the energy sector, USAID advisors assisted energy production and distribution enterprises to rationalize operations and improve strategic management in preparation for privatization.
Private Financial Sector Development: In 1995, with the help of U.S. advisors, both the large Czech Trading Bank (CSOB) and the Prague Stock Exchange (PSE) improved operations and instituted strategic plans. The CSOB also received U.S. assistance to upgrade information management and restructure operations, resulting in increased assets and profits.
The Municipal Finance program, in cooperation with the GOCR and commercial banks, successfully introduced competition to the municipal lending sector and surpassed every performance objective for 1995. As a result, interest rates were reduced and loan maturities extended. The first $20 million tranche of the Housing Guaranty (HG) loan program helped four banks finance 23 municipal infrastructure projects with lower interests rates than ever before. Technical assistance to participating banks produced more flexible collateral requirements and more project financing by attracting other commercial banks to this sector. This program is a high priority for the GOCR.
Next Steps: During phasedown of the SEED program, USAID will concentrate on completing restructuring, providing privatization support, and creating models for similar key efforts after U.S. assistance ends. Planned activities in partial privatization of energy distribution enterprises was postponed in 1995, but should go forward in 1996. Funding to the CSOB and the PSE will target critical areas to ensure the viability of the financial sector, and the Municipal Finance program will focus on infrastructure projects and reducing lending rates through competition among commercial banks. Participating banks will begin using their own resources for municipal lending by matching HG funds with a minimum ratio of 20%.
Building Democracy:
The basic institutions necessary for a vibrant democracy are in place. The Czechs held free and fair multiparty elections, have a smoothly functioning central government, legislature, and judiciary, and enjoy access to diverse opinions in the media. Efforts continue under the SEED program to enhance local governments and support the development of a civil society.
Local Government: Significant progress was made in strengthening local governments as revenue and budgets devolved to this level. Public officials are competitively elected, have demonstrated considerable skill in managing public resources, and have been responsive to the needs of citizens. A new public procurement law, providing for transparent and competitive conditions for all purchases went into effect on January 1, 1995.
USAID encourages local government support through the Public Administration activity (including public procurement legislation) and the HG program that funds the Municipal Finance activities. Over 300 municipalities and more than 700 public administrators, municipal managers, and infrastructure professionals participated in technical assistance and training activities on capital budgeting and financial management. This assistance helped many small municipalities to initiate planning and budgeting for priority infrastructure activities.
Political Process: Political debate remains robust and open, and although the number of political parties diminished recently, this is widely viewed as a sign of maturation in the electorate. Recent passage of the not-for-profit law, drafted with SEED assistance, is an important element in creating an atmosphere conducive to organized participation of different interest groups. This law recognizes the status of NGOs as private providers of services and brings under one law all existing regulation and tax treatment for these entities.
U.S. assistance provided training for non-profit managers in financial and personnel management, while communications training undertaken by the Democracy Network Project allowed NGOs to pool resources and ideas, forging alliances for political and social action. This USAID activity provides a lifeline to NGOs, including charities providing services not covered by the state and those which partner with public officials and businesses. The Public Administration activity also encourages public-private partnerships in planning, creating, and maintaining the economic and civic infrastructure of the municipalities.
Next Steps: By mid-1996, the Democracy Network will provide support to over 100 NGOs. The Public Administration pilot projects will establish citizens' advisory councils in at least five municipalities to participate in decisions regarding economic development. Under the Housing Guaranty program, special pilot training will be conducted to help financial directors in 12 cities develop performance indicators. The process can then be used as a model for over 300 other towns. USAID funding to the International Center for Not-for-Profit Law will facilitate both full implementation of the non-profit law and the enactment of a new charitable foundation law.
Social Sector Restructuring/Quality of Life:
U.S. assistance reflects overall priorities of the GOCR leadership, with individual activities helping to reduce environmental risks to public health and improving the sustainability of social benefits and services. The Environmental Action Program Support (SAPS) Project has assisted the State Environment Fund by reviewing operating procedures and developing a model for improved lending practices. EAPS is also identifying and developing economically viable projects to alleviate ambient air pollution and health problems in the seriously affected regions of Bohemia and Moravia.
Health: Economic, nutritional and environmental conditions have improved in the Czech Republic. Life expectancies, morbidity, and infant mortality rates have all changed for the better in the past five years. USAID activities directly contributed to the sustainability of health services by improving quality of care, lowering costs through better management, and providing learning opportunities for health management professionals. U.S. assistance is effective in establishing health care standards (quality assurance) that will lead to health care institutions' accreditation and improved hospital management.
Next Steps: Ongoing activities include assistance to municipalities in project preparation for SEF funding to improve environmental conditions. DOE and NRC will continue their SEEDfunded work to ensure nuclear safety in the Czech Republic. Resources are in place for successful completion of health sector activities in the next two years. In 1996, the model hospital management improvements package is expected to be replicated across the Czech Republic in over 50 hospitals.
Environment: The Czech Republic made quantifiable progress in reducing environmental risks to public health through improved identification and regulation of risks, economic investment and efficiency gains that eliminate wasteful polluting processes. Air and water quality continuously improved as inefficient fuels were replaced, production declines lowered consumption, and the worst polluters were simultaneously confronted with improved regulation and enforcement. U.S. assistance in 1995 contributed significantly to alleviating health risks by addressing these environmental problems. The U.S. Environmental Protection Agency's transborder Project Silesia offered strategies to lower risks in that industrialized region. Industrial pollution, now monitored daily in the region, dramatically declined. Nationally, over the past five years, SO, emissions were reduced 36%, NO, reduced 60%, and particulate emissions were cut in half. Assistance to the State Environmental Fund (SEF), a trust fund for mediating pollution and clean energy conversions, set priorities, developed a strategic plan and managed operations. The U.S. Department of Energy (DOE) improved operational safety and risk assessment at Dukovany Nuclear Power Plant and the Nuclear Regulatory Commission (NRC) assisted its Czech counterpart to improve oversight and licensing capabilities at the Temelin Nuclear Plant, due to come on line in 1997.
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