SEED Assistance Summary 1996
SEED Act
1994 | 1995 | 1996 | 1997 | 1998 | 1999
2000 | 2001 | 2002 | 2003 | 2004
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 CEMA trading system, and Czechoslovakia's own split into two nations.
As a result, the decline in real domestic production leveled off in 1993 and the Czech economy returned to growth in 1994 when GDP grew by 2.6 percent. GDP growth was 4.8 percent in 1995 and growth in 1996 is expected to reach that level again. GDP has reached 90% of its 1989 level. Inflation declined to 7.9 percent in 1995 and is forecast to be under 9 percent for 1996. Unemployment remains low, at about 3 percent.
The Czech Republic's balance of payments position slipped into deficit as of late 1996. However, the country maintains ample reserves of $16 billion. During the first nine months of 1996, the Czech Republic's widening trade deficit reached $4 billion, following a trade deficit of $3.8 billion for all of 1995. The trade deficit is partially offset by surpluses in services, mainly tourism ($2.9 billion in 1995) and transportation. Foreign capital inflows (reaching over S8 billion in 1995 but slowing to $800 million in the first half of 1996) may fail to offset the deficit on the current account for the whole of 1996.
The Czech Republic's integration into the world economy has moved forward rapidly. The Czech Republic entered the OECD in December 1995 and concluded an Association Agreement with the EU, free trade agreements with the members of the European Free Trade Area (EF fA) and its partners in the Central European Free Trade Area (CEFTA). It is a member of WTO, the IMF, the-World Bank, the EBRD and other international institutions. The Czech Republic continues to take steps to harmonize its legal system and standards and regulations with EU countries and formally applied for EU membership in 1996.
Looking ahead, prospects for the Czech Republic are excellent. A strong industrial tradition, progress in privatization and prudent fiscal and monetary policies lay the foundation for strong, non-inflationary growth. Real GDP growth in 1997 is expected to be around 5 percent; inflation to fall to around 8 percent and unemployment to rise somewhat to approach 4 percent.
However, there are potential problems. Corporate and individual income tax rates remain high and the government will have to exercise tight spending discipline to ensure a balanced budget for 1997. Vital microeconomic tasks remain important, such as completing the privatization of the steel, utilities, telecommunications and financial sectors, restructuring firms to maintain competitiveness, and strengthening the regulatory framework, especially for the capital markets. The low rate of unemployment, low number of bankruptcies, and the poor financial situation of many Czech enterprises testify that privatized firms have not been forced to undertake fundamental restructuring. Bank failures, culminating in the takeover of the fifth largest bank by the central bank, have highlighted the importance of improving the regulatory framework for debt and equity markets, corporate governance, and bankruptcy.
Political Developments
In the seven 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. Political institutions have matured rapidly, the Czech Republic is once again a M y functioning parliamentary democracy whose citizens enjoy the benefits of free speech, free assembly, and a vigorous, free press.
1996 saw two national elections on Czech soil, one in late spring for the lower house of parliament, and a second one in the fall for the Senate. Both elections were fully free and fair, and returned Prime Minister Klaus to office, albeit at the head of a three-party minority government. Human rights are well-respected, although popular discrimination against the Romani community remains common.
The Constitution provides for an independent judiciary, and it is impartial and independent in practice. Judges are neither fired nor transferred for political reasons. A separate Constitutional Court rules on the constitutionality of legislation. Nonetheless, there are still problem areas with the judiciary: qualified judges are in short supply and lengthy pre-trial delays are not uncommon. Indeed, public opinion polls indicate that over half the population remains somewhat skeptical of the courts' effectiveness as an instrument of justice.
On the foreign policy front, the Czech Government has supported U.S. positions in international fora. Czech troops took part in Desert Storm and 650 Czech soldiers now serve with distinction in SFOR The Czech Republic has enthusiastically participated in PFP and pushed aggressively for NATO enlargement. Defense cooperation between the Czech Republic and the United States will continue, and even expand. The goals of our defense-sector engagement are to advance the broad objectives of NATO's Partnership for Peace, help the Czech Republic complete the restructuring of its armed forces, promote professionalization of the military, and reinforce civilian control. MET and FMF programs will help produce a highly trained, mobile Western-style force structure capable of working side-by-side with the United States and NATO in such mutually-beneficial endeavors as IFOR peacekeeping. We will also continue to train defense officials in defense planning, military doctrine, peacekeeping operations, and English as the language of peacekeeping.
Private Financial Sector: The Czech Republic has made significant progress in the financial sector, but many structural and circumstantial problems remain. The banking sector remains largely owned by the public sector, as the government has not reduced its positions in the 4 largest banks (some 90% of the sector by assets) and has not, until recently, allowed foreign strategic partnerships. Operational performance has improved, but balance sheets tainted by bad debt could yet result in serious problems as 12 small banks have failed in the last year, and the fifth-largest has been taken under administration by the Czech National Bank (CNB). These recent developments have spurred movement by the GOCR and the CNB on bank privatization with open discussion of accepting foreign bids for stakes in the banks.
The flow of short-term foreign capital has slowed, but there may still be speculative money targeting European interest rate differentials which has not created a better environment for long-term lending for domestic investment. One bright spot has been a new municipal debt market created by the Czech government, banks and USAID's Housing Guarantee Program. For the first time, Czech cities have strategic investment plans and over 30 have fully funded infrastructure projects underway, a watershed in long-term lending and urban development for the Czech Republic.
The equity market and investment funds remain under criticism in spite of a three-fold increase in trading volume since last year. The Prague Stock Exchange (PSE) remains relatively thinly traded in regard to its capitalization ($20 billion), and even though there were many recent technical improvements, large trades are off market and sometimes even mysterious. Regulation for the transparent, orderly markets is now a rallying point for investors and banks, and the Czech Republic is now undertaking steps to improve the regulatory process. The Chairman of the Exchange, former Munster of Privatization Jezek, has turned again to USAID for assistance on drafting the legislation to create an SEC-type regulatory body for the Czech capital markets.
After a series of corporate governance problems, the entire board of directors of the Czech-Slovak American Enterprise Fund (CSAEF) resigned in February, 1996. An interim board of directors was appointed in May, 1996 and began to restructure the CSAEF. The interim board reduced the valuation of the fund's assets from $25.9 million to $6.7 million and negotiated a sale of the CSAEF's entire Czech portfolio ($10.9 million invested) for $1.2 million. It also reduced staff substantially and contracted out the CSAEF's back-office operations. The interim board attributed the decline in asset value to the difficult investment environment in the Czech Republic and Slovakia, the CSAEF's lack of an effective investment strategy or financial reporting system, and continuous turnover in management. More than 90 percent of the lost valuation on the Czech portfolio is attributable to investments made in the 1991-93 time period. The activities of the CSAEF were of no discernible consequence to the Czech economy.
Sustainable Energy Sector: The energy sector successfully focused improvements on developing a stable and reliable supply of energy, environmental benefits, and profit generation for financing environmental improvements. Economic development, a decline of production, and a better environmental technology have significantly decreased total emissions of major pollutants. Between 1989-1994 emissions of sulphur dioxide fell by 36%, emissions of nitrogen oxide fell by 60% and particulate by 49%. These favorable results might be also attributed to a new complex of environmental legislation adopted in 1991 which required gradual compliance of companies, with full compliance with the Clean Air Act by 1998. A Waste Management Law amendment was adopted. Regarding nuclear power, DOE and NRC contribute to safety procedures and technical reviews of operations at Dukovany Plant and the Temelin Plant which is under construction. In Temelin, with U.S. Export-Import Bank support, Westinghouse control technology is being wedded to, Soviet reactor design. The success of these efforts to implement hybrid safety and management protocols could be a critical model for the region and the NIS, as well as have applications for the U.S. nuclear industry.
Next Steps: During the final year of the SEED program, USAID will concentrate on completing restructuring and privatization support and establish models for similar key efforts after U.S. assistance ends. Funding to the CSOB and the PSE will target critical areas to ensure stability and viability of the financial sector and could help create a key regulatory institution and further privatize the banking sector. The Municipal Finance program will focus on further environmentally-linked infrastructure projects and reducing lending rates through competition among commercial banks. Participating banks are now using their own resources for municipal lending by matching HG funds with a minimum ratio of 20%. This work stimulated both growing competition for this market segment and encouraged larger municipalities to organize and plan to increase borrowing and eventually earn international ratings to issue bonds. DOE and NRC will continue their SEED-funded work to ensure nuclear safety in the Czech Republic. The Ministry of Industry and Trade is establishing an energy regulatory commission as a precept for energy sector privatization. Health care financing and health care management are a focus for the last year of USAID assistance. The U.S.-designed Diagnostic Related Grouping form of financing and cost control is being implemented. Future health care managers are being trained by partnerships between U.S. universities and Czech universities.
Building Democracy
The basic institutions necessary for a healthy democracy are established. The Czechs held free and fair multiparty elections, have a 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 civic society.
Citizens, Participation: Fundamentally, all basic citizens' rights and freedoms critical to the establishment of democracy are guaranteed and implemented in the Czech Republic and major new laws were endorsed during the past few years. Free local, parliamentary and presidential elections take place and the electoral system is multiparty (there are about 50 political parties registered, six of which are currently in the Parliament). Voter turnout is usually high, although only 30% voted in the most recent senate elections. In late 1995, there were 28,000 civic associations and about 4,000 foundations in the Czech Republic. Almost 5,000 new PVOs emerge every year although this growth is slowing. With assistance of USAID, legislation is now in place that defines PVO's tax status, benefits' for donors, etc. - Another USAID initiative resulted in the creation of a Donors'Forumn which brings together Czech and foreign donors. The Forum encourages corporate and philanthropic donors to boost support for NGOs in the post-USAID future.
Municipalities: Although macroeconomic and political changes have occurred at the national level in the Czech Republic, the longer term process of institutional change must take place at the local level - economically, politically and culturally. The GOCR passed important municipal legislation in 1991 (establishing municipalities as legitimate entities with responsibilities for town governance) and in 1993 (providing municipalities with direct responsibility for a large share of their own annual tax revenues). Numerous other laws and policies have been created as the State divests itself of central control of local governance. But problems in management and resources remain. The Czech Republic made significant progress in this area as budgets devolved to the local level and public officials are competitively elected based on their skill, experience and results in managing public resources as well as responsiveness to citizens. Citizens' priorities have been reflected in broader, more sophisticated planning by political groups that campaign to succeed in elections by knowing tomorrow s opportunities. The professional capabilities of public administrators have rapidly improved, especially with regard to strategic planning and budget management. USAID activities supported each of these processes. This has been driven by the realization that municipalities are now responsible for their own development and must manage their resources accordingly - citizens, business and government must all work together to solve any problem they face in their community.
Next Steps: By mid-1996, the Democracy Network was providing support to over 100 NGOs, who will now work toward full sustainability by improving public communication, fundraising and management. The Donors' Forum will play a critical role in bringing the Czech and international business community into the sponsorship role. Public Administration pilot projects established citizen's advisory councils in six Czech municipalities to participate in decisions regarding economic development, and in 1997 the citizens must take control of these institutions to plan and build the economic future of their communities. Under the Municipal Infrastructure (Housing Guaranty) Program, special pilot training will continue to help financial directors in 12 cities develop performance indicators, which as a model for over 300 other towns will lead to credit ratings for the growth of a public municipal credit market. On the capital side, another tranche ($14 million) of HG funds will facilitate environmentally sound infrastructure improvement in communities throughout the country. Through USAID's integrated program for achieving Strategic Objectives, environmental assistance will continue to municipalities in project preparation for State Environmental Fund funding to improve environmental conditions. By the end of September 1997, an estimated 3% of the Czech Republic will be directly affected by a partially U.S.- funded infrastructure improvement. 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 increase the quality of and accessibility to health care sector.
Health: The Czech Republic met with unexpected difficulties in the transition of the health care sector to a free-market economy. Although progress was made in the last five years, the system still faces severe crises mostly related to finance. One significant achievement for USAID assistance is related to the legal environment that could facilitate financial restructuring of health care services. The Ministry of Finance helped to push the development of the Non-profit Law that makes privatization easier for health care facilities. Additionally there has been progress in bringing market-driven logic to the insurance system.
Regarding quality, the pressures of a market economy have lead to increased competition and quality in health care and medical products, including some services. New technologies and new ideas have played an important role in these changes, for some of which, like Quality Assurance (QA) and the ongoing Diagnosis Related Grouping work, USA]]) can take some credit. This assistance actually relieves some of the financial pressures on the system through quick efficiency gains.
One of the greatest achievements of USAID's work in the Czech Republic was improvement in lifestyles of the Czech population. These are reflected in the decrease in hard alcohol consumption and the increasing consumption of vegetables. This type of conscious improvement in nutrition (among other choices) was strongly supported by the first USA]]) Partnership program aimed at the reduction of cardiovascular and cerebrovascular diseases, the main causes of death in the country. The project made both a considerable academic contribution to the study of lifestyles and a real improvement in the health of a large part of the population.
Next Steps: Resources are in place for successful completion of health sector activities in the next year. The model hospital management improvements package developed in 1996 is expected to be replicated across the Czech Republic in over 50 hospitals. The educational exchanges of AINA continue apace with the entrance of the first fill class for medical management in Fall 1996, and continued professional exchanges between Czech professionals and the University of Nevada.
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