SEED Assistance Summary 1997
SEED Act
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Economic Developments
When USG assistance ended in the autumn of 1997, the Czech Republic had largely consolidated its economic transition to a western market economy with most small- and medium-sized enterprises in private hands. While facing problems with external imbalances, lagging industrial restructuring, and a weak regulatory system that impedes investment, the country enjoys a favorable macroeconomic climate, a moderate national debt, a low budget deficit, strong foreign currency reserves, relatively low inflation and moderate unemployment. Preliminary data suggest GDP growth of 1.8 percent for 1997, following growth of 4.1 percent in 1996. GDP growth in the range of 2.5 - 3.1 is forecast for 1998. Inflation in November 1997 was running at 10.1 percent because of increases in regulated prices in mid-1997. However, the Czech Statistical Office estimates inflation for the year at around 9 percent. Wages grew by 9.7 percent in nominal terms in the first nine months of 1997. Currently, over 70 percent of output is produced by nominally or wholly private firms. The overall unemployment rate for 1997 is predicted to be 5.2 percent. Projected levels for 1998 are in the range of 5.5 - 6 percent.
The government put forward, and the parliament approved a balanced budget for 1998. While the government had to trim expenditures in April and May of 1997 to minimize the budget deficit for 1997, and despite losses of nearly $2 billion from catastrophic summer flooding, projections for the next year indicate a balanced budget can be achieved through continued tight fiscal control.
At the same time, vital microeconomic tasks remain, such as completing the privatization of the steel, utilities, telecommunications and financial sectors, restructuring firms to maintain competitiveness, and strengthening the regulatory framework. The austerity packages announced in April and May also included proposals to address these structural problems. However, these initiatives, notably privatization of the major banks and enhanced capital markets regulation, are only now being implemented.
Integrating the Czech economy into the West, and specifically into the European Union, remains a government priority. The Czech Republic continues to take steps to harmonize its legal system and standards and regulations with EU countries. The Czech Republic formally applied for EU membership in 1996 and has been invited to begin negotiations with the EU in March 1998.
During the first nine months of 1997, the Czech Republic's trade deficit reached $3.3 billion, following a trade deficit of $5.8 billion for 1996. For the first nine months of 1997, imports increased by 11.6 percent, while exports grew by 15.6 percent. The Czech Statistical Office estimates the 1997 trade deficit will be $4.2 billion. Factors explaining the improved trade performance include the crown's depreciation and austerity measures, as well as economic revival in Western Europe.
The trade deficit is partially offset by surpluses in services, mainly tourism ($4 billion in 1996 and $1.7 in 1997 first half), and transportation. The Czech Republic's current account deficit remained high; the Czech Statistical Office's latest estimate for the 1997 current account deficit is $3.1 billion, compared to $4.3 in 1996. Foreign capital inflows reached over $8 billion in 1995 and $4 billion in 1996 but slowed down to $540 million in the first half of 1997. Experts forecast a capital account surplus of $3 - 3.5 billion in 1997, compared to $4.3 billion in 1996.
Political Developments
In the eight 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 fully functioning parliamentary democracy whose citizens enjoy the benefits of free speech, free assembly, and a vigorous, free press. Three free and fair parliamentary elections have been held since 1993. President Vaclav Havel, an internationally respected advocate of human rights and social justice, will stand for a second 5-year term in January 1998.
Following a campaign finance scandal, Prime Minister Klaus's minority government resigned at the end of November 1997. Discussions on forming a new government or calling new elections are proceeding according to the Czech Constitution. The new government will govern the country until scheduled elections in the year 2000 or until early elections occur.
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 skeptical of the courts' effectiveness as an instrument of justice.
On the foreign policy front, the Czech Government is generally supportive of U.S. positions in international fora. Czech troops continue to take part in the SFOR peacekeeping mission in the Balkans and are enthusiastic participants in Partnership for Peace activities.
In December 1997, the Czech Republic signed accession protocols for NATO membership. The primary goal of our defense-sector engagement remains to prepare the Czech Republic to fulfill its responsibilities as a future NATO member, and defense cooperation between the Czech Republic and the United States continues following the end of SEED Act assistance. The U.S. Government has sought to advance a strong Czech role in the Partnership for Peace, to help the Czech Republic complete the restructuring of its armed forces, promote professionalization of the military, and reinforce civilian control. IMET and FMF programs are designed to help produce a highly trained, mobile Western-style force structure capable of working side-by-side with the United States and NATO. The U.S. also continues to train defense
officials in defense planning, military doctrine, peacekeeping operations, and English as the language of peacekeeping.
SEED ASSISTANCE SUMMARY
Program Overview
In September 1997, U.S. SEED Act assistance to the Czech Republic, and the USAID role in its management, came to an end. Several U.S. Government departments and agencies that have been active under the SEED Act will, however, continue their partnership with the Czech Republic in areas of mutual interests.
U.S. support of the Czech transition was extensive and cut across all sectors. From 1990 to its close in FY 1996, USAID's assistance program totaled almost $150 million in grant assistance and $34 million in loan guarantees. Sixteen U.S. Government departments and agencies as well as hundreds of non-government organizations, contractors, associations and universities provided technical assistance and training.
USAID-funded programs also played a vital role in the swift transfer of state-owned enterprises to the private sector. An aggressive privatization program placed more than 75 percent of the economy in private hands. At the same time, the SEED program provided assistance in establishing the necessary legal and regulatory framework to promote fair competition and support an emerging private sector.
USAID support was instrumental in marshaling a myriad of resources from both public and private sectors, which enabled the Czech Republic to reinstate and rebuild democratic processes and institutions. In the last year of the program, USAID continued to help foster the development of citizens' organizations to promote grassroots involvement in the democratic process.
Notwithstanding the recent spate of economic difficulties, the graduation of the Czech Republic from the U.S. assistance program sets a notable precedent for the region and sends an encouraging message to other nations in transition that the painful economic and political transformation can produce tremendous results. Further efforts to strengthen permanent bonds between the two countries will help achieve the long-term U.S. foreign policy objectives of peace, stability and prosperity in the region.
Program Impact
By the end of FY 1996, the number of USAID-funded activities declined rapidly from several hundred in 1992 to fifteen in six program areas. Final obligations were made in FY 1996 winding up USAID's management of five of six programs by the end of FY 1997. The one
exception was the Housing Guaranty-funded municipal finance program, which could well extend to the year 2000. USAID, in collaboration with the Czech government, also recently agreed to extend interagency agreements with the Nuclear Regulatory Commission (NRC) and the Environmental Protection Agency (EPA) which will ensure the long-term health and safety of Czech citizens. The interagency agreement with the NRC was extended through FY 2000 to complete training in the safe operation of the Temelin Nuclear Facility, and through FY 1999 with EPA for completion of work related to the clean-up of a toxic coke oven site. Post-1997 management and monitoring of continuing SEED Act programs will be carried out jointly by the USAID regional office in Poland and the U.S. Embassy in Prague.
The decision to closeout U.S. assistance programs in the Czech Republic was based largely on the extent of the successes achieved in the following program areas:
Privatization: The success of the privatization program was a particularly strong element in the decision to graduate the country from U.S. assistance. Ultimately, more than $32 billion of state-owned property was transferred into private hands between 1990 and 1996. USAID Advisory Teams participated in the review of 1200 privatization plans and settling of 130 plans with foreign investors. Transactions assisted by USAID-provided team of experts include over 130 deals with foreign investors attracting over $4 billion in investments. Of this total, over 20 major transactions were concluded with U.S. corporations, with a total value of over $850 million.
Legal structures, procedures and precedents have been established to continue privatization of more complex conglomerates and key enterprises that remain under public ownership. Larger firms in the core sectors of the economy such as energy, engineering, chemicals, manufacturing, and telecommunications are now on their way to full privatization.
Private Sector Development: Scores of American volunteers with financial and management expertise worked side by side with Czech businesses to provide skills required for innovation, competition and growth. This partnership not only addressed short-term needs of the evolving market economy, but put in place the educational opportunities for the next generation of managers, helping create new institutions of higher learning, such as the Center for Economic Research and Graduate Education (CERGE) and the Czech Management Center (CMC), both of which have gained international reputations for excellence.
Financial Sector Reform: The development of the Czech banking sector was rapid but required large financial investments to build systems, establish new networks, and attract foreign investors. Through the Financial Services Volunteer Corps (FSVC) and elements of short-term assistance provided by the U.S. Treasury, U.S. assistance aided the transition of the Czech National Bank into a fully functioning central bank. Training activities and expert advice focused on bank supervision, monetary policy, management of government debt, tax issues, and prevention of financial fraud with activities continuing through the summer of 1997. A bank training institute with assistance from USAID experts provided professional training for new managers. U. S. advisors also helped formulate inspection procedures to promote sound banking and financial practices, and were credited with improving the operations of three individual full-service banks, which represented 50% of all Czech-banking assets.
In partnership with FSVC volunteers and a major U.S. consulting firm, USAID assisted the Prague Stock Exchange in improving its technical and self-regulatory systems as well as encouraging the establishment of a supervisory body for all capital markets.
While most activities created conditions for growth, USAID-funded assistance also targeted other aspects of a market economy such as bankruptcy. A bankruptcy-training program has helped reform the laws and train new, inexperienced judges in theory and practice of bankruptcy.
In spite of the progress made over the past seven years, challenges remain. Many regulatory issues for banking and capital markets are still unresolved. In collaboration with USAID, there will be an opportunity for FSVC to provide limited training and technical assistance, on a case-by-case basis, to the CNB and the Prague Stock Exchange in accordance with agency criteria for continued assistance in post-presence countries.
Energy: Pilot projects and training undertaken with the assistance of USAID, the U.S. Department of Energy, and the U.S. Nuclear Regulatory Commission have set standards for cleaner and safe production and distribution of energy in the Czech Republic. As a result, Czech nuclear plants are safer than they were five years ago. USAID's projects, have help reduced air pollution by up to 20 percent and encouraged cleaner fuel usage. USAID work with SEVEn, the Czech Energy Efficiency Center, was a major success story. After only three years of USAID support, SEVEN has become self-sustaining by selling services to other companies.
Assistance in this sector has been completed, the Czech Republic has pledged to phase out energy subsidies by the year 2000, as well as to encourage companies to implement further energy efficiency measures.
Health Care: USAID assistance and intervention have been successful in reducing the leading causes of death, improving the quality of hospital care, and promoting private markets and innovations in insurance and health-care financing. USAID-sponsored health partnership programs helped save countless lives, and quality assurance programs improved the management of inpatient care and reduced the length of hospital stays. A USAID-supported pilot study of reimbursement methods has been instrumental in evaluating the quality of care and promoting an equitable basis for comparing and compensating hospitals.
Municipal Governance: USAID assistance led to greater empowerment and expanded resources for municipal governments. It was instrumental in strengthening communications among local officials through support provided to the Union of Town and Communities (UTC) which held its second annual conference in September 1997. USAID support also helped establish centers to improve municipalities' communications with Czech citizens. Public information offices to brief the media regularly on city events have been established for the first time in many districts. USAID-funded advisors also worked closely with municipal governmentsto improve management and accounting practices while increasing the efficiency and quality of public services.
The Housing Guaranty Program will remain the focal point for municipal and regional programs and will continue beyond close out. Under USAID's housing guaranty loan program, the Czech Municipal Infrastructure Finance Fund (MUFIS) can borrow up to $60 million from private U.S. investors and then lend in Czech korunas to commercial banks. The first $20 million was borrowed in March 1995 and was subsequently used to finance some 40 municipal infrastructure projects benefiting more than 40,000 households. An additional $14 million was borrowed in March 1997. Future obligations are excepted to continue strengthening the market system and increase the provision of commodities such as water, sewer, gas, solid waste disposal, and roads to an additional 80,000 households.
Civic Participation: USAID activities in the Czech Republic have been crucial in developing democratic institutions and promoting civic participation. A variety of U.S.- funded activities and partnerships coalesced to assist in the development and empowerment of private voluntary organizations (PVOs), and facilitated the cooperation of non-government organizations (NGOs) with their partners and supporters abroad. Over the past year, 100 grants have been provided to support the structure and activities of grassroots organizations. USAID grants to the National Democratic Institute helped create projects to promote dialogue among citizens, PVOs and local government about important policy and development issues. Service delivery and financial assistance were provided to PVOs through USAID-supported Democracy Network projects, and USAID support to the Democracy Commission has been instrumental in providing public servants with skills necessary to communicate effectively and be responsive to the needs of Czech citizens.
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