Czech Republic - Economy

Before World War II, Bohemia and Moravia were among the most agriculturally and industrially developed areas in Europe. In 1993, the Czech Republic emerged from 40 years of centralized economic planning in the communist era (including the more balanced economic development of the 1960s) with a more prosperous and less debt-ridden economy than most other post-communist countries. It enjoys an extensive industrial sector strong in both heavy and precision engineering, self-sufficiency in a variety of agricultural crops as well as an exportable surplus of meat, extensive timber resources, and adequate coal and lignite to supply two-thirds of its total energy needs.

After recovering from a recession following the 1993 separation from Slovakia, the republic enjoyed GDP growth of 4.8% in 1995. GDP growth of up to 5.5% was forecast for 1996 and 1997. Unemployment also stabilized at less than 3% through 1996. The annual rate of inflation dropped from 20% in 1993 to 9% in 1996. The thriving economy of the mid-1990s depended upon loans easily secured from state-owned banks to newly privatized companies that did not have effective managers. This method of fueling the economy collapsed in a 1997 currency crisis which caused the economy to go into a three-year recession. Following this collapse, the government rescued and privatized the four largest banks in the Czech Republic, which stabilized the banking sector, now largely foreign-owned. The banks had begun to lend again by 2001.

As of 2001, the country was receiving the highest level of foreign direct investment per capita in Central Europe, and 40% of industrial production was coming from foreign-owned companies. This high level of investment drove the value of the koruna up in 2001, which, coupled with a downturn in the global economy, put a damper on industry. The steel and engineering industries were struggling in the early 2000s, but growth in information technology and electronics diversified the economy. The telecommunications, energy, gas, and petrochemical sectors were due to be privatized by 2002.

Severe flooding in Central Europe in August 2002 negatively impacted the Czech economy. The tourism sector was especially affected.

The country was formally invited to join the EU in December 2002, and it will need to keep its budget deficit below the 3% of GDP mandated by the EU for entering into European economic and monetary union (it was 5.3% in 2002). The deficit is balanced against the influx of revenue from privatization, however, which reached 11.3% of GDP in 2002. Accession to the EU is planned for 2004.

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