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U.S. DEPARTMENT OF STATE
CZECH REPUBLIC: 1994 COUNTRY REPORT ON ECONOMIC POLICY AND TRADE PRACTICES
BUREAU OF ECONOMIC AND BUSINESS AFFAIRS





                        THE CZECH REPUBLIC

                     Key Economic Indicators
    (Billions of U.S. dollars at the exchange rate indicated)


                                    1992 1/   1993    1994 (est)

Income, Production and Employment:

Real GDP (1985 Prices) 2/           14.2      13.8      14.4
Real GDP Growth (pct.)              -7.1      -0.3       2.5
GDP (current prices) 2/             28.4      31.7      35.7
By Sector:  3/
  Agriculture/Husbandry/
    Forestry/Fisheries                         0.8       0.8
  Mining of Raw Materials                      0.6       0.5
  Energy/Water/Gas                             1.0       1.0
  Manufacturing                                3.9       4.7
  Construction                                 0.5       0.3
  Retail/Vehicle Reparis/
    Consumer Goods                             1.3       1.6
  Transports/Storage/Communications            0.8       1.0
  Private Health/Education                     2.0       2.6
  Goverment Health/Education                   2.2       2.5
Real Per Capita GDP                1,375     1,335     1,384
Labor Force (000s)                 4,766     4,777     4,777
Unemployment (pct.)                  2.6       3.5       3.5

Money and Prices:  (annual percentage growth)

Money Supply (M2)                  594.4     722.0     769.6
Base Interest Rate (average)       13.38     14.00     12.80
Personal Saving Rate                 7.5       9.3       9.9
Retail Inflation                    11.1      20.8      11.0
Producer Price Index                 9.9      13.1       7.0
Exchange Rate (KC/USD)
  Official                         28.29     29.15     28.17
  Parallel (Vienna market)         32.28     29.85     30.00

Balance of Payments and Trade:  (Billions of U.S. dollars)

Total Exports (FOB) 5/              8.23     12.93      6.59
  Exports to U.S.                  0.153     0.235     0.191 6/
Total Imports (CIF) 5/              8.89     12.84      6.40
  Imports from U.S.                0.525     0.386     0.306 6/
Aid from U.S. (million USD)           32        33        30
Aid from Other Countries            1.47      1.20      0.80
External Public Debt                 7.5       8.5       9.0
Debt Service Payment (paid)          1.3       1.4       1.1
Gold and Foreign Exch. Reserves
  Official                           0.8       3.0       5.2
  Gross                              3.6       6.2       7.7
Trade Balance 5/                   -0.66      0.09      0.19
  Trade Balance with U.S.         -0.372    -0.151    -0.115

1/ Figures are data from CNB and Czech Statistical Office. 
2/ GDP at factor cost.
3/ Figures compare first half year of 1993 to that of 1994.  
4/ Figures are average annual interest rates.
5/ Merchandise trade.
6/ January to August.



1.  General Policy Framework

    The Czech government has continued the tight, IMF-endorsed,
economic and fiscal policies begun by the former Czechoslovak
government in 1991, and which were devised and initiated by
many of the current policymakers in the Czech Republic. 
Similarly, it has maintained the former government's program of
broad privatization and wholesale legal reform in order to
permit the continued operation of a viable market economy.  The
economy is likely to experience growth this year.  The
government's estimate for this year is 2.5 percent growth, and
for the next year is 3.3 percent. 

    The Czech government, having largely adjusted to the
economic consequences of the split with Slovakia, is continuing
down the road towards European economic integration.  Despite
notable problems, such as restructuring newly privatized firms,
dealing with a shortage of domestic capital, and coping with a
generally weak financial sector, statistics suggest that the
Czech economy as a whole appears to have bottomed out in late
1992 and remained stable through 1993.  The economy is likely
to experience growth in 1994, as suggested by the latest data
on GDP.  Though 3.3 percent growth in the first quarter of 1994
can be ascribed to significant decline in the first quarter of
1993 due to the country's split, 2.2 percent growth over the
whole first half of 1994 indicates a real growth trend.   

    The government completed the first wave of privatization in
early 1993, during which approximately 1,500 formerly
state-owned large enterprises were transferred to the private
sector.  This was accomplished through the process of "coupon
privatization" whereby citizens over the age of 18 were allowed
to acquire shares of enterprises through the purchase of
vouchers.  Approximately 80 percent of Czechs (and Slovaks,
under the former Czechoslovakia) eligible to participate in the
voucher program did so, giving this country's population
perhaps the highest percentage of stockholders in the world. 
In addition, approximately 20,000 small businesses were
transferred through direct sale.  The second wave of
privatization is currently underway and is scheduled for
completion by the end of 1994.  When it is complete, some 80
percent of production will be in private hands.  The private
sector contribution to GDP is estimated at around 56 percent in
the first half of 1994.

    The government is likely to meet its target of a balanced
budget for 1994 with the contribution of funds acquired through
the sale of state enterprises and with restricted expenditures
counterbalancing lower than forecast tax revenues.  As of
August 1994, there was a budget surplus of 19.8 billion
crowns.  In 1993, the budget had a surplus of 1.1 billion
crowns.  The 1992 budget for Czechoslovakia was in deficit by
approximately $550 million, roughly 2 percent of GDP.  This can
be attributed chiefly to an overestimation of the turnover tax
revenues, an undercalculation of entitlement programs, and
off-budget expenditures needed to cover government loan
guarantees.  
  
    The central bank, or Czech National Bank, is an independent
monetary authority which has proven itself capable of
withstanding political pressure.  Monetary policy in the
Republic has stabilized.  As the inflow of foreign capital was
stronger than expected this year, the central bank, as an
anti-inflation measure, increased reserve requirements from 9
to 12 percent as of July 1994, and the discount and lombard
rates by 0.5 percent (as of October 24 they were 8.5. and 11
percent respectively).  The Czech National Bank also has been
strengthening its supervision over commercial banks. 


2.  Exchange Rate Policy

    The Czech government has followed a "hard crown" policy
which has kept the crown stable since January 1991.  The
official exchange rate has remained at the level of 28-30
crowns per U.S. dollar throughout 1993 and only in October 1994
did it fall below 28 crowns, following the USD-DM exchange
rate.  The composition of the currency basket was changed in
May 1993 from a mixture of five currencies to a new basket of
German marks (65 percent) and U.S. dollars (35 percent).  The
crown is fully convertible for trade purposes.  Full current
account convertibility is expected in 1995 and full capital
account convertibility in 1996-1997.

    Under the Foreign Exchange Act of 1990, both domestic and
foreign companies in the Czech Republic are guaranteed the
right to freely exchange crowns for hard currency in
business-related, current account transactions.  Current
account transactions include the import of goods and services,
royalties, interest payments and dividend remittances. 
Repatriation of earnings from U.S. investments is also
guaranteed by the U.S.-Czechoslovak Bilateral Investment Treaty
which went into effect in December 1992.  However, there is
currently a 25 percent tax on repatriation of profits from the
Czech Republic, and capital account transactions still require
a foreign exchange license.  In the past, companies were
obligated to exchange any foreign convertible currency earned
for crowns, except for cases when the bank granted permission
to maintain a foreign-exchange account.  As of March 1, 1994,
the Czech National Bank has routinely granted permission to
establish foreign currency accounts.  Private persons do not
need permission to have a foreign-exchange account. 
Additionally, if requested, banks must sell to foreign
investors for Czech crowns foreign currency equal to revenue
from investment.  In this instance, "revenue from investment"
is defined as income from business profits, interest, capital
profits, securities, or intellectual property.  


3.  Structural Policies

    The continued shift away from a centrally-planned economy
towards the free market continues to require adjustments 
throughout the legal, financial, and political structure.  Some
of the major changes are outlined below.

    Taxes:  The new tax system of January 1993 provides uniform
rates and is better aligned with EU tax policies.  The
corporate income tax or "profit tax" of 43 percent in 1993 was
lowered to 42 percent in 1994 and, if approved by the
Parliament, should drop to 41 percent in 1995.  In addition, in
1993 the government implemented a 5 percent value added tax
(VAT) on staple goods and a 23 percent VAT on other goods, as
well as a personal income tax.  The 23 percent VAT is to be
lowered by 1 percent as of 1995.  The government plans to lower
tax rates to EU levels over time.  A bilateral tax treaty
between the United States and the Czech Republic was signed in
September 1993 and went into force retroactively as of January
1, 1993.

    Prices:  Over 95 percent of price controls were eliminated
in 1991.  As of late 1994, only the price of utilities, rents,
gasoline, fuel oil, and various municipal services continue to
be regulated.  Remaining price controls are being eased
gradually over time.

    Wages:  Following repeated warnings against wage inflation,
the government reimposed punitive levies on excessive wage
growth at the end of June 1993.  For wage growth between 15 and
30 percent, companies unable to demonstrate productivity gains
are taxed at 100 percent of the excess in wages.  For wage
increases of more than 30 percent, the tax equals 200 percent
of the excess increase not justified by productivity growth. 
However, the government has announced it will abolish wage
regulation in the second half of 1995.

    Privatization:  The Czech government completed its first
wave of privatization in August 1993.  Under this program, the
majority of stock under large-scale privatization was sold
through the voucher program, whereby citizens over the age of
18 were allowed to acquire shares of enterprises through the
purchase of vouchers.  Approximately 80 percent of Czechs (and
Slovaks, as the program started under the Federation) eligible
to participate in this program did so.  The second wave of
privatization started on April 11, 1994 and is expected to be
complete by early 1995.  The government plans to sell 861
companies with property value of 155 billion crowns during the
second wave.  


4.  Debt Management Policies

    The Czech Republic maintains one of the lowest foreign
debts in central and eastern Europe.  As of September 1994, the
gross foreign debt was approximately 9.0 billion dollars. 
Government debt represents approximately 17 percent of GDP, and
current government plans call for the level of debt to drop to
10 percent by the year 2000.  The government believes it can
reach this level by payment of interest combined with general
expansion of the economy.  The current level of indebtedness is
well within the limits specified by the Republic's agreement
with the IMF.  The Czech Republic repaid its debt to the IMF
ahead of schedule, the first post-communist country to do so. 

    Due mainly to the lending policies of the former communist
regime, the current government is owed approximately 4.5
billion dollars by various (mainly formerly communist bloc)
countries.  Among them are Russia (owing approximately 3
billion dollars) and Syria (owing approximately 750 million
dollars).  Although the Russian debt was restructured in 1994
and some payments on this debt have been made, collection on
other debts is uncertain.    


5.  Significant Barriers to U.S. Exports

    The government of the Czech Republic is determined to
create and maintain a free market, and has made the elimination
of artificial trade barriers an important element of its
overall economic policy.  Thus, there are currently no
significant barriers for U.S. exports to this country.  The
Czech Republic adopted a GATT tariff code which has an average
tariff of 5-6 percent.

    Some provisions of the 1993 Czech tax code have been
criticized as inhibiting investment.  In particular, concern
has been expressed over bad debt write-off and the tax status
of group and offshore companies.  Czech legislation denies
(generally until bankruptcy proceedings are initiated)
corporate tax deductibility of bad debt reserves and the
possibility of reclaiming VAT on bad debts.  In addition, Czech
legislation effectively penalizes use of holding company
structures by leveling both corporate tax and dividend
withholding tax on profit flows between group companies, thus
creating double taxation on such profits.  Czech law also does
not permit intra-group use of losses (i.e., offsetting losses
in one group entity against profits in another) and imposes
corporate tax on dividends received from foreign holdings
without allowing use of a foreign tax credit for the underlying
tax suffered in the subsidiary's home jurisdiction.  Offshore
companies are taxable in the Czech Republic if they engage in a
significantly lower level of domestic activity than the
guidelines recommended by the Organization of Economic
Cooperation and Development (OECD) or standards applied in
other countries.

    With a few limited exceptions, such as defense-related
industries, all sectors of the Czech economy are fully open to
U.S. investment.  The official monopolies in tobacco and film
distribution were both abolished in 1993.

    In late 1991, Czechoslovakia signed a Bilateral Investment
Treaty (BIT) and an agreement with the U.S. Overseas Private
Investment Corporation (OPIC).  The BIT was ratified by the
U.S. in August 1992 and ratification by the Czechoslovak
parliament occurred in late 1992.

    A bilateral tax treaty was signed with the Czech Republic
in September 1993 and entered into force in January 1994.  The
United States granted most favored nation (MFN) status to
Czechoslovakia in 1992 and to the Czech Republic as a successor
state in January 1993.  The Czech Republic has signed the
Uruguay Round document in GATT to lower tariff rates over the
next ten years.


6.  Export Subsidies Policy

    A legal framework is being drafted to enable the Czech
export bank, a subsidiary of the Export Guarantee and Insurance
Company, to provide export guarantees and credits to Czech
exporters.  It is expected to begin operating in mid-1995. 
Additionally, the government maintains a fund (the Fund for
Market Regulation) through which it purchases domestic
agricultural surpluses for resale on international markets. 
For some commodities, pricing is established at a level which
includes a subsidy to local producers.


7.  Protection of U.S. Intellectual Property

    The Czech government has agreed to be bound by the
obligations undertaken by the former Czechoslovak government
under the Bern, Paris, and Universal Copyright Conventions and
is working to ensure that laws for the protection of
intellectual property conform to those of western Europe. 
However, enforcement of existing regulations is still uneven.

    Enforcement of video piracy laws is an ongoing concern for
U.S. video and motion picture exporters.  While awareness of
the problem by Czech officials is increasing, economic losses
continue to threaten the viability of these exports.  In 1993
the Czech Antipiracy Union (CPU) stated that 40 to 50 percent
of the local market for video cassettes was lost to video
products either illegally produced or imported.  The CPU filed
450 video piracy court cases in 1992 and 468 in 1993, but
enforcement remains lax and fines are low.  In 1993, the
activity in Prague's so-called "video exchanges" stabilized. 
Inspections in video-lending shops, carried out by CPU in
cooperation with the police, has improved enforcement. 
Copyright violations also represent a problem, especially
copies from German originals and piracy of both foreign and
Czech originals.

    There have been similar concerns about software piracy. 
Recently, two cases of software piracy were disclosed by the
media and are under investigation by the police.  The US-based
Business Software Alliance has opened an affiliate office in
Prague and is working to raise the level of awareness on this
and similar issues.


8.  Worker Rights

    Workers in the Czech Republic have the legal right to form
and join unions without prior authorization.  Currently,
two-thirds of workers are members of some labor organization,
although the overall number of union members has declined
slightly since 1991.  Under the law, all workers are guaranteed
the right to strike when mediation efforts have been exhausted;
exceptions are those workers in sensitive positions (nuclear
power plant operators, military, police, etc.) who are
forbidden to strike.

    Workers also have the right to organize and bargain
collectively.  Wages are set by free negotiation.

    Forced or compulsory labor was expressly prohibited by the
federal government's 1991 Declaration on Basic Rights and
Freedoms, and the Czech Republic has adopted the same
guarantee.  There is no evidence or indication that such
practices have occurred since the 1989 Revolution.

    The basic minimum age for employment is 16.  Exceptions are
made for 15 year-olds who have already finished elementary
school and for 14 year-olds who have completed courses at
special schools for the disabled.

    The Ministry of Labor and Social Affairs has set minimum
wage standards to guarantee an adequate standard of living for
a worker and, with special allowances, for his family as well. 
A standard workweek of 42.5 hours was mandated by law, but
collective bargaining has brought the actual number of hours
worked closer to 40.  Additionally, caps exist for overtime and
workers are assured at least 30 minutes of paid rest per work
day and annual leave of three to four weeks per year.

    As far as the Embassy is aware, all workers' rights are
applied to firms with U.S. investment and do not differ from
those in place in other sectors of the economy.



  Extent of U.S. Investment in Selected Industries.--U.S. Direct
Investment Position Abroad on an Historical Cost Basis--1993

                    (Millions of U.S. dollars)
                                                                
              Category                          Amount          

Petroleum                                               0
Total Manufacturing                                    62
  Food & Kindred Products                   (1)
  Chemicals and Allied Products             (1)
  Metals, Primary & Fabricated                0
  Machinery, except Electrical              (2)
  Electric & Electronic Equipment             1
  Transportation Equipment                    0
  Other Manufacturing                        -1
Wholesale Trade                                       (1)
Banking                                               (1)
Finance/Insurance/Real Estate                           0
Services                                              (2)
Other Industries                                      (1)
TOTAL ALL INDUSTRIES                                  127      

(1) Suppressed to avoid disclosing data of individual companies
(2) Less than $500,000
Source: U.S. Department of Commerce, Bureau of Economic
Analysis

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