The Czech government on Monday gave final approval to the framework of its fiscal reform package aimed at preparing the country for adoption of the euro but failed to agree on some minor details. The main targets of the reforms were to bring the public finance deficit down to four percent of GDP in 2006 from an expected 6.2 percent this year. The government still needs to decide on such issues as how to cut 20 billion crowns from next year's state budget.
The government expects the biggest savings to come from a slower growth in wages of staff in the public sector, a slower indexation of pensions, cuts in sickness benefits and tighter rules for the payment of social benefits. The number of civil servants will not grow and the number of staff in the entire public sector should drop. Budget revenues should grow on higher excise duty on cigarettes, alcohol and fuels, and many services will be subject to 22 percent VAT instead of the current five percent rate. Tax on real estate will grow and the self-employed will pay not only the minimum tax, but also higher sums in social insurance. On the other hand, corporate income tax will gradually drop from today's 31 percent to 24 percent in 2006.
The Czech central bank on Wednesday cut key interest rates by 25 basis points, surprising many analysts who had expected no rate reduction despite benign inflation pressures. The decision, effective immediately, brings the two-week repo rate to an all-time low of 2.25 percent, still a quarter point premium over the main rate in the euro zone. The cut comes on the heels of a decision by the Polish central bank on Wednesday to ease by a similar amount, as expected by the market.
The Czech trade deficit for May narrowed well beyond expectations to its lowest level since January, as exports jumped sharply due to positive exchange rate developments. The Czech Statistics Office said on Monday the May shortfall was less than 2.5 billion crowns, as compared to analysts' forecasts of around 8 billion crowns. The Statistics Office said exports were up 8.4 percent, year-on-year, for May, and imports were flat as the stronger euro hurt the flow of goods coming into the country while the crown/dollar exchange rate helped exports.
The government has proposed giving Czech farmers 3, 4 billion crowns in compensation for losses caused by last year's devastating floods. The money would come from two separate sources, one of which would be the proceeds from small-scale privatization. The proposal has yet to be approved by Parliament, and Agriculture Minister Jaroslav Palas warned farmers on Tuesday that they could expect to receive the money this autumn at the earliest. The farming sector is labouring under huge debts after suffering 3.5 billion crown losses because of last years floods.
The Czech Industry and Trade Ministry said it was considering selling a minority stake in the famous Budejovicky Budvar brewery. The sale of minority stakes in two state-owned oil companies is also under consideration, though debate is only in the early stages and the sell-offs would have to be approved by the government. The state holds 100 percent of all three firms.
Budvar, the third largest Czech brewery, has been engaged in a dispute with U.S. giant Anheuser Busch over trademark rights for the name Budweiser, and its sale would be difficult to accept for many Czechs.
The two oil companies concerned are Mero and Cepro. Mero is a crude oil pipeline linking Russia with Germany. Its sister company Cepro imports crude oil to the Czech Republic and is the biggest supplier to oil group Unipetrol.
The dominant Czech telecommunications company Cesky Telecom expects to save up to four billion crowns ($150 million) in operating costs during the next three or four years after it takes over local mobile phone operator Eurotel. The two companies will combine some of their operations, such as billing, to take advantage of synergies. In early June, state-controlled Czech Telecom bought the 49 percent of Eurotel that it did not already own from U.S. partners AT&T Wireless and Verizon in the biggest equity deal in central Europe this year. The former fixed-line monopoly has been losing business as an increasing number of Czechs prefer to use a mobile phone. Profitable Eurotel will help Cesky Telecom increase revenue and offer new products, such as combined fixed-line and mobile phone services for corporate customers.
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