Reports on Observance of Standards and Codes Czech Republic and the IMF Czech Republic ROSC I.  Update II.  Overview III.  Data Dissemination IV.  Fiscal Transparency V.  Transparency of Monetary and Financial Policies VI.  Banking Supervision VII.  Securities Market SURVEY What do you think of Reports on the Observance of Standards and Codes?

REPORT ON THE OBSERVANCE OF STANDARDS AND CODES (ROSC) Czech Republic   Queries/Comments      should be directed to:    Director    European I Department    700 19th Street, NW    Washington, DC 20431    202-623-7000    http://www.imf.org    scu-comment@imf.org II.  Overview   Prepared by staff from the International Monetary Fund on the basis of information provided by the Czech authorities Prepared in August 1999 and reissued in July 2000 Overview 1. The policy making process in the Czech Republic has undergone significant changes in recent years, which have improved both the transparency of various economic and financial policies and the quality of the economic policy framework. Following the abandonment of the exchange rate peg in May 1997 and a period with no clear nominal anchor for monetary policy, an inflation targeting framework was introduced from 1998. The legal and regulatory framework for banks has been strengthened; so has bank supervision, which is now to a large extent in compliance with Basle Core Principles in most areas. Measures have also been taken to address the problems of weak securities market regulation and oversight, including through the establishment of a Securities Commission. In the fiscal area, important steps have been taken to identify contingent liabilities and so-called hidden debt, and work has begun to place the budget more solidly in a medium-term fiscal and overall macroeconomic framework. Further, the authorities have subscribed to the Fund’s Special Data Dissemination Standard (SDDS).

2. Transparency is by nature a general and somewhat diffuse concept, which in many areas is difficult to distinguish clearly from the broader questions of the quality of economic information and data, or even of the underlying policy framework or the policies themselves. Internationally accepted standards of good practices have been or are being developed in a number of economic and financial policy areas that not only focus on narrow disclosure practices, but also on other elements of the policy framework such as how clearly areas of responsibility are defined and the extent to which an effective basis for the conduct of policy is provided. It is mainly against these standards that this experimental report considers transparency and its underpinnings in the Czech Republic. 3. The report covers transparency practices in the core areas of Fund surveillance: data dissemination (considered against the Special Data Dissemination Standard); fiscal policy (considered against the Code of Good Practices on Fiscal Transparency); monetary and financial policies (considered against the Code of Good Practices on Transparency of Monetary and Financial Policies); and banking supervision (considered against the Basel Committee’s Core Principles of Effective Banking Supervision). In addition, the report also assesses practices in the securities market, where transparency has been an important concern in the Czech Republic throughout the transition process. 4. The chapters on fiscal transparency, the transparency of monetary and financial policies, and banking supervision have been prepared on the basis of self-assessments undertaken by the authorities of their practices compared with the different codes and principles, while the chapter on data dissemination has been prepared by Fund staff on the basis of discussions with the authorities. The securities market chapter is also based on discussions with the authorities and was prepared in collaboration with the World Bank, drawing heavily on the Bank’s recent study of the Czech capital market. 5. In the staff’s view, the Czech Republic has made considerable progress in recent years in enhancing transparency practices in several key areas related to economic policy, and the level of transparency achieved is in many respects quite impressive for a transition economy. All transition plans related to the SDDS have been completed. The Czech National Bank (CNB) has made a commendable effort to improve various aspects of its monetary policy framework, bring banking supervision and regulation closer to international best practices, and provide information on a broad range of its operations in a timely and comprehensive fashion. The establishment of a Securities Commission (SC) is already yielding tangible results in terms of increasing the integrity of securities transactions, including by relicensing investment firms and strengthening disclosure requirements in the capital market. Finally, the Ministry of Finance (MOF) has devoted significant resources to improving the transparency of fiscal operations and the framework for fiscal policy. 6. Important areas nevertheless remain where further progress in improving transparency and compliance with international standards could be made. Notably: In the area of data dissemination, while the Czech Republic complies fully with the SDDS, some weaknesses remain, for example in the quality of the national accounts and external sector data. In the area of fiscal transparency, it would be desirable to reduce the government’s room for maneuver in changing expenditures from the appropriated level and to strengthen control over local government budgets, incorporate all guarantees and other contingent liabilities as well as quasi-fiscal operations in the budgetary process, and strengthen the medium-term and risk assessment of fiscal policy. In the area of monetary and financial policies, the CNB should continue its efforts to clarify the operating procedures for monetary policy, and further steps should be taken to clarify the responsibilities of the different financial policy regulators and strengthen reporting in certain areas, while involving the public more actively in changes under way. In the area of bank supervision, the regulatory framework needs to be strengthened in regard to consolidated supervision and market risk, and there remains scope to improve the implementation of bank supervision. In the area of the securities market, further reforms are needed with respect to both regulation and enforcement to address continued fragmentation and further improve the integrity and transparency of the market. Fund staff welcomes the several initiatives that are currently under way to support improvements in these areas. 7. Finally, IMF staff would like to thank the authorities for their willingness to participate in this experimental transparency report and for devoting a significant amount of scarce resources to comprehensive and frank self-assessments and discussions with staff in the various aspects of transparency considered in this report. IMF staff recognizes that the authorities efforts were all the more impressive in light of the tight deadlines they faced.