TOP INTERVIEWS Interview with Mr EDUARD JANOTA First Deputy Minister of Finance Prague, 22nd October 2002 You mentioned that the floods may cost up to 50 billion Crowns. What will be the impact of the floods on the state budget and what is your assessment of the state's current financial situation? The damages due to the floods reach almost 100 billions Crowns under my estimation. These include the damages caused to the inhabitants, the state property, the cities, the regions and the municipalities. The government has been solving the problems actively and unfortunately we already had an experience with this from the floods of 1997, when the damages were almost two thirds of this year's damages. The first issue, which had to be solved and for which the government has already paid 5 billion Crowns concerned the living conditions of the inhabitants. The second issue is the reconstruction of the regions. The Czech Republic has a special law to handle this kind of issues and it will be based on the regions' assessments of the costs for the citizens and for the state. The first phase will be to help the citizens: a first subsidy of 30,000 Crowns in cash has been paid immediately to those people, who lost everything. Secondly, there will be more long term help: 150,000 Crowns in cash, guaranteed credits to build new houses and also help for those people that were employed and lost their jobs because of the floods. The state paid the cleaning of areas and the immediate costs followed by the floods to the municipalities, villages and small cities. Another plan will be set up for companies: a plan of reconstruction credits with low interest rates and guaranteed by the state. The primary source for paying for the damages is the state budget. Secondly, we will use credits. I was also dealing with the Vice President of the European Investment Bank, from which we expect help of around Euro 300 million for infrastructure. A further great fact is that not only EU member countries are providing help, but also countries, which are going to enter the EU. We will also receive help from EU organizations, such as Ispa, Phare, etc as the EU simplified the whole process: we expect to receive around Euro 35 million. There is also a special EU fund of Euro 750 million and not only member countries, such as Germany and Austria will receive help from it, but the Czech Republic as well. A very important fact from the humanitarian point of view is the help from citizens themselves, not only from foreign countries, but also from the Czech Republic. It will take two to three years to repair and modernize everything. However, the impact on the Czech GDP should remain limited. We expect a slight decline in GDP in the third quarter, but it should be back to normal, which is around 3% growth per year, fairly rapidly. This of course depends on the global and European situation as the Czech Republic has around 60 % of export to EU countries. Will the impact of the floods on the state budget be short or long term? And what is your view on the current situation of the state budget? In the short term we expect revenues from taxes to decline this year. The Czech Republic has an annual budget deficit of 70 billion Crowns and, in the long term, our deficit will remain around 5.5 to 6% of GDP. We want the Czech Republic to enter the EU and we therefore have to take the Maastricht criteria into account. The main reason why we have a large deficit, almost double of what the Maastricht criteria require, is of course because the country is in a transformation process. Another reason is that the banking system is still under some problems: first of all, the state took over the responsibility for the banks, which went bankrupt; secondly, the large and important banks have been privatised. The second criteria is debt, which should be kept under 60 % of GDP. The Czech Republic is doing quite well in this respect as our debt is at 20 % of GDP, not taking into account the debts, for which the Consolidation Agency, a state owned agency, takes care. Including these debts, our debt would be around 30 % of GDP. We still have to improve the trend of the country's debt. The Czech Republic's deficit remains at 5.5 to 6 %, but Maastricht criteria placed the mark at 3 %. What is the timeframe for your country to be at the 3 % mark? The current government wants to stabilize the budget by 2006, when the annual deficit should be under 5 % of GDP. Moreover, our interest rates are very low: the interest rate of the Czech National Bank is lower than the rate of the European Central Bank in Frankfurt. Inflation is also low as it is expected to be around 2 % this year. We still have some exchange rate concerns due to a quite strong Crown, which is caused by the attraction of the Czech Republic for foreign investors. Our country is attractive because of solid investment incentives offered by the government and also because of the privatisation of the remaining part of the national property. I am pleased about the massive investments made by French companies, of which the most important is the investment made by Renault V.I. in Karosa, a manufacturer of buses. What are your expectations for overall FDI, and especially for French investments? And how can you maintain the current level of investment? If the exchange rates, the interest rates and the investment incentives remain at their current levels, then it will still be interesting for foreigners to invest in the Czech Republic. Furthermore, our country has a good labour force, which is an important factor for foreign investors. During the past two years, the Czech Republic attracted FDI of USD 5 billion annually and these were mainly green field investments, which is good for the Czech economy. An important step was the privatization of the banking sector, with for example Komercni Banka and Société Générale, which is very good for the stabilization of the country and for the business environment and I believe that the big problems in the banking sector are now behind us. The cooperation between the ministry and banks is very good. I, for example, had a meeting with representatives of Société Générale to discuss some chapters which are not finalised in the EU negotiations, such as economic competition. We also had to explain how privatisation happened and if it was the correct solution for economic competition. There are still some chapters in the EU negotiations, which are not closed, such as transportation, institutions, budget and agriculture. I hope that we will close these chapters by the end of this year or in the beginning of next year, which should allow us to join the EU by the 1st January 2004. The parliament has passed a law on the referendum for the entrance into the EU. Negotiations are reaching the end and we are now discussing final issues, such as how much we will have to contribute and how much we will receive. The most tricky chapter, which still remains open, is perhaps the agriculture chapter, and namely everything, which concerns direct payments and production quotas. We are currently in the process of adjusting our legislation and taxation system and we have agreed on a transition period, which is important especially for VAT. Concerning the excise duties, we will need more time, mainly because of cigarettes. If it were adapted immediately, the price would be too high. The Czech Republic's preparation, both on a legal and an institutional level, is very good. Our annual trade deficit is currently at around 4 % of GDP. What are for the near future the main priorities of your ministry? The first priority is to make a budgetary outlook, which will be binding for all ministries and the whole government until 2006. Further priorities of the state budget for next year is to secure the payments related to the damages of the floods and the questions related to EU accession. Also very importantly are education, research & development and the improvement of the legal environment, with a commercial law to solve problems effectively and quickly. This report will be read by foreign investors, who are looking for business opportunities in the Czech Republic. What would be your final message to them? The good news for potential investors is that investment incentives work very well here. Furthermore, there is a very stable bank system with the major international players, a good taxation system compatible with EU regulations and including laws on double-taxation, a very qualified workforce, a good infrastructure and a favourable location. One of the sectors with the most potential for foreign investors is the energy sector, where several French companies were interested and where further possibilities will arise in the future. Note: WINNE cannot be held responsible for the content of unedited transcriptions.