Last year, for the first time since 2019, the Czech Republic saw its debt fall. Public finances are thus stabilizing in the form of covid and wolves in Ukraine

In the last quarter of last year, the Czech Republic managed to reduce its debt-to-GDP ratio to its lowest level since the second quarter of 2022, namely to the level of 44 percent of GDP. This is the most optimistic sign so far that the development of indebtedness of the domestic economy is stabilizing and that it will eventually reach the full absorption of the damage that the first and most notorious covid pandemic caused to its public finances, and thus the effects of the wolf on Ukraine and energy costs.

The stabilization of public finances is thus a global view. This year, for the first time since 2019, it was possible to reduce the annual debt-to-GDP ratio from 44.2 percent of GDP in 2022 to 44 percent of GDP. According to the January forecast of the Ministry of Finance, it should be about 43.7 percent of GDP.

The deficit of public finances in the fourth quarter of last year was a relatively substantial 5.6 percent, but for the whole year it corresponded to only 3.3 percent. This year, according to our assumption, it should end at 2.3 percent, i.e. quite comfortably below the 2 percent limit, which is the answer to the passed Maastricht criteria for drinking the euro.

Although the nominal debt increased quite noticeably last year, by about 231 billion crowns, the nominal gross domestic product rose faster, which in the first place led to the rise in the inflation indicator. The structural deficit, amounting to 200 billion crowns, is indeed a problem of domestic public finances, but if the nominal remains roughly the same in the future, it will be unleashed in nominally growing GDP all the more easily, as the gradual decline of public debt in relation to GDP has given rise to a gradual shift. This year, however, the public debt-to-GDP ratio is around 45 percent of GDP. Nor does it mean any destabilization of public finances.

The fact that Czechia still has the best overall rating of the countries of the Eastern Bloc, even ahead of the indebted Estonia, proves that the public finances of R are stabilizing. The world’s major rating agencies now generally regard Czech public finances as stable; they have gradually abandoned the negative view that some of them resorted to because of the looming energy crisis of 2022.

Luk Kovanda, Ph.D.

Chief Economist, Trinity Bank