UPDATE 2-IMF says Czechs need spending reforms quickly

(adds quote on euro adoption)

By Marek Petrus

PRAGUE, Nov 21 (Reuters) - A booming economy gives the Czech Republic an opportunity to implement needed reforms to contain the rising costs of pensions and healthcare as it looks to adopt the euro, the IMF said on Tuesday.

The International Monetary Fund (IMF) said in a statement at the end of a mission to Prague that consolidation of the EU member's public finances is the most pressing issue for the economy, which grew an annual 6.2 percent in the second quarter.

The Czech Finance Ministry expects the public sector gap to grow to 4.2 percent of GDP next year from 3.5 percent this year, far above the 3 percent limit for euro adoption.

"Taking advantage of the current good times to advance fiscal consolidation would be desirable," the statement said.

"A strong political commitment to fiscal consolidation is necessary to address looming fiscal pressures from social spending and age related expenditures."

The IMF warning follows an announcement by ratings agency S&P which on Monday confirmed the country's credit ratings but said the challenge of implementing fiscal and social reforms are the main constraining factors on the ratings.

A June election saw leftist and rightist parties each win 100 seats in the 200 seat Czech parliament, which has halted the formation of a new government to set out a path for implementing social spending reforms.

The Czech government recently delayed the country's 2010 euro adoption target date because of the the fiscal gap.

The slippage in the outlook for euro adoption -- the Czechs have not set a new target date -- has mirrored similar delays in other new EU member states, which have been caused mostly by loose fiscal policies and inflation.

"We do not think that the delay in euro adoption, in itself, is a big setback," IMF Assistant Director Subhas Thakur told a news conference. "It emphasises the need for the Czech Republic to move on to a strong fiscal consolidation path."

Czech second quarter growth was driven by gross capital formation, including a 5.3 percent gain in fixed investment and a build-up of inventories, but household consumption also revived, rising 3.8 percent.

The IMF said it expected growth to remain robust in 2007, though it would slow from the current rapid pace, and that the government must not feed growth -- as well as inflation -- through its policies.

"It is important that the budget for 2007 does not add a demand stimulus to an already booming economy. This could be done in part by targeting new social spending more efficiently to low-income households," the IMF said.

The IMF said that the cautious pace of interest rate hikes by the central bank was appropriate. ((Reporting by Marek Petrus, Writing by Alan Crosby; Editing by Gerrard Raven; prague.newsroom@reuters.com; Reuters Messaging: alan.crosby.reuters.com@reuters.net; +420 224 190 477))

Keywords: ECONOMY CZECH IMF