•                                                                           Polish

Poland: Staff Concluding Statement of the 2017 Article IV Mission

May 18, 2017

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.

The current growth momentum is very strong and risks to the near-term outlook are broadly balanced. But long-term economic growth prospects are more subdued, given demographic headwinds and slower productivity growth.

The key policy priorities are

rebuilding buffers: fiscal consolidation should start as soon as possible to take advantage of the cyclical upswing
managing reflation: a prompt monetary tightening will be needed if accelerating core inflation threatens the inflation objectives
preserving resilience: policies should safeguard banks’ stability and capacity to support growth
advancing reforms: efforts should focus on creating efficient institutions and growth-friendly regulations

  1. The strong cyclical upswing is expected to continue in the near-term. Economic growth remained robust at 2.7 percent in 2016 and is expected to rebound to 3.6 percent this year on the back of strong consumption and higher public investment boosted by EU funds. Labor market conditions continue to tighten, with unemployment rate falling to a historical low. Headline inflation increased rapidly to 2 percent in April, on the back of rising food and fuel prices, crossing the lower bound of the central bank’s target band, while core inflation accelerated to 0.9 percent, the highest level since 2014. The output gap is closed, and both tight labor market and a record-high capacity utilization signal that the Polish economy is likely operating at or above potential. The fiscal deficit of 2.4 percent of GDP in 2016 turned out to be better-than-expected, hitting the lowest level since the global financial crisis.

  2. Over the longer-term, sustaining current growth rates will not be possible without faster productivity growth, stronger private investment and higher labor force participation. Adverse demographics, slow productivity growth, low private investment, infrastructure gaps, and regional disparities will pose challenges to the growth prospects. The working age population has been falling by 1 percent annually since 2012, and skilled labor shortages have been rising steadily. Some of the recent policy decisions, notably the reversal of the 2013 retirement age increase, will likely exacerbate the decline in the working-age population, and entail additional fiscal costs. Without structural reforms to boost productivity growth, private investment and labor force participation, potential growth will remain below 3 percent, slowing Poland’s convergence to the EU living standards.

  3. In the near-term, risks to the outlook are broadly balanced. The external environment can improve further if global growth accelerates on stronger policy stimulus in the U.S. and China. The key downside external risks for Poland include a faster-than-expected tightening in the global financial conditions, as well as growth, financial or political shocks in Europe. Domestically, both growth and inflation can surprise on the upside if the EU funds’ absorption and investment rise further or if wage growth accelerates faster than expected. The downside risks include a delayed monetary policy response to higher-than-expected inflation leading to inflation overshooting its target, and a weakening of institutions or fiscal slippages damaging investor confidence.

  4. The policy mix should reflect the need to rebuild buffers during good times, and address longer-term growth and fiscal challenges. Policies should be calibrated to ensure consistency between the long-term goal of lifting potential growth, the medium-term goal of achieving a durable structural fiscal consolidation and the near-term objective of managing the current cyclical upswing, while maintaining macro-financial stability.

  5. The fiscal consolidation should start as soon as possible. The 2017 budget deficit of 2.9 percent of GDP is only a shock away from the EU’s Excessive Deficit Procedure (EDP) limit of 3 percent of GDP. The fiscal policy priorities for this year are to avoid breaching the EDP limit and to save any revenue overperformance from stronger-than-envisaged tax collection. During 2018–19, the structural deficit should be reduced by 0.5 percent of GDP each year (as set out in the authorities’ 2017 Convergence Program Update) to reverse the current pro-cyclical stance and to build a “safety buffer” relative to the EDP limit. Beyond 2019, were ambitious growth-enhancing structural reforms to be adopted, the pace of consolidation could be adjusted to accommodate any direct fiscal costs. However, the medium-term objective (MTO) – a structural deficit of 1 percent of GDP – will still need be reached no later than 2023, given projected aging costs, exacerbated by the retirement age reduction, and in anticipation of some phasing out of the EU funds.

  6. The fiscal adjustment should be based on high-quality measures and conservative estimates of the expected yield from the tax administration reforms . The authorities’ efforts in improving tax administration are commendable and the recent improvement in the tax collection is very encouraging, but future gains are uncertain, and therefore, should be budgeted conservatively. While spending limits under the stabilizing expenditure rule force consolidation to reach the MTO, it would be desirable to identify specific permanent measures in advance to enhance the quality and credibility of the adjustment. The additional fiscal consolidation measures could include keeping the VAT rate at the current level beyond 2018, unification of multiple VAT rates, rationalizing current spending through expenditure reviews and gradually phasing out preferential pension regimes. The reversal of the 2013 retirement age increase will have lingering effects on public finances and on the long-term sustainability of the pension system. Mitigating measures could aim to increase incentives for seniors to remain in the workforce longer, but may not be sufficient to fully offset the negative impact of the 2013 retirement reform reversal on labor supply, public finances and pension system.

  7. The monetary stance is appropriate for now, but the central bank should stand ready to raise the policy rate if accelerating core inflation threatens the inflation objectives . The incipient domestic inflationary pressures should be monitored closely, given an opening positive output gap, a pro-cyclical fiscal stance, a negative short-term real interest rate, and a record-low unemployment rate. Wage growth, though still moderate, may be accelerating, with signs that pressures are on the rise (firms’ intentions to raise wages, skilled labor shortages, rising PPI inflation). Given uncertainty about the possible mitigating factors, including immigration, on future pace of wage growth, policy decisions should be data dependent, taking into account the fiscal stance and monetary transmission lags to avoid inflation overshooting its target. A more procyclical fiscal stance could entail a need for a tighter monetary stance. A clear communication strategy should stipulate the circumstances for a rate change instead of providing a time frame for how long the rates are likely to stay on hold.

  8. The financial sector’s resilience should be preserved, to maintain its ability to support growth. The banking system remains well capitalized and liquid. However, banks’ profitability continues to decline, as the challenges of operating in a low interest rate environment have been compounded by higher capital requirements, additional tax obligations and other required contributions. The impact of the bank asset tax, which already induced banks to significantly increase holdings of government bonds, should be monitored and the tax should be adjusted, if adverse effects on banks’ activities and risk profiles become apparent. A tax on banks’ profits and remuneration is a less distortionary alternative to the bank asset tax. The final solution to address consumer protection concerns related to foreign currency mortgages should preserve banks’ capacity for internal capital generation and lending. A voluntary case-by-case restructuring remains the best approach. The difficulties in the credit-union and cooperative bank segments should be addressed in a sustainable way, including by encouraging further consolidation/integration and ensuring an orderly market exit of unviable firms. The increasing share of the state-controlled intermediaries in the Polish financial sector, in combination with rising bank holdings of sovereign bonds, may create new prudential and macroprudential challenges. In this regard, maintaining a strong and independent supervision and robust macroprudential framework are critical.

  9. Structural reforms to boost Poland’s growth potential are key to offset demographic pressures and ensure continued convergence . In this regard, a formal adoption of the comprehensive Responsible Development Strategy (RDS) in February 2017 is welcome. The RDS aims to achieve strong sustainable and inclusive growth through reindustrialization, development of innovative firms and SMEs, international expansion, mobilizing capital for development, supporting social and regional development and increasing the efficiency of institutions. While many elements of the RDS look promising, much work lies ahead to determine the key priorities and translate them into concrete reform plans, which should be closely coordinated with the authorities’ medium-term fiscal consolidation strategy outlined in the Convergence Program. With fiscal space constrained by the stabilizing expenditure rule, the priority could be given to reforms that do not require additional public expenditures, while fiscally costly reforms could, in the first instance, be financed by the EU funds.

  10. The development strategy should focus on improving Poland’s institutional and business environment to make it more attractive for both domestic and foreign investors. This would require efficient institutions and more growth-friendly regulations, addressing shortages of skilled labor and infrastructure gaps, as well as supporting innovation. In product markets, there is scope for reducing administrative burdens on start-ups and deregulating professional services and network industries. In labor markets, there is a need for more effective and better focused active labor market policies (including vocational training) and upgrading the childcare and early education systems, which could increase the labor force participation, particularly of women, and help mitigate labor shortages. A targeted and efficientpublic spending on infrastructure and R&D support could help boost productivity and private investment. It is important to ensure a level-playing field for all market participants to allow financial resources to be channeled to the most efficient firms.

We are grateful to the authorities and private sector interlocutors for candid and constructive discussions.

IMF Communications Department
MEDIA RELATIONS

PRESS OFFICER: Wiktor Krzyzanowski

Phone: +1 202 623-7100Email: MEDIA@IMF.org