Poland--Concluding Statement of the 2010 Staff Visit
October 29, 2010
Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). 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, and as part of other staff reviews of economic developments.
1. The economy is steadily building momentum. GDP growth accelerated in the first half of 2010, led by inventory accumulation and private consumption. Looking forward, strong employment growth is expected to support consumption; improved corporate profitability should boost private investment; and EU-funded public investment will grow. We thus project GDP growth to reach around 3½ percent in 2010 and 3¾-4 percent in 2011, though external risks are on the downside. The current account deficit is expected to widen gradually to about 3 percent of GDP, with robust FDI inflows mostly financing the deficit.
2. The fiscal deficit continued to widen in 2010, but is expected to narrow in 2011 as the result of fiscal consolidation. The countercyclical fiscal policy that helped sustain GDP growth in 2009 also led to an increase in the general government deficit to above 7 percent of GDP. The fiscal deficit is projected to rise further to about 8 percent of GDP in 2010, mainly reflecting the lagged effect of the earlier economic slowdown on corporate and personal income tax revenues. Looking forward, we project that the fiscal deficit will fall to around 6.5-6.7 percent of GDP in 2011, based on announced measures, which amount to about 1 percent of GDP, as well as one-off factors and tax buoyancy. The measures are roughly evenly distributed between expenditure and revenue, including limiting discretionary expenditure growth to no more than 1 percent above inflation (CPI+1)—which encompasses a freeze in the central government wage bill—and raising VAT rates by 1 percentage point.
3. The fiscal consolidation effort for 2011 is welcome and should be continued in the following years. We project that, on announced policies, the fiscal deficit will fall below 5 percent of GDP in 2013. To put the debt-to-GDP ratio on a downward path while preserving the economy’s momentum, additional steady fiscal consolidation is needed, with the aim of reducing the fiscal deficit to 3 percent of GDP by 2013. This implies further measures (above and beyond those already announced) amounting to about 1 percent of GDP per year over 2012-13. Measures that could be considered include broadening the coverage of the general tax and social security system, rationalizing social benefits, and tightening pension indexation. Such a strategy would send a strong signal of Poland’s commitment to fiscal sustainability.
4. The proposed strengthening of the medium-term fiscal framework is also welcome and could be complemented by further steps. The proposal to put in place additional revenue-boosting measures should the debt ceiling be breached provides predictability about public finances if downside risks materialize. Similarly, the proposal to keep the CPI+1 discretionary spending ceiling in place as long as Poland is in the EU’s Excessive Deficit Procedure helps to provide confidence that fiscal consolidation will continue. In addition, the government should consider a thorough spending review and strengthening the implementation of the ongoing multi-year budgeting reforms. Over the medium term, the government should consider a permanent expenditure rule consistent with its medium-term targets. Since Poland is one of the few countries where significant pension reform has been implemented to reduce the burden of an ageing population in the long term, such a framework, together with structural measures aimed at raising the long-term growth potential, would buttress Poland’s long-term fiscal position.
5. With economic slack diminishing, monetary policy should be prepared to respond to signs of inflationary pressures. We expect inflation to rise over the next 12 months to a level near the upper bound of the central bank’s 1½-3½ percent tolerance range. However, considerable uncertainty surrounds the outlook for inflation, especially with regard to labor supply and the impact of capital inflows on the exchange rate. In this context, the central bank could consider enhancing communication, including by further elaborating on the MPC’s view of inflation prospects in the post-MPC meeting communiqué.
6. The Polish banking system is well-buffered, and supervisors should remain vigilant to emerging risks. Banks’ profits have increased and capital adequacy ratios are above pre-crisis levels. While non-performing loans have crept up, they should soon stabilize. As demand for credit revives and banks’ risk aversion declines, credit growth is showing signs of revival, especially in mortgage lending. In this context, we welcome the authorities’ consideration of further steps to mitigate the risk of an acceleration of foreign currency lending by banks to unhedged borrowers.