Poland—Concluding Statement of the 2012 Staff Visit
November 16, 2012
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.
The Polish economy has performed well on the back of very strong policies and fundamentals, but growth is now slowing, as a result of developments in the euro zone. The key policy challenge is to provide support to the economy. Monetary easing is therefore welcome and further rate cuts are needed. The pace of structural fiscal consolidation is being maintained, while automatic stabilizers are being allowed to operate, which is appropriate given the narrower fiscal space available. The banking system has remained strong, but non-performing loans (NPLs) may require more proactive solutions.
1. After robust growth last year, the Polish economy is feeling the effects of headwinds from Europe. Growth is moderating amid weaker export demand and confidence effects on private investment and consumption, which have combined with lower public investment. Economic activity is projected to slow further. Rising unemployment and tight credit availability are expected to weigh further on household spending. Public investment will continue to decline and private investment is expected to rebound only when uncertainty about external and domestic prospects dissipates. Overall, GDP growth is projected to slow from about 2¼ percent in 2012 to 1¾ percent in 2013. Risks around this outlook are on the downside, as a deeper or more protracted slowdown in Europe or a re-intensification of the crisis would affect Poland through substantial trade and financial channels.
2. We welcome the recent cut in the policy interest rate and see room to continue the monetary easing cycle. With the economy slowing and inflation pressures receding, further cuts in the policy rate are already clearly warranted. In the event of a sharper deterioration in economic conditions than currently anticipated, and given the limited fiscal space, additional easing would be required.
3. The impressive fiscal consolidation has continued, and the draft 2013 budget balances further fiscal adjustment and support for the economy. Despite weaker-than-expected VAT revenues, the general government deficit is projected to drop by 1½ percentage points to about 3½ percent of GDP in 2012. The 2013 budget rightly continues the structural consolidation (with measures of some ½ percent of GDP) while allowing automatic stabilizers to mitigate the slowdown. These consolidation efforts have supported market confidence and contributed to very favorable financing conditions. The authorities’ plans to boost infrastructure investment and SME lending could help protect needed investment and spur economic activity. At the same time, it will be important to ensure that public resources are used efficiently, and that the program is implemented in a transparent manner, under appropriate governance and accountability mechanisms.
4. Over the medium term, reducing the ratio of public debt to GDP remains a key priority. In this regard, we welcome the authorities’ intention to put in place a permanent expenditure rule that will help anchor public finances. This, alongside additional consolidation measures of about 1 percent of GDP over the next few years, should enable Poland to reach its medium-term objective (a 1 percent of GDP structural fiscal deficit) and put the public debt ratio firmly on a downward path. Improving the multi-year fiscal framework would complement these steps by strengthening expenditure planning. Further reforms to the pension system should continue, particularly with respect to special occupational pension schemes.
5. Regulatory and supervisory efforts have helped improve the resilience of the banking system, but the economic slowdown will pose some challenges for banks. Bank capital buffers have remained comfortable and overall liquidity is ample. However, as the economy has slowed, NPLs have increased and credit growth has eased. We continue to favor a more proactive approach to addressing NPLs—including through voluntary out-of-court restructuring by banks, which should be transparently reported and subject to strict prudential rules and supervisory scrutiny—as this would help ensure that credit and growth prospects are not undermined. We welcome progress in establishing a Systemic Risk Board to implement a macro-prudential framework and the upgrading of the bank resolution toolkit. An in-depth financial stability assessment and a review of these issues will be part of the forthcoming Financial Sector Assessment Program (FSAP) update, planned for the first half of 2013.