Public Information Notices
Republic of Poland and the IMF
On March 11, 1999, the Executive Board concluded the Article IV consultation with Poland1.
Poland’s overall economic performance continues to be impressive. In 1998 the economy turned in its sixth straight year of strong output growth, while inflation declined into single digits for the first time since the transition began in 1989. Growth in 1998 was led by private investment spending, which was driven increasingly by foreign direct investment. Even so, real private investment and consumption both increased by only about two-thirds as much as in 1997. The pace of activity decelerated noticeably over the course of 1998 and industrial production registered negative year-on-year growth during the last three months of the year. The slowdown reflected lower exports, a development associated with retrenchment in Russia and other eastern European markets after August 1998 as well as a weakening of economic activity in the EU countries, but it also stemmed from persistently high domestic real interest rates during much of the year. The unemployment rate, which had declined over the first half of the year, increased from 9.5 percent in August to 10.4 percent in December.
Weaker domestic demand growth helped ease external current account pressures in 1998 until events in Russia began to impair external sector performance starting in September. Imports in dollar terms increased much less rapidly in 1998 than they had in 1997, while through the summer export growth (dollar terms) was strong and outpaced import growth, despite modestly reduced international competitiveness stemming from the 5.2 percent real effective appreciation of the zloty in 1998. The reductions in exports to eastern markets were sharp enough to increase the current account deficit to 4.5 percent of GDP in 1998, compared with 3.2 percent in 1997.
Inflation declined steadily in 1998. The December-to-December increase in the CPI dropped from just over 13 percent in 1997 to 8.6 percent in 1998. Among the factors that contributed to this sharp decline in inflation was the slowing in domestic demand growth, progressive reductions in the rate of crawl of the zloty (from 1 percent a month early in the year to 0.5 percent a month by September), deflationary price pressures from EU trading partners, and sharp declines in food prices late in the year reflecting good production results in agriculture and the loss of export demand. Real wages (on a gross basis) increased by only 3.8 percent in 1998, compared with the 5.9 percent increase in 1997.
After a slowdown of credit and domestic demand growth in the spring of 1998, the Monetary Policy Council (RPP) undertook a series of interest rate reductions. The interest rate on the 28–day NBP bill, the RPP’s key policy instrument, was cut by 850 basis points to 15.5 percent in six steps between April 23 and December 10, 1998; on January 20, 1999 the RPP took a decision to reduce it by a further 250 basis points to 13 percent. Disinflation was faster than anticipated, however. Thus until recently real interest rates remained higher than expected, especially in relation to forward-looking inflation expectations, and inhibited credit growth, weakened domestic demand, and supported the zloty’s appreciation. Real broad money growth was 15 percent in 1998.
There was moderate fiscal consolidation in 1998. The fiscal deficit of the general government was 3.0 percent of GDP on a commitment basis—0.1 percent of GDP smaller than budgeted and about 0.3 percent of GDP lower than in 1997. Substantial savings were achieved in debt servicing because of sharply lower interest rates and a more appreciated zloty than projected in the budget. As growth eased over the course of the year, income-related revenues went from exceeding budget projections to being below target. With an increase in arrears of 0.4 percent of GDP—mainly in the health area—the 1998 deficit on a cash basis was about 2.6 percent of GDP. Fiscal consolidation thus moderated domestic demand growth and inflation in 1998 and—in conjunction with higher-than-anticipated real interest rates and unfavorable external conditions—slowed output growth, especially towards the end of the year.
The slower pace of industrial activity and economic growth evident in the latter part of 1998 is likely to continue into the first part of 1999, and as a result the growth rate for the year will be below the average rate of growth for the past five years. The sharp reduction in interest rates already in the pipeline is likely to lead to a rebound in activity in the second half of 1999. Inflation prospects appear good, and it is likely that further reductions in CPI inflation will be forthcoming. Notwithstanding the slower growth profile that is anticipated, the external current account deficit is expected to be somewhat larger in 1999 than it was in 1998, because of theprojected continuation of weak demand from eastern markets and a likely slowdown in the pace of economic activity in key EU markets.
Executive Directors commended the authorities for Poland’s strong economic performance–one of the best among transition economies–as indicated by a sustained period of robust output growth and declining inflation, now down to single digits. This success reflected a clear and consistent approach to macroeconomic management. Directors considered the main challenge for Poland in the period ahead was to find that balance in policies that would increase investment and support growth without exacerbating balance of payments pressures.
Directors remarked that in response to some signs of overheating of the economy in 1997 and early 1998 the authorities had reacted appropriately by tightening macroeconomic policies. By mid-1998, domestic demand growth had moderated to a rate more in line with output growth and the external current account deficit had stabilized in a sustainable range. As a result, the international capital markets had increasingly favored Poland among emerging market countries, as evidenced by buoyant capital inflows, most of which were in the form of foreign direct investment.
Over the second half of 1998, however, economic activity in Poland decelerated noticeably, partly because of the restrictive monetary policy but mainly because of the financial crisis in Russia, followed by the slowing of growth in major EU trading partners. At the same time, the exchange value of the zloty continued to appreciate and the external current account deficit rose. Against this background, most Directors welcomed the authorities’ recent rebalancing of the mix of demand management policies, with continued fiscal consolidation being balanced by a relaxation of monetary conditions and a reduction in real interest rates. They also cautioned that although Poland’s fundamentals were strong, given current global financial uncertainties any sign of a further widening of the external current account deficit or retrenchment of foreign direct investment inflows should be met by additional fiscal restraint and steps to improve competitiveness.
Most Directors thus welcomed both the continuation of fiscal consolidation in the recently approved budget for 1999 and the authorities’ resolve to achieve this in the context of important pension, health care, and administrative reforms. A few Directors, nevertheless, noted that such consolidation might result in a further slowdown of activity. Noting some uncertainties on both the revenue and expenditure sides of the budget, most Directors cautioned that there was no room for fiscal slippage in 1999, and that backsliding would undermine the medium-term strategy of fiscal consolidation, weaken confidence, and put capital inflows at risk. Fiscal consolidation was also viewed as necessary to allow room forfuture increases in infrastructure and restructuring expenditures needed for EU accession. Accordingly, Directors endorsed the authorities’ intention to implement fiscal contingency measures promptly, if necessary, to ensure that the 1999 budget remained on track.
Given the restrained fiscal stance and the continued progress with disinflation, Directors welcomed the recent decision of the Monetary Policy Council (RPP) to reduce key policy interest rates. In particular, they considered that this action would help support demand, deter speculative inflows, and improve Poland’s international competitiveness, while being consistent with achievement of the authorities’ inflation targets for 1999. However, in view of the magnitude of recent interest rate reductions, Directors considered that it would be appropriate for the authorities to gauge the effects of the recent easing of interest rates on the exchange rate of the zloty, the rate of liquidity expansion, and the pace of economic activity before deciding what further monetary policy actions might be warranted during the remainder of the year.
As regards the framework for implementing monetary policy Directors agreed that, since its inception in early 1998, the RPP had gained considerable anti-inflation credibility. Directors saw the inflation-targeting framework as providing useful guidance for the conduct of monetary policy and an anchor for inflation expectations. They considered the inflation target of not more than 4 percent by 2003 as reasonable and achievable. While the planned inflation reports would foster transparency, Directors noted the need to strengthen further the analytical framework for inflation targeting, especially to deepen the understanding of the relationship between policy-determined interest rates, monetary aggregates, and inflation.
Directors also supported the authorities’ parallel shift toward encouraging more flexibility in the exchange rate. This approach would allow the zloty to adjust more freely to economic developments over the medium term, including those resulting from differential productivity gains in the tradable and nontradable sectors as growth and structural reforms proceed. They considered that the decision to widen the zloty’s trading band and to refrain from active intervention had served the country well. Directors felt that the main focus of monetary and exchange rate policy should be on disinflation and, therefore, saw continued reductions in the rate of crawl, with a view to an eventual phaseout, as consistent with this goal. Some Directors suggested a faster move to a freely floating exchange rate arrangement in light of these considerations.
Directors noted that Poland’s banking system was regulated and supervised in a manner broadly consistent with international norms and practices, and that the financial system appeared healthy. Nevertheless, they urged the authorities to be vigilant with respect to rapid growth in foreign currency-linked lending to domestic residents, and stressed the need to put in place the legal framework to support supervision of financial institutions on a consolidated basis. Directors also expressed concern about the practice of rehabilitating some banks through selective reductions in reserve requirements, which imposes a quasi-fiscal burden onthe National Bank of Poland. Attention to these areas was also important in light of the planned further liberalization of the capital account.
Directors welcomed the increase in the pace of structural reforms in 1998. In particular, the authorities had successfully completed the initial public offering of a portion of the national telephone company, met their financial goals for privatization, and completed preparations for the major pension, health care, and administrative reforms that took effect at the beginning of 1999. Directors welcomed the authorities’ privatization schedule for 1999, but cautioned that achievement of the ambitious objectives would require strong resolve and rapid progress with restructuring efforts in some industries and companies.
Directors noted that the broad thrust of the authorities’ plans to reform both personal and corporate income taxes was in line with modern tax policy principles and would help Poland create a more efficient tax system. Specifically, further enhancements of tax and customs systems and their effective administration were needed to help ensure that fiscal revenue objectives would be met and that a high level of compliance with the tax system would be achieved.
In finding that the authorities’ efforts on the year 2000 computer problem were still in the early stages and that the magnitude of potential difficulties was largely unknown, Directors urged a marked increase in efforts to reduce the risk of disruptions to the economy.
While noting that Poland has subscribed to the Special Data Dissemination Standard and that the statistical base was adequate for effective surveillance, Directors encouraged the authorities to continue to improve the quality of macroeconomic data, in particular, balance of payments and external debt statistics.
|Poland: Main Economic Indicators|
|Real economy (change in percent)|
|Unemployment rate (in percent)||16.0||14.9||13.2||10.3||10.4|
|Gross national saving (percent of GDP)||18.2||21.3||19.4||20.8||19.6|
|Gross domestic investment (percent of GDP)||15.9||18.0||20.4||23.9||24.1|
|Public finance (in percent of GDP)|
|General government balance1||-3.2||-3.2||-3.6||-3.3||-3.0|
|Money and credit (end of period, percent change)|
|Net domestic assets2||22.5||5.3||19.8||11.7||19.7|
|Money and quasi-money||33.8||39.4||29.2||31.0||25.0|
|Lending rate (annual average in percent)||38.9||32.3||25.6||25.1||24.6|
|Balance of payments in convertible currencies|
|Trade balance (in percent of GDP)||-0.9||-1.5||-6.1||-8.3||-9.2|
|Current account (in percent of GDP)|
|Including unrecorded trade||2.3||3.3||-1.0||-3.2||-4.5|
|Gross official reserves (in billions of U.S. dollars)||6.0||15.0||18.0||20.7||27.4|
|Reserve cover (months of imports of GNFS)||3.6||6.5||6.0||5.9||6.8|
|External debt (end of period)3|
|(In billions of U.S. dollars)||42.2||44.0||40.6||38.5||42.8|
|External debt service ratio4|
|Fund position (in millions of SDRs)|
|Holdings of zloty (end-December 1998)||911.4|
|Holdings of SDRs (end-December 1998)||5.0|
|Exchange rate regime||Crawling Band5|
|Present rate||Zl 3.93 per US$1 (Friday, March 12)|
|Depreciation (-) against U.S. dollar|
|(period average, in percent)||-20.2||-6.3||-10.1||-17.8||-6.2|
|Depreciation (-) of real effective exchange rate|
|(relative CPIs, in percent)||1.4||7.9||8.9||3.0||5.2|
|Sources: Central Statistical Office, Rocznik Statystyczny; data provided by the authorities; and staff estimates.
|1On a commitment basis.|
|2In relation to broad money at end of the previous year.|
|3Including arrears and the Fund.|
|4In percent of exports of goods and nonfactor services in convertible currencies, including the Fund.|
|5The zloty currently floats within a ± 15.0 percent band around the central rate, which depreciates at a fixed monthly rate (0.3 percent since March 24, 1999) against a basket of currencies.|
1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.
IMF EXTERNAL RELATIONS DEPARTMENT