IMF Executive Board Concludes 2009 Article IV Consultation with the Republic of Poland

Public Information Notice (PIN) No. 09/105
August 13, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 31, 2009, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Poland.1


Poland’s rapid growth had begun to lose steam even before the global crisis hit. Following robust and relatively well-balanced expansion, driven by an EU accession-related investment boom and rapid credit and wage growth, economic activity began to slow down in the face of capacity constraints. By mid-2008, inflationary pressures peaked and the unemployment rate was at record lows.

As world commodity prices are expected to remain in check and wage developments are likely to track slower economic activity, price pressures are projected to be subdued. With output growth well below potential, headline inflation is forecasted to stay within the tolerance range of 1½ to 3½ percent for the foreseeable future.

External imbalances have been relatively limited, and the equilibrium exchange rate has been broadly aligned with fundamentals. The current account deficit widened to 5.5 percent of GDP in 2008, from 4.7 percent of GDP a year earlier. However, the current account deficit is projected to narrow significantly this year, as domestic demand has weakened and the fall in imports offset the contraction in exports.

Macroeconomic policies have provided stimulus. The fiscal deficit was allowed to increase as the slowdown set in, with the general government deficit reaching 3.9 percent of GDP at end-2008, compared with the budget target of 2.5 percent of GDP. Meanwhile, the decline in inflation, together with the room provided by euro interest rate cuts, prompted the central bank to embark on a loosening cycle since last November. The policy rate was cut by cumulative 250 basis points to 3.5 percent. Besides renewed price pressures in commodities, recent policy rate cuts have been tempered by concerns about zloty depreciation.

The banking system has weathered the global crisis relatively well. Capital-adequacy ratios (CAR) have declined, but the banking system remains well capitalized with a CAR of 11.7 percent at the end of the first quarter of 2009, a high ratio of tier 1 capital, and record profits in 2008. However, credit risk has risen with the slowdown of the economy, while a sharp deceleration in credit growth is underway as new foreign funding dried up and uncertainty about future economic developments have emerged. Reflecting these uncertainties and the difficulties that banking groups are facing at the global level, the interbank market has seen very little activity beyond one-week maturities. Still, the authorities’ top-down stress tests suggest that the system is resilient to adverse scenarios, and only a prolonged recession would lead to general recapitalization needs.

Executive Board Assessment

Executive Directors noted that the strength of Poland’s fundamentals, policies, and institutions had enabled it to withstand the global crisis better than most of its peers, as reflected in a limited buildup of external and internal imbalances. Financial markets have broadly stabilized, and investor confidence has strengthened, attributable in part to Poland’s Flexible Credit Line arrangement with the Fund.

Directors noted that a significant deceleration in economic activity is underway, reflecting adverse spillovers through real and financial channels. They commended the authorities for the timely, well-focused, and measured policy response. Sound policies in the past are now affording policy-makers room for maneuver. The authorities’ continued commitment to adjust policies as circumstances warrant would help Poland to endure a mild recession this year.

Directors welcomed the accommodative stance of monetary policy. Given a benign outlook for inflation and public confidence in the National Bank of Poland’s strong antiinflation credentials, most Directors supported the authorities’ intention to maintain a loosening bias, while remaining vigilant about price developments. Some Directors considered that a pause in interest rate cuts appears warranted in light of uncertainties surrounding external financing conditions. Directors noted that further measured monetary easing is not likely to result in undue depreciation pressures on the zloty.

Directors recognized that the challenges facing fiscal policy are more complex, reflecting the need to balance short-term cyclical priorities and longer-term objectives. They broadly supported the authorities’ recent decision to raise the deficit limit for 2009 to accommodate the revenue shortfall. Noting that the deficit is set to remain above the Maastricht target through the medium term, Directors welcomed the authorities’ commitment to take corrective actions to preserve debt sustainability. They called for fiscal consolidation to start in 2010 if the recovery materializes as expected, with a few seeing limited scope for further delaying the consolidation process if the medium-term deficit targets were to be achieved. Introducing rolling and binding multi-annual expenditure limits, together with measures to enhance the expenditure prioritization process, could help anchor confidence in the medium-term targets. These efforts should be complemented by a further strengthening of fiscal institutions.

Directors welcomed the authorities’ pre-emptive actions to safeguard financial stability, notably steps to encourage banks to retain the record-high 2008 profits, as well as ongoing efforts to strengthen the supervisory framework. While the banking system remains well-capitalized, continued vigilance is warranted, given banks’ rising non-performing loans and funding costs. Directors welcomed the plan to conduct bank-by-bank bottom-up stress tests to ensure that, if needed, banks move preemptively to shore up capital. This exercise should help reduce uncertainty and facilitate the unfreezing of the local interbank market.

Directors stressed that raising Poland’s labor participation rate is the key to boosting long-term growth. In this regard, they welcomed last year’s reforms of the early retirement system, and highlighted the need to continue reforming the pension system, including by gradually increasing the retirement age and merging special pension schemes with the general scheme. Reinvigorating structural reforms more broadly, including the privatization plan, will help enhance the economy’s flexibility, bolster its long-run potential, and facilitate successful euro adoption in the medium term.

Poland: Selected Economic Indicators, 2005-09

  2005 2006 2007 2008 2009
        Prelim. Proj.

Real economiy (change in percent)


Real GDP

3.6 6.2 6.8 4.9 -0.7

Real domestic demand

2.5 7.3 8.7 5.4 -1.4

CPI (end of period)

0.7 1.4 4.0 3.3 2.8

Unemployment rate (in percent)

17.7 13.8 9.6 7.1 9.4

Gross domestic saving (percent of GDP) 1/

21.2 25.6 32.1 33.0 26.1

Gross domestic investment (percent of GDP)

19.3 21.1 24.4 23.9 21.2

Public finances (percent of GDP)


General government balance 2/

-3.9 -3.9 -2.0 -3.1 -5.6

according to ESA95

-4.3 -3.8 -2.0 -3.9

Public debt

47.5 47.8 44.8 47.1 52.1

according to ESA95

47.1 47.7 44.8 47.0

Money and credit


Private sector credit (12-month change)

12.6 22.9 29.5 33.9 . . .

Broad money (12-month change)

13.1 16.0 13.4 17.5 . . .

Money market rate (eop)

4.6 4.2 5.7 5.3 . . .

Balance of payments


Current account balance (percent of GDP)

-1.2 -2.7 -4.7 -5.5 -3.2

Official reserves (millions U.S. dollars)

42,571 48,484 65,746 62,180 61,703

Reserve cover (months of merchandise imports)

5.2 4.7 4.9 3.7 5.1

Total external debt (percent of GDP)

43.7 49.6 54.8 45.9 59.3

Fund relations (May 31, 2009)


Quota (SDR million)


Fund holding of currency (SDR million)


Holding of SDRs (SDR million)


Exchange rate


Exchange rate regime


Present exchange rate (July 13, 2009)

PLN 3.13 = US$1

Zloty per US$, period average

3.23 3.10 2.77 2.41

Zloty per Euro, period average

4.03 3.90 3.79 3.52

 Real effective exchange rate (INS, CPI based) 3/

136.3 139.4 144.8 159.1

Sources: Polish authorities; and IMF staff estimates.
1/ Derived as total savings minus the current account minus capital transfers.
2/ IMF definition (including pension reform costs); estimates assume full execution of EU Fund spending in the 2009 budget, amounting to 2.5 percent of GDP.
3/ Annual average (1995=100).

1 Under 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 Executive Directors, and this summary is transmitted to the country's authorities.


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