IMF Executive Board Concludes 2011 Article IV Consultation with the Republic of PolandPublic Information Notice (PIN) No. 11/86
July 8, 2011
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. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2011 Article IV Consultation with Poland is also available.
On July 1, 2011 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Poland.1
The economic recovery gained momentum in 2010. Real GDP growth picked up to 3.8 percent, driven primarily by private consumption—in turn helped by a rebound in employment and wage growth during the second half of the year—and strong inventory accumulation. Fixed investment contracted, as robust EU-financed public investment was more than offset by weak private investment, as firms remained cautious about the outlook. Strengthening domestic demand reduced the contribution to growth from net exports, while the current account deficit increased to 3.4 percent of GDP. Recent improvements to the Balance of Payments compilation system lowered large errors and omissions, but increased the reported current account deficit.
The fiscal deficit widened to 7.9 percent of GDP, mainly reflecting the lagged effects of the economic slowdown on corporate income tax revenues, as firms continued to deduct earlier losses. Government’s financing needs were comfortably met in financial markets (with nonresident purchases of government bonds reaching an all-time high) and through privatization receipts. Substantial fiscal consolidation is under way, with consolidation measures amounting to 1½–1¾ percent of GDP per year planned for 2011–12.
CPI inflation increased to 5 percent in May-2011, well above the National Bank of Poland’s (NBP) 2½ percent target. Inflation has been driven primarily by higher commodity prices, though core inflation (excluding food and energy) has been rising in recent months. In response to inflationary pressures, the NBP has hiked the policy rate since January-2011 by a cumulative 1 percentage point to 4½ percent. This puts the policy rate broadly in the neutral range (based on an estimated equilibrium real rate of 2¼ percent plus the 2½ percent inflation target).
The banking sector remained profitable and well capitalized in 2010, but credit quality deteriorated. Improving net interest margins boosted profitability and the average capital adequacy ratio rose to around 14 percent. Private sector credit grew by about 9 percent, with mortgage lending remaining strong, consumer lending falling, and corporate lending picking up. The nonperforming loan ratio rose to about 9 percent, but now appears to have stabilized. Recent stress tests by the NBP show that most banks are resilient to adverse shocks.
Executive Board Assessment
Executive Directors welcomed the return of Poland’s economy to solid growth in 2010, supported by timely and forceful countercyclical policy responses to the global crisis. Directors observed that, with the economy gaining momentum, capacity constraints are emerging, inflationary pressures are rising, and the current account deficit is widening. At the same time, Poland remains vulnerable to contagion from regional financial strains. In this context, while agreeing that the Flexible Credit Line arrangement with the Fund continues to provide insurance against external financial risks, Directors highlighted the importance of maintaining disciplined macroeconomic policies and advancing growth-enhancing structural reforms.
Directors welcomed the substantial fiscal consolidation that is already under way. Given the narrowing output gap and increased external vulnerabilities associated with the upward revision to the current account deficit, they considered that additional front-loaded measures will be necessary to lessen the burden of monetary policy and put debt firmly on a downward path over the medium term. Directors supported the authorities’ plan to adopt an expenditure-based fiscal rule, complemented by efforts to strengthen budgetary processes, tighten entitlement programs, and streamline the public administration.
Directors welcomed the recent increases in the policy interest rate. They noted that some further gradual hikes in the policy rate are warranted to bring inflation back to target, while efforts should continue to improve monetary policy communication. Directors encouraged the authorities to remain vigilant to developments in aggregate demand pressures and inflation expectations. A gradual exchange rate appreciation could be considered as part of the policy mix to deal with a potential surge in capital inflows. With international reserves still below short-term debt at remaining maturity plus the current account deficit, most Directors considered that some additional reserve accumulation would be desirable.
Directors commended the Polish authorities for the steps already taken to improve the effectiveness of financial sector surveillance policies. They encouraged further efforts to strengthen the resilience of the financial sector, including by further improving bank supervision, increasing the independence of the Financial Supervision Authority, developing a framework for coordinating policy responses to systemic risks, and strengthening the bank resolution framework. Directors looked forward to a Financial Sector Assessment Program update planned for next year.
Directors underscored that a further increase in labor participation and a reduction in product market rigidities are key to boosting potential growth. They recommended measures to improve labor supply with a complementary long-term fiscal effect, such as raising the retirement age and merging special pension schemes within the general system. Improving the business climate and advancing the privatization agenda remain priorities.
Directors welcomed recent improvements to the balance of payments compilation system, which have reduced errors and omissions. They encouraged the authorities to continue to build on this progress.