IMF Executive Board Concludes 2013 Article IV Consultation with the Republic of PolandPress Release No. 13/271
July 23, 2013
Despite its resilience in recent years and very strong fundamentals, the Polish economy has slowed markedly. Real GDP growth moderated to 1.9 percent in 2012 from 4.5 percent in 2011. A slowdown in Poland’s main export markets, combined with uncertain prospects for euro area growth and a sharp drop in public investment, weighed on demand. Household consumption was affected by adverse confidence effects, sluggish disposable income, falling real wage growth, and rising unemployment. Credit growth decelerated sharply to 3.5 percent in the first quarter of 2013 (down from 11 percent a year before), on the back of weak credit demand and tight lending policies by banks.
Reflecting the slowdown, as well as lower fuel and energy prices, CPI inflation has fallen sharply and stood at 0.5 percent (year-on-year) in May. A monetary easing cycle was started in November 2012, and the policy rate was cut by a cumulative 200 basis points to 2.75 percent in June 2013.
Fiscal consolidation has continued, albeit at a slower than envisaged pace. The fiscal deficit declined from 5 percent of GDP in 2011 to 3.9 percent in 2012. The latter was somewhat larger than expected, as the economic slowdown dented on indirect tax collections, especially the VAT. Public debt (ESA95 definition) dropped to 55.6 percent of GDP in 2012.
The banking sector remained well-capitalized, profitable, and liquid. Reliance on foreign currency funding has declined. But the impaired loan ratio inched up to 9 percent mainly due to deterioration in the corporate loan portfolio, reflecting rising bankruptcies (notably in the construction sector). Stress tests conducted as part of the recent IMF-World Bank Financial Sector Assessment Program update confirm the sector’s resilience: bank capital and liquidity buffers can withstand large shocks and contagion risks are limited.
Executive Board Assessment
Executive Directors emphasized that Poland’s sound macroeconomic management, strong fundamentals, resilient financial system, and adequate international reserves have helped preserve confidence in the country’s policies. The precautionary Flexible Credit Line arrangement has provided insurance against external risks. However, Directors noted that slower growth will require balancing support for the economy with the need to further build up policy buffers.
Directors observed that Poland’s high trade and financial interconnectedness with Europe and open capital account make it susceptible to shocks. In this regard, Directors welcomed actions by the authorities, notably the large pre-funding of government financing needs, to mitigate these risks.
Directors commended the authorities’ commitment to fiscal sustainability. For 2013, most Directors agreed that automatic stabilizers should be allowed to operate fully around budgeted measures. A few others, however, considered that further consolidation measures could be necessary. Directors broadly agreed that the medium-term objective of a structural deficit of 1 percent of GDP by 2016 remains appropriate. However, additional fiscal measures of about 1 percent of GDP would be needed to put the public debt ratio firmly on a downward path. They called for a broad expenditure review to identify areas where non-priority spending can be reduced, while protecting investment spending. They looked forward to the implementation of a simple and transparent expenditure rule which should allow for countercyclical fiscal policy.
Directors noted that the recent review of the pension system will have significant implications for the functioning of the second pillar. They emphasized that the fiscal and financial market implications should be carefully assessed.
Directors agreed that the accommodative monetary policy stance is appropriate in a context of muted inflationary pressures and narrow fiscal space. However, a number of Directors advised a cautious approach to further easing, given risks associated with a low rate environment. Directors agreed that the exchange rate should be allowed to float freely, but that interventions could be used to limit excessive volatility. They urged the National Bank of Poland to provide liquidity support if needed.
Directors welcomed the findings of the Financial System Stability Assessment that the banking system is well capitalized, profitable and liquid. They commended efforts to further strengthen banking system resilience, including the reduced reliance on foreign funding. Directors underscored that safeguarding asset quality will be essential, especially given the economic slowdown. They encouraged broadening the areas where the Financial Supervision Authority (KNF) can issue effective supervisory guidance, as well as increasing its resources, budgetary autonomy, and flexibility. They looked forward to the establishment of macroprudential and bank resolution frameworks in the near future.
Directors encouraged continued structural reforms to boost potential growth and maximize the benefits of integration into global supply chains. They recommended reducing administrative barriers, improving access to certain regulated professions, and advancing reforms to increase labor force participation and labor market efficiency. Directors noted the launch of the new investment fund and recommended that its corporate governance and operations follow best international practices.