IMF Executive Board Concludes 2014 Article IV Consultation with the Republic of PolandPress Release No. 14/305
June 26, 2014
The economy is steadily recovering from the 2012–13 slowdown on the back of Poland’s very strong fundamentals and policies. Real GDP growth moderated to 1.6 percent in 2013 as the slowdown in core euro area countries had knock-on effects on consumer and investor confidence. However, a steady recovery is now underway with growth accelerating to
3.4 percent year-on-year in the first quarter of 2014, led by improving conditions in main trading partners and a recovery in domestic demand. Nonetheless, partly reflecting external factors, CPI inflation remains well below the target range, declining to 0.2 percent year-on-year in May. As the trade balance turned positive in 2013, the current account deficit narrowed to its lowest level in more than a decade.
The outlook is for a continuing recovery but external risks remain firmly on the downside. Growth is expected to reach 3.3 percent in 2014 but strong trade and financial linkages with core euro area countries make it vulnerable to growth shocks. Although the U.S. tapering of unconventional monetary policy has so far had only limited impact on Polish financial markets, a further tightening of global financial conditions could lead to capital outflows and increase interest rates, as could rising geopolitical tensions surrounding Russia and Ukraine. Poland’s Flexible Credit Line (FCL) arrangement with the IMF helps mitigate these risks.
Policies have appropriately supported the recovery while continuing adjustment. The fiscal balance worsened to 4.3 percent of GDP in 2013 on account of weak economic growth, which took a toll on tax collections. However, the cyclically-adjusted balance continued to gradually improve and the fiscal framework was overhauled with the approval of a permanent expenditure rule. More recently, the pension system underwent significant changes, entailing a downsizing of the second pillar. Monetary policy has kept rates on hold after a substantial easing cycle ended in July 2013. The banking sector has remained well capitalized, profitable, and liquid, reliance on parent funding has declined, and foreign currency mortgage issuance has effectively halted. However, the share of foreign currency mortgages remains high and the Non-Performing Loan (NPL) ratio, while starting to edge down, has remained sticky at around 8½ percent.
Executive Board Assessment2
Executive Directors noted that Poland’s very strong fundamentals and economic policies had helped it weather the turmoil in financial markets during 2013–14, and welcomed the current economic recovery, buoyed by more robust domestic and external demand. Noting that external risks—including geopolitical developments, tightening global financial conditions, and slower growth in main trading partners—remain elevated, Directors encouraged the authorities to strengthen the economy’s resilience by rebuilding policy buffers and stepping up critical structural reforms. They noted that the precautionary FCL arrangement provides important insurance against external risks.
Directors advised that a measured pace of fiscal consolidation over the medium term would help restore the fiscal deficit to more prudent levels without weighing unduly on growth. The authorities’ medium-term objective, and a stronger downward trajectory for the public debt ratio, could be achieved through better expenditure prioritization, following a review of public expenditures, and improved tax compliance and efficiency of tax administration. Directors considered that the changes to the pension system would deliver an improvement in the fiscal accounts, and urged the authorities to address legacy flaws in the pension system and consider measures to deal with the sharp drop in future replacement rates. Directors also advised continued monitoring of liquidity in the government bond and equity markets, given the reduced presence of pension funds.
Directors concurred that the monetary stance was broadly appropriate within the context of limited inflationary pressures and subdued euro area inflation. However, heightened vigilance is needed, as policy interest rates could be further reduced if the recovery falters or if revised projections indicate below-target inflation for a protracted period.
While noting that international reserves remain broadly adequate, most Directors concurred that moderate reserve accumulation would be prudent in light of external risks. However, some Directors questioned the need for further reserve accumulation given that they were assessed to be broadly adequate under the IMF’s metric.
Directors commended the resilience of the banking system, which remains well capitalized, profitable, and liquid. However, they called for enhanced financial sector supervision, given the elevated ratio of NPLs and the large share of foreign-currency-denominated mortgages. Directors advised tackling legal obstacles and tax disincentives to resolving NPLs, and expediting the completion of the macro-prudential and bank resolution frameworks—including legislation to create a Systemic Risk Board.
Directors encouraged the authorities to deepen structural reforms to achieve more inclusive sustainable growth. They called for further liberalization of regulated professions and other labor market reforms, to help reduce segmentation and unemployment. Additional privatizations, further reduction of administrative barriers, and finalization of the work on the new insolvency regime to promote rehabilitation of viable debtors would also help improve the business climate.