## cr17220 - 2.9 percent of GDP represents a pro-cyclical stance and is only marginally below the Excessive ## Source details **Canonical URL:** [cr17220 - 2.9 percent of GDP represents a pro-cyclical stance and is only marginally below the Excessive](https://www.imf.org/-/media/files/publications/cr/2017/cr17220.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17220.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17220.pdf.json) --- ### Fiscal stance and consolidation - Key assessment: - 2.9 percent of GDP represents a pro-cyclical stance and is only marginally below the Excessive Deficit Procedure (EDP) limit. - Fiscal performance so far this year has been described as "very encouraging." - Authorities intend to resume fiscal consolidation next year with an adjustment in the structural and headline deficits of about half a percent of GDP. - Directors welcomed the authorities’ intention to reduce the headline and structural deficits by about half a percent of GDP per year during 2018–19, and supported the medium-term objective of cutting the structural deficit to one percent of GDP. - Staff and Directors urged: - Start consolidation as soon as possible to reverse the pro-cyclical stance and build a buffer relative to the EDP limit this year, taking advantage of the cyclical upswing and saving any revenue overperformance. - Use high quality and permanent measures to underpin a growth-friendly fiscal adjustment. - Consider measures including eliminating preferential VAT rates and exemptions, rationalizing current spending and improving public expenditure efficiency, and gradually phasing out preferential pension regimes. - Key public finance figures (percent of GDP): - General government revenues: 39.8 (2017), 40.3 (2018), 40.1 (2019), 40.0 (2020), 39.9 (2021), 39.9 (2022). - General government expenditures: 42.6 (2017), 42.9 (2018), 42.8 (2019), 42.3 (2020), 42.0 (2021), 41.8 (2022). - General government net lending/borrowing: -2.8 (2017), -2.7 (2018), -2.7 (2019), -2.3 (2020), -2.1 (2021), -1.9 (2022). - General government structural balance: -3.1 (2017), -3.0 (2018), -3.0 (2019), -2.6 (2020), -2.3 (2021), -2.1 (2022). - General government debt: 54.3 (2017), 53.9 (2018), 53.5 (2019), 53.0 (2020), 52.3 (2021), 51.6 (2022). ### Fiscal projections, gaps, and recommended additional measures - Authorities' Convergence Program (headline/structural deficits, percent of GDP): - Headline deficit for 2018–2020: -2.5, -2.0, -1.2. - Structural deficit for 2018–2020: -2.5, -2.1, -1.2. - o.w. VAT compliance measures: 0.5, 0.7, 0.8. - Staff baseline and recommended paths (structural deficit, percent of GDP): - Staff's baseline structural deficit for 2018–2020: -3.0, -3.0, -2.6. - o.w. VAT compliance measures: 0.2, 0.4, 0.5. - Staff's recommended structural deficit for 2018–2020: -2.5, -2.0, -1.8. - Gap between staff's baseline and recommended deficit for 2018–2020: -0.5, -1.0, -0.8. - Staff's recommended additional measures (impact on fiscal balance relative to baseline, percent of GDP): - Revenues: 0.2, 0.7, 0.7 - Closing part of the VAT policy gap: 0.1, 0.2, 0.2 - Closing part of the VAT compliance gap: 0.1, 0.2, 0.2 - Maintaining the VAT rate (starting from 2019): 0.0, 0.4, 0.4 - Expenditures: 0.3, 0.3, 0.2 - Rationalization of discretionary government consumption: 0.2, 0.2, 0.0 - Improving efficiency of social spending: 0.2, 0.2, 0.2 ### Monetary policy: managing reflation and guidance - Assessment and stance: - Directors agreed that the accommodative monetary policy stance is appropriate for now, but stressed the need to closely monitor domestic inflationary pressures. - Monetary policy should be data-dependent to ensure a timely response and avoid overshooting the inflation target given uncertainties around future wage growth. - Recommendation: adopt a clear state-contingent rather than time-bound communication strategy to better guide inflation expectations. - CPI inflation projections (percent): - Average CPI inflation: 2.1 (2017), 2.5 (2018), 2.5 (2019), 2.5 (2020), 2.5 (2021), 2.5 (2022). - End of period CPI inflation: 2.3 (2017), 2.6 (2018), 2.5 (2019), 2.5 (2020), 2.5 (2021), 2.5 (2022). - Policy Rate historical (NBP Reference Rate (avg), percent): 2.9 (2013), 2.4 (2014), 1.6 (2015), 1.5 (2016). - Staff recommendations on monetary policy: - Holding the policy rate steady is appropriate for now; monitor inflationary pressures and tighten if accelerating core inflation threatens inflation objectives. - Monetary policy response depends on fiscal stance—absence of sufficient fiscal adjustment would raise the burden on monetary policy. - Support monetary policy with clear state-contingent forward guidance; avoid mixed messages that could undermine credibility. ### Monetary policy shock scenarios (selected) - Scenario 1 (wage shock): - Wage shock: sharp acceleration to an average 10 percent year-on-year in 2018, gradual return to baseline thereafter. - Policy implication: requires moderate tightening starting from 2017; delay increases required tightening and persistent higher inflation. - Scenario 2 (exchange rate shock): - Shock: 10 percent nominal depreciation of the zloty in 2017, gradual return by 2019. - Policy implication: pass-through mainly affects food and fuel prices; model suggests a rate hike of 80 basis points would be needed in 2017 to facilitate faster return to the inflation target. - Note: Simulations carried out using the semi-structural general equilibrium model (FSGM). ### Financial sector resilience and risks - System-wide metrics and recent trends: - Average capital adequacy ratio: 17.7 percent (2016:Q4). - Average Tier 1 capital ratio: 16.1 percent (2016:Q4). - Loan-to-deposit ratio: 106.6 percent (2016:Q4). - Non-performing loans (NPLs): 7 percent of total loans. - Bank profitability: fell by 11 percent y-o-y for the first three months of 2017 (excluding a one-off factor). - Banking sector return on equity has dipped below the cost of equity. - Liquidity: continued to improve on the back of strong deposit growth. - Credit and deposits (selected indicators): - Private credit (change in percent, end-period): 6.8 (2017), 6.5 (2018), 6.0 (2019), 5.9 (2020), 5.7 (2021), 5.5 (2022). - Credit to GDP (percent): 58.8 (2017), 59.0 (2018), 59.2 (2019), 59.5 (2020), 59.8 (2021), 60.0 (2022). - Deposits (change in percent, end-period): 8.7 (2017), 6.2 (2018), 4.9 (2019), 4.8 (2020), 4.7 (2021), 4.5 (2022). - FX mortgage loans and potential costs: - Stock of FX mortgages accounts for 7.7 percent of GDP (shrinking since March 2012). - Legislative proposal (President’s Office) cost range: PLN 4–9 billion. - Sovereign–bank linkages and ownership: - By April 2017, banks held about 40 percent of total government bonds outstanding, about 14 percent of banks’ total assets. - Share of state-controlled banks rose to 36 percent (in percent of total banking system assets); domestic ownership of the banking sector rose above 50 percent. - Financial Stability Committee’s nine recommendations (timing highlights): - Increase risk weighting for FX mortgages to 150 percent (effective December 1, 2017). - Amend Borrowers' Support Fund operating design (effective January 1, 2018). - Impose a 3 percent systemic risk buffer (likely effective January 1, 2018). - KNF to send individual banks new capital surcharges in 2017:Q4. ### Financial-sector policy recommendations - Foreign-currency mortgages: - Prefer a case-by-case approach to FX mortgage restructuring (offer restructuring only to distressed borrowers). - Legislative repayment and regulatory solutions are significantly less costly than mandatory blanket conversion; assess impacts carefully. - Profitability pressures and tax design: - Monitor the impact of the bank asset tax and consider revising its design if adverse effects appear. - Staff view: a tax on profits and remuneration would be less distortionary than a tax on assets. - Sovereign–bank linkages and consolidation: - Closely monitor increasing linkages; maintain strong and independent supervision and robust macroprudential framework. - Encourage consolidation/integration of credit unions and cooperative banks; ensure orderly market exit of unviable firms. ### Structural reforms, demographics, and growth outlook - Near-term context: - Near-term growth momentum remains strong, supported by accommodative monetary and fiscal policies and sizable EU transfers; economy operating above potential with unemployment at a historical low. - Demographic and structural challenges: - Working-age population has been declining by 1 percent annually since 2012 and is expected to shrink by over a ¼ by 2050, resulting in more than doubling of the old-age dependency ratio. - TFP growth slowed from an average of 2.4 percent over 2003–07 to barely 1 percent on average over 2013–16. - Under the 2014–20 EU funds program Poland can receive up to EUR 86 billion; over half of national public investment during 2014–17 was financed by EU funds. - Staff reform priorities: - Streamline product market regulations. - Implement more effective labor market policies to raise labor force participation (LFP). - Improve efficiency of EU-funded investment in infrastructure and R&D. - Increase labor force participation and incentivize employees to remain longer in the workforce. - Potential gains from structural reforms (FSGM estimates): - Closing/partially closing gaps in PMR, labor market policies, infrastructure investment, and R&D support can raise the level of GDP by 2030. - Staff’s estimates: under a range of plausible reform scenarios, the level of output could be lifted by about 7–11 percent by 2030. ### Reform scenarios and illustrative impacts (selected figures preserved) - Selected reform impacts (entries as presented): - Relaxing administrative burdens on startups 1.39-0.68-1.33- - Relaxing regulations on professional services and retail 0.83-0.97-1.86- - Relaxing regulations on gas sector0.75-1.51-3.01- - Increasing infrastructure spending1.170.361.400.430.780.25 - Increasing public spending on childcare services0.490.110.480.110.930.23 - Increasing direct public funding of business R&D0.490.030.240.010.460.03 - Increasing public spending on ALMP0.230.130.090.070.170.13 - A combined impact of all reforms7.010.666.840.6611.410.66 - of which fiscally costly reforms2.372.212.33 ### Outlook and selected real-economy figures - Growth and demand (change in percent): - GDP growth: 3.6 (2017), 3.3 (2018), 3.0 (2019), 2.8 (2020), 2.7 (2021), 2.6 (2022). - Domestic demand: 4.0 (2017), 3.8 (2018), 3.3 (2019), 2.9 (2020), 2.8 (2021), 2.7 (2022). - Private consumption growth: 4.2 (2017), 3.5 (2018), 3.2 (2019), 2.8 (2020), 2.6 (2021), 2.4 (2022). - Labor market: - Unemployment rate (average, LFS): 5.3 (2016), 4.5 (2018), 4.3 (2019), 4.2 (2020), 4.2 (2021), 4.2 (2022). - External sector (selected): - Current account balance (billion U.S. dollars): -5.9 (2016), -7.3 (2017), -8.9 (2018), -10.9 (2019), -13.2 (2020), -15.2 (2021). - Current account balance (percent of GDP): -1.2 (2016), -1.4 (2017), -1.6 (2018), -1.9 (2019), -2.2 (2020), -2.4 (2021). - Total external debt (billion U.S. dollars): 344.0 (2016), 348.3 (2017), 351.9 (2018), 357.2 (2019), 363.6 (2020), 370.5 (2021). - Total external debt (percent of GDP): 69.6 (2016), 66.7 (2017), 63.8 (2018), 61.5 (2019), 59.5 (2020), 57.7 (2021). ### Risks and contingency policy responses - Near-term risk balance: - External upside: stronger-than-expected advanced-economy recoveries. - External downside: faster-than-expected tightening in global financial conditions; growth, financial, or political shocks in Europe; rise of protectionism. - Domestic upside: stronger EU funds absorption and investment or faster wage growth. - Domestic downside: delayed monetary response to higher-than-expected inflation; weakening of institutions or fiscal slippages. - Policy response options if risks materialize: - Use flexible exchange rate and reserve buffers; rely on FCL arrangement as insurance. - Allow fiscal automatic stabilizers to operate in downturns. - NBP to provide zloty and FX liquidity in case of significant capital outflows; interest rate hikes if outflows intensify. - Maintain strong policies and institutions to safeguard against domestic risks. ### Public debt and debt sustainability highlights - Public debt levels and projections (percent of GDP): - Nominal gross public debt: 50.5 (2015), 51.1 (2016), 54.4 (2017), 54.3 (2018), 53.9 (2019), 53.5 (2020), 53.0 (2021), 52.3 (2022). - Stress-test outcomes (selected): - Combined shock: public debt-to-GDP ratio jumps to 64 percent in 2019 and gradually reduces to 63 percent in 2022; gross financing needs increase to 12 percent of GDP in 2018 before trending down. - Primary balance shock: public debt-to-revenue ratio rises to about 138 percent in 2019; gross financing needs peak ~10 percent of GDP in 2019. - Growth shock: public debt increases to about 59 percent of GDP in 2019, then trends down to about 56 percent by 2022. - Exchange rate shock: gross public debt increases by 1 percentage point to 55 percent of GDP in 2018, trends down to about 53 percent by 2022. - Public gross financing needs (percent of GDP): 12.5 (2015), 7.7 (2016), 4.1 (2017), 9.2 (2018), 8.4 (2019), 8.8 (2020), 7.8 (2021), 7.1 (2022). ### Annex: External sector assessment (selected) - NIIP and reserves: - NIIP around -60 percent of GDP in recent years; assets and liabilities 52 percent and 111 percent of GDP in 2016. - NIIP projected to improve towards -49 percent of GDP over the medium term. - Gross reserves: about 128 percent of the IMF’s composite reserve adequacy (ARA) metric in 2016; net reserves 103 percent of the ARA metric. - FCL arrangement: SDR 6.5 billion provides added insurance. - Current account and REER: - CA gap and assessments: ES model CA gap of 1 percent; staff assessment CA gap range for 2016 centered on 0.9 (plus or minus 1) percent of GDP. - REER: annual average REER depreciated 7¾ percent cumulatively over 2014-16; REER up by 2.5 percent relative to the 2016 average as of May 2017. - Policy implications: - Flexible exchange rate first line of defense against external shocks. - More hawkish monetary tightening could be warranted if inflationary pressures from exchange rate depreciation and domestic demand materialize. - Vigilance on bank funding and readiness to extend FX liquidity. *Republic of Poland: Staff Report for the 2017 Article IV Consultation — IMF staff report excerpt (cr17220).* ### 2.9 percent of GDP represents a pro-cyclical stance and is only marginally below the Excessive ### cr17220 - 2.9 percent of GDP represents a pro-cyclical stance and is only marginally below the Excessive ### Fiscal stance and consolidation - 2.9 percent of GDP represents a pro-cyclical stance and is only marginally below the Excessive Deficit Procedure (EDP) limit. - Fiscal performance so far this year has been described as "very encouraging." - Authorities intend to resume fiscal consolidation next year with an adjustment in the structural and headline deficits of about half a percent of GDP. - Directors welcomed the authorities’ intention to reduce the headline and structural deficits by about half a percent of GDP per year during 2018–19, and supported the medium-term objective of cutting the structural deficit to one percent of GDP. - Staff and Directors urged: - Start consolidation as soon as possible to reverse the pro-cyclical stance and build a buffer relative to the EDP limit this year, taking advantage of the cyclical upswing and saving any revenue overperformance. - Use high quality and permanent measures to underpin a growth-friendly fiscal adjustment. - Consider measures including eliminating preferential VAT rates and exemptions, rationalizing current spending and improving public expenditure efficiency, and gradually phasing out preferential pension regimes. - Key public finance figures (percent of GDP): - General government revenues: 39.8 (2017), 40.3 (2018), 40.1 (2019), 40.0 (2020), 39.9 (2021), 39.9 (2022). - General government expenditures: 42.6 (2017), 42.9 (2018), 42.8 (2019), 42.3 (2020), 42.0 (2021), 41.8 (2022). - General government net lending/borrowing: -2.8 (2017), -2.7 (2018), -2.7 (2019), -2.3 (2020), -2.1 (2021), -1.9 (2022). - General government structural balance: -3.1 (2017), -3.0 (2018), -3.0 (2019), -2.6 (2020), -2.3 (2021), -2.1 (2022). - General government debt: 54.3 (2017), 53.9 (2018), 53.5 (2019), 53.0 (2020), 52.3 (2021), 51.6 (2022). ### Monetary policy: managing reflation - Directors agreed that the accommodative monetary policy stance is appropriate for now, but stressed the need to closely monitor domestic inflationary pressures. - Monetary policy should be data-dependent to ensure a timely response and avoid overshooting the inflation target given uncertainties around future wage growth. - Recommendation: adopt a clear state-contingent rather than time-bound communication strategy to better guide inflation expectations. - CPI inflation projections (percent): - Average CPI inflation: 2.1 (2017), 2.5 (2018), 2.5 (2019), 2.5 (2020), 2.5 (2021), 2.5 (2022). - End of period CPI inflation: 2.3 (2017), 2.6 (2018), 2.5 (2019), 2.5 (2020), 2.5 (2021), 2.5 (2022). - Policy Rate (NBP Reference Rate (avg)) shown historically: 2.9 (2013), 2.4 (2014), 1.6 (2015), 1.5 (2016). ### Financial sector resilience - The banking sector remains well capitalized, but profitability continues to decline amid low interest rates and rising non-interest costs. - The final solution to foreign currency mortgage loans is still pending, but will likely entail further costs to banks. - Directors highlighted: - Need to monitor the impact of the bank asset tax. - The solution to consumer protection concerns related to foreign-currency mortgages should preserve financial stability and banks’ lending capacity; a case-by-case approach is preferable. - Rising sovereign-bank linkages require maintaining strong and independent financial supervision and macroprudential oversight. - Selected banking and credit indicators: - Private credit (change in percent, end-period): 6.8 (2017), 6.5 (2018), 6.0 (2019), 5.9 (2020), 5.7 (2021), 5.5 (2022). - Credit to GDP (percent): 58.8 (2017), 59.0 (2018), 59.2 (2019), 59.5 (2020), 59.8 (2021), 60.0 (2022). - Deposits (change in percent, end-period): 8.7 (2017), 6.2 (2018), 4.9 (2019), 4.8 (2020), 4.7 (2021), 4.5 (2022). ### Structural reforms, demographics, and growth outlook - Context: near-term growth momentum remains strong, supported by accommodative monetary and fiscal policies and sizable EU transfers; the economy is operating above potential with unemployment at a historical low. - Long-term risks: adverse demographics and structural constraints on investment and TFP growth could subdue growth. - Demographic and structural challenges: - Working-age population has been declining by 1 percent annually since 2012 and is expected to shrink by over a ¼ by 2050, resulting in more than doubling of the old-age dependency ratio. - TFP growth slowed from an average of 2.4 percent over 2003–07 to barely 1 percent on average over 2013–16. - Infrastructure gaps and low private investment: under the 2014–20 EU funds program Poland can receive up to EUR 86 billion; over half of national public investment during 2014–17 was financed by EU funds. - Directors encouraged prioritization and implementation of the Responsible Development Strategy with focus on: - Streamlining product market regulations. - Implementing more effective labor market policies. - Improving the efficiency of EU-funded investment in infrastructure and R&D. - Increasing labor force participation and incentivizing employees to remain longer in the workforce. ### Outlook and selected real-economy figures - GDP growth (change in percent): 3.6 (2017), 3.3 (2018), 3.0 (2019), 2.8 (2020), 2.7 (2021), 2.6 (2022). - Domestic demand: 4.0 (2017), 3.8 (2018), 3.3 (2019), 2.9 (2020), 2.8 (2021), 2.7 (2022). - Private consumption growth: 4.2 (2017), 3.5 (2018), 3.2 (2019), 2.8 (2020), 2.6 (2021), 2.4 (2022). - Unemployment rate (average, according to LFS): 5.3 (2016), 4.5 (2018), 4.3 (2019), 4.2 (2020), 4.2 (2021), 4.2 (2022). - External sector indicators: - Current account balance (billion U.S. dollars): -5.9 (2016), -7.3 (2017), -8.9 (2018), -10.9 (2019), -13.2 (2020), -15.2 (2021). - Current account balance (percent of GDP): -1.2 (2016), -1.4 (2017), -1.6 (2018), -1.9 (2019), -2.2 (2020), -2.4 (2021). - Total external debt (billion U.S. dollars): 344.0 (2016), 348.3 (2017), 351.9 (2018), 357.2 (2019), 363.6 (2020), 370.5 (2021). - Total external debt (percent of GDP): 69.6 (2016), 66.7 (2017), 63.8 (2018), 61.5 (2019), 59.5 (2020), 57.7 (2021). *Republic of Poland: Staff Report for the 2017 Article IV Consultation* ### 4. The current strong growth momentum provides an opportunity to advance structural ### 4. The current strong growth momentum provides an opportunity to advance structural reforms ### Recent developments - The Responsible Development Strategy (RDS), formally adopted in February 2017, aims to address structural obstacles to sustainable, strong, and inclusive growth; work remains to translate the strategy into concrete reform plans and ensure consistency with lifting Poland’s potential growth while maintaining fiscal prudence and macro-financial stability. - External demand and financial conditions: - External demand is recovering despite lingering policy uncertainties in major economies. - Expectations of a fiscal stimulus in the U.S. lifted forecasts of growth and interest rates there, but external financing conditions have remained supportive for Poland given low Eurozone interest rates and subdued global market volatility. - Domestic financial conditions: - The policy interest rate has been held at a historically low level for more than two years. - Yields on government bonds increased from 2.9 percent in September 2016 to 3.2 percent in June 2017. - Polish equities gained more than 30 percent since end-2016, recovering about three quarters of the stock market losses from mid-2015. - Recent REER appreciation and some tightening in bank lending standards, especially on corporate loans, have led to a slight tightening of overall financial conditions. - Growth and investment: - Real GDP growth accelerated to 4 percent in 2017:Q1 after a temporary slowdown to 2.7 percent in 2016 from 3.9 percent in 2015 due to weaker investment. - Public investment growth was weak, reflecting low absorption of EU funds during transition to the 2014–20 program. - Private investment growth was disappointing, with political and regulatory uncertainties cited as key factors; investment momentum appears to have strengthened in 2017:Q1 with more upbeat PMI and business sentiment indicators and a pick-up in contracts and disbursement requests for EU-funded projects. - Private consumption remains the main driver of growth, supported by solid wage growth, a minimum wage hike, and higher social spending (the child benefits program). - Business cycle and credit: - Different estimation methods indicate the negative output gap opened during the global financial crisis had largely closed by 2015 and a positive output gap opened in 2016. - Credit growth was moderate at 4.9 percent y-o-y (as of May 2017). - No signs of excessive asset price acceleration were detected as of the latest charts. - Labor market and wages: - The seasonally-adjusted harmonized unemployment rate dropped to a historical low of 4.8 percent in April 2017. - About 30 percent of surveyed firms reported labor shortages as a barrier to growth. - Wage growth accelerated from an annual average of 4 percent to 4.7 percent in the first five months of 2017 in the enterprise sector. - A large inflow of Ukrainian migrants, reportedly around 1.3 million, many on short-term contracts (maximum of 6 months within 12 consecutive months) and at much lower effective wages than local workers, is a leading explanation for relatively restrained wage growth; these temporary migrants are not included in official employment statistics. - Real wage growth is already outpacing real labor productivity growth. - Inflation: - Headline inflation accelerated from 0 percent in November 2016 to 1.9 percent in May 2017, driven by rising food and fuel prices, but remained below the NBP’s inflation target of 2.5 percent. - Core inflation reached 0.8 percent in May 2017. - Model-based decomposition suggests the drag from euro area inflation declined while the contribution of domestic factors increased. - Fiscal and external positions: - The realized general government fiscal deficit was 2.4 percent of GDP in 2016, the lowest level since the global financial crisis; revenues outperformed due to a significant increase in VAT and other tax receipts reflecting improved compliance; expenditures were under-executed due to weak public investment associated with low absorption of EU funds. - Public debt increased to 54 percent of GDP at end-2016 but remains sustainable under a wide range of shocks. - Poland’s current account deficit declined to 0.3 percent of GDP in 2016 (the smallest deficit on record since 1995). - Net financial inflows remained weak in 2016; the small positive financial account was primarily due to the accumulation of reserves partly driven by increased repo transactions of the National Bank of Poland (NBP). - Net portfolio inflows turned positive in 2017:Q1, contributing to nominal and real appreciation of the PLN following a depreciation streak since mid-2015. - Gross reserves amounted to 128 percent of the IMF’s composite reserve adequacy metric as of end-2016; net reserves were at 103 percent of the IMF’s modified composite reserve adequacy metric at end-2016. ### Outlook - Growth projections: - Real GDP growth is projected to accelerate to 3.6 percent in 2017 on the back of stronger EU funds’ absorption, robust private consumption, and modest recovery of private investment amid supportive external demand. - Over the medium term adverse demographics are projected to weigh on employment growth, pulling GDP growth back to its potential rate of around 2.7 percent by 2022, despite moderate improvements in investment and TFP growth. - As domestic demand strengthens and commodity prices recover, import growth is likely to outpace export growth, leading to a moderate widening in the current account deficit over the medium term. - Inflation projection: - Headline inflation is expected to reach the mid-point of the target band in early 2018. - The impulse from strong growth in food and fuel prices is likely to taper off in the second half of 2017. - Core inflation is set to accelerate amid an increasingly positive output gap and rising wage pressures, including an 8 percent minimum wage hike that came into effect in January 2017. - With a timely monetary policy response, inflation will likely stabilize around the NBP target of 2.5 percent after 2017, with limited risks of overshooting in 2017 barring upside surprises on food and fuel price inflation. ### Risks and scenarios - Near-term risk balance: - External upside: Global growth could accelerate further if advanced economies recover more strongly than expected. - External downside: Faster-than-expected tightening in global financial conditions (including faster-than-expected U.S. monetary policy normalization) would raise external borrowing costs and negatively impact Poland given relatively high external financing requirements; growth, financial, or political shocks in Europe would have negative spillovers through trade, GVC, and financial channels; a rise of protectionism could moderately reduce cross-border trade, capital and labor flows. - Domestic upside: Growth and inflation could surprise on the upside if EU funds’ absorption and investment rise further or if wage growth accelerates faster than expected. - Domestic downside: A delayed monetary policy response to higher-than-expected inflation could lead to inflation overshooting the target; weakening of institutions or fiscal slippages could dent investor confidence. - Policy response options if risks materialize: - Poland’s flexible exchange rate, high reserve buffers, and a well-diversified foreign investor base should help mitigate adverse financial spillovers. - In an economic downturn, fiscal automatic stabilizers should be allowed to fully operate. - In the event of significant capital outflows, the NBP should be ready to provide both zloty and FX liquidity to the banking sector; interest rate hikes could be used if capital outflows intensify. - Poland’s Flexible Credit Line (FCL) arrangement is an added insurance against adverse external shocks and could be used as needed to prevent disorderly market conditions. - To safeguard against domestic risks, authorities should remain focused on maintaining strong policies and institutions. ### Authorities’ views - General alignment with staff: - The authorities broadly agreed with staff’s assessment of outlook and risks. - The NBP’s growth forecast is broadly in line with staff’s, with the output gap projected to close later in the year. - The Ministry of Finance (MoF) is more optimistic, forecasting real GDP growth of 3.8–3.9 percent in 2018–20 on sustained strong investment growth. - After a period of deflation, authorities see domestic inflationary pressures rising slowly and inflation staying close to the target in the medium term; higher wage growth is seen as a key driver of future inflation, though authorities’ wage growth and core inflation forecasts are more benign than staff’s. - Authorities identified further normalization of U.S. monetary policy and earlier-than-expected ECB tapering, as well as Brexit and other political event risks in Europe, as key external risks; they noted Poland’s strong external position, diversified investor base, flexible exchange rate, and the FCL arrangement with the IMF as buffers. ### Policy discussions and priorities - Overarching guidance: - The policy mix should reflect the need to rebuild buffers during good times and address longer-term growth and fiscal challenges. - This consultation focused on policies to achieve higher potential growth over the long term, a durable structural fiscal consolidation over the medium term, and maintenance of macro-financial stability amid the current cyclical upswing. - Past policies were broadly in line with Fund recommendations, but fiscal consolidation has stalled and the 2013 retirement age increase was reversed against staff’s advice. *Source: IMF staff report excerpt (chapter 4), Republic of Poland Article IV consultation materials.* ### 19. The authorities assess the current policy stance as appropriate to keep inflation within ### 19–28: Monetary Policy and Fiscal Policy (Poland) ### Monetary policy: staff assessment, risks, and recommendations - Current stance and outlook - The authorities assess the current policy stance as appropriate to keep inflation within the target range over the forecast horizon. - The NBP expects the effects of higher oil and food prices to taper off later this year, and the domestic price pressures to remain contained. - Thus, the policy rate is expected to be on hold throughout 2017 and well into 2018, though a negative real policy rate is becoming more of a concern. - Staff’s baseline assumption is that wage growth will accelerate gradually amid tight labor market conditions with a relatively fast pass-through to core inflation, as suggested by historical patterns. - Staff view on need for tightening - Monetary policy tightening will likely be needed in 2018 to stabilize inflation around its target. - Under staff baseline assumptions, headline inflation could reach the upper bound of the target band by end-2018 without monetary tightening. - A continuation of the moderate wage growth of around 4 percent in 2017–18 would bring headline inflation below target by end-2018, while faster wage growth could result in inflation breaching the upper bound of the target band in mid-2018. - Inflation expectations and market signals - All survey and market-implied inflation expectations have adjusted upward in recent months. - Survey-based one-year and two-year ahead inflation expectations have risen toward 2 percent or higher, while five-year inflation expectations remain stable. - Inflation expectations derived from the long-term inflation-indexed government bonds have increased to the 2.5–3.5 percent range. - Consensus forecast of the short-term interest rate suggests that investors expect a rate hike in 2017–18. - Key scenarios analyzed (Figure 5) - Scenario 1 (wage shock) - A sharp acceleration of wage growth to an average 10 percent year-on-year in 2018, with a gradual return to baseline in the medium term. - In this illustrative scenario, the persistent wage growth shock requires moderate tightening starting from 2017. If delayed, the rate hike needed would be larger and inflation would be persistently higher. - The 10 percent wage growth is consistent with the current level of unemployment gap and the historical relationship between unemployment gap and wage growth. - Scenario 2 (exchange rate shock) - A 10 percent nominal depreciation of the zloty in 2017, with a gradual return to the pre-shock level in 2019. - In the model, the pass-through from depreciation mainly affects food and fuel prices (rather than core inflation), while monetary tightening can only affect core inflation. - In this scenario, a rate hike of 80 basis points would be needed in 2017 to facilitate a faster return to the inflation target. - Note: The shock-policy response simulations for scenarios 1 and 2 were carried out by Zoltan Jakab using the semi-structural general equilibrium model (FSGM). - Staff recommendations on monetary policy - Holding the policy rate steady is appropriate for now. - Staff does not see a need for immediate tightening, especially as the increase in headline inflation has so far been mainly driven by external factors, such as higher fuel and food prices, which are expected to taper off. - Monitor inflationary pressures and tighten if accelerating core inflation threatens inflation objectives. - Incipient domestic inflationary pressures should be monitored closely, given an opening positive output gap, a pro-cyclical fiscal stance, a negative real interest rate, and a record-low unemployment rate. - Because of considerable uncertainty about future wage growth, monetary policy decisions should be data dependent. - When there are clear signs of accelerating core inflation, the authorities should tighten to prevent headline inflation from rising above the upper bound of the target range. - Given long lags in the monetary transmission, timely actions will be crucial to avoid inflation overshooting and to maintain credibility. - Monetary policy response depends on fiscal stance. - In the absence of sufficient fiscal adjustment, monetary policy will need to shoulder a greater burden in managing domestic demand pressures. - Support monetary policy with clear communication strategy. - The NBP should provide clear state-contingent rather than time-bound forward guidance based on timely updates of inflation outlook to help guide inflation expectations. - The MPC should avoid sending mixed messages that may undermine the credibility of the inflation-targeting framework. - Authorities’ views - The authorities agreed monetary policy decisions should be data dependent and that clear communication is important, but were not in favor of formal forward guidance. - The MoF envisages freezing the wage bill for the central government in 2018 to mitigate wage growth. - The NBP expects several factors to restrain wage growth (Ukrainian migrants, switching from temporary civil law contracts to labor code contracts, structural change in labor demand), but acknowledged uncertainties and the need for data-dependent policy. The NBP prefers to avoid formal forward guidance. ### Fiscal policy: current stance, projections, and staff recommendations - Current stance and recent performance - The 2017 fiscal stance is procyclical. - The general government budget deficit of 2.9 percent of GDP is only a shock away from the EDP limit of 3 percent of GDP and represents a relaxation of about 0.5 percent of GDP in structural terms. - Compared to the 2016 budget outcome, the 2017 budget accommodates additional expenditures of about 0.6 percent of GDP: the new child benefits program (the full year effect), a lower retirement age (effective from October 2017), lower revenues from an increased PIT tax-free allowance for low-income tax payers, and the co-financing of higher EU-funded capital spending. - Fiscal performance so far in 2017 has been better than expected, reducing the risk of breaching the EDP limit. - In the first four months of 2017, VAT revenue increased by 33 percent (y-o-y), reflecting strong private consumption, improved compliance, and one-off adjustments of the VAT refunds and settlements. - About half of the VAT revenue increase is explained by one-off factors, about a quarter is likely due to the cyclical upswing, while the rest could be attributed to the structural factors. - The envisaged 2017 budget deficit is close to the EDP limit and represents a pro-cyclical fiscal stance. - Authorities’ Convergence Program projections and staff assessment - Authorities’ Convergence Program update envisages a consolidation path: - Headline deficit expected to improve to 1.2 percent of GDP by 2020. - MTO (structural deficit of 1 percent of GDP) expected to be hit by 2021. - Path underpinned by assumptions of strong nominal GDP growth, sizable revenue gains from tax administration reforms, and conservative projections of social benefits and wages (constant in real terms). - Staff’s baseline projections and judgment: - Staff projects the headline deficit to decline to 2.3 percent of GDP by 2020, given announced policies and conservative assumptions (i) more conservative budgeting of potential gains from tax administration reforms; (ii) a higher public sector wage bill and social benefits reflecting upward pressures from accelerating private sector wages; and (iii) more conservative growth assumptions. - The expected revenue gains from tax administration measures (1.3 percent of GDP by 2020 per authorities) appear overly optimistic. - Fiscal numbers and targets (Figure 6 and text) - Authorities' Convergence Program headline deficit for 2018–2020: -2.5, -2.0, -1.2 (percent of GDP). - Authorities' Convergence Program structural deficit for 2018–2020: -2.5, -2.1, -1.2 (percent of GDP). - o.w. VAT compliance measures: 0.5, 0.7, 0.8 (percent of GDP). - Staff's baseline structural deficit for 2018–2020: -3.0, -3.0, -2.6 (percent of GDP). - o.w. VAT compliance measures: 0.2, 0.4, 0.5 (percent of GDP). - Staff's recommended structural deficit for 2018–2020: -2.5, -2.0, -1.8 (percent of GDP). - The gap between staff's baseline and recommended deficit for 2018–2020: -0.5, -1.0, -0.8 (percent of GDP). - Staff's recommended additional measures to close the gap (impact on fiscal balance relative to baseline, in percent of GDP): - Revenues: 0.2, 0.7, 0.7 - Closing part of the VAT policy gap: 0.1, 0.2, 0.2 - Closing part of the VAT compliance gap 1/: 0.1, 0.2, 0.2 - Maintaining the VAT rate (starting from 2019) 2/: 0.0, 0.4, 0.4 - Expenditures: 0.3, 0.3, 0.2 - Rationalization of discretionary government consumption: 0.2, 0.2, 0.0 - Improving efficiency of social spending: 0.2, 0.2, 0.2 - Note: Staff's estimated impact of each of the additional measures refers to the improvement in the fiscal balance relative to the baseline. The components may not add up to the total due to rounding effects. - Staff projects that under conservative assumptions, the headline deficit declines to 2.3 percent of GDP by 2020. - Staff recommendations for fiscal strategy and structural reforms - Immediate priorities - Start fiscal consolidation as soon as possible to take advantage of the cyclical upswing. - Focus in 2017 on avoiding slippages that could lead to breaching the EDP limit and on saving any revenue over-performance. - In case of revenue underperformance, contingency measures include mobilizing savings by using margins built into the budget expenditure assumptions and rationalizing part of discretionary government consumption of goods and services, while avoiding public investment cuts. - Medium-term consolidation - Staff supports authorities’ intention to reduce the structural and headline deficits by about half a percent of GDP each year during 2018–19, in line with the 2017 Convergence Program Update. - The MTO should be reached no later than 2023, given projected aging costs and the phasing out of EU funds. - Recommended measures (main themes) - Revenue collection: Focus on closing tax compliance gaps and tax policy gaps; maintain the 2011 VAT rate until higher revenues from tax administration reforms are realized; consider removing some preferential rates and tax exemptions. - Expenditure efficiency: Increase efficiency of current expenditures, notably on social protection, to generate savings without compromising income distribution; improve efficiency of public investment (about 20 percent gap relative to efficiency frontier). - Pension system: Reform special pension regimes and mitigate adverse impact of retirement age reduction (minimum-years-of-service requirement, reduce double-dipping incentives, increase public awareness of old age poverty), though these may not fully offset the retirement age reduction fiscal cost. - Fiscal institutions: Develop a medium-term budgetary framework starting in the 2018 budget cycle with IMF TA support; operationalize the Stabilizing Expenditure Rule (SER) by identifying specific expenditure measures ex ante and underpinning them with a well-defined system of medium-term expenditure forecasts for each ministry. - Additional context and risks - The contingency reserves built into the budget are relatively low by international standards. - The envisaged 2017 budget deficit is close to the EDP limit and represents a pro-cyclical fiscal stance. - The recent reversal of the 2013 retirement age increase is expected to add fiscal pressures through lower social security contributions, higher pension payments, and lower potential growth. *REPUBLIC OF POLAND INTERNATIONAL MONETARY FUND* ### 30. The authorities saw upside risks to fiscal performance in 2017 and underscored their ### The authorities saw upside risks to fiscal performance in 2017 and underscored their commitment to the medium-term fiscal consolidation ### Fiscal outlook and policy stance - The authorities expected the deficit to outperform the budget target of 2.9 percent of GDP in 2017 on the back of strong revenue collection, and indicated their intention to save revenue overperformance. - The authorities agreed with staff’s assessment on the need to rebuild fiscal space to increase the capacity to respond to shocks and to accommodate long-term pension expenditures and public investment. - The authorities were optimistic on the timing and magnitude of expected gains from tax administration reforms and thought such revenue gains would be sufficient to achieve the medium-term fiscal objective. - The authorities acknowledged that any additional structural adjustment will be politically challenging before the 2019 elections. - The authorities concurred that the reversal of the 2013 retirement age increase could entail additional fiscal costs, but noted that the defined contribution pension system and tight labor market conditions could encourage eligible retirees to stay in the work force longer. ### Financial sector resilience — key metrics (2016:Q4 and early 2017) - Average capital adequacy ratio: 17.7 percent (2016:Q4). - Average Tier 1 capital ratio: 16.1 percent (2016:Q4). - Loan-to-deposit ratio: 106.6 percent (2016:Q4). - Non-performing loans (NPLs): 7 percent of total loans. - Bank profitability: continued to decline; profitability fell by 11 percent y-o-y for the first three months of 2017 (excluding a one-off factor from Visa’s merger to Visa Europe). - Banking sector return on equity has dipped below the cost of equity. - Liquidity: continued to improve on the back of strong deposit growth from corporate and household sectors. ### Credit developments (early 2017) - Credit for investment growth: 9.9 percent (as of March 2017). - Mortgage lending: constrained by macroprudential measures (Recommendation S effective since January 1, 2017). - Consumer credit: fastest growth among categories. - Lending standards: tightened slightly in recent quarters, especially on corporate loans. - Drivers: deceleration in corporate credit growth driven by weaker demand for working capital. ### FX mortgage loans — stock and potential cost - Stock of FX mortgages has been shrinking since March 2012 and accounts for 7.7 percent of GDP. - NPLs on FX mortgages remain relatively low and stable. - The proposed legislative and regulatory solutions to address consumer protection concerns related to FX mortgages could entail significant costs to banks. - Legislative proposal (President’s Office): repay excessive FX spreads unfairly charged to borrowers; cost range could be PLN 4–9 billion (up to two-thirds of the 2016 banking sector profits). The PO proposal is under review by the parliamentary Public Finance Committee, with a final decision expected this summer (2017). - Regulatory approach (Financial Stability Committee, KSF): released nine recommendations in January 2017 to encourage restructuring (including conversion) of FX mortgages; most regulations expected to come into effect by end-2017 or early 2018. Progress on voluntary conversion has been slow as banks await clarity. ### Financial Stability Committee’s nine recommendations (summarized, with timing where specified) 1. Increase risk weighting for FX mortgages from 100 percent to 150 percent for banks’ standard capital assessment methods; regulation to come in effect on December 1, 2017. 2. Increase minimum Loss Given Default (LGD) parameter for banks using IRB approach to assess capital requirements. 3. Change Borrowers' Support Fund operating design to encourage voluntary restructuring by linking bank contributions to value of FX mortgage portfolio; amendment expected effective from January 1, 2018. 4. Develop solutions to neutralize potential excessive tax burdens resulting from FX mortgage restructuring. 5. Impose a 3 percent systemic risk buffer (from current zero percent), replacing the 4 percent “discretionary” buffer imposed by the KNF; likely in effect from January 1, 2018. 6. Modify Supervisory Review and Evaluation Process (BION) methodology to allow KNF to assign additional capital charges related to FX mortgages; methodology updated in April 2017 and BION study to be implemented in November 2017. 7. KNF to impose additional capital surcharges on banks with FX mortgage portfolios; plans to send individual banks the new capital surcharges in 2017:Q4. 8. Issue supervisory recommendation on good practices in restructuring FX mortgages; to be presented by the KNF by end-2017. 9. Modify individual bank contributions to the Bank Guarantee Fund to increase premiums for banks with FX mortgage portfolios; this was completed in February 2017. ### Sovereign–bank linkages and state ownership - Banks’ holdings of domestic government bonds increased sharply after the bank asset tax introduction in February 2016. - By April 2017, banks held about 40 percent of total government bonds outstanding, constituting about 14 percent of banks’ total assets. - Domestic ownership of the banking sector rose to above 50 percent following sale of UniCredit’s remaining share in Pekao S.A. to PZU and PFR; share of state-controlled banks rose to 36 percent (in percent of total banking system assets). - Implications: larger holdings of government bonds increase exposure to market risk; increased state ownership raises concentration and creates a systemically important financial conglomerate, entailing new prudential and macroprudential challenges. ### Staff’s main recommendations to preserve financial sector resilience - Foreign-currency mortgages: - Prefer a case-by-case approach to FX mortgage restructuring (offer restructuring only to distressed borrowers). - Both legislative (repayment of excessive FX spreads) and regulatory solutions are significantly less costly for banks than a mandatory blanket conversion; assess impacts on sector and individual banks carefully. - Beware that the legislative repayment approach does not address the stock of FX mortgages; regulatory incentives to reduce FX loan books could induce overly generous restructuring terms if pressure to meet targets arises. - Profitability pressures and tax design: - Continue to monitor the impact of the bank asset tax on banks’ activities and risk profiles; stand ready to revise its design if adverse effects become apparent. - Staff’s view: a tax on profits and remuneration (proxying the VAT from which the financial sector is exempt) would be less distortionary than a tax on assets. - Conduct a holistic assessment of rising total costs on banks’ profitability, resilience and credit supply. - Credit unions and cooperative banks: - Address difficulties sustainably by encouraging consolidation/integration and ensuring orderly market exit of unviable firms. - Sovereign–bank linkages: - Closely monitor increasing linkages as they may reinforce fiscal and financial vulnerabilities; maintain strong and independent supervision and a robust macroprudential framework. ### Authorities’ views (summary) - The authorities shared the view that the final solution to FX mortgages should preserve financial stability, but were less concerned about the effects of the bank asset tax. - Authorities believed major risks from the bank asset tax have not materialized and banks were strong enough to “digest” it without adverse impact on credit supply. - Authorities noted the need to manage total costs to banks to safeguard resilience and financial stability while finalizing FX mortgage solutions. - Authorities viewed rising sovereign–bank linkages positively: increased banks’ holdings of government bonds reduce financing risks for the government and the acquisition of UniCredit’s subsidiary by state-controlled entities reduces risk of negative financial spillovers from abroad. ### Structural reform outlook and growth - Baseline potential growth under current policies will likely drift to 2.7 percent (staff estimate, Annex II), well below the pre-crisis average. - Estimates already reflect positive spillovers from an improving global environment on Poland’s TFP growth; without these spillovers the estimated potential growth rate would have been 0.2-0.3 percentage points lower. - Achieving higher potential growth requires faster productivity growth, stronger private investment, and higher labor force participation. - Responsible Development Strategy (RDS) objectives include re-industrialization, development of innovative firms and SMEs, promoting expansion of Polish companies abroad, mobilizing capital for development, and promoting social and regional development; many specific action plans and economic and fiscal impact assessments are still being prepared. - Table 1 (RDS key areas and selected quantitative targets) presents multiple baseline and target indicators (examples from the table as presented in the source): - Spending on R&D activities relative to GDP: baseline 1.0 (2015) — target 1.7 (2020) — target 2.5 (2030). - Adults participating in education or training (aged 25–64): baseline 4.2 percent — targets shown in table. - Share of private-sector investment in total investment: baseline 62.6 percent (Poland, 2014) — targets shown in table. - Share of exports of high-tech products in total exports: baseline 10 percent — target 15 percent. - Note: the table includes many other baseline and target figures for 2020 and 2030 across RDS objectives. *INTERNATIONAL MONETARY FUND — Republic of Poland country report excerpt (cr17220)* ### 1.1 Reindustrialization ### 1.1 Reindustrialization ### Reindustrialization and sectoral targets - Increase in industry’s ability to meet global competition. - 34Share of net revenue from the sale of products of industrial processing enterprises in the high- and medium-high-tech sectors in net revenue from the sale of products of industrial processing enterprises % - 1.3 Small and Medium-Sized Enterprises: Structural sector changes, new forms of action and cooperation, modern assistance mechanisms - 13 % GDP - 1.5 International Expansion: Average annual growth rate of goods exports 3.4 - 3.4 Effective Use of EU Funds: 22.0–25.0 - 1.4 Development Capital: Inclusive and effective public institutions. Development of an integrated social, economic, and zoning planning system. % - 6570 Employment indicator for people aged 20–64 % - 3.5 Human and Social Capital: Improved quality of human capital. Increased share of social capital (including civil society organizations) in socio-economic development - Gross household savings relative to GDP%2.2>5.0 - Investment rate 15 - 1.2 Development of Innovative Firms - Indicator 40–45 - Share of manufacturing in gross value-added%2021 % - Spending by the enterprise sector on R&D activities relative to GDP - Poland’s position in the NES GEM ranking for the category “Government Policy on Entrepreneurship” (ranked between 10th and 15th) ranking ### Key findings: demographics and labor supply - Higher labor force participation (LFP) would help counter demographic headwinds. - Recent policies (notably, the reversal of the 2013 retirement age increase) will likely exacerbate adverse labor supply dynamics. - Staff’s estimates show that even with strong mitigating policies (increasing LFP up to the highest level in the EU) and encouraging immigration, the decline in the working age population (WAP) will be significant. - The estimated negative impact of the reversal of the 2013 retirement age increase would be difficult to offset even with strong measures, underscoring the need for incentives for seniors to stay in the labor force longer. - Cumulative loss of the labor supply (in percent of 2015 WAP) under different scenarios illustrated for 2015–2050 (chart referenced). ### Labor-supply and labor-market policy recommendations - To counter shrinking labor supply: - increase labor force participation (LFP) through more effective labor market policies (e.g., vocational training) - provide incentives for seniors to remain in the workforce past their retirement age - improve child-care services to raise female LFP - address the decline in the working age population (WAP) through immigration policies and policies aimed at increasing fertility - To increase private investment: - streamline the product market regulations (PMR) to reduce regulatory burdens and ensure level playing field - reduce administrative burdens on startup companies - improve physical and ditigal infrastructure through efficient public investment - improve the quality of vocational training - To lift TFP growth (in addition to policies mentioned earlier): - provide R&D support to private companies - reduce barriers (incl. labor market rigidities) to resource reallocation across sectors - enhance institutional and government efficiency ### Structural reform gaps and strengths - Areas where Poland lags peers (OECD): infrastructure, business regulation, labor market efficiency, and R&D/innovation. Poland-specific shortcomings include labor market regulation, human capital development, and institutions/government efficiency. A relatively high share of agriculture and relatively low share of services suggest scope for re-allocation toward higher-productivity sectors. - Areas of relative strength: market-friendly institutions, low barriers to trade and investment, less regulatory complexity and protection of incumbents, and relatively high quality of human capital. - The priority is to preserve and leverage strengths while closing lagging areas. ### Potential gains from structural reforms (FSGM model estimates) - Closing/partially closing gaps in PMR, labor market policies, infrastructure investment, and R&D support can raise the level of GDP by 2030. - Staff’s estimates: under a range of plausible reform scenarios, the level of output could be lifted by about 7–11 percent by 2030, covering about a third of the distance to the RDS convergence objective. - Fiscal constraints considered: baseline deficit projections, the EDP and debt limits; fiscal cost of reforms incorporated in calibration when applicable. - Figure 10 illustrative reform impacts (selected entries preserved exactly as in source): - Relaxing administrative burdens on startups 1.39-0.68-1.33- - Relaxing regulations on professional services and retail 0.83-0.97-1.86- - Relaxing regulations on gas sector0.75-1.51-3.01- - Relaxing regulations on airlines and road sectors0.74-0.96-1.90- - Relaxing employment protection0.78-0.38-0.56- - Increasing infrastructure spending1.170.361.400.430.780.25 - Increasing public spending on childcare services0.490.110.480.110.930.23 - Increasing direct public funding of business R&D0.490.030.240.010.460.03 - Increasing public spending on ALMP0.230.130.090.070.170.13 - A combined impact of all reforms7.010.666.840.6611.410.66 - of which fiscally costly reforms2.372.212.33 - Reform scenarios defined: - Reform scenario based on past experiences of Poland and the best performers - Reform scenario in which Poland closes half of the reform gaps relative to the OECD average by 2030 - Reform scenario in which Poland fully closes the reform gaps relative to the OECD average by 2030 ### Reform priorities and channels - Focus on creating more efficient institutions and more growth-friendly regulations; ensure level playing field for market participants so resources flow to most efficient and innovative firms. - Maintain strong governance standards and effective oversight of state-controlled firms; advance privatization in line with past staff advice. - Staff’s prioritized reforms given limited fiscal space and strong cyclical position: - Regulations: streamline PMR—reduce administrative burdens on startups; deregulate professional services and network industries. These could bring substantial benefits without additional fiscal costs. - Labor-market policies: well-targeted ALMPs (e.g., improving vocational training) to increase LFP of young workers, long-time unemployed women, seniors, and less-skilled immigrants. Incentives for seniors to stay past retirement age. Childcare and early education reforms to raise female LFP. Some of these policies entail fiscal costs that could be initially covered by allocated EU funds. Review labor market protection to reduce constraints on reallocation across sectors. - Infrastructure and R&D: more targeted and efficient public spending on infrastructure and R&D support, relying where possible on allocated EU funds, to lift private investment and TFP and help firms move up the value chain. ### Authorities’ views - Authorities reiterated commitment to the RDS and advancing structural reforms; some reforms started before formal RDS adoption in February 2017. - Acknowledged need to increase LFP and listed pipeline projects: increasing childcare facilities, changing school structure to address business needs and reduce youth unemployment and emigration, increasing adaptability of senior citizens to changing labor market conditions. - Flagship projects on complex technological products and support for SMEs and start-ups expected to boost TFP. - Authorities intend to use EU funds and state funds for RDS implementation and view the RDS as broadly fiscally neutral. ### Safeguards assessment - Safeguards procedures for Poland’s FCL arrangement are underway. - Discussions with E&Y Audyt Polska, external auditor of the NBP, found no significant safeguards issues on the 2016 and 2015 external audits. - Financial statements continue to be published on a timely basis and the audit opinions remain unqualified. *Source: IMF staff analysis* ### 48. Poland’s economic fundamentals and policy frameworks remain very strong. Public ### Poland’s economic fundamentals and policy frameworks remain very strong. ### Macroeconomic assessment and institutional framework - Public debt is moderate. - International reserves are adequate. - The external position is broadly in line with macroeconomic fundamentals and desirable policy settings. - The financial system is sound, supported by strong financial regulation and supervision. - Institutional settings support policy commitments, including: - a flexible exchange rate to work as an effective shock absorber, - an inflation targeting regime to guide monetary policy, - medium-term fiscal targets to anchor fiscal consolidation. ### Growth outlook and risks - Short-term: Growth is expected to accelerate in 2017, supported by accommodative policies, higher public investment boosted by EU funds, and strong consumption. - Labor market: Labor market conditions continue to tighten, with unemployment at record low. - Inflation: Headline inflation increased rapidly, crossing the lower bound of the central bank’s target band. - Medium-term concerns: - Subdued private investment. - Lower than pre-crisis TFP growth. - Key challenge: ensure timely and effective implementation of policies and reforms to sustain strong and inclusive growth. ### Monetary policy guidance - Current stance: Appropriate for now but should be tightened if accelerating core inflation threatens the inflation objectives. - Risks: Incipient domestic inflationary pressures could accelerate amid an opening positive output gap and a pro-cyclical fiscal stance. - Considerations: - Wage pressures are rising, though still moderate. - Significant uncertainties about the future pace of wage growth imply monetary policy decisions should be data dependent. - With lags in the monetary transmission mechanism and adaptive inflation expectations, timely actions are critical to avoid significant overshooting of the inflation target. - A clear and consistent communication strategy should stipulate the circumstances for a rate change rather than providing a time frame for how long rates are likely to stay on hold. ### Fiscal stance and consolidation strategy - Near-term: Strong fiscal performance so far this year is welcome; consolidation should start as soon as possible. - 2017 priorities: - Avoid breaching the limit of the Excessive Deficit Procedure (EDP). - Save any revenue overperformance. - 2018–19 plan: - Authorities intend to start fiscal consolidation with about half a percent of GDP annual adjustment in the structural and headline deficits during 2018–19. - This adjustment is appropriate to reverse the pro-cyclical stance and build a “safety buffer” relative to the EDP limit. - Beyond 2019: - Pace of consolidation could be adjusted to accommodate any direct fiscal costs associated with growth-enhancing structural reforms. - Aim to reach the MTO target no later than 2023, given projected aging costs and anticipated phasing out of the EU funds. ### Recommended fiscal measures to preserve growth and credibility - Base fiscal adjustment on credible growth-friendly measures. - Encourage revenue-side and spending-side actions: - Continue efforts to upgrade tax administration; budget conservatively for future gains from improved tax collection. - Keep the VAT rate at the current level beyond 2018. - Eliminate preferential VAT rates and exemptions. - Rationalize current spending through expenditure reviews. - Gradually phase out preferential pension regimes. - Introduce measures to encourage seniors to work longer to partially mitigate the negative impact of the retirement age reduction, while noting this may not fully offset the negative impact on public finances and long-term pension sustainability. ### Financial sector resilience and measures - Banks remain sound but profitability has continued to decline due to: - Operating in a low interest rate environment. - Rising costs and regulatory burdens. - Policy recommendations: - Monitor and adjust the bank asset tax if adverse effects on banks’ activities and risk profiles become apparent. - Consider a tax on banks’ profits and remuneration as a less distortionary alternative to the bank asset tax. - Preserve banks’ capacity for internal capital generation and lending when addressing consumer protection concerns related to FX mortgages; a voluntary case-by-case restructuring remains the best approach. - Maintain strong and independent supervision and a robust macroprudential framework given: - Increasing share of state-controlled entities in the Polish financial sector. - Rising bank holdings of sovereign bonds. ### Structural reforms and policy priorities - Focus on improving institutional and business environment to make regulations more growth-friendly: - Reduce administrative burdens on startups. - Deregulate professional services and network industries. - Labor market and human capital: - Adopt more effective and better focused active labor market policies. - Upgrade childcare and early education systems to address shortages of skilled labor and increase labor force participation. - Public investment and productivity: - Better targeted and more efficient public spending on infrastructure and R&D support to boost productivity and private investment. - Fiscal constraint considerations: - Prioritize reforms that do not require additional public expenditures. - Finance some fiscally costly reforms initially with allocated EU funds. - Reform delivery: - While many elements of the RDS look promising, key priorities must be determined and translated into concrete reform plans, closely coordinated with the authorities’ fiscal consolidation strategy. *Source: IMF staff assessment of Poland’s policy and institutional settings as presented in the provided content.* ### 55. It is recommended that the next Article IV consultation be held on the standard 12- ### cr17220 - 55. It is recommended that the next Article IV consultation be held on the standard 12- ### Financial Market Developments - The zloty has appreciated since end-2016; implied volatility trended down. - Equity market has gained some value as in regional peers. - Credit default swap spreads remain narrow. - Foreign investors’ holdings of domestic government bonds declined since a year ago. - Government bond yields have increased from late 2016. - Sources: Bloomberg Finance L.P., Haver Analytics, Poland Ministry of Finance, and IMF staff calculations. - Selected Euro Area includes Greece, Portugal, Spain, Ireland, and Italy (note label "1/ Selected Euro Area includes Greece, Portugal, Spain, Ireland, and Italy."). ### Real Sector Developments (2011–17) - PMI is approaching historical high in early 2017 amid a pick-up in industrial production. - Retail sales are strong with record high consumer confidence. - Net exports improved, benefitting from depreciation. - Unemployment has continued to decline rapidly. - Wage pressures remain moderate; wage growth outpaces productivity growth. - Indicators shown include: Unemployment Rate (Percent, seasonally adjusted); Real labor productivity and Real gross wages and salaries (Year-on-year growth; percent); Composite PMI (SA, 50+=expansion); Industrial Production (Yoy percent change); Retail Sales (Year-on-year percent change); Consumer Confidence (Percent balance); Trade Volume (Year-on-year percent change); Exchange Rate (2000 = 100). ### Inflation Dynamics and Monetary Developments - Inflation rose sharply on the back of higher fuel and food prices; core inflation rose as well, though from a low base. - Domestic demand pressures are building up as output gap turned positive. - Near-term inflation expectations rose accordingly; longer-term inflation expectations also rose. - Policy rates remain at historical lows; real interest rate was much lower as inflation rose. - Indicators include: contributions to CPI inflation by Electricity, gas, other fuels; Fuel; Food; Core inflation; Inflation gap (inflation - 2.5 percent); Output gap (lagged two quarters); Consensus forecasts (two years and five years ahead); Inflation Expectations, One Year Ahead; Interest Rates (End of period, percent) including "3- month W ibid", "Reference rate", "Deposit rate", "Lombard rate"; Real Policy Rate (Percent). ### Balance of Payments Developments (2011–16) - The current account deficit continued to improve on account of lower oil prices. - The current account was financed primarily by FDI and EU transfers. - Financial flows remained weak; net portfolio outflows reversed. - The IIP remained stable as liabilities leveled off across all sectors. - Current Account Balance (Percent of GDP, four-quarter rolling sum) and components: Secondary Income, Primary Income, Services, Goods. - Financial Account Balance (net outflows) and components: Other investments, Portfolio, FDI. - Portfolio Inflows, Net (Billions of U.S. dollars, 3-month moving average, "+"=inflows) shown. - International Investment Position (Percent of GDP) and International Investment Position, Liabilities (Billions of U.S. dollars) by sector: Other sectors, General government, Banks. ### Banking Credit Growth and Funding (2011–17) - Loan-to-deposit ratio has been declining steadily. - Deposits remain an important funding source for both households and nonfinancial corporations. - External financial liabilities have declined. - Reliance on parent bank funding has declined. - FX hedging needs remain below recent levels. - Indicators: Private Sector Deposit Growth (Year-on-year percent change) for Total, Nonfinancial corporations, Households; Banking Sector Debt to Parents (Percent); On-balance Sheet Open FX Position (Percent); Nonfinancial Sector Loans to Deposit (Percent); Contributions to Private Sector Credit Growth (Percentage points) including Others, Deposit growth, Net claim on government, Net foreign assets, Claims on private sector; Polish Banks' External Liabilities to Financial Sector (Billions of US$). ### Coping with Demographic Headwinds - Population aging is underway; Share of population 65+ projection (Percent) shows increase to 2050. - Working-age population is set to decline (Millions of persons, projection). - Labor productivity shows a downtrend (Labor Productivity, 5-year moving average). - Real GDP growth simulation (5-year average) shows potential subdued growth under assumptions: "Simulation reflects demographic scenario and assumes constant labor productivity (2010-15 average) and employment rate." - Migrants may help mitigate adverse demographic trends; changes in stock of Poles staying temporary abroad (2005-15) shown in Thousands. - Approximate annualized change in temporary immigration measured via changes in declarations to hire foreigners; note: "Declarations allow to hire foreigners for a period not exceeding 6 months within 12 consecutive months, hence approximate impact on employment is 1/2 of the change in declarations." - Differences between labor force participation rates in Poland and EU15, 2015 shown for "From 15 to 64 years" and "From 55 to 64 years". ### Investment Challenge - Poland’s actual investment rate is below the estimated optimal investment benchmarks, given its fundamentals and its level of development. - Low business investment post-crisis is the main drag, while public investment has been boosted by the EU funds. - Without reforms to address barriers to investment, the private investment rate will likely remain at a modest level, well below the rate observed in the fast converging economies of the past. - Note: "GDP per capita (PPP) in Korea in 2000 was like in Poland in 2017." - Based on the recent EIB survey, financing availability does not seem to be a key constraint; firms cite uncertainty, business regulation and labor shortages as major barriers to investment. - Indicators: Poland Investment Rate and Benchmarks (In percent of GDP) including Actual, Golden Rule, Historical Benchmark, Predicted norm, RDP target; Long Term Investment Barriers (share of total firms) with categories such as Uncertainty, Avail. staff, Business reg., Demand for products, Avail. ext. finance, Labour reg., Energy costs, Transport infra., Dig. infra. across Foreign, SOE, PL, EU; Investment in Poland and EU (In percent of GDP) for POL Business Inv., EU Gov. Inv., EU Business Inv., POL Gov. Inv., POL Household Inv., EU Household Inv.; Gross Fixed Capital Formation (In percent, y/y growth) with Pre-crisis, Post-crisis, Staff's Baseline Projection; Gross Fixed Capital Formation (In percent of GDP) comparison Poland(t=2017) vs Korea(t=2000). ### Total Factor Productivity - Poland’s average TFP level has been higher than other EMs but the trend has been declining. - Poland’s TFP growth has been strongly correlated with GVC participation and external demand. - External demand and GVC participation are expected to provide limited support to TFP growth going forward. - Without structural reforms, TFP growth will likely remain around 1 percent per year over the medium term, falling short of Korea’s performance during its fast convergence episode (from the 1980s). - Sources and notes: Penn World Table 9.0, WEO, Conference Board, ORBIS, TiVA database, and IMF staff calculations; "1/ For more details see Article IV 2017 Selected Issues Paper Chapter 3." - Indicators: Average Total Factor Productivity Levels: Emerging Markets (EU15 = 100, 2002-2014 average); Growth in External demand, GVC participation and TFP; Contribution of External Factors to the TFP Growth in Poland (In percent) with components TOT, External demand, Capital flows, Other Factors; TFP Level: Poland Baseline vs. Korea Experiences (Index; year t = 100); Baseline TFP Growth Projection (In percent) with Baseline TFP growth (RHS) and External demand growth; Cyclically Adjusted TFP Growth (In percent) comparisons. ### Selected Economic Indicators, 2013–22 (Table 2 highlights) - GDP (change in percent): 2013 1.4, 2014 3.3, 2015 3.9, 2016 2.6, 2017 Est. 3.6, 2018 3.3, 2019 3.0, 2020 2.8, 2021 2.7, 2022 2.6. - Domestic demand and components: Private consumption growth 2017 Est. 4.2; Public consumption growth 2017 Est. 2.1; Domestic fixed investment growth 2017 Est. 5.8. - Output gap: 2013 -1.2, 2014 -0.9, 2015 0.0, 2016 0.1, 2017 Est. 0.7. - CPI inflation (percent) Average: 2016 -0.6, 2017 Est. 2.1; End of period: 2016 0.8, 2017 Est. 2.3. - Unemployment rate (average, according to LFS): 2017 Est. 5.3. - Public finances (percent of GDP): General government revenues 2017 Est. 39.8, expenditures 2017 Est. 42.6, net lending/borrowing 2017 Est. -2.8, structural balance 2017 Est. -3.1, general government debt 2017 Est. 54.3. - Money and credit: Private credit (change in percent, end-period) 2017 Proj. 6.8; Credit to GDP (percent) 2017 Proj. 58.0. - Policy Rate (percent) historical values: 2010 2.9, 2011 2.4, 2012 1.6, 2013 1.5 (note entry "Policy Rate (percent) 5/2.92.41.61.5.................."). - Balance of payments: Current account balance (billion U.S. dollars) 2017 Est. -5.9; percent of GDP 2017 Est. -1.2. - Official reserves (billion U.S. dollars) 2017 Proj. 120.3; in percent of short-term debt plus CA deficit 2017 Proj. 108.9. - Total external debt (billion U.S. dollars) 2017 Proj. 344.0; in percent of GDP 2017 Proj. 69.6. - Exchange rate regime: Freely floating. - Memorandum: Nominal GDP (billion zloty) 2017 Proj. 1,951.1. - Sources: Polish authorities and IMF staff calculations. - Notes: 1/ Real GDP calculated at constant 2010 prices; 2/ According to ESA2010; 3/ Difference from general government debt reflects different sectoral classification; 4/ Credit defined as in IFS: "Claims on other sectors."; 5/ NBP Reference Rate (avg); 6/ Annual average (2000=100). ### Balance of Payments, 2013–22 (Table 3 highlights) - Current account balance (Millions of U.S. dollars): 2013 -6,744; 2014 -11,444; 2015 -2,932; 2016 -1,395; 2017 Est. -5,863; 2018 Proj. -7,310; 2019 Proj. -8,947; 2020 Proj. -10,906; 2021 Proj. -13,178; 2022 Proj. -15,224. - Current account percent of GDP: 2017 Est. -1.2. - Trade balance (Millions of U.S. dollars): 2013 9,692; 2014 7,755; 2015 14,577; 2016 17,344; 2017 Est. 12,522. - Balance on Goods and Services, Primary Income, Secondary Income balances shown. - Merchandise exports f.o.b. (Millions of U.S. dollars): 2017 Est. 216,453; 2018 Proj. 235,392; 2019 Proj. 255,086. - Merchandise imports f.o.b. (Millions of U.S. dollars): 2017 Est. 219,722; 2018 Proj. 241,326; 2019 Proj. 263,333. - Capital and financial account balances and components: Capital account balance (net) 2017 Est. 6,679; Financial account balance (net) 2017 Est. -1,762. - Foreign direct investment (net): 2017 Est. -6,499 (note sign convention: "[+ = outflows]"). - Portfolio investment (net) and Other investment (net) series provided. - Errors and omissions: -2,578 each year in projections. - Financing: Reserve assets [Increase = +] 2017 Est. 22,661. - Memorandum: Gross official Reserve 2017 Est. 120,297; in months of imports 2017 Est. 6.1; Net Reserves (USD) 2017 Est. 97,726. - Note: 1/ Net reserves are calculated as a difference between gross reserves (official and other FX reserves) and FX liabilities. 2/ Short-term debt is on remaining maturity. - Sources: National Bank of Poland and IMF staff calculations. ### Monetary Accounts (2010–17) (Table 4 highlights) - Central bank net foreign assets (Billions of zlotys): 2010 257, 2011 317, 2012 321, 2013 297, 2014 332, 2015 349, 2016 390, 2017 Proj. 387. - Base money (Billions of zlotys): 2017 Proj. 236. - Deposit money banks: Deposits 2017 Proj. 1,163 (Billions of zlotys). - Consolidated banking system: Broad money (M3) 2017 Proj. 1,371 (Billions of zlotys). - Memorandum items (percent change from end of previous year): Broad money (M3) 2017 Proj. 8.3; Private sector credit 2017 Proj. 6.8; Deposit growth 2017 Proj. 8.4. - Sources: Haver, IFS, NBP, and IMF staff calculations. ### Financial Soundness Indicators (2010–16) (Table 5 highlights) - Regulatory capital to risk-weighted assets: 2016Q4 17.7 percent. - NPLs to gross loans (nonfinancial sector): 2016Q4 7.0 percent. - Provisioning coverage for nonperforming loans (nonfinancial sector): 2016Q4 53.5 percent. - Loans to households share in total loans to nonfinancial sector: 2016Q4 65.1 percent. - Loans to non-financial corporations share: 2016Q4 34.2 percent. - Return on average assets (after tax): 2016 0.8 percent. - Loans to deposits: 2016Q4 106.6. - Net open positions in FX to capital: 2016Q4 0.3. - Sources: NBP and KNF. - Note: Data for domestic banking sector (Bank Gospodarstwa Krajowego excluded). Since 2014: data on capital in accordance with CRDIV/CRR. ### General Government Statement of Operations (2013–22) (Table 6 highlights) - Revenue (percent of GDP): 2017 Est. 39.8. - Taxes (percent of GDP): 2017 Est. 20.8; Personal income tax 2017 Est. 4.9; Corporate income tax 2017 Est. 1.9; VAT 2017 Est. 7.4; Excises 2017 Est. 3.6. - Social contributions 2017 Est. 14.0 percent of GDP. - Expenditure (percent of GDP): 2017 Est. 42.6. - Net lending/borrowing (percent of GDP): 2017 Est. -2.8. - Structural fiscal balance (percent of GDP): 2017 Est. -3.1. - General government debt (percent of GDP): 2017 Est. 54.3. - Gross operating balance 2017 Est. 1.8 (percent of GDP). - Memorandum: Nominal GDP in billions of zloty 2017 Proj. 1,951. - Sources: Eurostat and IMF staff calculations. - Note: 1/ Includes grants. ### General Government Financial Balance Sheets (Table 7 highlights) - Net Financial Worth (Millions of zloty) projected: 2015 -67,366; 2016 -?? (table shows complex flows); projections show large negative net financial worth with closing balances through 2022 (e.g., 2022 -1,052,436). - Financial Assets and Liabilities components presented in Millions of zloty including Currency and deposits, Debt securities, Loans, Equity and inv. fund shares, Other financial assets, and Other liabilities. - Memorandum: Net financial worth (percent of GDP) projections include -37.6 (2015) and up to -42.7 (2016). - GDP nominal prices (billion PLN) 2017 Proj. 1,951.1. - Sources: National authorities and IMF staff calculations. ### 2013 FSAP Recommendations and Current Status (Table 8 highlights) - Addressing impaired loans: - Actions: In-depth analyses including credit file review (cross-sector inspections in 2013) and Asset Quality Review (AQR) in 2014; KNF clarified expectations to standardize and enhance bank accounting practices; follow-up in 2015; verification of implementation conducted in 2017; biggest banks examined on progress implementing IFRS 9. - Strengthening banking supervision: - Context: Under the Polish constitution the KNF cannot issue legally binding general acts (regulations); KNF issues recommendations to banks; many regulatory provisions are from the EU (CRR); KNF management has increased flexibility to allocate budgetary and staff resources subject to government budget constraints. - Strengthening credit unions (SKOK): - Actions: Dual supervision solved; KNF is sole supervisor; 33 of 42 credit unions obliged to prepare capital rehabilitation plans; restructuring involved bankruptcy and take-overs by banks; draft law on bank resolution framework awaiting President’s signature; current SKOK accounting regulation came into force on January 1, 2015. - Developing sound macroprudential policies: - Actions: The Act on Macroprudential Supervision over the Financial System and on Crisis Management took effect in 2015; Financial Stability Committee (KSF) designated as macroprudential authority and crisis management authority, chaired by Governor of the NBP and comprising Minister of Finance, Chairman of KNF and President of the Bank Guarantee Fund; KSF fully operational and publishes press releases; August 2016 KSF adopted opinions on identification of other systemically important institutions and O-SII buffers; 12 O-SIIs were identified and buffers imposed; January 2017 KSF passed a resolution recommending restructure of FX housing loans portfolio; June 2017 KSF informed about progress. - Improving the bank resolution framework: - Actions: The Act on the Bank Guarantee Fund (BFG), Deposit Guarantee Scheme and Resolution came into effect in October 2016 covering FSAP recommendations on precedence of administrative powers, creditor claims hierarchy protecting BFG claims, and Tier-1 capital trigger/public interest trigger linkage to financial stability. - Improving the deposit insurance system: - Actions: The Act on the BFG and implementing acts cover removing PBA from BFG Council, ensuring adequate funding and capacity, revising regulations, enhancing protocols, and amending code of conduct to restrict employment in member institutions. - Strengthening pension reform and capital markets: - Status: Pension funds do not offer lifecycle strategies; assets are transferred gradually to the Social Security Fund managed by ZUS starting 10 years before retirement; performance of pension funds measured relative to an external benchmark; mortgage covered bond and securitization frameworks and enforcement of security interests/judicial decisions referenced as priorities. - Source reference for FSAP: "See 'Republic of Poland: Financial System Stability Assessment,' IMF Country Report No. 13/221, 2013." (table header: "1/ See “Republic of Poland: Financial System Stability Assessment,” IMF Country Report No. 13/221, 2013.") *Source: IMF staff compilation from the chapter's figures, tables, and notes.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Foreign asset and liability position and trajectory - A large negative net international investment position (NIIP) has remained broadly stable around 60 percent of GDP over the last five years, with both assets and liabilities growing in 2016, to 52 percent and 111 percent of GDP, respectively. - The NIIP is projected to improve towards -49 percent of GDP over the medium term as nominal GDP grows faster than the current account (CA) deficit, which is financed largely by non-debt creating FDI and EU fund flows. - Over 40 percent of foreign liabilities are FDI; associated intra-company lending is noted. - Short-term (ST) debt is about 23 percent of the total. ### Overall assessment - The external position in 2016 was broadly consistent with medium-term fundamentals and desirable policies. - Improvements in the CA balance in 2016 were driven mostly by stronger demand in the euro area, supported by a weaker currency and marginally better terms of trade. - A widening of the CA deficit is expected in 2017 on the back of stronger domestic demand and investment as well as a rebound in oil prices. - Reserves are adequate; the FCL arrangement provides an added buffer. ### Potential policy responses - Current policy settings—an accommodative monetary policy stance and a frontloaded, but gradual, fiscal consolidation—are broadly appropriate under the baseline, given Poland’s cyclical position and the need to maintain fiscal sustainability in the longer term. - In the event of external shocks, a flexible exchange rate should be the first line of defense. - More hawkish monetary tightening could be warranted if inflationary pressures from exchange rate depreciation and domestic demand lead to inflation overshooting the target. - Vigilance with respect to bank funding (including foreign exchange swaps) is important; authorities should be ready to extend FX liquidity. - Medium-term risks include fiscal slippages and monetary policy being too loose for too long; these should be properly managed. - Implement macro-prudential and bank resolution frameworks to address systemic risks. - Structural reforms are crucial to boost potential growth. ### Current account - Poland’s current account deficit was broadly unchanged at 0.3 percent of GDP in 2016, with improvements in trade balance (by 0.6 percent of GDP) offset by a larger income deficit. - The higher trade surplus reflected improved terms of trade, stronger export performance due to continued demand recovery in the euro area, and subdued non-oil import growth as domestic demand remained relatively weak. - In 2017, the CA deficit is projected to widen on the back of a pickup in domestic demand and a deterioration in the terms of trade. - Assessment and model results: - The ES model gives a CA gap of 1 percent. - The CA approach estimates a gap between cyclically-adjusted CA (-0.1 percent of GDP) and the CA norm (-0.7 percent of GDP) of around 0.6 percent of GDP. - Staff assessment: CA gap range for 2016 centered on 0.9 (plus or minus 1) percent of GDP. ### Real exchange rate (REER) - The annual average REER depreciated 7¾ percent cumulatively over 2014-16, weakening by around 4 percent in 2016 relative to the 2015 average. - The depreciation was largely explained by nominal depreciation vis-à-vis the US dollar and the Swiss Franc, NBP policy rate cuts in response to deflationary pressures, and domestic policy uncertainties in the run-up and after the 2015 elections. - The REER has been on a depreciation trend since mid-2015, but appreciated slightly in 2017:Q1. As of May 2017, the REER is up by 2.5 percent relative to the 2016 average. - EBA / model-implied REER gaps for 2016: - CA EBA model: -1 percent. - ES EBA: -2.6 percent. - REER index model: -9.6 percent. - Staff assesses Poland’s REER in 2016 to have been close to a level consistent with fundamentals and desirable policy settings, with a range for the REER gap of -10 to 0. ### Capital and financial accounts: flows and policy measures - The capital account is dominated by EU structural fund inflows; there was a temporary slowdown in EU funds absorption in 2016 due to transition to the new EU funds cycle. - In recent years, inflows in the financial account were particularly volatile and centered on portfolio and FDI flows. - Net capital inflows remained weak in 2016; the largest net inflows were driven by NBP repo transactions as part of reserve management. - High foreign holdings (around 40 percent) of government bonds indicate potential vulnerabilities, but the ratio has declined recently as domestic banks increase holdings in response to the bank asset tax, which excludes government bonds. - A diversified foreign investor base mitigates risks. ### FX intervention and reserves level - Gross reserves increased from USD 95 billion at end-2015 to 114 billion at end-2016, partly due to a significant increase in NBP’s repo transactions. - Net reserves increased from USD 87 billion at end-2015 to about 92 billion at end-2016 (staff calculation). - The zloty has floated freely. - Assessment: - Gross reserves are adequate, standing at about 128 percent of the IMF’s composite reserve adequacy (ARA) metric in 2016. - Net reserves stood at 103 percent of the IMF’s ARA metric. - The recently approved FCL arrangement of SDR 6.5 billion provides insurance against external tail risks. ### Technical background notes and model details (selected figures preserved) - Poland’s EBA CA gap (including residual) 0.6 percent of GDP. Contribution of identified policy gaps is 0.9 percent. Domestic fiscal policy gap is -0.7 percent, offset by fiscal gaps in trading partners resulting in 0.2 percent net contribution of fiscal policies to the CA gap. Domestic credit gaps contribute 0.2 percent to the total CA gap; health spending, domestic capital controls and reserves also contribute positively. - Staff assesses the mid-point CA norm to be slightly lower (by 0.2 percent of GDP), but well within the 90 percent confidence interval of [-2.3, 0.9] percent of GDP suggested by the EBA CA model. - The level REER model for Poland suggests an undervaluation of 18.2 percent, however has large residuals of 14.0 percent, and may not be adequately capturing the dynamics over the estimated period. - Net reserves are calculated as a difference between gross reserves (official and other FX reserves) and FX liabilities, based on IFS data. *Annex I. External Sector Assessment — Republic of Poland, International Monetary Fund* ### 3. Financial sector policy. The macroprudential and bank resolution frameworks have been ### 3. Financial sector policy. The macroprudential and bank resolution frameworks have been ### Financial sector policy - The macroprudential and bank resolution frameworks have been finalized. - Restructuring of the small non-systemic credit union segment has continued, though at a slow pace. - Consumer protection concerns related to FX mortgages: - The final solution is still pending. - A draft law to require banks to repay excessive FX spreads charged and more recent recommendations from the Financial Stability Committee are much less costly than the original proposal of a mandatory blanket conversion of the FX mortgages into zloty. ### Structural reforms - Labor market: - Authorities continued to reduce labor market duality by encouraging the switch from civil law employment contracts to labor code contracts. - Duration of temporary contracts has been limited. - Business climate: - A package of regulations has been implemented to improve the business climate. - Responsible Development Strategy (RDS): - A comprehensive and ambitious RDS was approved in early 2017, covering all key areas where structural reforms are needed. - The strategy has yet to be translated into concrete action plans. ### Annex V. The Fiscal Space and the Medium-Term Objective - Overall assessment: - Although Poland may have some fiscal space given its moderate debt level, fiscal space becomes limited once the need to comply with fiscal rules is taken into account. - Current level of structural deficit coupled with future aging costs and public investment spending provide strong economic rationale for adhering to fiscal rules to achieve the structural deficit target of 1 percent of GDP over the medium-term. - Fiscal limits and current positions: - The 2017 general government budget deficit is 2.9 percent of GDP. - The EU Excessive Deficit Procedure (EDP) limit is 3 percent of GDP. - Public debt (national definition) is around 52 percent of GDP. - Poland’s Public Finance Act threshold requiring fiscal consolidation is 55 percent of GDP. - Constitutional debt limit is 60 percent of GDP. - Aging and pensions: - Under baseline demographic trends and reversal of the 2013 retirement age increase, the average pension replacement rate is projected to decline by more than a half to below 30 percent in 2040. - To keep the average replacement rate at 40 percent (minimum recommended by the International Labor Organization), pension expenditures would have to increase by over 2.7 percent of GDP per year by 2040. - EU funding and public investment: - Under the 2014–20 EU funds program, Poland can receive up to EUR 86 billion. - Poland currently accounts for about 19 percent of the total EU funds’ allocation. - EU funding may decline in the next cycle after 2023, especially if the size or structure of the EU budget is revised following Brexit. - Medium-term Objective (MTO) analysis: - The MTO of 1 percent of GDP is an appropriate long term fiscal anchor. - In a scenario accommodating additional pension expenditures (starting from 2031) and replacing much of EU-funded public spending (starting from 2023), achieving the MTO before 2025 and sustaining it afterwards will keep public debt within 60 percent of GDP until 2040. - If a larger share of EU funding needs to be replaced from 2023 onwards or infrastructure spending increases in line with the RDS, the MTO would need to be reached sooner. - If the deficit is maintained at 2 percent of GDP over the long term with additional pension and public investment requirements, debt will breach the 60 percent of GDP limit in 2034 and continue to rise thereafter. - Keeping debt firmly on a declining path beyond 2040 may require additional parametric changes of the pension system in both scenarios. - Policy implication: - Fiscal space is limited; limited room for discretionary fiscal stimulus over the medium term. - A positive output gap, relatively flexible labor market, high trade openness and flexible exchange rate point to a low fiscal multiplier in Poland. - It is appropriate to use the current favorable cyclical position to rebuild fiscal space to accommodate future aging costs and public investment, and to preserve social sustainability of the pension system. ### Annex VI. Implications of Lower Retirement Age - Policy change: - Authorities reduced statutory retirement age to 60 years for women and to 65 years for men as of October 2017, reversing the gradual increase to an equalized retirement age of 67 years. - Public finance impacts: - If all eligible persons retire at the lower age, maximum combined effect will exceed ½ percent of GDP annually, with some 5 percent of GDP cumulative negative impact by 2025. - The effect on public debt would be lower by 1pp of GDP due to accelerated below-the-line asset transfer from the 2nd pillar pension funds. - Pension benefits: - The pension system is mostly defined-contribution; reduced retirement age implies lower benefits. - By 2060, women’s pensions would be 30 percent lower if they retire at 60 rather than at 67. - Assuming the minimum pension is indexed by wage growth, about half of the pensioners may fall below this threshold by 2060, adding to fiscal cost. - Labor market and demographics: - Reversal will reduce the working age population by some 2½ million by 2050. - This exacerbates adverse demographic outlook unless people choose to work after reaching retirement age; incentivizing longer working years would likely imply additional fiscal costs. - Potential growth: - Reversal may result in an estimated decline in potential output of 0.6–0.9 percent over the medium term and of about 0.8–1.2 percent over the long run, based on IMF’s FSGM simulations. - Notes on simulations: - Simulations include two scenarios: i) assuming a 70 percent drop-out rate of eligible retirees from the labor market and ii) assuming a 100 percent drop-out rate, giving a maximum potential impact. ### Annex VII. Tax Administration Reforms - VAT context: - Poland’s relatively large VAT gaps suggest significant scope for revenue gains from tax administration reforms. - VAT revenue-to-GDP ratio is below the EU average due to sizable policy and compliance gaps. - 2014 VAT gap in Poland was 24 percent of potential VAT (2016 CASE study), EU average was 14 percent. - Institutional and compliance measures underway: - Tax administration, customs and fiscal control operations merged into single operational offices at regional and local levels. - Ministry of Finance consolidated related departments under a single undersecretary. - Improved governance and procurement processes for major IT projects. - Compliance measures: targeted actions against VAT fraud in fuels and other sectors; mandatory online filing of standard audit files and invoice transaction logs; process automation; required monthly submission of the VAT record; creation of a centralized data warehouse for automated risk detection; General Anti-Avoidance Rule for corporate income tax (CIT). - New initiatives under preparation include the “split payment mechanism” to create separate VAT accounts, which needs careful targeting to avoid unnecessary compliance costs. - Revenue targets and realism: - Authorities expect gains of 1.3 percent of GDP during 2017–20, implying a reduction of the VAT compliance gap by 14 percentage points. - IMF staff baseline projects total gains of about 0.8 percent of GDP, equivalent to reducing the VAT compliance gap to the EU average level of 14 percent by 2020. - Cross-country experience suggests the authorities’ target is ambitious relative to historical performances of best performers. - Implementation risks: - Administrative reorganization and merger could distract efforts from fighting tax evasion and fraud. - FAD advised creating a single national tax administration with a strong headquarter and greater autonomy from the Ministry of Finance. - Strong strategic management is required to ensure best use of compliance resources and to avoid unnecessary compliance costs for taxpayers. - Historical improvements examples: - LVA: 11 percentage points reduction of VAT gap in four years. - EST: 5 percentage points reduction in one year. - Other countries (LVA, CZE, HUN, SVK, EST) achieved 3–11 ppts reduction during 2010–14 through similar measures. ### Annex VIII. Public Sector Debt Sustainability Analysis - Summary assessment: - Public debt is moderately high but remains sustainable. - Debt profile appears robust to interest, rollover, and foreign currency risks. - A negative real GDP growth shock represents the largest risk to the debt outlook. - A large share of foreign investors in domestic debt market entails risk, though a well-diversified investor base mitigates it. - Baseline and projections: - General government debt rose to 54 percent of GDP in 2016. - With the projected deficit path, public debt is expected to gradually decline to about 52 percent of GDP by 2022. - Real GDP growth accelerated to 4 percent in 2017:Q1 from 2.7 percent in 2016. - Projections assume pickup in growth to 3.6 percent in 2017 with a positive output gap, followed by gradual slowdown to 2.6 percent by 2022. - Fiscal trajectory: - Under the baseline, the primary deficit is expected to increase to 1 percent of GDP by 2017, before declining to 0.1 percent of GDP by 2022. - Sovereign yields and interest rates: - Effective interest rate on public debt projected at 3.5 percent in 2017 and remains at a similar level in the medium term. - Yields on 10‒year bonds dropped by 47 basis points year-to-date close to 3.2 percent. - Spreads of Polish euro-denominated bonds over 10‒year German bonds declined by 54 basis points. - CDS spreads reduced marginally by 19 basis points year-to-date to 61 basis points. - Maturity and rollover: - Average maturity of outstanding debt is estimated at 5.3 years. - Share of short-term debt in total government debt is under 1 percent. - As of end-May 2017, 66 percent of gross borrowing requirements for 2017 have been financed. - Domestic banks have increased holdings of treasury securities, which are exempt from the new bank asset tax. *Source: IMF staff compilation from the content unit "cr17220 - 3. Financial sector policy. The macroprudential and bank resolution frameworks have been"* ### 3.5 percent of GDP during 2016. The overall share of external debt in total public debt has ### cr17220 - 3.5 percent of GDP during 2016. The overall share of external debt in total public debt has ### Public debt composition and baseline assumptions - Overall share of external debt in total public debt reduced from 57 percent in 2015 to 53 percent in 2016. - Share of foreign currency debt in state debt is about 34 percent as of end-2016. - Baseline assumes gradual convergence toward the current structure of public debt: - Share of foreign currency debt in total debt: about 30 percent. - Share of external debt in total debt: about 50 percent. ### Debt sustainability analysis (DSA) — risk assessment (heat map highlights) - External financing requirements: about 22 percent of GDP in 2016. - Public debt held by non-residents: about 53 percent at end-2016. - Foreign investor base is well-diversified and dominated by institutional investors (over 50 percent are long-term investors), which is a mitigating factor. ### Fan charts and uncertainty around baseline - Symmetric fan chart (symmetric upside and downside risks): - Debt-to-GDP ratio could drop to below 50 percent by 2020 with a 25 percent probability. - Debt-to-GDP ratio could surpass 60 percent by 2020 with a 25 percent probability. - Restricted (asymmetric) exercise (restrictions to upside shocks to interest rates and GDP growth): - Probability of debt-to-GDP surpassing 60 percent in 2020 increases to 50 percent. ### Shocks and stress tests — scenarios and key outcomes - Primary balance shock: - Assumed deterioration in the primary balance by 0.9 percentage points relative to the baseline during 2018–19. - Public debt-to-revenue ratio rises to about 138 percent in 2019. - Gross financing needs peak at about 10 percent of GDP in 2019 and converge to the baseline in the outer years. - Growth shock: - Assumes a drop in GDP growth by about 1.7 percentage points in two consecutive years (2018‒19) relative to the baseline. - Combined with a 0.4 percentage points drop in inflation and deterioration in the primary balance by 0.9 percentage points in 2018 and further by 1.7 percentage points in 2019. - Under these assumptions: - Public debt increases to about 59 percent of GDP in 2019. - Public debt trends downward to about 56 percent of GDP by 2022. - Gross financing needs increase to about 11 percent of GDP in 2019, then converge toward the baseline in the outer years. - Interest rate shock: - Permanent 260 bps increase in the nominal interest rate starting in 2018. - Effective interest rate on debt increases by 36 bps in 2019 (compared to the baseline) and further gradual increases to 133 bps by 2022. - Under this scenario, public debt is 2 percent of GDP higher than under the baseline by 2022. - Exchange rate shock: - Assumes a nominal exchange rate depreciation of about 26 percent in 2018 (from 3.95 PLN/US$ to 5.0 PLN/US$), calibrated to emulate the maximum historical movement of the FX rate over the last 10 years. - Under this scenario: - Gross public debt increases by 1 percentage point to 55 percent of GDP in 2018. - Gross public debt trends down to about 53 percent by 2022. - Resilience reflects the predominance of public debt in local currency. - Combined shock: - Under the combined shock: - Public debt-to-GDP ratio jumps to 64 percent in 2019 and gradually reduces to 63 percent in 2022. - Gross financing needs increase to 12 percent of GDP in 2018 before trending down to around 7 percent of GDP by 2022. ### Baseline projections and selected indicators (as presented) - Nominal gross public debt: - 2015: 50.5 - 2016: 51.1 - 2017: 54.4 - 2018: 54.3 - 2019: 53.9 - 2020: 53.5 - 2021: 53.0 - 2022: 52.3 - (Units: percent of GDP; values listed as in table) - Public gross financing needs (percent of GDP): - 2015: 12.5 - 2016: 7.7 - 2017: 4.1 - 2018: 9.2 - 2019: 8.4 - 2020: 8.8 - 2021: 7.8 - 2022: 7.1 - 2022 (last column): 5.6 - Real GDP growth (in percent): - 2015: 3.9 - 2016: 3.9 - 2017: 2.6 - 2018: 3.6 - 2019: 3.3 - 2020: 3.0 - 2021: 2.8 - 2022: 2.7 - 2022 (table final): 2.6 - Inflation (GDP deflator, in percent): - 2015: 2.4 - 2016: 0.7 - 2017: 0.2 - 2018: 1.7 - 2019: 2.6 - 2020: 2.6 - 2021: 2.5 - 2022: 2.5 - 2022 (table final): 2.4 - Effective interest rate (in percent) 4/: - 2015: 5.0 - 2016: 3.7 - 2017: 3.4 - 2018: 3.5 - 2019: 3.5 - 2020: 3.5 - 2021: 3.5 - 2022: 3.5 - Change in gross public sector debt (cumulative): - 2015: 0.4 - 2016: 0.9 - 2017: 3.3 - 2018: 0.0 - 2019: -0.5 - 2020: -0.4 - 2021: -0.5 - 2022: -0.7 - 2022 (final column): -0.7 - Cumulative to 2022: -2.8 - Primary deficit (percent of GDP) and related flows: - Primary deficit: - 2015: 2.1 - 2016: 0.8 - 2017: 0.7 - 2018: 1.0 - 2019: 0.9 - 2020: 0.9 - 2021: 0.5 - 2022: 0.3 - Cumulative (to 2022): 3.7 - Primary (noninterest) revenue: - 39.5, 39.0, 38.8, 39.8, 40.3, 40.1, 40.0, 39.9, 39.9 (as listed) - Primary (noninterest) expenditure: - 41.5, 39.8, 39.6, 40.7, 41.1, 41.0, 40.5, 40.2, 40.0, 243.6 (values listed in table) - Automatic debt dynamics (percent): - 2015: -0.3 - 2016: 1.4 - 2017: 1.5 - 2018: -1.0 - 2019: -1.3 - 2020: -1.1 - 2021: -0.9 - 2022: -0.9 - Cumulative to 2022: -0.8 and -5.9 (table entries as presented) - Interest rate / growth differential and components: - Interest rate/growth differential: - 2015: -0.6 - 2016: -0.5 - 2017: 0.3 - 2018: -1.0 - 2019: -1.3 - 2020: -1.1 - 2021: -0.9 - 2022: -0.9 - Cumulative to 2022: -0.8 and -5.9 (table entries) - Real interest rate contribution (of which): - 1.2, 1.4, 1.6, 0.9, 0.4, 0.4, 0.5, 0.5, 3.2 (as listed) - Real GDP growth contribution (of which): - -1.8, -1.9, -1.3, -1.9, -1.7, -1.5, -1.4, -1.4, -1.3, -9.2 (as listed) - Exchange rate depreciation contribution: - 0.2, 1.9, 1.2 (table entries shown; further cells show ".......... ...") - Other identified debt-creating flows: - -1.7, -0.1, -0.5, -0.5, -0.4, -0.4, -0.4, -0.4, -0.4, -2.4 (as listed) - Privatization (reduces financing need): - -0.6, -0.1, -0.3, -0.2, -0.2, -0.2, -0.2, -0.2, -0.2, -1.3 (as listed) - Contingent liabilities: - 0.0 across listed years, cumulative 0.0 - Incurred liabilities not included: - -1.1, 0.0, -0.2, -0.2, -0.2, -0.2, -0.2, -0.2, -0.2, -1.2 (as listed) - Residual, including asset changes: - 0.4, -1.3, 1.6, 0.4, 0.4, 0.3, 0.2, 0.2, 0.2, 1.8 (as listed) ### Composition of public debt and alternative scenarios (selected entries) - Composition by currency (projection chart labels): - Local currency-denominated vs Foreign currency-denominated (chart series shown; values not numerically tabulated beyond earlier figures). - By maturity (projection chart labels): - Medium and long-term vs Short-term (chart series shown; values not numerically tabulated in text). ### Stress test tables — baseline and alternative scenarios (selected rows) - Baseline underlying assumptions (percent): - Real GDP growth 2017–2022: 3.6, 3.3, 3.0, 2.8, 2.7, 2.6 - Inflation 2017–2022: 1.7, 2.6, 2.6, 2.5, 2.5, 2.4 - Primary Balance 2017–2022: -1.0, -0.9, -0.9, -0.5, -0.3, -0.2 - Effective interest rate 2017–2022: 3.5, 3.5, 3.5, 3.5, 3.5, 3.5 - Historical scenario (selected row values): - Real GDP growth 2017–2022: 3.6, 3.5, 3.5, 3.5, 3.5, 3.5 - Effective interest rate 2017–2022: 3.5, 3.5, 3.8, 4.0, 4.2, 4.3 - Constant Primary Balance scenario: - Primary Balance 2017–2022: -1.0, -1.0, -1.0, -1.0, -1.0, -1.0 *Source: IMF staff (Public Sector Debt Sustainability Analysis — Poland, as presented in the supplied content).* ### Annex IX. External Debt Sustainability Analysis, 2014–22 ### Annex IX. External Debt Sustainability Analysis, 2014–22 ### External Debt Sustainability: Bound Tests - External debt (in percent of GDP): actual/shaded areas and baseline values shown; baseline value noted as 58 percent. - Stress tests illustrated: - Interest-rate shock: individual shocks are permanent one-half standard deviation shocks. - Historical scenarios: historical averages calculated over the ten-year period and used to project debt dynamics five years ahead. - Combined shock: Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - Real depreciation shock: One-time real depreciation of 30 percent occurs in 2018. - Figures in boxes represent average projections for the respective variables in the baseline and scenario being presented; ten-year historical average for the variable is also shown. - Selected scenario labels and baseline: - Historical: 66 (percent) - Baseline: 58 (percent) - CA shock: 63 (percent) - Combined shock: 66 (percent) - Growth shock: 59 (percent) - Growth shock parameters (from figure annotation): - Baseline: 3.3 - Scenario: 3.6 - Historical: 2.6 - Alternate annotation: - Baseline: 2.9 - Scenario: 2.0 - Historical: 3.8 - Current-account (non-interest) shock annotations: - Baseline: 0.1 - Scenario: -1.0 - Historical: -2.1 - Gross financing need under baseline shown on right scale (figure). ### External Debt Sustainability Framework, 2014–22 (In percent of GDP, unless otherwise indicated) - External debt (percent of GDP) by year: - 2014: 65.4 - 2015: 69.1 - 2016: 71.6 - 2017: 69.6 - 2018: 66.7 - 2019: 63.8 - 2020: 61.5 - 2021: 59.5 - 2022: 57.7 - Debt-stabilizing non-interest current account: 0.0 - Change in external debt: - 2014: -7.8 - 2015: 3.7 - 2016: 2.5 - 2017: -2.0 - 2018: -4.9 - 2019: -2.9 - 2020: -2.3 - 2021: -2.0 - 2022: -1.8 - Identified external debt-creating flows (4+8+9): - 2014: -3.6 - 2015: 0.0 - 2016: -1.1 - 2017: -2.9 - 2018: -4.1 - 2019: -4.0 - 2020: -3.4 - 2021: -3.0 - 2022: -2.6 - Current account deficit, excluding interest payments: - 2014: 0.5 - 2015: -0.8 - 2016: -1.1 - 2017: -0.5 - 2018: -0.4 - 2019: -0.4 - 2020: -0.2 - 2021: 0.0 - 2022: 0.2 - Deficit in balance of goods and services: - 2014: -1.4 - 2015: -3.1 - 2016: -3.7 - 2017: -2.5 - 2018: -2.1 - 2019: -1.7 - 2020: -1.4 - 2021: -1.0 - 2022: -0.7 - Exports (percent of GDP): - 2014: 47.6 - 2015: 49.5 - 2016: 52.1 - 2017: 54.8 - 2018: 56.4 - 2019: 57.9 - 2020: 58.9 - 2021: 60.1 - 2022: 61.0 - Imports (percent of GDP): - 2014: 46.2 - 2015: 46.4 - 2016: 48.4 - 2017: 52.2 - 2018: 54.3 - 2019: 56.1 - 2020: 57.5 - 2021: 59.1 - 2022: 60.2 - Net non-debt creating capital inflows (negative): - 2014: -3.0 - 2015: -2.9 - 2016: -0.5 - 2017: -0.5 - 2018: -1.5 - 2019: -2.0 - 2020: -2.1 - 2021: -2.1 - 2022: -2.1 - Automatic debt dynamics 1/: - 2014: -1.1 - 2015: 3.8 - 2016: 0.5 - 2017: -1.9 - 2018: -2.2 - 2019: -1.6 - 2020: -1.2 - 2021: -0.9 - 2022: -0.7 - Contributions to automatic debt dynamics: - Contribution from nominal interest rate: - 2014: 1.6 - 2015: 1.5 - 2016: 1.4 - 2017: 1.6 - 2018: 1.9 - 2019: 2.0 - 2020: 2.1 - 2021: 2.1 - 2022: 2.2 - Contribution from real GDP growth: - 2014: -2.3 - 2015: -2.9 - 2016: -1.9 - 2017: -2.4 - 2018: -2.2 - 2019: -1.9 - 2020: -1.7 - 2021: -1.6 - 2022: -1.5 - Contribution from price and exchange rate changes 2/: - 2014: -0.4 - 2015: 5.2 - 2016: 0.9 - 2017: -1.1 - 2018: -1.8 - 2019: -1.7 - 2020: -1.6 - 2021: -1.5 - 2022: -1.4 - Residual, incl. change in gross foreign assets (2-3): - 2014: -4.2 - 2015: 3.7 - 2016: 3.6 - 2017: 0.9 - 2018: -0.8 - 2019: 1.1 - 2020: 1.1 - 2021: 1.0 - 2022: 0.8 - External debt-to-exports ratio (in percent): - 2014: 137.5 - 2015: 139.7 - 2016: 137.4 - 2017: 127.1 - 2018: 118.3 - 2019: 110.3 - 2020: 104.5 - 2021: 99.1 - 2022: 94.7 - Gross external financing need (in billions of US dollars) 3/: - 2014: 139.6 - 2015: 108.7 - 2016: 99.6 - 2017: 103.8 - 2018: 105.4 - 2019: 106.1 - 2020: 109.9 - 2021: 111.9 - 2022: 115.0 - Gross external financing need (in percent of GDP): values presented in table (columns truncated in source text). ### Key Macroeconomic Assumptions - Real GDP growth (in percent): - Historical average and projections presented; key entries include: - 2014: 3.3 - 2015: 3.9 - 2016: 2.6 - 2017: 3.8 - 2018: 1.8 - 2019: 3.6 - 2020: 3.3 - 2021: 3.0 - 2022: 2.8 - Exchange rate appreciation (US dollar value of local currency, percent): - 2014: 0.1 - 2015: -16.3 - 2016: -4.4 - 2017: -1.2 - 2018: 11.3 - 2019: -0.1 - 2020: -0.4 - 2021: -0.1 - 2022: 0.0 - GDP deflator in US dollars (change in percent): - 2014: 0.6 - 2015: -15.7 - 2016: -4.2 - 2017: 0.9 - 2018: 12.0 - 2019: 1.6 - 2020: 2.3 - 2021: 2.5 - 2022: 2.5 - Nominal external interest rate (in percent): - 2014: 2.3 - 2015: 1.9 - 2016: 1.9 - 2017: 2.6 - 2018: 0.4 - 2019: 2.5 - 2020: 2.7 - 2021: 3.1 - 2022: 3.4 - Further projection values: 3.6, 3.8, 3.8 (as listed). - Growth of exports (US dollar terms, in percent): - 2014: 6.8 - 2015: -9.0 - 2016: 3.6 - 2017: 7.4 - 2018: 14.6 - 2019: 10.7 - 2020: 8.7 - 2021: 8.4 - 2022: 7.2 - Further projection values: 7.3, 6.6, 6.6. - Growth of imports (US dollar terms, in percent): - 2014: 8.0 - 2015: -11.9 - 2016: 2.6 - 2017: 6.6 - 2018: 18.3 - 2019: 13.6 - 2020: 9.8 - 2021: 9.1 - 2022: 8.0 - Further projection values: 8.0, 7.2, 7.2. - Current account balance, excluding interest payments: - 2014: -0.5 - 2015: 0.8 - 2016: 1.1 - 2017: -2.1 - 2018: 2.3 - 2019: 0.5 - 2020: 0.4 - 2021: 0.4 - 2022: 0.2 - Further projection values: 0.0, -0.2, -0.2. - Net non-debt creating capital inflows: - 2014: 3.0 - 2015: 2.9 - 2016: 0.5 - 2017: 2.4 - 2018: 1.0 - 2019: 0.5 - 2020: 1.5 - 2021: 2.0 - 2022: 2.1 - Further projection values: 2.1, 2.1, 2.1 - Debt-stabilizing non-interest current account (long-run constant balance that stabilizes the debt ratio): values shown in tables (0.0 and negative entries such as -2.8, -3.8, -2.9, -2.6, -3.0, -2.6, -1.1 in scenario panels). ### Alternative Scenarios and Bound Tests (Selected Results) - Alternative scenario A1 (Key variables at their historical averages in 2017–2022 4/): - Results: 71.0, 69.1, 68.5, 67.9, 67.2, 66.3 - Debt-stabilizing non-interest current account: 0.0 - Change reported: -3.8 - Bound Tests: - B1. Nominal interest rate is at baseline plus one-half standard deviation: - Results: 71.0, 67.4, 64.5, 62.1, 60.0, 58.1 - Debt-stabilizing non-interest current account: 0.0 - Change reported: -2.9 - B2. Real GDP growth is at baseline minus one-half standard deviations: - Results: 71.0, 67.8, 65.0, 62.8, 61.0, 59.4 - Debt-stabilizing non-interest current account: 0.0 - Change reported: -2.6 - B3. Non-interest current account at baseline minus one-half standard deviations: - Results: 71.0, 66.7, 66.6, 65.1, 64.0, 63.1 - Debt-stabilizing non-interest current account: 0.0 - Change reported: -3.0 - B4. Combination of B1-B3 using 1/4 standard deviation shocks: - Results: 71.0, 67.1, 66.8, 65.3, 64.0, 63.0 - Debt-stabilizing non-interest current account: 0.0 - Change reported: -2.6 - B5. One-time 30 percent real depreciation in 2018: - Results: 71.0, 75.0, 73.0, 69.6, 66.4, 66.2 - Debt-stabilizing non-interest current account: 0.0 - Change reported: -1.1 ### Notes on Methodology and Definitions - 1/ Automatic debt dynamics derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt. - 2/ Contribution from price and exchange rate changes defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator). - 3/ Gross external financing need defined as current account deficit, plus amortization on short-term and medium- and long-term debt. - 4/ Key variables included in historical-average scenario: real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP. - 5/ Long-run, constant balance that stabilizes the debt ratio assuming that key variables remain at their levels of the last projection year. ### Policy Notes from Article IV Consultation (Selected) - Monetary policy: - Directors noted accommodative monetary policy stance was appropriate but urged vigilance if inflation expectations were to disappoint or if growth were to slow down sharply. - Financial sector policy: - Directors welcomed strengthened financial sector frameworks. - Expressed concerns about new bank asset tax potentially undermining credit expansion and growth; encouraged consideration of a more growth-friendly tax. - Recommended case-by-case approach to restructuring foreign exchange-denominated mortgages rather than blanket conversion. - Fiscal policy: - Directors concurred with medium-term objective of 1 percent of GDP structural deficit. - Recommended resuming fiscal consolidation without delay to take advantage of favorable cyclical conditions. - Suggested maintaining the 2011 VAT increase, rationalizing discretionary government consumption, reducing sizable VAT policy and compliance gaps, and strengthening tax administration. - Encouraged maintaining legislated retirement age increases. - Structural reforms: - Directors encouraged continued structural reforms to boost productivity and promote inclusive growth. - Welcomed plans to increase access to vocational training and promote innovation. - Advised addressing regional disparities via improving educational attainment in Poland’s east, scaling up public infrastructure, and facilitating labor mobility. *Source: IMF staff calculations.* ### Introduction of expert ### Introduction of expert ### Economic outlook - 2016 real GDP grew by 2.7 percent. - Q1 2017 GDP growth accelerated to 4 percent. - 2017 growth is expected to be at least 3.6 percent, broadly in line with potential output. - Drivers of 2017 growth: increasing private consumption, growth in employment and wages, child benefit payments (“Family 500 plus”), improved consumer sentiment, better business confidence, boosted manufacturing and construction output, stabilized investment spending. - Unemployment rate declined to 4.8 percent in April 2017 and is expected to remain well below the EU average of 7.8 percent. - Financial sector: well capitalized; non-performing loans (NPLs) decreased to 7 percent. - Headline inflation picked up to 1.9 percent in May 2017. ### External sector - Current account (CA) deficit decreased to 0.3 percent of GDP in 2016, from 0.6 percent in 2015. - Nominal surplus in trade of goods and services reached 3.7 percent of GDP. - Exports benefited from euro area revival, especially Germany; weaker currency supported stronger exports in Q4 2016. - Transition to 2014-20 EU financial perspective reduced capital account surplus through lower inflow of funds. - Gross reserves increased in 2016 to about 128 percent of ARA metric. - Reserves increased in USD-terms from 95 to about 114 billion at end of 2016. - Access to the precautionary Flexible Credit Line (FCL) provides additional protection; it has recently been lowered in line with authorities’ exit strategy. ### Fiscal policy and public finances - 2016 general government deficit declined to 2.4 percent of GDP (according to ESA 2010), from 2.6 percent in 2015. - Tax revenues increased by 0.8 percent of GDP to 20.6 percent of GDP in 2016. - General government debt amounted to 54.4 percent of GDP in 2016. - 2017 budget deficit is expected to reach 2.9 percent of GDP, mainly due to an increase in public investment. - Government plans to reduce the structural deficit gradually beginning from 2018 to reach the medium-term objective (MTO) — a structural deficit of 1 percent of GDP — just after 2020. - Expenditure rule: requires a dynamic of expenditure by 1.5-2.0 percentage points lower than average GDP growth until MTO achieved and public debt reduced below 43 percent of GDP. - Fiscal measures to mobilize revenue and limit fraud: - The General Anti-Avoidance Rule — in force since 2016. - The Fuel Package — in force since August 2016. - Merging the tax and customs administration into the National Tax Administration — in force since March 2017. - A detailed automated analysis of tax books (Standard Audit File) — in force. - A system for monitoring road freight transport of certain sensitive goods (e.g. fuel, tobacco). - A split VAT payment mechanism — planned from 2018. - New spending commitments financed by higher tax revenues include “Family 500 plus” and lowering of the retirement age (planned from October 2017), with fiscal impact to be limited by incentives for employees to remain longer in the labor market. - June 2016: adoption of “Assumptions to Budgetary System Reform” aimed at strengthening medium-term budgetary framework, integrating annual and multiannual planning, and institutionalizing spending reviews. ### Monetary policy and inflation - From July 2014 to October 2016 Poland experienced CPI deflation caused mainly by the drop in global commodity prices (energy and food). - The average level of consumer prices in 2016 was 0.6 percent lower than in 2015. - Inflation increased to 1.9 percent in the first quarter of 2017. - Core inflation was 0.8 percent as of May 2017, indicating low demand pressure and limited pass-through from labor market tightening to wages and prices. - Inflation is forecast to reach 1.8 percent in 2017 and to gradually move towards the central bank target of 2.5 percent over the next two years. - The central bank has left its main policy interest rate unchanged since March 2015. ### Statistical issues, data adequacy, and data standards - General assessment: Data provision is adequate for surveillance. - National accounts: - GUS compiles and disseminates annual and quarterly GDP by production and expenditure approaches, both at current and previous year’s prices following the 2008 SNA and ESA 2010. - A supply and use table is only available for the year 2010. - Quarterly financial accounts of general government sector compiled by GUS. - Annual and quarterly financial accounts by institutional sectors compiled by Narodowy Bank Polski (NBP) following ESA 2010 and disseminated on an advance release calendar: annual financial accounts on the 20th of October the following year and quarterly financial accounts on the 20th calendar day of the 4th month following the end of the reference quarter (i.e., on the 20th of January, April, July, and October). - Price statistics: - Consumer price index does not cover imputed rents of owner-occupied dwellings. - Scope covers all resident households, except those in some rural areas. - Producer price index does not include estimation for missing prices; quality and seasonal adjustment techniques are not implemented. - Government finance statistics: - Ministry of Finance (MoF) compiles monthly data in accordance with GFSM 2001; monthly cash data cover “core” central government. - Starting in 2015 (annual data for 2014), GUS is responsible for annual government finance statistics compiled according to ESA2010 and adjusted to GFSM2014. - Data for 2013 were prepared by the Ministry of Finance according to GFS2001; data for 2014 were prepared by the Central Statistical Office according to GFSM2014. - Monthly and annual data regularly disseminated on the SDDS website. - Monetary and financial statistics: - From January 2004, NBP provides ECB with monetary accounts according to the ECB’s framework using national residency approach. - Data on other financial corporations (OFC) are currently not available. - Earlier ROSC recommended regular reconciliation of monetary and government finance statistics by NBP in cooperation with MoF. - Financial sector surveillance: - Since November 2009, NBP in cooperation with GUS, KNF and MoF began reporting Financial Soundness Indicators (FSI) based on IMF guide. - Poland reports all core FSIs and 21 of the 28 encouraged FSIs quarterly with a lag of approximately one quarter. - NBP implemented EU regulation 680/2014; first supervisory reporting collected for March 2014 for own funds and liquidity; consolidated reporting reported for the first time for September 2014. - External sector statistics: - Since Q1 2010 NBP fully depends on survey-based source data. - STA evaluation in July 2009 and follow-up in June 2011; errors and omissions reduced from 4 percent of GDP in 2004 to around 1 percent of GDP in recent years. - Poland started disseminating balance of payments data in line with BPM6 and external debt statistics in line with 2013 EDS Guide. - Poland reports Coordinated Direct Investment Survey and Coordinated Portfolio Investment Survey data to the IMF. - Data Standards and Quality: - Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since April 17, 1996. - Uses SDDS flexibility option on the timeliness of the data on general government and central government operations. - Data ROSC published in 2003. *Source: cr17220 - Introduction of expert (IMF).* ### 1.5 percent. Keeping interest rates stable, yet markedly higher than in other EU countries, has ### cr17220 - 1.5 percent. Keeping interest rates stable, yet markedly higher than in other EU countries, has ### Monetary policy and inflation outlook - Keeping interest rates stable, yet markedly higher than in other EU countries, has supported macroeconomic balance and price stability. - The authorities perceive holding the policy rate on hold as appropriate at least until the end of 2017. - Agreement with staff: policy decisions should be data driven and inflationary pressures should be monitored. - Authorities underline commitment to timely actions in the event of any changes that would jeopardize the inflation objectives. ### Financial sector — resilience, capitalization, liquidity, and credit - Financial sector in Poland remains resilient and stable, with solvency ratios well-exceeding regulatory minimum. - Financial institutions are well-capitalized and liquid. - Banks increased capital adequacy ratio from 16 percent in 2015: Q4 to 17.2 percent in 2016: Q4. - Average Tier 1 capital ratio increased by 1 percentage point (from 14.6 to 15.6 percent in the same period). - Non-performing loans (NPLs) dropped to 7 percent of total loans. - Liquidity of banks improved, due to higher household and corporate deposit growth. - Operating costs are rising, reflecting the current low interest rate environment. - Credit supply continued to grow despite gradual strengthening of lending standards. - Growth dynamics: - Growth of housing and consumer loans mainly driven by further improvement in the labor market and rising incomes. - Decrease of the growth rate of corporate loans underpinned by a slowdown in the segment of loans to large enterprises. - Economic indicators pointing to credit cycle phase: - Increased economic growth, further improvement on the labor market and an increase in individual consumption point to the credit cycle in Poland moving through the juncture of recovery and expansion phases in 2017. - Growth of lending should also be supported by expected higher utilization of the EU funds. ### FX mortgage loans — policy deliberations and legislative developments - Authorities are reviewing possible options to address the issue of the FX mortgage loans. - Current assessment: the FX mortgage portfolio does not generate systemic risks and such loans are being serviced on time. - Authorities seek most efficient solution to address consumer protection concerns, with agreement that no solution implemented should endanger financial stability. - Legislative activity and proposals: - Appreciation of the Swiss franc led to initiatives of legislative intervention into contractual provisions arising from FX mortgages. - Three bills are being proceeded in the Parliament, including: - A proposal of refunding a part of FX spreads prepared by the Chancellery of the President. - A Parliament’s draft on a statutory conversion of FX mortgages. - Financial Stability Committee (KSF) position (January 2017): - Any restructuring should be on a voluntary basis. - Statutory conversions are not a proper course of action. - The Committee released nine recommendations to encourage banks to convert FX mortgages into Polish zloty denominated ones, by providing measures facilitating voluntary restructuring. - Timeline for decisions: - Work on solutions is ongoing and final decisions and implementation of the package of measures to address FX mortgages are expected to be concluded by the end of 2017 or in early 2018. ### Ownership and sectoral consolidation - Government declared a strategy to increase share of domestic ownership in the banking sector, to strengthen its stability and capacity to absorb external shocks. - In December 2016, PZU, together with Polish Development Fund (PFR), signed the agreement to purchase a 32.8 percent stake in Bank Pekao from UniCredit. - The transaction was completed in June 2017. ### Structural reforms — Responsible Development Strategy (RDS) and innovation - Authorities strongly committed to implementation of structural reforms, expressed by the introduction of the Responsible Development Strategy (RDS). - Main objective of the RDS: provide sustained and inclusive economic, social, environmental and regionally-spread growth. - RDS features: - Presents a set of strategic objectives, supplemented by flagship projects and monitoring tools. - Aims to increase potential of the economy through re-industrialization, foster innovative companies, promote sustained regional development, support international expansion of domestic firms, create more high-quality jobs and achieve convergence with the EU average per capita income. - Currently encompasses 185 legal, investment or organizational initiatives. - Some initiatives already implemented, such as the Business Constitution (a set of 100 pro-business legal rationalization initiatives) and creation of the Polish Development Fund. - Innovation priority: - One of top priorities of the RDS is to promote innovation. - The PFR and other institutions offer a range of investment initiatives addressed to startups and innovative companies. - Increase in the R&D spending and support for innovative companies at different stages of maturity is perceived by the authorities as a way to achieve a more technologically advanced economy. *IMF staff report content (cr17220).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17220.pdf_