## Republic of Poland — Selected IMF Staff Report (cr1937)

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### Foreign workers, labor market, and macro implications
- Trend and magnitude
  - Foreign workers rose from around 1 percent of employment in 2014 to about 5 percent (adjusted for double-accounting) of total employment at end-2017, with more than 90 percent coming from Ukraine.
  - An individual foreign worker is permitted to work for up to 6 months within any 12-month period under the “employer’s statement” procedure; effective measurement halves the number to obtain effective foreign workers employed.
  - Relative wages: In PPP terms, average wages in Poland are three times higher than in Ukraine. At market exchange rates the difference rises to five times.
- Labor market effects
  - Unemployment at 3.8 percent in 2018, near a record low.
  - Adding effective foreign workers to LFS-based employment suggests employment grew by 2.8 percent in 2017 (vs. 1.4 percent reported in the LFS).
  - For 2017, the adjusted labor contribution to potential GDP growth doubles to 1.2 percent; corresponding adjustment: a 0.6 percentage point downward adjustment to the contribution from TFP.
  - Evidence suggests foreign workers may earn less than average wages; survey of Ukrainian workers: more than 40 percent reported earning around the minimum wage (less than half the Polish average wage), an additional third earning slightly more.
  - Foreign labor supply considered highly elastic given large wage gap and Ukrainian labor force; foreign-worker inflows limit the output gap and dampen inflationary pressure.
- Macroeconomic implications
  - The sharp increase in foreign workers contributed to rapid household consumption growth, though foreign workers are thought to repatriate the majority of their earnings as remittances abroad.
  - New foreign worker arrivals expected to slow amid decelerating growth and partial opening of labor markets in higher-income EU countries.
  - Risk: labor shortages if foreign workers migrate to other countries with better opportunities.

### Recent developments: growth, external sector, and reserves
- Growth dynamics
  - GDP growth accelerated from 3.1 percent (year-on-year) in 2016 to more than 5 percent during the first three quarters of 2018.
  - Since 2017 growth supported by three cycles: rebound in euro-area activity, substantial increase in EU transfers, and new large social benefit programs.
  - EU capital transfers contributed about 2 percentage points of GDP during 2017–18 to local government and SOE investment.
  - Private investment remained lackluster; external sector contribution turned marginally negative as imports rose faster than exports.
  - High-frequency indicators suggested growth may have moderated in late-2018 amid a drop in external demand (notably in the automotive sector).
- External sector and reserves
  - Current account balance improved by 6½ percentage points of GDP since the pre-GFC low in 2007–08, reaching a modest surplus in 2017.
  - In 2018 the current account is estimated to have returned to a deficit (around ¾ percent of GDP).
  - Negative net international investment position moderated to an estimated 58 percent of GDP in Q3:2018; NIIP estimated to reach negative 63 percent of GDP in 2018 (Annex VI).
  - Gross international reserves are estimated at US$114 billion at end-2018; net reserves (excluding NBP’s repo operations) estimated at US$98 billion at end-2018.
  - Reserves: about 100 percent of the Fund’s reserve adequacy metric (net reserves about 99 percent; gross reserves about 113 percent of the metric).

### Inflation, monetary policy guidance, and outlook
- Recent inflation
  - Headline inflation hovered between 1.3–2.5 percent (year-on-year) since early 2017; it dropped to 1.3 percent in November 2018.
  - Core inflation was just under 1 percent, falling to 0.7 percent in November 2018.
  - About half of the core consumer price basket remains in very-low inflation or deflation territory; the share in deep deflation rose in 2018.
  - Factors keeping inflation low: participation in regional supply chains, large price declines in categories (notably around 15 percent drop in "banking and postal charges" reducing CPI by around ½ percentage point), dampening of wage growth from foreign workers, strong competition from “big-box” retailers and e-commerce.
- Inflation outlook and risks
  - Inflation is expected to edge up gradually toward the mid-point of the target on modest growth in unit labor costs and potential second-round effects from energy price increases for firms.
  - Temporary factors: the large decline in financial services prices expected to dissipate in early 2019.
  - Energy-price note: anecdotal evidence indicates prices for firms are rising by about 60 percent on average; energy accounts for about 2 percent of firms’ total costs—on average—so second-round effects are expected to be limited.
  - Key uncertainties: evolution of cyclical position; size of foreign worker inflows and their impact on wage dynamics; extent of second-round energy effects; idiosyncratic consumer price developments; lack of clarity on administered electricity prices and compensation schemes.
- Monetary policy guidance
  - Recommended approach: data-dependent; respond only to sustained inflation developments.
  - Recent stance: a stable nominal policy rate of 1.5 percent—consistent with a marginally-negative real rate—has been appropriately accommodative given inflation persistently below the mid-point of the target.
  - Conditional guidance: raise interest rates if inflation is approaching the mid-point of the target on a sustained basis; pace of tightening should be attuned to inflation momentum and stance of other policies; faster tightening warranted if fiscal policy turns expansionary.
  - Role of non-monetary measures: avoid raising policy rate in response to exogenous supply shocks beyond NBP influence.

### Fiscal policy, PPK pension scheme, and fiscal outlook
- Recent fiscal outcomes and trajectory
  - Headline deficit on track to reach a record low of 0.6 percent of GDP in 2018 (about 0.8 percentage point below the previous year’s); other sections note headline deficit expected to reach 0.5 percent of GDP in 2018.
  - Structural deficit declining to around 1½ percent of GDP.
  - Public debt projected to fall below 50 percent of GDP in 2018 and to about 43.5 percent of GDP by 2023 (Annex V baseline: public gross debt series: 2018 = 48.6; 2019 = 46.1; 2020 = 44.7; 2021 = 44.1; 2022 = 43.7; 2023 = 43.6 percent of GDP).
  - Effective interest rate projected around 3.2 percent in 2018, rising gradually to 3.5 percent by 2023.
- Risks and quality concerns
  - Headline balance benefited from temporary revenue from buoyant cyclical position and sharp increase in foreign workers.
  - Risks: new pre-election measures in 2019–20 (including electricity compensations) could increase deficits; consolidation relied on measures hard to sustain (compression of wages and social benefits relative to GDP), rising share of nondiscretionary spending, use of extrabudgetary funds reducing transparency, and earmarking narrowly-based taxes causing distortions.
  - Staff assumption: electricity subsidy will have an annual cost of about 0.2 percent of GDP, financed in 2019 by auctioning unused CO2 emission rights; beyond 2019 subsidy assumed to continue and result in a larger general government deficit.
- Policy recommendation to reach MTO
  - Reaching and maintaining the MTO (a structural deficit of one percent of GDP) would likely require a further adjustment of close to 1 percentage point of GDP, which could be frontloaded.
  - Possible measures include: reducing proliferation of preferential VAT rates; better-targeting social benefits (including means-testing currently universal programs); eliminating electricity subsidies to households and SMEs; raising the pension age; phasing out generous special pension schemes; avoiding excessive reliance on further tax compliance gains.
  - A comprehensive review of expenditure and strengthening the medium-term budget framework recommended to identify savings and increase achievability of the expenditure ceiling and the MTO.
- PPK: design, coverage, and fiscal implications
  - PPK objectives: increase domestic saving and investment; augment household retirement incomes; deepen capital markets.
  - Coverage and roll-out: automatic participation for employees up to 55 years; official projection envisages 75 percent of employees (8.6 million persons) will join; roll-out schedule from July 2019 to January 2021 by firm size.
  - Contributions and incidence:
    - Total standard contribution set at 3½ percent of the employees’ gross wage, plus a “welcome bonus” from the state budget for the first year.
    - Employee’s standard contribution: 2 percentage points, reduced to 0.5 percentage points for those earning less than 1.2 times the minimum wage; employees may voluntarily top-up to 4 percentage points.
    - Employers’ standard contribution: 1.5 percentage point—with voluntary top‑up to 4 percentage points.
    - Alternative description: basic plan contributions of 3.5 percent of net wage, and full plan up to 8 percent.
    - Authorities project annual private contributions to the PPK of 0.7 percent of GDP by 2021 (1.4 percent of GDP with full top‑up). Projected fiscal cost of the scheme: 0.16 percent of GDP.
    - State bonuses: one‑time PLN250 and yearly PLN240 conditional bonus.
    - Contributions treated as employee income taxed under PIT but exempted from social contributions; income on PPK assets exempted from capital gains tax.
    - Incidence: PPK will increase the wedge between net and gross wages; in the tight labor market much of the cost likely to be borne by employers.
  - Asset management and rules:
    - Savings managed by investment funds within guidelines; default manager is the state‑owned Polish Development Fund (PFR) if employer does not select a fund.
    - Management fees capped at 0.5 percent of assets, plus a 0.1 percent "success fee."
    - Initially, 60–80 percent of assets must be held in equities (at least 40 percentage points in WSE quoted blue‑chips (WIG20)); equity share diminishes to 15 percent approaching retirement.
    - Allowable debt instruments: issued or guaranteed by Polish or other EU governments, local authorities, central banks, the EIB, or IFIs; foreign currency assets may comprise no more than 30 percent of the portfolio.
  - Payouts and withdrawals:
    - Payouts commence at age 60: first payout up to a quarter of assets, rest as 120 or more monthly installments; no annuities offered.
    - Early withdrawal: quarter allowed; full early withdrawal possible for mortgage down‑payment but must be replenished; otherwise subject to capital gains tax and social contributions on employer payments at a 30 percent rate.

### Financial sector resilience, supervision, and risks
- System resilience and credit
  - FSAP/FSSA stress-tests: banks resilient to sizable-but-plausible macroeconomic, market and liquidity shocks, despite pockets of vulnerability in some small and mid-sized banks.
  - Credit growth moderate; credit growing more slowly than nominal GDP. Composition skewed toward unsecured consumer credit.
  - NPL ratio for certain segments at 10.9 percent (against a system-average of 7.3 percent).
  - Zloty-denominated mortgage growth remains around 11 percent; FX mortgage replacement/amortization around 8 percent annually; legacy FX mortgages declined to 6½ percent of GDP and not systemic.
  - Banks are well-capitalized, liquid, mostly deposit-funded; average capital adequacy ratio 18.4 percent; Tier 1: 16.4 percent.
- FIAT and credit allocation
  - FIAT induced shifts toward tax-exempt government bonds and unsecured consumer credit; profitability lower than before FIAT; replacing FIAT with one on profits and remuneration would be less distortionary.
- Supervisory governance and PFSA
  - PFSA faces severe resource constraints—budgetary and staffing—and lacks independence over operational decisions, impeding oversight and AML/CFT compliance.
  - Recent legislation (late-November 2018) may allow better resourcing but gives government and president a blocking majority on PFSA’s Board (five of nine voting-members), raising concerns about political interference.
  - New law adds three non-voting members to PFSA Board, increasing total membership to 12.
  - State ownership and control of systemically-important banks rose to 14 percent and 42 percent of assets, respectively; about half of banking assets domestically controlled after 2017 sale.
  - Recommendations: protect PFSA operational independence; ensure appropriate budget and governance to provide well-resourced supervisor; insulate PFSA board from undue political influence; delegate technical tasks to PFSA chair and staff; give PFSA a formal role in setting regulatory policies and priorities.
  - Absent safeguards, state ownership of the financial sector should be reduced over time.

### Structural policies, state ownership, and productivity
- Labor supply and participation
  - Lowering the pension age and generous child benefits encouraged workforce withdrawals amid severe labor shortages.
  - Empirical estimates: participation rate of mothers dropped by 2.4 percentage points by mid-2017 due to the 500+ benefit program (implying withdrawal of about 100 thousand women); participation rate of older workers eligible for retirement benefits dropped by about 0.5 percentage point in mid-2018 (implying withdrawal of about 40 thousand workers).
  - Suggested measures: raise labor force participation of women and older cohorts; continue to attract foreign workers by permitting longer-term stays; tap under-utilized labor pools; recognize foreign qualifications; regionally-differentiated minimum wage.
- Investment, competition, and SOEs
  - Persistently subdued private investment is holding back productivity and output per worker.
  - Staff estimates: converting all nonfinancial state-owned firms in Poland to private ownership could increase the level of TFP and real GDP by nearly nine percent, while future TFP growth would also be faster.
  - Risks from state control: politicized credit allocation, crowding out efficient investment, negative spillovers from broader SOE mandates.
  - Recommendations: evenhanded and independent oversight to maintain competition between SOEs and private firms; protect minority shareholders; limit state acquisitions to cases of market failure; address social and macro objectives transparently through the budget.
- Environmental taxation and energy policy
  - Poland generates around 80 percent of its electricity from coal; carbon emissions fees saw a nearly five-fold increase in the EU-wide market during 2018.
  - Concern: compensating end-users for environmental taxes circumvents environmental objectives.
  - Recommendation: raise end-user electricity prices and rebate users with revenue collected from the fees or proceeds from selling emissions rights to protect low-income households while achieving environmental goals.

### Debt sustainability, external debt, and shock scenarios (Annexes)
- Public sector DSA key baseline indicators
  - Nominal gross public debt (percent of GDP): 2017 = 50.6; 2018 = 48.6; 2019 = 46.1; 2020 = 44.7; 2021 = 44.1; 2022 = 43.7; 2023 = 43.6.
  - Public gross financing needs (percent of GDP): 2017 = 3.7; 2018 = 5.9; 2019 = 6.5; 2020 = 6.3; 2021 = 6.2; 2022 = 5.2; 2023 = 5.3.
  - Real GDP growth (percent): 2017 = 4.8; 2018 = 5.1; 2019 = 3.6; 2020 = 3.0; 2021 = 2.8; 2022 = 2.8; 2023 = 2.8.
  - Inflation (GDP deflator, percent): 2017 = 1.8; 2018 = 2.1; 2019 = 3.1; 2020 = 2.8; 2021 = 2.3; 2022 = 2.3; 2023 = 2.3.
  - Effective interest rate (percent): 2017 = 3.1; 2018 = 3.2; 2019 = 3.2; 2020 = 3.3; 2021 = 3.4; 2022 = 3.5; 2023 = 3.5.
  - Change in gross public sector debt (cumulative 2018–2023) = -7.0 (percent of GDP).
  - Identified debt-creating flows (cumulative 2018–2023) = -8.4 (percent of GDP).
  - Primary deficit (2018–2023 cumulative) = -0.5 (percent of GDP).
- Stress-test scenarios and results (selected)
  - Primary balance shock: deterioration by 0.8 percentage points during 2018–19 → public debt remains on declining path to about 45 percent of GDP in 2023; gross financing needs peak ≈ 7 percent of GDP in 2020.
  - Growth shock: drop in GDP growth by about 1.2 percentage points for 2019–20 with inflation and primary balance deterioration → public debt ≈ 47 percent of GDP by 2023; gross financing needs increase to about 8 percent of GDP in 2020.
  - Interest rate shock: permanent 352 bps increase beginning 2020 → effective interest rate increases by 49 bps in 2020 and to 182 bps by 2023; debt-to-GDP about 2 percentage points higher than baseline by 2023.
  - Exchange rate shock: nominal depreciation of about 26 percent in 2019 (3.84PLN/US$ to 4.88 PLN/US$) → gross public debt increases by 0.5 percentage point in 2019, then trends down.
  - Combined shock: public-debt-to-GDP ratio jumps to 52 percent in 2020; gross financing needs increase to 8 percent of GDP in 2020.
- External debt and vulnerabilities (Annex VI)
  - External debt (percent of GDP baseline): 2018 = 68.2; 2019 = 64.6; 2020 = 60.5; 2021 = 57.5; 2022 = 54.8; 2023 = 52.7.
  - External debt under interest rate shock scenario peak = 71 (percent of GDP).
  - Gross external financing need (US$ billions): 2018 = 90.4; 2019 = 94.0; 2020 = 97.1; 2021 = 100.3; 2022 = 103.2; 2023 = 108.8.
  - External position assessment: external position in 2018 broadly in line with fundamentals and desirable policies; cyclically-adjusted CA balance moderately higher than implied by EBA CA norm; full utilization of EU funds should bring CA in line with fundamentals.
  - NIIP projected at negative 63 percent of GDP in 2018; gross external debt projected at 66 percent of GDP at end-2018; share of short-term debt (remaining maturity) 29 percent.

### Outlook, risks, and policy priorities
- Growth outlook
  - GDP growth projected to moderate to 3.6 percent in 2019 as external demand softens, underpinned by buoyant private consumption and absorption of EU funds.
  - Over the longer term, growth gradually moderating to around 2¾ percent by 2023 due to shrinking working-age population, subdued private investment, and tepid productivity gains.
  - Current account deficit forecast to widen gradually to around 1½ percent of GDP on declining household net saving (rather than desirable increase in corporate investment).
- Risks
  - Near-term risks two-sided; longer-run risks tilted to downside.
  - Downside risks include escalation of global trade tensions, disruptive Brexit, turbulence in global financial markets, labor shortages if foreign workers migrate elsewhere, and domestic risks from larger state footprint slowing productivity or slippages in policies and governance.
  - Upside: faster absorption of EU funds could boost near-term growth though limited by supply bottlenecks.
  - External risk matrix highlights rising protectionism (Relative Likelihood: High) and sharp tightening of global financial conditions (Relative Likelihood: High) as key external risks.
- Staff policy priorities
  - Monetary policy: remain data dependent; current accommodative stance appropriate while inflation below mid-point; tighten if underlying inflation pressures accelerate.
  - Fiscal policy: additional adjustment needed to reach MTO; adhere to expenditure rule ceilings; strengthen revenue administration; narrow VAT policy gap; implement more-targeted social benefits; raise pension age.
  - Structural reforms: raise labor force participation; remain attractive to foreign workers; increase private investment to raise output per worker; ensure level playing field for investors; protect minority shareholders; maintain competition where state presence is significant; gradually reduce state ownership of financial sector.

*Source: IMF staff report text (cr1937).*

### 1. Foreign Workers and Some Implications for the Polish Economy______________________________ 22

### 1. Foreign Workers and Some Implications for the Polish Economy

### Context
- Poland experienced continuous expansion for 25 years and was the only EU member to avoid a recession during the Global Financial Crisis (GFC).
- PPP-based per capita income reached 70 percent of the EU average.
- Strong growth and redistribution policies reduced unemployment to low levels and improved social welfare indicators (incidence of poverty and income inequality) relative to EU peers.
- Further reforms are required as Poland is at an advanced stage of demographic transition:
  - The working-age population is forecast to decline at an annual rate of over 1 percent through the middle of the century.
  - Potential opening of labor markets in neighboring countries to non-EU workers could reduce Poland’s attractiveness for foreign workers.
- Policy implication: Transition from a labor-intensive growth model toward productivity-enhancing policies and moving up the value chain; avoid sustained reliance on policy stimulus to maintain macroeconomic stability.

### Recent Developments — Growth, Labor, and Prices
- Growth dynamics:
  - GDP growth accelerated from 3.1 percent (year-on-year) in 2016 to more than 5 percent during the first three quarters of 2018.
  - Since 2017 growth was supported by three coincident cycles: a rebound in euro-area activity, substantial increase in EU transfers, and new large social benefit programs.
  - EU capital transfers contributed about 2 percentage points of GDP during 2017–18 to local government and SOE investment.
  - Private investment remained lackluster; external sector contribution turned marginally negative as imports rose faster than exports.
  - High-frequency indicators suggested growth may have moderated in late-2018 amid a drop in external demand (notably in the automotive sector).
- Labor market and foreign workers:
  - The estimated stock of foreign workers rose from 1 percent of employment in 2014 to around 5 percent in 2017.
  - Unemployment at 3.8 percent in 2018, near a record low.
  - Capacity utilization rates are high; output gap estimated at around 0.5 percent in 2018.
  - Evidence suggests foreign workers may earn less than average wages; survey of Ukrainian workers: more than 40 percent reported earning around the minimum wage (less than half the Polish average wage), an additional third earning slightly more. Anecdotal evidence: in the formal sector foreign workers’ monthly wages similar to Polish workers but they tend to work additional hours.
  - Given the large wage gap between Poland and Ukraine and the large Ukrainian labor force, foreign labor supply considered highly elastic, implying actual and potential output co-move closely and limit the output gap.
- Inflation:
  - Headline inflation hovered between 1.3–2.5 percent (year-on-year) since early 2017; it dropped to 1.3 percent in November 2018.
  - Core inflation was just under 1 percent, falling to 0.7 percent in November 2018.
  - About half of the core consumer price basket remains in very-low inflation or deflation territory; the share in deep deflation rose in 2018.
  - Factors keeping inflation below the mid-point of the target include:
    - Participation in regional supply chains restraining tradable sector prices.
    - Large price declines in several categories, notably a around 15 percent drop in "banking and postal charges" in early 2018, which reduced CPI inflation by around ½ percentage point.
    - Some dampening of wage growth from the influx of foreign workers.
    - Strong price competition from “big-box” retailers and e-commerce.
- External sector and reserves:
  - Current account balance improved by 6½ percentage points of GDP since the pre-GFC low in 2007–08, reaching a modest surplus in 2017.
  - In 2018 the current account is estimated to have returned to a deficit (around ¾ percent of GDP).
  - Negative net international investment position moderated to an estimated 58 percent of GDP in Q3:2018.
  - Real effective exchange rate broadly unchanged from mid-2000s; exchange rate served as a shock absorber.
  - Reserves: about 100 percent of the Fund’s reserve adequacy metric (gross reserves about 113 percent of the metric).
  - External sector position in 2018 assessed broadly in line with medium-term fundamentals and desirable policies (Annex VIII).
- Banking and credit:
  - Credit growth moderate; credit growing more slowly than nominal GDP.
  - Composition skewed toward unsecured consumer credit.
  - NPL ratio for certain segments at 10.9 percent (against a system-average of 7.3 percent).
  - Zloty-denominated mortgage growth slowed due to step-wise decrease in loan-to-value ceiling during 2014–17, but growth remains around 11 percent.
  - FX mortgage replacement/amortization around 8 percent annually; issuing FX mortgages to unhedged borrowers prohibited since 2013.
  - Housing demand financed increasingly with buyers’ own resources; rising construction costs slowed supply; nominal house prices in some regions back to pre-GFC levels, though affordability remains comfortable.
  - Bank lending to corporates subdued; leasing activity large and expanding rapidly, heavily utilized by SMEs.
  - Banks are well-capitalized, liquid, mostly deposit-funded; NPL ratio resumed downward trend after a one-off rise from IFRS9 introduction in early 2018.
  - Profitability recovered somewhat after a dip in early 2016 following the financial institutions asset tax (FIAT).
  - Following the 2017 sale of part of a large foreign bank to state-controlled entities, about half of banking assets are domestically controlled—predominantly by the state (Annex III).

### Outlook and Risks
- Growth projections:
  - GDP growth projected to moderate to 3.6 percent in 2019 as external demand softens, underpinned by buoyant private consumption and absorption of EU funds (including carry-over of unspent amounts from 2018).
  - New foreign worker arrivals expected to slow amid decelerating growth and partial opening of labor markets in higher-income EU countries.
  - Over the longer term, projections point to GDP growth gradually moderating to around 2¾ percent by 2023 due to a shrinking working-age population, subdued private investment, and tepid productivity gains.
  - Current account deficit forecast to widen gradually to around 1½ percent of GDP on declining household net saving (rather than a desirable increase in corporate investment).
- Risks:
  - Near-term risks are two-sided; longer-run risks tilted to the downside.
  - Upside: faster absorption of EU funds could boost near-term growth, though limited by supply bottlenecks.
  - Downside risks include:
    - Escalation of global trade tensions.
    - Disruptive Brexit.
    - Resumption of turbulence in global financial markets.
    - Labor shortages if foreign workers migrate to other countries with better opportunities.
    - Domestic risks from a larger state footprint slowing productivity growth or from slippages in prudent policies and governance—heightened around Poland’s electoral calendar or deterioration in relations with the EU.
  - Foreign investor behavior:
    - Foreign holdings of zloty-denominated government bonds have gradually declined as interest rate differentials with US dollar assets narrowed.
    - Little evidence that investors have been perturbed by disputes with the EU or policies of “re-Polonization”; sovereign spreads widened from 2015 lows but remained stable recently; new FDI continues.
    - Credit rating agencies have maintained or raised strong ratings for Poland.

### Authorities’ Views (as reported)
- Authorities expect GDP growth to slow gradually; risks mainly external.
- Based on first three quarters data, 2018 GDP growth expected to exceed 2017 outturn.
- Growth expected to moderate from late 2018 due to subdued euro-area activity and a tight labor market, with growth reaching 3.8 percent in 2019 and 3.7 percent in 2020.
- Authorities identify major external risks:
  - Possible escalation of international trade disputes disrupting global supply chains.
  - Adverse conditions for the UK’s departure from the EU.
  - Changes to immigration policy by other EU countries that could intensify labor shortages.

*International Monetary Fund staff report excerpt.*

### 11.      Inflation is expected to edge up gradually toward the mid-point of the target, but

### 11.      Inflation is expected to edge up gradually toward the mid-point of the target, but

### Inflation outlook and risks
- Inflation is expected to edge up gradually toward the mid-point of the target on:
  - modest growth in unit labor costs, and
  - potential second-round effects from energy price increases for firms.
- Temporary factors:
  - The large decline in financial services prices has a temporary effect that is expected to dissipate in early 2019.
- Sectoral constraints:
  - Strong supply-chain links with the region are expected to continue to limit increases in costs and prices in the tradable sectors.
- Pass-through:
  - The tight labor market and some pass-through of higher electricity prices for firms are projected to gradually lift inflation.
- Offsetting factors:
  - Strong corporate profitability would allow firms to absorb much of the rising labor and energy costs without raising output prices.
- Key uncertainties and risks to the forecast:
  - Evolution of the cyclical position.
  - Size of foreign worker inflows and their impact on wage dynamics.
  - Extent of second-round effects from energy price increases.
  - Increasingly-unpredictable consumer price developments—including large idiosyncratic declines for some items.
  - Lack of clarity on changes in administered electricity prices and a possible compensation scheme for households and SMEs.
- Specific energy-price note:
  - Energy prices for firms are unregulated and agreed bilaterally under staggered contracts with durations of one year or longer.
  - Anecdotal evidence indicates that prices for firms are rising by about 60 percent on average.
  - Because energy accounts for about 2 percent of firms’ total costs—on average—second-round effects are expected to be limited.

### Monetary policy guidance
- Recommended approach:
  - Monetary policy should follow a data-dependent approach, and respond only to sustained inflation developments.
- Recent stance:
  - A stable nominal policy rate of 1.5 percent—consistent with a marginally-negative real rate—in recent years has been appropriately accommodative in the context of inflation persistently below the mid-point of the target.
- Conditional guidance:
  - With inflation projected to edge up only gradually toward the mid-point of the target, interest rates should be raised if inflation is approaching the mid-point of the target on a sustained basis.
  - The pace of monetary policy tightening should be attuned to the momentum of inflation and to the stance of other policies.
  - A faster tightening than otherwise is warranted if fiscal policy were to turn expansionary.
- Role of non-monetary measures:
  - Raising the policy rate in response to exogenous price shocks that are beyond the influence of the NBP’s monetary policy would exacerbate the growth slowdown; measures other than monetary policy should be used to address supply shocks.

### Authorities’ views on inflation and policy (Monetary Policy Council)
- Majority view of the Monetary Policy Council:
  - Slowing growth would ensure that any cost-push increase in inflation is short-lived.
  - Monetary policy should not react to temporary, supply-side shocks.
  - For 2019, headline inflation is forecast to increase on account of rising unit labor costs and higher electricity prices (assuming new tariffs for households are introduced) but to stay well-within the tolerance band.
  - Core inflation will remain below 2.5 percent.
  - Headline inflation is generally seen as returning close to the mid-point of the target by 2020 without the need to raise the policy rate due to intense competition among companies and slowing GDP growth, notwithstanding a still-sizeable positive output gap.
  - Inflation is expected to be close to the mid-point of the target at the horizon of monetary policy transmission.
- View on policy response to exogenous shocks:
  - Raising the policy rate in response to exogenous price shocks beyond NBP influence would exacerbate the growth slowdown and thus other measures should address supply shocks.
- Incorporates views in the NBP’s November 7, 2018 Inflation Report and minutes of recent MPC meetings.

### Fiscal policy: securing previous gains and risks
- Recent outcomes:
  - Further substantial reductions in the headline and structural deficits are expected in 2018.
  - The headline deficit is on track to reach a record low of 0.6 percent of GDP in 2018 (about 0.8 percentage point below the previous year’s).
  - The structural deficit is declining to around 1½ percent of GDP.
  - Public debt is projected to fall below 50 percent of GDP.
- Drivers of improvement:
  - Cost of several new initiatives was largely offset by revenue from the introduction of a tax on assets of financial institutions and improvements in tax compliance.
  - Structural position improved on account of indexing some tax thresholds and expenditure items below the rate of nominal GDP growth.
  - Headline balance benefited from temporary revenue from the economy’s buoyant cyclical position and the sharp increase in the number of foreign workers.
- Risks and 2019 outlook:
  - For 2019, much of the previous structural improvement is expected to carry forward, although the headline deficit is forecast to increase on account of slowing cyclical revenue.
  - New pre-election measures in 2019–20, including to offset higher electricity costs for additional groups of users, present a risk.
- Quality concerns:
  - Consolidation has relied on measures that will be hard to sustain, notably compression of wages and social benefits relative to GDP that will depress future living standards.
  - Rising share of nondiscretionary spending, mainly for social transfers, has increased budget rigidity.
  - Proposal to use extrabudgetary funds (outside the budget process and not covered by the expenditure rule), including to compensate end-users for electricity price increases in 2019, reduces transparency and usefulness of the rule.
  - Earmarking revenue from narrowly-based taxes and levies can create distortions and cause revenue yields to be overestimated.
  - Public investment driven by the EU funds cycle leads to capacity constraints, inefficiencies and procyclical fiscal stimulus.
- Staff assumptions and estimates:
  - Staff assumes the electricity subsidy will have an annual cost of about 0.2 percent of GDP, and will be financed in 2019 by auctioning unused CO2 emission rights.
  - Beyond 2019, the subsidy is assumed to continue, and result in a larger general government deficit.
- Policy recommendation and needed adjustment:
  - Additional adjustment is needed, relying on well-specified and sustainable measures.
  - Reaching and then maintaining the MTO—a structural deficit of one percent of GDP—would likely require a further adjustment of close to 1 percentage point of GDP, which could be frontloaded because the economy is operating above potential.
  - Adjustment should be underpinned by clearly-identified and sustainable measures. Possible measures include:
    - reducing the proliferation of preferential VAT rates;
    - better-targeting social benefits (including means-testing currently universal programs);
    - eliminating electricity subsidies to households and SMEs;
    - raising the pension age (consistent with past gains in life expectancy);
    - phasing out generous special pension schemes;
    - avoiding excessive reliance on further tax compliance gains.
  - A comprehensive review of expenditure and strengthening the medium-term budget framework would help identify potential savings and increase achievability of the expenditure ceiling and the MTO.
- Authorities’ (majority) view on fiscal trajectory:
  - Permanent revenue gains from narrowing the VAT compliance gap helped reduce the 2018 headline deficit to around 0.5 percent of GDP.
  - For 2019, considerable overperformance relative to the headline deficit target of 1.7 percent of GDP is likely due to underspending and conservative revenue forecasts.
  - Existing policies and debt-adjustors in the national expenditure rule will lower debt to about 43 percent of GDP by 2022.
  - If new spending pressures or permanent revenue cuts occur, compliance with the rule necessitates that savings be identified and implemented within a medium-term budget framework.
  - Pensions under the notional defined contribution system do not present a fiscal risk because payouts are linked to each individual’s own contributions; the pension-to-wage replacement rate is expected to fall from the current 60 percent to around 40 percent by 2030.
  - The EU’s Aging Working Group estimates that Poland’s pension spending will remain at around 11 percent of GDP through 2060.

### Financial stability and supervision
- Overall system resilience:
  - The financial system is broadly robust, although pockets of vulnerability exist.
  - Stress tests on end-2017 data indicate that commercial banks are resilient to sizable-but-plausible macroeconomic, market and liquidity shocks, despite pockets of vulnerability.
- Credit allocation and tax distortions:
  - Introduction of the FIAT prompted banks to shift asset allocation toward tax-exempt government bonds and to more profitable-but-riskier unsecured consumer credit at the expense of less-profitable, potentially more-productive, corporate lending.
  - Replacing the FIAT with a tax on banks’ profits and remuneration would be less distortionary for credit allocation and reduce banks’ risk profiles.
- Consumer credit and mortgages:
  - Rapid growth of consumer credit, increasing size and lengthening maturity of individual loans, warrant close monitoring; targeted macroprudential measures should be deployed if systemic risks arise.
  - Sustained low double-digit growth in zloty-denominated, variable-rate mortgages occurred in context of low borrowing costs at origination; their quality has not been tested under higher interest rate conditions.
  - Risks are mitigated by the LTV limit and improved affordability.
  - Legacy portfolio of foreign currency-denominated (FX) mortgages has declined to 6½ percent of GDP; loan quality is high and they do not pose a systemic risk.
  - Distressed FX mortgages should be restructured based on voluntary bilateral agreement between creditor and debtor; mandatory centralized approaches should be avoided.
  - Integration and harmonization of cooperative bank networks should continue; re-thinking of the business model for the credit union sector is needed.
- Supervision capacity and independence:
  - The Polish Financial Supervision Authority (PFSA) faces severe resource constraints—both budgetary and staffing—and lacks independence over its operational decisions, impeding effectiveness of oversight, including compliance with AML/CFT requirements.
  - Legislation approved in late-November 2018 may allow better resourcing of the PFSA, enabling better calibration of supervision to institution-specific risks rather than across-the-board regulatory measures.
  - The amendment gives the government and the president of the Republic a blocking majority on the PFSA’s Board (five of the nine voting-members), exacerbating concerns about potential political interference.
  - State ownership and control of domestic systemically-important banks have risen to 14 percent and 42 percent of assets, respectively.
  - Increased sovereign-bank linkages could lead to “self-regulation” of state-controlled financial intermediaries and compromise sound oversight.
  - An over-sized PFSA Board could promote better information sharing but may hinder efficiency and timeliness of decision making.
- Priorities and recommendations:
  - Address shortcomings in operational independence of supervision and protect rights of minority investors.
  - Ensure an appropriate budget and governance structure that would:
    - provide a well-resourced financial supervisor with robust supervisory capacity;
    - insulate the PFSA board from undue political influence;
    - allow efficient operations and timely decision making while delegating technical supervisory tasks to the PFSA chair and staff;
    - give the PFSA some formal role in setting regulatory policies and priorities.
  - These principles are particularly important given significant state control of the financial sector to ensure state-controlled institutions operate on commercial terms and supervision is evenhanded and free from conflicts of interest.
  - Absent these safeguards, state ownership of the financial sector should be reduced over time.

*IMF staff summary based on the Republic of Poland Article IV consultation chapter.*

### 21.      The banking sector is resilient, although some new risks are emerging. The FSAP stress

### cr1937 - 21.      The banking sector is resilient, although some new risks are emerging.

### Banking sector: resilience and emerging risks
- FSAP/FSSA stress-test finding: system-wide resilience of the banking sector, but with pockets of vulnerability (weaknesses in a few small and mid-sized banks).
- Consumer credit:
  - Strong growth of consumer credit is not, by itself, a concern given that household incomes are growing quickly.
  - These loans should be closely monitored; no supervisory or regulatory action is needed at this time.
- FIAT (financial intermediation tax):
  - FIAT created only limited and temporary distortions to the interbank market.
  - No evidence of credit diversion away from corporate lending.
  - Banks adjusted deposit margins and operating costs after the tax was introduced; profitability is still lower than before the introduction of the tax.
  - There are no plans to revise the tax.
  - Policy note: Replacing the FIAT with one on profits and remuneration would avoid distortions and potential increase in systemic risks.
- Mortgage risks:
  - Potential risks from strong growth in zloty-denominated mortgages are being monitored; sustained rapid growth in zloty-denominated variable-rate mortgages should be monitored to ensure borrowers have adequate debt-service capacity if interest rates were to increase.
  - Legacy foreign-currency mortgages do not pose a systemic risk; any conversion into zloty should be on terms agreed bilaterally between the creditor and the debtor.
- Liquidity and market shocks: sector resilient to sizable-but-plausible macroeconomic, market and liquidity shocks overall.

### PFSA governance, state ownership, and supervision concerns
- Broad agreement on the need to amend the governance structure of the PFSA, but views differ on direction of reform.
  - Government/parliament position: adding additional members to the PFSA Board would increase coordination and information sharing across government agencies and with the Prime Minister, enabling more-timely and better-targeted responses to emerging financial sector risks.
  - NBP position: PFSA should be reintegrated into the central bank to inherit independence and protections under central bank law (PFSA was separated out in 2006).
- Recent legislative change: the new law adds three non-voting members to the PFSA Board, increasing total membership to 12.
- Rationale for increased government representation: any payout of insured deposits is ultimately a fiscal responsibility; proposal was partly motivated by the GetBack failure in Spring 2018 and perceived insufficient information sharing between PFSA and the PM.
- State ownership trends:
  - Recent increase in state ownership of the financial sector reflects withdrawal of some foreign shareholders and acquisition by the state.
  - Government does not intend to reduce its holdings in the financial sector.
  - Effects: better balance between domestic and foreign ownership; foreign-owned banks more likely to withdraw funding during external stress; state banks tend to be more countercyclical in lending.
- Supervisory capacity risks:
  - PFSA faces severe resource constraints and lacks autonomy over its budget and operations.
  - Recent legislation does not rectify these concerns and may increase scope for political interference.
  - De facto “self-regulation” of state-controlled financial corporations could create systemic risks when these corporations dominate the financial sector.
  - An over-sized supervisory board may slow decision-making when timely action is needed.

### Structural policies to raise potential growth
- Key objectives:
  - Grow the effective workforce and boost labor productivity to sustain rapid and inclusive growth.
  - Shift from labor-intensive production to accelerate output per worker.
- Labor supply constraints and measures:
  - Lowering the pension age and providing generous child benefits encouraged withdrawals from the workforce at a time of severe labor shortages.
  - Suggested measures: raise labor force participation of women and older cohorts; continue to attract foreign workers by permitting longer-term stays.
  - Specific empirical estimates cited:
    - Participation rate of mothers dropped by 2.4 percentage points by mid-2017 as a result of the 500+ benefit program, implying withdrawal of about 100 thousand women from the workforce.
    - Participation rate of older workers eligible for retirement benefits (women aged 60+ and men aged 65+) dropped by about 0.5 percentage point in mid-2018, implying withdrawal of about 40 thousand workers.
  - More durable gains require higher private investment, better access to high-quality education and job training, wider international search for well-qualified foreign workers, and longer lead-times plus greater advance-consultation before new regulations and taxes.
- Investment and PPK:
  - Persistently subdued private investment is holding back productivity and output per worker.
  - Removing barriers to investment is a prerequisite for the new pension scheme (PPK) to deliver high returns over the longer term; otherwise new savings—mostly likely modest, and limited to lower-wage workers—would temporarily inflate financial asset prices.
  - The PPK will increase the wedge between gross and net wages; incidence likely borne by employers in the current tight labor market.
- Firm-level barriers:
  - 2017 firm survey: skilled labor shortages and an unpredictable tax and regulatory environment are main barriers to investment.

### State ownership, competition, and productivity effects
- High government ownership in banking and insurance, energy and transport; WIG20 dominated by state-controlled enterprises.
- Staff estimates: converting all nonfinancial state-owned firms in Poland to private ownership could increase the level of TFP and real GDP by nearly nine percent, while future TFP growth would also be faster.
- Mechanisms and risks:
  - Broader mandates of SOEs relative to private firms can create negative spillovers for incumbent firms.
  - State control of financial firms risks politicizing credit allocation and crowding out more-efficient investment projects, lowering productivity economy-wide.
  - Recommendations: evenhanded and independent oversight to maintain competition between SOEs and private firms; protect property rights of minority shareholders; limit state acquisitions of equity positions to cases where market failures are present; address social and macro objectives transparently through the budget rather than through SOE operations.
- Governance trends: despite progress in controlling corruption and resolving insolvency, other indicators point to some weakening in the governance framework and adherence to the rule of law in recent years.

### Environmental taxation and energy policy
- Context:
  - Poland generates around 80 percent of its electricity from coal.
  - Carbon emissions fees saw a nearly five-fold increase in the EU-wide market during 2018.
  - Already Poland has 33 of the 50 EU cities with the worst air quality, including Katowice.
- Policy concern:
  - Compensating end-users for environmental taxes circumvents their purpose; taxes on carbon and other emissions are intended to reduce electricity demand and deter polluting generation.
  - Government intention to neutralize impact of higher fees on electricity prices paid by households and SMEs will insulate real incomes but fail to achieve environmental goals.
- Recommendation:
  - Preferred approach: raise end-user electricity prices and rebate users with revenue collected from the fees or with proceeds from selling emissions rights, to avoid the regressive nature of environmental fees and to achieve environmental goals while protecting low-income households.

### Authorities’ views
- Strategy for Responsible Development: ongoing implementation expected to correct past mis-steps and support future dynamism via less-cumbersome business regulation, lower taxes for SMEs, vocational training reforms, incentives for innovation and R&D.
- Labor and migration:
  - Increasing labor force participation and encouraging return-migration of the more than 2 million Poles who emigrated since the turn of the century are priorities.
  - Poland expected to remain attractive to foreign workers from neighboring countries due to geographical proximity and language similarities.
- Ownership stance:
  - More-balanced ownership between foreign and domestic capital is now considered appropriate.
  - Increased state ownership intended to create national champions in strategic industries; an extrabudgetary fund, managed by the PM’s office and financed by SOE dividends, is being established to acquire stakes in private companies.
- PPK expectations:
  - The PPK scheme is designed to increase household saving to augment individual incomes in retirement and to deepen capital markets, reducing dependence on foreign saving for investment financing.
  - Savings of low-wage employees expected to increase owing to government subsidies to encourage participation.

### Staff appraisal: macro outlook, monetary and fiscal policy, and reform priorities
- Recent performance:
  - Polish economy expanded rapidly alongside narrowing imbalances and improving social indicators.
  - Growth benefited from the euro-area rebound, inflows of EU funds and new social transfers.
  - Historically-low unemployment and influx of foreign workers expanded potential output and helped dampen inflation pressures.
  - Level of reserves is broadly adequate; external position broadly in line with medium-term fundamentals and desirable policies.
- Outlook and risks:
  - Growth has peaked and is expected to moderate to a more sustainable pace during the next few years on slowing trading-partner demand.
  - Economy will continue to operate above capacity with a still-tight labor market and high capacity utilization.
  - Key risks: worsening global trade tensions and reduced access to foreign workers.
  - Longer-run constraints: population aging, subdued private investment and weak productivity gains.
- Monetary policy:
  - Should remain data dependent given unpredictable price fluctuations and lack of clarity on impact of electricity price increases and compensation scheme.
  - Current accommodative stance of a negative real policy rate appropriate with headline and core inflation persistently below the mid-point of the target.
  - Inflation is forecasted to rise gradually toward the mid-point of the target due to rising wages and possible second-round effects from energy price increases.
  - If underlying inflation pressures accelerate, a faster increase in the policy rate would be warranted.
- Fiscal policy:
  - Substantial fiscal adjustment achieved in recent years; medium-term objective within reach though budget structure has weakened.
  - Improvements in revenue administration and automatic savings from low rates of indexation expected to reduce the structural deficit to a historical low in 2018.
  - Similar fiscal outturns expected for 2019 in the absence of new unfunded spending initiatives.
  - Risks: compressing wages and social benefits relative to GDP may be difficult to sustain; increasing share of nondiscretionary spending makes budget more rigid; spending from extrabudgetary funds reduces transparency; relying on narrowly-based taxes and levies introduces distortions.
- Fiscal recommendations to reach the MTO:
  - Adhere to the ceilings in the expenditure rule to achieve the MTO and lower public debt to a moderate level.
  - Specific measures: continue to strengthen revenue administration; narrow the VAT policy gap; implement more-targeted social benefits; raise the pension age.
- Structural reform priorities:
  - Raise labor force participation and remain attractive to foreign workers.
  - Durably increase investment to raise output per worker; ensure more-reliable access to skilled labor and greater predictability of business regulation and taxes.
  - Provide a level playing field for investors: protect minority shareholders, maintain competition in industries with significant state presence, avoid inefficient lending by state-controlled banks, gradually reduce state ownership of the financial sector, and ensure price signals reflect economic costs.
  - Remove barriers to investment so savings accumulated under the new pension scheme can support productive investment and deliver higher returns in retirement.

*Source: IMF staff report text (cr1937).*

### 35.      It is recommended that the next Article IV consultation be held on the standard

### It is recommended that the next Article IV consultation be held on the standard

### Recommendation
- It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Box 1. Foreign Workers and Some Implications for the Polish Economy
- Trend and drivers
  - Number of foreigners working in Poland has surged since 2014.
  - Pull factors: rapidly-expanding economy and a shrinking labor force due to population aging and past emigration, resulting in low unemployment and large numbers of unfilled job openings.
  - Policy facilitation: simplified procedures for the short-term employment of foreign workers from selected CIS countries were introduced in 2007.
  - Push factors: conflict in Eastern Ukraine and its adverse effects on economic activity and the exchange rate made working in Poland an attractive option.
  - Relative wages: In PPP terms, average wages in Poland are three times higher than in Ukraine.
    - At market exchange rates the difference rises to five times.
- Magnitude and composition
  - Staff estimates that foreign workers rose from around 1 percent in 2014 to about 5 percent (adjusted for double-accounting) of total employment at end-2017, with more than 90 percent coming from Ukraine.
  - The majority of foreign workers are concentrated in relatively low-skill sectors and are performing basic tasks.
  - An individual foreign worker is permitted to work for up to 6 months within any 12-month period under the “employer’s statement” procedure.
  - Effective measurement: This is measured in effective terms (i.e., adjusted for within-year limits on length of work). Thus, the number of foreign workers is halved to obtain the number of effective foreign workers employed.
  - Uncertainty: Estimates are adjusted downward to account for possible double-counting and employers not filling their work-permits; the ease of hiring makes tracking their number more difficult.
- Macroeconomic implications
  - Labor market impact:
    - Adding effective foreign workers to the labor force survey (LFS)-based employment data suggests that employment grew by 2.8 percent in 2017, notably faster than the 1.4 percent reported in the LFS.
    - For 2017, the adjusted labor contribution to potential GDP growth doubles to 1.2 percent.
    - Corresponding adjustment: a 0.6 percentage point downward adjustment to the contribution from TFP.
  - Domestic demand:
    - The sharp increase in number of foreign workers has contributed to the rapid growth of household consumption, even though foreign workers are thought to repatriate the majority of their earnings as remittances abroad.

### Box 2. A New Private Pension Scheme
- Objectives and design rationale
  - According to the government’s Responsible Development Strategy, higher domestic saving and investment—together with a well-developed capital market—are prerequisites for strong and sustainable long-term growth.
  - Given the projected decline in replacement rates under the notional defined-contribution pension system, higher savings are also needed for households’ financial safety in retirement.
  - The recently-approved “Employee Capital Plan” (PPK) is a long-term savings scheme intended to achieve these goals.
- Coverage, participation and roll-out
  - PPKs are private, outside the public pension system, and fully-owned by the employee.
  - Participation is automatic for all employees up to 55 years of age, but with the possibility of voluntary opt-out.
  - Official projections envisage that 75 percent of employees (8.6 million persons) will join PPK.
  - Roll-out schedule:
    - July 2019: large firms (250+ employees)
    - January 2020: firms with 50–250 employees
    - July 2020: firms with 20–50 employees
    - January 2021: micro-firms and government entities
- Contributions and incentives
  - The total standard contribution is set at 3½ percent of the employees’ gross wage, plus a “welcome bonus” from the state budget for the first year of eligibility to encourage participation.
  - Employee’s standard contribution is 2 percentage points, but reduced to 0.5 percentage points for those earning less than 1.2 times the minimum wage.
  - Employees may voluntarily top-up to 4 percentage points.
  - Employers’ standard contribution is

*Source: cr1937 - 35.*

### 1.5 percentage point—with voluntary top-

### cr1937 - 1.5 percentage point—with voluntary top-

### PPK (voluntary opt‑out private pension scheme): design and fiscal implications
- Contributions: basic plan contributions to the PPK of 3.5 percent of net wage, and full plan up to 8 percent.  
- Initial statutory description (text fragment): "1.5 percentage point—with voluntary top‑up to 4 percentage points."  
- Projected aggregate impact:
  - Authorities project annual private contributions to the PPK of 0.7 percent of GDP by 2021 (1.4 percent of GDP with full top‑up).
  - Projected fiscal cost of the scheme: 0.16 percent of GDP.
- Treatment and incentives:
  - Contributions are treated as income of employees and taxed under the PIT, but exempted from social contributions.
  - Income on PPK assets is exempted from capital gains tax.
  - The state budget will pay a one‑time bonus to each new member of PLN250 (about €55), and a yearly bonus of PLN240 if contributions exceed a certain threshold (which is lower for low‑wage employees).
- Incidence and labor market effect:
  - "These contributions will increase the wedge between net and gross wages and, given the tight labor market, much of the cost is likely to be borne by employers."

### PPK asset management, investment rules, and fees
- Management and default arrangements:
  - Savings in PPKs will be managed by investment funds, within specific guidelines and with no guaranteed minimum return.
  - Employers will either select an authorized investment fund or, otherwise the savings will be invested by the state‑owned Polish Development Fund (PFR).
- Fee structure:
  - Management fees are capped at 0.5 percent of assets, plus a 0.1 percent "success fee."
- Asset allocation and allowable investments:
  - Initially, 60–80 percent of assets must be held in equities (of which at least 40 percentage points in WSE quoted blue‑chips (WIG20)).
  - Equity share will diminish gradually to 15 percent—with a corresponding increase in fixed‑income assets—as individual beneficiaries approach retirement.
  - Allowable debt instruments must be issued or guaranteed by the Polish or other EU governments, local authorities, central banks, the EIB, or IFIs.
  - Foreign currency assets may comprise no more than 30 percent of the portfolio.

### Payouts, withdrawals, and tax/penalty treatment
- Eligibility and payout structure:
  - Payouts will commence when participants reach the age of 60.
  - The first payout will be up to a quarter of assets, with the rest paid as 120 or more monthly installments.
  - No annuities will be offered.
- Early withdrawal rules:
  - Early withdrawal of a quarter of assets is allowed.
  - Full early withdrawal is possible for mortgage down‑payment, but must be replenished.
  - Otherwise, early withdrawals will be subject to capital gains tax and social contributions on employer payments at a 30 percent rate.

### Macroeconomic and distributional considerations (excerpted indicators and context)
- Labor cost wedge:
  - The PPK will "increase the wedge between net and gross wages"; the source includes a chart titled "Labor Cost Wedge in OECD Countries (In percent of labor costs, 2017)" showing Poland and variants "POL with basic PPK 1/" and "POL with full PPK 1/". (Chart source: OECD. Note: "1/ Poland data adjusted for the voluntary opt‑out private pension scheme (PPK), with contributions to the basic plan of 3.5 percent of net wage, and full plan up to 8 percent. Data of other countries do not reflect similar scheme.")
- Fiscal context and selected projections (from tables and figures in the chapter):
  - The authorities project private contributions to PPK of 0.7 percent of GDP by 2021 (1.4 percent of GDP with full top‑up), with a fiscal cost of 0.16 percent of GDP.
  - State bonuses: one‑time PLN250 and yearly PLN240 conditional bonus.
  - Capital gains on PPK assets: exempted from capital gains tax.
  - Employer selection responsibility: employers select authorized investment fund or default to PFR.

*International Monetary Fund. Republic of Poland: Selected excerpts on PPK design, fiscal and macroeconomic implications.*

### Annex I. Implementation of Past Fund Advice

### Annex I. Implementation of Past Fund Advice

### Monetary Policy
- Recommendation: "Hold the policy rate steady for now"
- Implementation status:
  - "The policy interest rate remains on hold amid inflation persistently below the mid-point of the target."
- Recommendation: "Tighten if accelerating core inflation threatens the inflation objectives."
- Recommendation: "Provide clear forward guidance based on timely updates of inflation outlook, flagging the key triggers for a rate change"
  - Implementation status: "Recent MPC communication is more conditional on inflation outlook."

### Fiscal Policy
- Recommendation: "Start consolidation as soon as possible"
  - Implementation status: "Consolidation advanced in 2017–18, with the structural deficit reaching a historically-low level."
- Recommendation: "Comprehensive fiscal structural reforms to support consolidation, including keeping the VAT rate at the current level beyond 2018, eliminating preferential VAT rates and exemptions, rationalizing current spending through expenditure reviews and gradually phasing out preferential pension regimes."
  - Implementation actions/status:
    - "The VAT rate remains unchanged in 2018, while conditions for a rate cut are now explicitly linked to the debt level and deficit deviations from the MTO;"
    - "Costs of the child benefit program declined in 2018 due to efforts to reduce fraud;"
    - "No changes to preferential VAT rates, exemptions or preferential pension regimes."

### Financial Sector Policy
- Recommendation: "A case-by-case approach to FX mortgage restructuring is preferable."
  - Implementation status: "Legislative action on the legacy portfolio of FX mortgages has so far been avoided."
- Recommendation: "Continue to monitor the impact of the bank asset tax and stand ready to revise its design if adverse effects become apparent."
  - Implementation status: "No changes on the design of the tax have been made."
- Recommendation: "Maintain strong and independent supervision and a robust macroprudential framework"
  - Implementation status: "A new legislation has been approved to change the governance structure of the PFSA, likely further damaging the financial supervisor’s independence and operational efficiency."

### Structural Reforms
- Recommendation: "Prioritize and implement the Responsible Development Strategy, focusing on streamlining product market regulations, more effective labor market policies, efficient public investment in upgrading the infrastructure and targeted R&D support."
  - Implementation status: 
    - "Guided by the Responsible Development Strategy, initiatives have been adopted or planned to improve the business climate, especially for smaller firms and startups, and to incentivize innovation and R&D."
    - "EU-funded infrastructure investment increased sharply in 2018."

*Source: IMF staff.*

### Annex V. Public Sector Debt Sustainability Analysis

### Annex V. Public Sector Debt Sustainability Analysis

### A. Baseline and Realism of Projections
- Public debt and trajectory:
  - Public debt is expected to drop below 50 percent of GDP in 2018.
  - Public debt is projected to reach about 43.5 percent of GDP by 2023, driven by a favorable differential between projected GDP growth and the real interest rate.
  - The baseline assumes the share of foreign currency debt in total debt will remain at 30 percent and external debt in total debt at 50 percent in the medium term.

- GDP growth:
  - Real GDP grew by 4.8 percent in 2017 and is expected to accelerate to around 5.1 percent in 2018.
  - Over the medium term, growth is projected to slow to 2.8 percent by 2023 as actual output trends back toward long-run potential.
  - Staff’s growth projections have been somewhat pessimistic, with a modest forecast bias relative to other countries.

- Fiscal adjustment and primary balance:
  - Under the baseline, some deterioration in headline and structural deficits is expected over the medium term owing to new spending initiatives.
  - Risks exist of larger increases in deficits on account of possible additional pre-election spending.
  - Recent staff forecast errors for the primary deficit are more conservative than other countries.

- Sovereign yields and market perception:
  - The effective interest rate on public debt is projected at around 3.2 percent in 2018, gradually rising to around 3.5 percent over the medium term.
  - Yields on 10‒year bonds dropped by 48 base points in 2018, and are now close to 2.8 percent.
  - Spreads of Polish euro-denominated bonds relative to German bonds (both with remaining maturity of around 10 years) increased by 13 basis points to 80 base points as of end-December 2018.
  - CDS spreads increased by 19 base points to 67 basis points.

- Maturity, rollover, and currency composition:
  - 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-November, 15 percent of gross borrowing requirements for 2019 had been pre-financed.
  - Domestic banks increased holdings of treasury securities by about 5 percent of GDP since early 2016.
  - Overall share of external debt in total public debt declined from 57 percent in 2015 to 49 percent in 2018:Q2.
  - Share of foreign currency debt in state debt is about 31 percent.
  - A large—though declining—share of foreign investors in the domestic debt market entails some risk; over 50 percent of foreign investors are long-term institutional investors.

- DSA heat‑map and fan charts:
  - The heat map highlights risks associated with the relatively large economy-wide external financing requirements (about 20 percent of GDP in 2017), and the share of public debt held by non-residents.
  - Symmetric fan charts indicate:
    - Debt-to-GDP ratio could drop to around 40 percent by 2023 with a 25 percent probability.
    - Debt-to-GDP ratio could stay around 50 percent by 2023 with a 25 percent probability.
  - Under downside-only shocks to interest rates and GDP growth, debt-to-GDP would still remain below 60 percent over the medium term.

### B. Shocks and Stress Tests — Results and Implications
- Primary balance shock:
  - Assumed deterioration in the primary balance by 0.8 percentage points relative to the baseline during 2018–19.
  - Public debt would remain on a declining path to about 45 percent of GDP in 2023.
  - Gross financing needs would peak at about 7 percent of GDP in 2020 and converge to the baseline in the outer years.

- Growth shock:
  - Assumed drop in GDP growth by about 1.2 percentage points for two consecutive years (2019‒20) relative to the baseline, combined with a 0.3 percentage points drop in inflation and deterioration in the primary balance by 0.6 percentage points in 2019 and further by 1.2 percentage points in 2020.
  - Public debt projected to remain on a declining path to about 47 percent of GDP by 2023.
  - Gross financing needs increase to about 8 percent of GDP in 2020, then converge toward the baseline.

- Interest rate shock:
  - A permanent 352 bps increase in the nominal interest rate beginning in 2020 leads to:
    - Increase in the effective interest rate by 49 bps in 2020 (compared to the baseline).
    - Further gradual increases to 182 bps by 2023.
  - Under this scenario, the public debt-GDP ratio is about 2 percentage points higher than under the baseline by 2023.

- Exchange rate shock:
  - Assumes a nominal exchange rate depreciation of about 26 percent in 2019 (from 3.84PLN/US$ to 4.88 PLN/US$), calibrated to emulate the maximum historical movement over the last 10 years.
  - Gross public debt increases by 0.5 percentage point in 2019 before trending down to baseline by 2023.
  - Resilience reflects predominance of public debt in local currency (70 percent of total).

- Combined shock:
  - Under the combined shock, public-debt-to-GDP ratio jumps to 52 percent in 2020 and remains around that level in outer years.
  - Gross financing needs increase to 8 percent of GDP in 2020 before trending down to around 6.5 percent of GDP by 2023.

### C. Key Quantitative Baseline Indicators (selected)
- Nominal gross public debt: 2017 = 50.6; 2018 = 48.6; 2019 = 46.1; 2020 = 44.7; 2021 = 44.1; 2022 = 43.7; 2023 = 43.6 (percent of GDP).
- Public gross financing needs: 2017 = 3.7; 2018 = 5.9; 2019 = 6.5; 2020 = 6.3; 2021 = 6.2; 2022 = 5.2; 2023 = 5.3 (percent of GDP).
- Real GDP growth (in percent): 2017 = 4.8; 2018 = 5.1; 2019 = 3.6; 2020 = 3.0; 2021 = 2.8; 2022 = 2.8; 2023 = 2.8.
- Inflation (GDP deflator, in percent): 2017 = 1.8; 2018 = 2.1; 2019 = 3.1; 2020 = 2.8; 2021 = 2.3; 2022 = 2.3; 2023 = 2.3.
- Effective interest rate (in percent): 2017 = 3.1; 2018 = 3.2; 2019 = 3.2; 2020 = 3.3; 2021 = 3.4; 2022 = 3.5; 2023 = 3.5.
- Change in gross public sector debt (cumulative 2018–2023) = -7.0 (percent of GDP).
- Identified debt-creating flows (cumulative 2018–2023) = -8.4 (percent of GDP).
- Primary deficit (2018–2023 cumulative) = -0.5 (percent of GDP).

### D. Vulnerabilities and Mitigants
- Vulnerabilities:
  - Relatively large economy-wide external financing requirements (about 20 percent of GDP in 2017).
  - Share of public debt held by non-residents remains significant.
  - Participation of foreign investors in domestic government bond market introduces sensitivity.

- Mitigating factors:
  - Well-diversified foreign investor base dominated by institutional investors (over 50 percent are long term investors).
  - Predominance of local-currency debt (70 percent), limiting exchange rate transmission to public debt.
  - Long average maturity (5.3 years) and share of short-term debt under 1 percent reduce rollover risk.

*Source: IMF staff.*

### Annex VI. External Debt Sustainability Analysis

### Annex VI. External Debt Sustainability Analysis

### External Debt: Bound Tests and Stress Scenarios
- External debt in percent of GDP: Baseline 53; Interest rate shock scenario peak 71.
- Individual permanent one-half standard deviation shocks applied to real interest rate, growth rate, and current account balance. 1/4 standard deviation shocks used for combined scenarios.
- Real depreciation shock: One-time real depreciation of 30 percent occurs in 2018.
- Growth shock (Percent per year): Baseline 3.2; Scenario 3.5; Historical 2.5. (Additional series: Baseline 3.0; Scenario 2.2; Historical 3.7; Baseline 0.6; Scenario -0.7; Historical -1.7.)
- Non-interest current account shock (Percent of GDP): Gross financing need under baseline (right scale) shown alongside CA shock scenario where combined shock produces external debt rising toward upper bound levels.
- Combined shock 3/ leads to external debt of 71 (percent of GDP) in the presented bound tests.

### External Debt Sustainability Framework, 2013–23 (In percent of GDP, unless otherwise indicated)
- 1 External debt: 2013 73.2; 2014 65.4; 2015 69.4; 2016 72.2; 2017 72.8; 2018 68.2; 2019 64.6; 2020 60.5; 2021 57.5; 2022 54.8; 2023 52.7. Debt-stabilizing non-interest current account: -2.8.
- 2 Change in external debt: 2013 -0.4; 2014 -7.8; 2015 3.9; 2016 2.8; 2017 0.6; 2018 -4.6; 2019 -3.7; 2020 -4.0; 2021 -3.0; 2022 -2.7; 2023 -2.1.
- 3 Identified external debt-creating flows (4+8+9): 2013 -4.2; 2014 -1.8; 2015 -0.3; 2016 -4.1; 2017 -5.1; 2018 -3.7; 2019 -4.2; 2020 -5.7; 2021 -4.3; 2022 -3.6; 2023 -3.2.
- 4 Current account deficit, excluding interest payments: 2013 -0.4; 2014 0.5; 2015 -0.9; 2016 -0.9; 2017 -1.4; 2018 -0.9; 2019 -0.8; 2020 -0.7; 2021 -0.6; 2022 -0.5; 2023 -0.4.
- 5 Deficit in balance of goods and services: 2013 -1.8; 2014 -1.4; 2015 -3.1; 2016 -4.0; 2017 -4.2; 2018 -3.4; 2019 -3.2; 2020 -2.9; 2021 -2.7; 2022 -2.6; 2023 -2.5.
- 6 Exports (percent of GDP): 2013 46.3; 2014 47.6; 2015 49.5; 2016 52.2; 2017 54.6; 2018 57.9; 2019 58.2; 2020 57.3; 2021 56.2; 2022 54.7; 2023 53.0.
- 7 Imports (percent of GDP): 2013 44.4; 2014 46.2; 2015 46.4; 2016 48.2; 2017 50.5; 2018 54.5; 2019 55.0; 2020 54.4; 2021 53.4; 2022 52.1; 2023 50.4.
- 8 Net non-debt creating capital inflows (negative): 2013 -1.8; 2014 -1.3; 2015 -3.4; 2016 -3.0; 2017 -0.3; 2018 -0.3; 2019 -1.3; 2020 -2.4; 2021 -1.8; 2022 -1.6; 2023 -1.5.
- 9 Automatic debt dynamics 1/: 2013 -2.0; 2014 -1.0; 2015 4.0; 2016 -0.1; 2017 -3.3; 2018 -2.5; 2019 -2.0; 2020 -2.6; 2021 -2.0; 2022 -1.5; 2023 -1.4.
- 10 Contribution from nominal interest rate: 2013 1.7; 2014 1.6; 2015 1.5; 2016 1.4; 2017 1.3; 2018 1.7; 2019 1.8; 2020 1.8; 2021 1.8; 2022 1.8; 2023 1.9.
- 11 Contribution from real GDP growth: 2013 -1.0; 2014 -2.3; 2015 -2.9; 2016 -2.1; 2017 -3.2; 2018 -3.5; 2019 -2.3; 2020 -1.8; 2021 -1.6; 2022 -1.5; 2023 -1.4.
- 12 Contribution from price and exchange rate changes 2/: 2013 -2.7; 2014 -0.3; 2015 5.4; 2016 0.6; 2017 -1.5; 2018 -0.7; 2019 -1.5; 2020 -2.7; 2021 -2.3; 2022 -1.9; 2023 -1.8.
- 13 Residual, incl. change in gross foreign assets (2-3): 2013 3.8; 2014 -6.0; 2015 4.2; 2016 6.9; 2017 5.7; 2018 -0.8; 2019 0.5; 2020 1.7; 2021 1.3; 2022 0.9; 2023 1.1.
- External debt-to-exports ratio (in percent): 2013 158.2; 2014 137.5; 2015 140.2; 2016 138.2; 2017 133.2; 2018 117.9; 2019 111.0; 2020 105.6; 2021 102.3; 2022 100.3; 2023 99.5.
- Gross external financing need (in billions of US dollars) 3/: 2013 141.3; 2014 139.6; 2015 110.3; 2016 103.9; 2017 110.0; 2018 90.4; 2019 94.0; 2020 97.1; 2021 100.3; 2022 103.2; 2023 108.8.
- Gross external financing need in percent of GDP: 2013 26.9; 2014 25.6; 2015 23.1; 2016 22.0; 2017 21.0; 10-Year 16.3; 10-Year 15.8; additional decade series 15.1; 14.4; 13.8; 13.5. (Table shows historical and standard deviations.)

Key Macroeconomic Assumptions (Average / Deviation)
- Real GDP growth (in percent): Historical series includes 1.4; 3.3; 3.8; 3.1; 4.8; 3.7; 1.6; 5.1; 3.6; 3.0; 2.8; 2.8; 2.8.
- Exchange rate appreciation (US dollar value of local currency, percent): 3.0; 0.1; -16.3; -4.4; 4.4; -1.2; 11.3; -1.6; 0.2; 2.6; 2.4; 2.4; 2.5.
- GDP deflator in US dollars (change in percent): 5.4; 0.4; -15.9; -3.7; 4.7; 0.9; 11.7; 0.2; 2.3; 5.7; 5.2; 4.8; 4.9.
- Nominal external interest rate (in percent): 2.4; 2.3; 2.0; 2.0; 2.0; 2.5; 0.4; 2.5; 2.7; 3.1; 3.3; 3.4; 3.7.
- Growth of exports (US dollar terms, in percent): 9.2; 6.8; -9.0; 4.2; 16.6; 8.3; 14.1; 11.8; 7.7; 6.9; 5.6; 4.9; 4.4.
- Growth of imports (US dollar terms, in percent): 3.5; 8.0; -11.9; 2.6; 16.5; 7.5; 17.6; 14.0; 8.1; 7.4; 5.8; 5.0; 4.4.
- Current account balance, excluding interest payments: 0.4; -0.5; 0.9; 0.9; 1.4; -1.7; 2.5; 0.9; 0.8; 0.7; 0.6; 0.5; 0.4.
- Net non-debt creating capital inflows: 1.8; 1.3; 3.4; 3.0; 0.3; 2.3; 1.0; 0.3; 1.3; 2.4; 1.8; 1.6; 1.5.

A. Alternative Scenarios
- A1. Key variables are at their historical averages in 2018-2023 4/: External debt series 70.5; 69.7; 70.3; 70.5; 70.3; 70.4; -2.8.

B. Bound Tests
- B1. Nominal interest rate is at baseline plus one-half standard deviation: External debt series 70.5; 71.3; 71.1; 71.2; 71.0; 71.1; -0.6.
- B2. Real GDP growth is at baseline minus one-half standard deviations: External debt series 70.5; 71.7; 71.9; 72.4; 72.6; 73.1; -0.3.
- B3. Non-interest current account at baseline minus one-half standard deviations: External debt series 70.5; 72.4; 73.4; 74.5; 75.4; 76.6; -0.9.
- B4. Combination of B1-B3 using 1/4 standard deviation shocks: External debt series 70.5; 72.1; 72.8; 73.7; 74.3; 75.3; -0.5.
- B5. One time 30 percent real depreciation in 2019: External debt series 70.5; 70.9; 70.6; 70.5; 70.2; 70.9; 0.0.

Notes and Definitions
- 1/ Derived formula for automatic debt dynamics provided in text (r, g, e, a definitions).
- 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.
- 3/ Gross external financing need defined as current account deficit plus amortization on short-term and medium- and long-term debt.
- 4/ Key variables include 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 key variables remain at last projection levels.

*Source: IMF staff calculations.*

### External Risks and Risk Assessment Matrix (selected entries)
- External: Rising protectionism and retreat from multilateralism.
  - Relative Likelihood: High. Time Horizon: Short Term, Medium Term. Expected Impact: Medium.
  - Impact: Potential disruption to global supply chains, reduced global trade and FDI, increased capital flow volatility; Poland’s domestic value-added in European supply chains about 10 percent of GDP.
  - Policy response:
    - Exchange rate flexibility as first defense.
    - Fiscal policy to allow automatic stabilizers and implement gradual growth-friendly consolidation.
    - NBP to provide liquidity support (including in FX) if needed.
    - Structural reforms to improve investment climate and labor mobility.
- External: Sharp tightening of global financial conditions.
  - Relative Likelihood: High. Time Horizon: Short Term, Medium Term. Expected Impact: High/Medium.
  - Assessment: Poland has net external liability position of 63 percent of GDP; gross external debt 66 percent of GDP; nonresidents hold 48 percent of government debt; share of short-term external debt 29 percent; financing needs about 20.2 percent of GDP.
  - Mitigating factors: Banking system liquid and mostly domestically funded; 44 percent of private external debt are intercompany loans.
  - Policy response:
    - Exchange rate flexibility as first defense.
    - Monetary policy accommodative if inflation contained; raise rates if inflation breaches target top on sustained basis.
    - Fiscal policy to allow automatic stabilizers.
    - NBP liquidity support (including FX) if needed.
    - Sustain prudent macro policies and enhanced debt-management practices.
- External: Weaker-than-expected global growth (Euro Area).
  - Relative Likelihood: Medium. Time Horizon: Medium Term. Expected Impact: Medium.
  - Impact: Reduced external demand and FDI, higher cost of capital for subsidiaries of EA banks, potential capital outflows.
  - Policy response:
    - Monetary policy should be eased.
    - Allow fiscal automatic stabilizers.
    - Diversify trade partners and product specialization.
- Domestic: Domestic uncertainty and policy slippages.
  - Relative Likelihood: Medium. Time Horizon: Short to Medium Term. Expected Impact: Medium/High.
  - Impact: Reduced capital inflows, higher financing costs, exchange rate depreciation, higher inflation, lower growth.
  - Policy response:
    - Maintain prudent policies and sound institutions, independent central bank and supervisor.
    - Continue gradual fiscal consolidation; resist economically-costly policies.
    - Facilitate structural reforms: business climate, labor market, education, infrastructure, R&D to attract investment and boost productivity.
- Domestic: Intensification of labor shortages.
  - Relative Likelihood: Medium. Time Horizon: Medium Term. Expected Impact: Medium/High.
  - Assessment: Foreign workers account for 5-10 percent of Polish employment.
  - Policy response:
    - Tap under-utilized labor pools (women, younger retirees); eliminate special pension plans; regionally-differentiated minimum wage.
    - Target education to future labor market needs.
    - Allow foreign workers more-stable and longer-duration employment arrangements; recognize foreign qualifications where appropriate.
    - Relieve barriers to investment to facilitate labor-saving capital.

### Foreign Asset and Liability Position and Trajectory (2018 assessment)
- NIIP: Estimated to reach negative 63 percent of GDP in 2018.
- Gross liabilities: Projected to decrease to 114 percent of GDP.
- Gross assets: Remain at about 2017 level of 51 percent of GDP.
- FDI (equity and debt): Projected to account for 53 percent of gross external liabilities in 2018; diversified across sectors and source countries.
- Gross external debt: Projected at 66 percent of GDP at end-2018; more than a quarter are liabilities to direct investors.
- Share of short-term debt (remaining maturity): 29 percent of total gross debt.
- Assessment: Sizeable external debt and short-term debt present vulnerability; rollover risk mitigated by large share of debt FDI and sizable reserves.
- Overall assessment: External position in 2018 broadly in line with medium-term fundamentals and desirable policies. Cyclically-adjusted CA balance moderately higher than implied by EBA CA norm; full utilization of EU funds should bring CA in line with fundamentals in the medium-term. REER points to a broadly balanced external sector position. Reserves sufficient against external shocks and disorderly market conditions.
- Potential policy responses: Maintain prudent policies to reduce macro vulnerabilities; reduce barriers to private sector investment to boost potential growth and rebalance domestic demand composition.

### Current Account Assessment (2018)
- Background: Sizable CA deficits during 2004–14 replaced by close-to-balance positions more recently, despite significant primary income deficit. Improvement followed large depreciation during 2014–16 and lower public investment due to transition to 2014–20 EU funds cycle.
- Projection: Poland’s CA projected to become negative in 2018; opening of CA deficit in 2018 driven by buoyant public investment due to increased EU funds absorption.
- Assessment: For 2018, cyclically-adjusted current account based on nine-month BoP estimates expected to record a deficit of 0.7 percent of GDP. Preliminary estimated EBA CA norm at a deficit of 1.9 percent of GDP. Resulting EBA gap of 1.2 percent of GDP reflects sum of domestic and ROW policy gaps of 1.1 percentage point and an estimation residual.

*Source: IMF staff calculations.*

### 0.1 percentage points. EU Funds utilization accelerated in 2018 relative to 2016–17 average, however, full planned absor

### cr1937 - 0.1 percentage points. EU Funds utilization accelerated in 2018 relative to 2016–17 average, however, full planned absor

### Current account (CA) and cyclically adjusted CA
- Actual CA: -0.8
- Cycl. Adj. CA: -0.7
- EBA CA Norm: -1.9
- EBA CA Gap: 1.2
- Staff Adj.: 0.2
- Staff CA Gap: 1.0
- Staff assessment: The CA was broadly in line with fundamentals and medium-term policies in 2018, with a CA gap range centered on 1 (± 1) percent of GDP.
- EU funds utilization: Accelerated in 2018 relative to the 2016–17 average; full planned absorption for 2018 may not be reached due to capacity constraints in certain sectors, and may be delayed to 2019 (about 0.2 percentage points of the EBA gap).

### Real exchange rate (REER)
Background
- The annual-average REER depreciated by a cumulative 7¾ percent during 2014–16.
- REER movements: appreciated by 3.2 percent on average in 2017; depreciated by about 3.1 percent in 2018.
- Nominal zloty: weakened by about 8 percent against the dollar in 2018, and by 3 percent against the euro in 2018, with no intervention from the NBP.
Assessment
- EBA REER and CA models (nine-month estimates) suggest an undervaluation between 0 and 3 percent for 2018.
- REER gap implied by the EBA CA model: -2.6 percent.
- REER index model gap: -2.4 percent.
- Overall staff assessment: Poland’s REER in 2018 was close to the level consistent with fundamentals and desirable policy settings, with a gap in range of -5 to 0 percent.
Technical note
- The REER level model for Poland suggests an undervaluation of 16.6 percent; the model has residuals of -15.6 percent and may not adequately capture changes in the equilibrium REER that occurred during the sample period.

### Capital and financial accounts; flows and vulnerabilities
Background
- The capital account is dominated by EU funds inflows for financing investment projects, despite a temporary slowdown in EU funds absorption in 2016–17 due to the transition to the 2014–20 EU funds cycle.
- In 2018, net financial inflows increased relative to the 2016–17 average due to larger FDI inflows.
Assessment
- Foreign holdings of government debt securities are around 46 percent, indicating potential vulnerabilities.
- The ratio of foreign holdings continued to decline since 2017 as domestic banks increased their holdings in response to the introduction of the bank asset tax, which exempts government bonds.
- A diversified foreign investor base is a mitigating factor.

### FX intervention and reserves level
Background
- Gross international reserves are estimated to have remained stable at US$114 billion at end-2018.
- Net reserves (excluding NBP’s repo operations) increased from US$97 billion at end-2017 to estimated US$98 billion at end-2018.
- The zloty has floated freely.
Assessment
- Net reserves are about adequate, standing at 99 percent of the IMF’s composite reserve adequacy (ARA) metric in 2018.
- Gross reserves are about 113 percent of the ARA metric.

### Technical background notes (selected)
- The 1.1 percentage points contribution of identified policy gaps reflects: a domestic fiscal policy gap of -0.6 percentage points; fiscal gaps in trading partners resulting in a positive 0.46 percentage points contribution of fiscal policies to the current account gap; the credit gap and health spending together contribute 0.66 percentage points to the total policy gap; capital controls and reserves contribute 0.0 percent of GDP to the total gap.
- The EBA estimation standard error for the 2018 CA norm is 0.6 percent of GDP.

### Fund relations, data, and surveillance (selected operational facts)
- Membership Status: Joined 6/12/1986; Article VIII.
- Quota: 4,095.40 SDR Million (100.00 percent).
- Fund Holdings of Currency: 3,865.82 SDR Million (94.39 percent).
- Reserve Tranche Position: 229.59 SDR Million (5.61 percent).
- Net Cumulative SDR Allocation: 1,304.64 SDR Million (100.00 percent).
- Holdings (SDR): 298.82 (22.90 percent).
- Outstanding Purchases and Loans: None.
- Latest financial arrangements (In Millions of SDR): FCL approvals listed with amounts 6,500.00; 13,000.00; 22,000.00; 19,166.00; 13,690.00 (Amount Drawn: 0.00 for each).
- Projected Payments to Fund: Charges/Interest: 2.48 (2018), 10.38 (2019), 10.39 (2020), 10.38 (2021), 10.38 (2022); Total mirrors Charges/Interest for those years.
- Article IV: Last consultation concluded on July 7, 2017; Poland is on the standard 12-month consultation cycle.
- Resident Representative: Mr. Nadeem Ilahi replaced Mr. Bas Bakker effective Aug 2018.
- Exchange arrangements: The zloty is freely floating. Poland accepted obligations of Article VIII, Sections 2, 3, and 4 on June 1, 1995.

### Statement by the Staff Representative — December 28, 2018 law on electricity price freeze (implications)
Background
- Parliament approved a law freezing electricity prices in 2019 for end-users in all sectors at levels prevailing in mid-2018.
- Electricity generating costs projected to rise by PLN9 billion (0.4 percent of GDP) in 2019—reflecting higher prices for coal and CO2 emissions allowances—these additional costs will be borne by the government.
- The European Commission is planning to assess compatibility of the law with EU state aid rules.
Staff accounting (relative to the counterfactual where electricity prices for all end-users increase to fully compensate higher generating costs), effects in 2019 measured as a share of GDP:
- End-users benefit from: (i) lower excises on electricity (0.1); (ii) reduced “transitional fees” on electricity (0.1); and (iii) lower electricity tariffs (0.2), yielding a net gain of 0.4 percent of GDP.
- Electricity Companies: receive less revenue owing to lower electricity tariffs (0.2) and be fully compensated by a general government transfer (0.2).
- General Government (including extrabudgetary units): collect lower revenue from excises (0.1) and transitional fees (0.1), and transfer the proceeds from selling unused CO2 emissions allowances to electricity companies (0.2), yielding an increase in the fiscal deficit of 0.4 percent of GDP.
Staff baseline treatment and risks
- The staff report factors in a price freeze only for households and SMEs.
- Broadening the scope of the price freeze will affect staff’s macroeconomic forecasts:
  - Higher fiscal costs: The fiscal deficit will increase relative to that in the staff report by around 0.2 percent of GDP in each year that the scheme remains in place.
  - Lower inflation: Owing to unchanged electricity prices for non-SME companies, the second-round effect on consumer price inflation assumed in the staff report (about [text cutoff in source]) would be affected.

*REPUBLIC OF POLAND — STAFF REPORT FOR THE 2018 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX*

### 0.1 percentage point in 2020 and 0.2 percentage point in 2021) will not materialize,

### Statement by Mr. Piotr Trabiński and Ms. Agnieszka Urbanowska (January 18, 2019)

### Outlook and risks
- Since the last consultation, Poland has significantly improved its macroeconomic position.
- Economic growth has been strong, driven mostly by private consumption and investment.
- Harmonized unemployment rate: around a record-low level of 3.8 percent.
- Inflation: 1.6 percent on average in 2018, consistent with the NBP inflation target.
- NBP reference rate: unchanged at 1.5 percent.
- External position: broadly in line with fundamentals; reserves level is adequate.
- Fund engagement: termination of the Fund’s Flexible Credit Line in November 2017.
- Authorities’ medium-term view:
  - Growth expected to moderate over the medium-term due to tight labor market and projected slowdown in the euro area.
  - Primary external risks: escalation of trade tensions, uncertainties on global financial markets, a hard Brexit, and potential move of foreign labor force participants to other EU countries.

### Fiscal Policies
- Fiscal outcomes in 2018:
  - Headline deficit expected to reach a record-low level of 0.5 percent of GDP in 2018.
  - Public debt on a downward path.
- Fiscal framework components:
  - Constitutional debt ceiling: 60 percent of GDP.
  - “Safety threshold”: 55 percent of GDP.
  - Expenditure rule: nominal limit on growth of public spending.
- Drivers of fiscal improvement:
  - Higher tax revenues from improved revenue administration and elimination of loopholes.
  - Targeted policies enhancing VAT compliance and strengthening tax administration.
  - Stabilizing expenditure rule maintained public spending discipline.
- Debt trajectory projection:
  - Public debt expected to decline to 43.4 percent of GDP by 2022.
- Medium-term objective:
  - Structural deficit target: one percent of GDP.
- Social spending and sustainability:
  - Social spending as a share of GDP is on a declining path.
  - Pension benefits indexed well below nominal GDP; some other social benefits fixed in nominal terms.
  - Welfare system considered fiscally sustainable in context of demographic headwinds.
- Policy measures:
  - Adopted Employee Capital Plan (PPK) in October 2018 to increase savings and support productive investment; accumulated assets to be managed by investment funds, pension funds, or insurance companies within a well-defined framework.
  - Ongoing reforms to budgetary planning and procedures; completion of the first stage expected by the end-2019.
- Near-term assessment: no major risks to fiscal stability foreseen.

### Monetary Policy
- 2018 experience:
  - Inflation reached 1.6 percent on average in 2018.
  - NBP inflation target midpoint: 2.5 percent +/- 1 percentage point.
  - Core inflation: 0.7 percent.
  - Price growth driven mostly by rising energy and food prices.
- Policy stance:
  - Monetary policy stance in recent years judged appropriate.
  - CPI inflation likely to remain close to 2018 levels in the near term.
  - Medium-term inflationary pressures limited due to projected slowdown of economic activity domestically and abroad.
  - Electricity prices frozen by recent law for all economic sectors; expected not to lift inflation in coming quarters.
- Authorities’ view vs. staff:
  - Share staff’s view on data-dependent approach given high uncertainty.
  - Disagree with assessment that interest rates might be raised in the near term.
  - Expectation: interest rates likely to stay at current level in the coming quarters.
  - Central bank readiness: stand ready to adjust policy if macroeconomic developments materially deviate from current forecasts.

### External Sector
- 2017 current account: surplus of 0.2 percent of GDP (compared with a deficit of 0.5 percent in 2016).
- Trade in goods and services: nominal surplus reached 4.1 percent of GDP in 2017.
- Drivers: exports benefited from revival in the euro area, especially Germany.
- 2018 projection: current account balance projected to deteriorate to -0.6 percent of GDP in 2018, mainly due to stronger dynamics for imports rather than exports.
- Staff assessment: Polish external position consistent with medium-term policies and fundamentals.

### Financial Sector
- Systemic characteristics:
  - Financial system remains broadly robust, with sustainable lending growth.
  - Banks are profitable, well-capitalized, and have relatively low leverage.
- Capital metrics:
  - Average capital adequacy ratio: 18.4 percent.
  - Tier 1: 16.4 percent.
  - Average applied risk weight: higher than in most EU countries.
- Resilience:
  - High regulatory capital quality contributes to resilience to shocks.
  - Systemic risk from non-credit financial institutions limited due to size and business models.
- Foreign-currency mortgage loans:
  - Risk abating: portfolio value decreasing steadily; quality remains very high.
  - Political discussions on mandatory conversion at non-market rates have calmed down.
- External vulnerabilities:
  - Risks to domestic financial stability mainly external, related to global economic and financial shocks.
  - Direct foreign asset exposures of Polish banking system limited; foreign funding of banking sector, government, and corporations remains important.
  - Stress tests indicate banks remain resilient and would be able to provide continued financing.
- Ownership and governance:
  - Authorities’ view differs from staff regarding increased risks from greater participation of state-controlled institutions.
  - Historical share of foreign banks: three-quarters of total assets; withdrawal of foreign participants led to increased domestic ownership.
  - Recent governance changes at the PFSA aim to increase cross-governmental coordination and institutional effectiveness.
  - PFSA board composition: four out of nine voting members designated by the government.
  - Legislative amendment granted greater budgetary independence to the PFSA.

### Structural Policies
- Strategy for Responsible Development (SRD):
  - SRD is the government’s main policy document identifying priorities until 2030.
  - Progress made in reaching SRD objectives; emphasis on strong institutions, efficient administration, and effective processes.
  - Overarching goal: continued convergence to higher living standards, poverty reduction, and social inclusion.
- Education reform:
  - “Constitution for Science” adopted in November 2018 to increase quality of education and ensure sustainable development of Polish universities.
  - Expected to increase job market participation rate in the long term.
- Business environment:
  - “Constitution for Business” adopted to enhance business climate, especially for SMEs and startups; aims to simplify bureaucracy and improve relations between business and public administration to attract FDI and raise productivity.
- Innovation and R&D:
  - Progress toward incentivizing R&D spending through R&D tax incentives for innovative startups and government emphasis on areas such as electromobility.
  - EU-funded public R&D and infrastructure projects increased sharply in 2018; private sector innovation spending yet to accelerate.
- Convergence targets:
  - Assumed that by 2020 average gross disposable income of households (per capita, in PPP terms) will increase to 76-80 percent of the EU average.
  - By 2030, assumed to reach the EU level.
- Environmental considerations:
  - Authorities acknowledge more work is needed to improve energy efficiency to improve air quality and make growth sustainable.

_Statement by Mr. Piotr Trabiński, Alternate Executive Director for Republic of Poland and Ms. Agnieszka Urbanowska, Advisor — January 18, 2019_

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_Source: https://www.imf.org/-/media/files/publications/cr/2019/cr1937.pdf_