## _cr15182

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---

### Outlook and risks
- Growth was 1.4 percent in 2014, benefiting from strong exports.
- Outlook: continued robust growth and subdued inflation.
- Growth projections:
  - 3.5 percent in 2015 and around 3½ percent in 2015 and over the medium term.
  - Real GDP (change in percent): 1.8 (2012), 1.7 (2013), 3.4 (2014), 3.6 (2015 proj).
- External downside risks:
  - Surge in global financial market volatility amid asymmetric monetary exit in advanced economies.
  - Continued geopolitical tensions in the region.
  - Renewed sovereign stress or protracted low growth in the euro area.
- Domestic downside risk:
  - Inflation could fail to pick up owing to external factors or if low inflation expectations become entrenched.
- Upside scenarios:
  - Stronger-than-expected recovery in the euro area.
  - Low oil prices would further lift growth in Poland.
- Buffer: Poland’s Flexible Credit Line (FCL) arrangement with the IMF helps mitigate external downside risks.

### Policies and macroeconomic developments
- Monetary policy:
  - Remained accommodative, helped by a cumulative 100 basis points cut in the policy interest rate since October.
  - Policy rate (NBP Reference Rate, avg): 4.6 (2012), 2.9 (2013), 2.4 (2014), 1.5 (2015, rate as of June 4).
  - March 2015 MPC cut by 50 bps to 1.5 percent; cumulative reduction since October: 100 bps.
- Inflation:
  - CPI inflation (percent, average): 3.7 (2012), 0.9 (2013), 0.0 (2014), -1.0 (2015 proj).
  - CPI inflation (percent, end of period): 2.4 (2012), 0.7 (2013), -1.0 (2014), -0.2 (2015 proj).
  - Inflation has been negative since July 2014; deflation eased from -1.6 percent in February to -1.1 percent in April.
- External accounts and reserves:
  - Current account balance (percent of GDP): -3.5 (2012), -1.3 (2013), -1.4 (2014), -1.3 (2015).
  - Official reserves (billion U.S. dollars): 108.9 (2012), 106.2 (2013), 100.4 (2014), 104.4 (2015).
  - Total external debt (percent of GDP): 73.8 (2012), 72.7 (2013), 64.3 (2014), 72.9 (2015).
  - Zloty per USD, period average: 3.3 (2012), 3.2 (2013), 3.7 (2014), 3.1 (2015, exchange rate as of June 4).
  - Zloty per Euro, period average: 4.2 (2012), 4.2 (2013), 4.1 (2014), 4.2 (2015, exchange rate as of June 4).
- Labor market and activity:
  - Unemployment rate (percent): 10.1 (2012), 10.3 (2013), 9.0 (2014), 7.9 (2015).
  - Nominal GDP (billion zloty): 1615.9 (2012), 1662.7 (2013), 1728.7 (2014), 1791.1 (2015 proj).

### Fiscal policy and public finances
- Fiscal consolidation advanced; Poland exited the Excessive Deficit Procedure (EDP) one year early.
- General government deficit (percent of GDP): -3.7 (2012), -4.0 (2013), -3.2 (2014), -2.8 (2015 proj).
- General government revenues (percent of GDP): 39.2 (2012), 38.2 (2013), 38.6 (2014), 39.1 (2015).
- General government expenditures (percent of GDP): 42.9 (2012), 42.2 (2013), 41.8 (2014), 41.8 (2015).
- Public debt (percent of GDP): 54.4 (2012), 55.7 (2013), 50.1 (2014), 51.1 (2015).
- Directors’ recommendations:
  - Continue gradual consolidation to build policy buffers.
  - Medium-term objective: structural deficit of 1 percent of GDP remains appropriate.
  - Identify specific expenditure savings and reduce the large VAT revenue gap.
  - Over the longer run, raise spending efficiency and reform special pension schemes.

### Financial sector and legacy vulnerabilities
- Banking sector performance:
  - Remained well-capitalized, liquid, and profitable.
  - Banking sector capital adequacy: 14.7 percent (fourth quarter); regulatory capital to risk-weighted assets series includes values: 12.0 11.1 13.3 13.9 13.1 14.8 15.7 14.7.
- Credit and money:
  - Private sector credit (change in percent, eop): 2.4 (2012), 4.5 (2013), 7.6 (2014), 7.5 (2015).
  - Broad money (change in percent, eop): 4.5 (2012), 6.2 (2013), 8.2 (2014), 7.3 (2015).
- Vulnerabilities:
  - Legacy vulnerabilities: sizable stock of foreign-currency loans; still-elevated NPL ratio (NPLs remain elevated at above 8 percent of total loans).
  - About half of mortgages are denominated in FX (mostly Swiss franc); around half a million households hold Swiss franc-denominated mortgages.
  - Foreign participation: about 60 percent of banking sector assets held by foreign banks.
- Policy recommendations:
  - Expedite macroprudential and bank resolution frameworks.
  - Address elevated NPLs and credit union (SKOKs) vulnerabilities.
  - Support case-by-case restructuring of distressed Swiss-franc-denominated mortgages.
  - Moderate reserve accumulation recommended.

### Structural reforms and convergence
- Progress:
  - Poland closed about a quarter of its per capita income gap with the EU average over the past two decades.
  - Integration with the euro area boosted technological transfers, sophistication of domestic value added, and productivity gains.
- Recent reforms welcomed:
  - Streamlining list of regulated professions.
  - Reducing labor market segmentation.
  - Easing administrative requirements for business start-ups.
- Directors’ recommendations:
  - Further structural reforms to boost productivity, safeguard competitiveness, and move up the value-added chain.
  - Promote innovation, encourage greenfield investment, and better target education and training to employer needs.
  - Facilitate labor mobility to higher-productivity sectors to complete convergence.

### Key statistics (selected)
- Growth and prices:
  - Real GDP: 1.8 (2012), 1.7 (2013), 3.4 (2014), 3.6 (2015 proj).
  - CPI inflation (average): 3.7 (2012), 0.9 (2013), 0.0 (2014), -1.0 (2015 proj).
- Labor and output:
  - Unemployment rate: 10.1 (2012), 10.3 (2013), 9.0 (2014), 7.9 (2015).
  - Nominal GDP (billion zloty): 1615.9 (2012), 1662.7 (2013), 1728.7 (2014), 1791.1 (2015 proj).
- Public finances:
  - General government balance (percent of GDP): -3.7 (2012), -4.0 (2013), -3.2 (2014), -2.8 (2015 proj).
  - Public debt (percent of GDP): 54.4 (2012), 55.7 (2013), 50.1 (2014), 51.1 (2015).
- External sector:
  - Current account balance (percent of GDP): -3.5 (2012), -1.3 (2013), -1.4 (2014), -1.3 (2015).
  - Official reserves (billion U.S. dollars): 108.9 (2012), 106.2 (2013), 100.4 (2014), 104.4 (2015).
  - Total external debt (percent of GDP): 73.8 (2012), 72.7 (2013), 64.3 (2014), 72.9 (2015).

### Political environment and implications for reform
- Presidential elections in May ended with Law and Justice (PiS) candidate victory; parliamentary elections scheduled in the fall.
- Political uncertainty could dampen near-term reform momentum and delay structural and financial sector reforms, undermining potential output if protracted.

### Recent economic developments — growth, demand, labor, and inflation
- Growth:
  - Real GDP growth: 3.4 percent in 2014; accelerated to 3.6 percent in 2015Q1.
  - Q1 2015 q-o-q sa: 1.0 percent; year-on-year level 3.5 percent higher than a year ago.
- Demand drivers:
  - Private consumption buoyed by accelerating wages, falling unemployment, and declining prices.
  - Investment benefited from robust credit growth and eased financial conditions.
- Labor market:
  - Harmonized unemployment: fell about 3 percentage points from early-2013 peak to 7.9 percent in April.
  - Nominal wages accelerated to 4.1 percent in Q1; wage growth has outpaced labor productivity, raising real unit labor costs.
- Inflation:
  - Headline inflation negative; deflation slowed from -1.6 percent in February to -1.1 percent in April.
  - Core inflation: 0.4 percent in April y-o-y.
  - Low commodity prices and weak imported inflation keep inflation subdued.

### External position (Box 1: External Sector Assessment)
- Current account:
  - Deficit declined from 3.5 percent in 2012 to 1.4 percent in 2014; projected to improve only marginally in 2015.
  - Cyclically-adjusted current account consistent with fundamentals and desirable policies.
- Real exchange rate:
  - Broadly in line with fundamentals; alternative approaches suggest modest undervaluation between 2 and 11 percent.
- Capital flows and reserves:
  - Portfolio inflows weakened in 2014; decrease in FDI flows reflecting high income repatriation; EU funds stable.
  - Net international investment position (IIP) liabilities stabilized at 60 percent of GDP in 2014.
  - Reserves broadly adequate at about 114 percent of the IMF’s modified composite reserve adequacy metric at end-2014.

### Outlook and medium-term projections
- Growth and inflation outlook:
  - Domestic demand expected to maintain growth at around 3½ percent in 2015.
  - Output gap projected to close in 2016.
  - Inflation contained below the target band (1.5 to 3.5 percent) until late-2016; staff projects return to target band by end-2016.
- Structural constraints:
  - To sustain growth given adverse demographics, policies should increase labor participation (including women), and boost investment and productivity.

### Risks — external and domestic (selected)
- External:
  - Volatile global financial conditions from asynchronous monetary policies could affect capital flows; ECB QE may attract inflows and risk zloty appreciation; U.S. tightening could trigger outflows and depreciation.
  - Sovereign stress or euro-area slowdown could spill over via trade and financial links.
  - Conflict in Russia/Ukraine could disrupt gas supplies to heavy industry.
- Domestic:
  - Prolonged low inflation could increase real interest rates ex-post, hurt balance sheets, reduce consumption and investment, raise NPLs, and squeeze bank margins.
  - Election-driven slowdown in structural reform could undermine potential output.

### Balance-sheet channels and sectoral effects from prolonged low inflation (Box 2)
- Near-term effects: limited so far due to strong activity, healthy balance sheets, and bank profitability.
- Potential adverse transmission:
  - Households: reduced debt servicing capacity, lower consumption, higher NPLs.
  - Corporations: reduced profits, postponed investment.
  - Banks: margin compression, higher NPLs, weaker credit supply.
  - Public sector: reduced fiscal space and harder fiscal targets.
- Key indicators:
  - NPLs above 8 percent.
  - Around half of mortgages in FX (mostly Swiss franc).
  - January 2015: zloty depreciated ~20 percent vs Swiss franc; high bank capital buffers and emergency liquidity (NBP–SNB swap) mitigated risks.
  - Credit unions: assets about 1 percent of banking sector assets.

### Monetary policy stance and inflation outlook (Box 2 conclusions)
- MPC cut policy rate in March by 50 bps to 1.5 percent; cumulative reduction since October: 100 bps.
- Staff projects inflation returning to target by end-2016, accounting for 6 to 8 quarter transmission lags; weak inflation expectations are downside risk.
- Policy guidance:
  - Maintain easing bias guided by data; NBP has ample space to cut further if needed.
  - Monitor bank search-for-yield risk.
  - Moderate reserve accumulation recommended.

### Financial sector resilience, vulnerabilities, and reform priorities
- Positive metrics:
  - Banking sector capital adequacy: 14.7 percent (Q4).
  - Liquidity above regulatory minimum; declining loan-to-deposit ratio.
  - AQR and stress tests confirmed resilience, including to large exchange-rate depreciation.
- Legacy vulnerabilities and recommendations:
  - FX mortgages: large legacy stock; support case-by-case restructuring; banks encouraged to pass negative CHF LIBOR rates to customers and not require additional collateral.
  - NPLs above 8 percent; use consumer bankruptcy law changes and new insolvency law (expected Jan 1, 2016) to facilitate restructuring.
  - Credit unions (SKOKs): restructure and replenish BFG funds; doubled financial sector contributions in 2015 expected to help.
  - Finalize macroprudential and bank resolution frameworks.

### Fiscal consolidation, risks, and structural revenue measures
- Fiscal outcomes:
  - General government deficit: 3.2 percent of GDP in 2014 (or 2.8 percent when adjusted for 1999 pension reform costs).
  - Public debt declined by about 5.5 percentage points to 50.1 percent of GDP in 2014.
  - By end-April 2015, ~70 percent of 2015 gross borrowing needs pre-financed.
- Near- and medium-term risks:
  - Risks: lower-than-expected inflation, pre-election spending pressures, restructuring costs of mining sector assumed at about PLN3 billion during 2015–18.
  - Authorities’ Convergence Program envisages deficit decline to 1.2 percent of GDP by 2018 but lacks identified measures.
  - Staff estimate under unchanged policies: deficit would decline to around 2 percent of GDP by 2019—about 1 percentage point above authorities’ MTO.
- Policy recommendations:
  - Identify contingency measures to mitigate short-term risks.
  - To reach MTO of 1 percent of GDP structural deficit by 2019, additional measures of about 1 percent of GDP needed.
  - Closing one-third of the VAT compliance gap could increase revenue by about 0.6 percent of GDP in the medium term.
  - Consider reducing number of VAT rates and prevent 2011 VAT increase from expiring in 2017.
  - Strengthen credibility of stabilizing expenditure rule and improve expenditure efficiency; health expenditures estimated to rise by some 1.7 percentage points of GDP by 2030.
  - Promote voluntary savings (third pillar) and address special occupational pension scheme imbalances.

### Authorities’ views and staff appraisal (selected)
- Authorities broadly shared staff’s assessment; viewed short-term fiscal risks as manageable given upside growth risks.
- Authorities confident that strict enforcement of stabilizing expenditure rule supports MTO achievement.
- Staff appraisal highlights:
  - Continued economic expansion with growth projected around 3½ percent in 2015 and over the medium term.
  - Deflation persists; gradual return of inflation to target by end-2016 expected.
  - Monetary easing may be needed if inflation expectations disappoint.
  - Prompt adoption of bank resolution framework and comprehensive macroprudential framework essential.
  - Fiscal consolidation should continue; reaching MTO requires about 1 percent of GDP in additional measures.
  - Structural reform priorities: move up value-added chain, promote innovation and greenfield investment, better target education and training.

### Public Sector Debt and DSA (baseline and stress-test highlights)
- External debt (percent of GDP) key series: 2010: 66.8; 2011: 61.7; 2012: 73.8; 2013: 72.7; 2014: 64.3; 2015: 72.9; 2020: 57.4.
- Public gross financing needs (percent of GDP, baseline snapshots): 2013: 15.1; 2014: 10.8; 2015: 8.1; 2016: 10.0; 2017: 9.1; 2018: 7.8; 2019: 7.8; 2020: 7.5.
- Baseline projections (selected):
  - Nominal gross public debt: 49.4 (2013), 55.7 (2014), 50.1 (2015), 51.1 (2016), 51.0 (2017), 50.9 (2018), 49.5 (2019), 48.5 (2020).
  - Real GDP growth (in percent): 4.3 (2013), 1.7 (2014), 3.4 (2015), 3.6 (2016), 3.5 (2017), 3.6 (2018), 3.6 (2019), 3.6 (2020).
  - Effective interest rate (percent): 5.6 (2013), 4.7 (2014), 3.6 (2015), 3.6 (2016), 3.5 (2017), 3.2 (2018), 3.2 (2019), 3.3 (2020).
- Stress tests include shocks to interest rates, growth, exchange rate (one-time 30 percent real depreciation), and combined shocks; bound tests show external debt sensitivity (examples: interest-rate shock up to 78 percent of GDP; CA shock up to 82 percent of GDP; combined shock up to 71 percent).

### Foreign-currency mortgages and FX exposure
- Swiss franc-denominated mortgages:
  - Peak around 11 percent of GDP in November 2011; March 2014: 8.3 percent of 2014 GDP.
  - March portfolio share: close to 40 percent of the mortgage portfolio; all FX mortgages ~47 percent.
  - Reported NPL ratios around 3.5 percent in March.
  - Many mortgages issued before the crisis have LTV ratios above 100 percent.
- Macroeconomic implications:
  - Most CHF mortgages at floating rates; higher debt-servicing from zloty depreciation may be mitigated by lower Swiss LIBOR rates if passed on to borrowers.
  - KNF stress tests showed bank capital and liquidity buffers sufficient even under large zloty depreciation.
- Authorities’ response:
  - FSC recommendations: pass negative CHF rates to customers, narrow FX spreads, offer maturity extensions/payment holidays, offer provision-free conversions, not require additional collateral; case-by-case restructuring for distressed borrowers.
  - Ministry of Finance regulation exempted gains from mortgage credit restructuring and negative interest rates from income taxation; banks allowed to deduct these amounts from taxable income.

### Public expenditure efficiency (health, education, social protection)
- Public expenditure context:
  - Poland’s public expenditure averaged 43¼ percent of GDP during 2008–13; combined health, education, and social protection ~60 percent of total expenditure, ~26 percent of GDP.
  - DEA analysis finds potential savings by improving efficiency.
- Potential savings from bridging half the efficiency gap:
  - Health: some 0.4 percent of GDP.
  - Social protection: some 0.4 percent of GDP.
- Sector findings:
  - Health spending: Poland ~4½ percent of GDP vs industrial EU 6.6 percent; room to improve managerial and financial accountability in hospitals.
  - Education: Poland spends ~5½ percent of GDP; performs well on PISA and stands on efficiency frontier by PISA scores but has enrollment/completion shortfalls and weak lifelong learning participation.
  - Social protection: spends 15¾ percent of GDP vs industrial EU 17¾ percent; distributive impact comparable to Slovakia; coverage could be improved.

### Fund relations, arrangements, and statistics
- Fund relations (as of May 31, 2015):
  - Quota: 1,688.40 SDR Million.
  - SDR Department net cumulative allocation: 1,304.64 SDR Million.
- FCL arrangements:
  - FCL Approval Date 1/14/2015, Expiration 1/13/2017, Amount Approved 15,500.00 (SDR Million), Amount Drawn 0.00.
- Exchange arrangements:
  - Zloty freely floating; Poland accepted Article VIII obligations on June 1, 1995.
- Data adequacy:
  - Data provision adequate for surveillance; national accounts follow 2008 SNA and ESA 2010; Poland subscribes to SDDS since April 17, 1996.

*Source: IMF staff report for the 2015 Article IV consultation with Poland (excerpts).*

### 1.4 percent in 2014, benefiting from strong exports.

### _cr15182 - 1.4 percent in 2014, benefiting from strong exports.

### Outlook and risks
- Growth was 1.4 percent in 2014, benefiting from strong exports.
- Outlook: continued robust growth and subdued inflation.
- Growth projected at 3.5 percent in 2015 and over the medium term.
- External downside risks:
  - Surge in global financial market volatility amid asymmetric monetary exit in advanced economies.
  - Continued geopolitical tensions in the region.
  - Renewed sovereign stress or protracted low growth in the euro area.
- Domestic downside risk:
  - Inflation could fail to pick up owing to external factors or if low inflation expectations become entrenched.
- Upside scenarios:
  - Stronger-than-expected recovery in the euro area.
  - Low oil prices would further lift growth in Poland.
- Buffer: Poland’s Flexible Credit Line (FCL) arrangement with the IMF helps mitigate external downside risks.

### Policies and macroeconomic developments
- Monetary policy:
  - Remained accommodative, helped by a cumulative 100 basis points cut in the policy interest rate since October.
  - Directors welcomed the March policy interest rate cut and agreed there may be a need to ease monetary policy further if inflation expectations continue to disappoint.
  - Policy rate (NBP Reference Rate, avg): 4.6 (2012), 2.9 (2013), 2.4 (2014), 1.5 (2015, rate as of June 4).
- Inflation:
  - CPI inflation (percent, average): 3.7 (2012), 0.9 (2013), 0.0 (2014), -1.0 (2015 proj).
  - CPI inflation (percent, end of period): 2.4 (2012), 0.7 (2013), -1.0 (2014), -0.2 (2015 proj).
  - Noted that inflation has been negative since July 2014.
- External accounts and reserves:
  - Current account balance (percent of GDP): -3.5 (2012), -1.3 (2013), -1.4 (2014), -1.3 (2015).
  - Official reserves (billion U.S. dollars): 108.9 (2012), 106.2 (2013), 100.4 (2014), 104.4 (2015).
  - Total external debt (percent of GDP): 73.8 (2012), 72.7 (2013), 64.3 (2014), 72.9 (2015).
  - Zloty per USD, period average: 3.3 (2012), 3.2 (2013), 3.7 (2014), 3.1 (2015, exchange rate as of June 4).
  - Zloty per Euro, period average: 4.2 (2012), 4.2 (2013), 4.1 (2014), 4.2 (2015, exchange rate as of June 4).
- Labor market and activity:
  - Real GDP (change in percent): 1.8 (2012), 1.7 (2013), 3.4 (2014), 3.6 (2015 proj).
  - Unemployment rate (percent): 10.1 (2012), 10.3 (2013), 9.0 (2014), 7.9 (2015).
  - Nominal GDP (billion zloty): 1615.9 (2012), 1662.7 (2013), 1728.7 (2014), 1791.1 (2015 proj).

### Fiscal policy and public finances
- Fiscal consolidation advanced, allowing Poland to exit the Excessive Deficit Procedure (EDP) one year early.
- General government deficit: -3.7 percent of GDP (2012), -4.0 (2013), -3.2 (2014), -2.8 (2015 proj).
- General government revenues (percent of GDP): 39.2 (2012), 38.2 (2013), 38.6 (2014), 39.1 (2015).
- General government expenditures (percent of GDP): 42.9 (2012), 42.2 (2013), 41.8 (2014), 41.8 (2015).
- Public debt (percent of GDP): 54.4 (2012), 55.7 (2013), 50.1 (2014), 51.1 (2015).
- Directors’ views and recommendations:
  - Continue gradual consolidation to build policy buffers and allow timely, effective response to shocks without unduly weighing on growth.
  - Medium-term objective of a structural deficit of 1 percent of GDP remains appropriate.
  - Authorities encouraged to identify specific expenditure savings and reduce the large VAT revenue gap.
  - Over the longer run, raise spending efficiency and reform special pension schemes to address aging-related fiscal pressures.

### Financial sector and legacy vulnerabilities
- Banking sector performance:
  - Remained well-capitalized, liquid, and profitable.
  - Continued strong performance commended by Directors.
- Credit and money:
  - Private sector credit (change in percent, eop): 2.4 (2012), 4.5 (2013), 7.6 (2014), 7.5 (2015).
  - Broad money (change in percent, eop): 4.5 (2012), 6.2 (2013), 8.2 (2014), 7.3 (2015).
- Vulnerabilities:
  - Legacy vulnerabilities remain, including a sizable stock of foreign-currency loans and the still-elevated nonperforming loan (NPL) ratio.
  - Reliance on foreign funding has declined, but substantial foreign participation persists (about 60 percent of banking sector assets are held by foreign banks).
- Policy recommendations:
  - Expedite implementation of key financial sector reforms, including comprehensive macroprudential and bank resolution frameworks.
  - Continue efforts to address legacy vulnerabilities from still-elevated levels of NPLs and the credit union segment.
  - Support authorities’ case-by-case approach to restructuring distressed Swiss-franc-denominated mortgages.
  - Moderate reserve accumulation recommended to strengthen resilience to shocks.

### Structural reforms and convergence
- Context:
  - Poland has closed a quarter of its per capita income gap with the EU average over the past two decades.
  - Integration with the euro area has led to technological transfers, higher sophistication of domestic value added, and productivity gains.
- Recent reforms welcomed:
  - Streamlining the list of regulated professions.
  - Reducing labor market segmentation.
  - Easing administrative requirements for business start-ups.
- Directors’ recommendations:
  - Further structural reforms to boost productivity, safeguard competitiveness, and move up the value-added chain.
  - Promote innovation, encourage greenfield investment, and better target education and training to employer needs.
  - Continued structural transformation to facilitate labor mobility to higher productivity sectors and complete convergence.

### Key statistics (selected)
- Growth and prices:
  - Real GDP: 1.8 (2012), 1.7 (2013), 3.4 (2014), 3.6 (2015 proj).
  - CPI inflation (average): 3.7 (2012), 0.9 (2013), 0.0 (2014), -1.0 (2015 proj).
- Labor and output:
  - Unemployment rate: 10.1 (2012), 10.3 (2013), 9.0 (2014), 7.9 (2015).
  - Nominal GDP (billion zloty): 1615.9 (2012), 1662.7 (2013), 1728.7 (2014), 1791.1 (2015 proj).
- Public finances:
  - General government balance (percent of GDP): -3.7 (2012), -4.0 (2013), -3.2 (2014), -2.8 (2015 proj).
  - Public debt (percent of GDP): 54.4 (2012), 55.7 (2013), 50.1 (2014), 51.1 (2015).
- External sector:
  - Current account balance (percent of GDP): -3.5 (2012), -1.3 (2013), -1.4 (2014), -1.3 (2015).
  - Official reserves (billion U.S. dollars): 108.9 (2012), 106.2 (2013), 100.4 (2014), 104.4 (2015).
  - Total external debt (percent of GDP): 73.8 (2012), 72.7 (2013), 64.3 (2014), 72.9 (2015).

*Source: IMF staff report for the 2015 Article IV consultation with Poland.*

### 6.      The near-term reform momentum is being dampened by political uncertainty. The

### 6.      The near-term reform momentum is being dampened by political uncertainty.

### Political environment and implications for reform
- Presidential elections in May were closely contested and ended with a decisive victory of the opposition, Law and Justice (PiS) party candidate.
- Parliamentary elections are scheduled to take place in the fall.
- Given the uncertainty and the ruling coalition’s slim parliamentary majority, a slowdown of reform momentum is a risk.
- Weaker impetus for structural reform from elections could delay structural and financial sector reforms and, if protracted, could undermine potential output growth going forward.

### Recent economic developments — growth and demand
- Real GDP growth reached 3.4 percent in 2014, up from 1.7 percent in 2013, supported by strong domestic demand.
- Growth accelerated to 3.6 percent in 2015Q1.
- Drivers:
  - Private consumption buoyed by higher disposable income from accelerating wages, falling unemployment, and declining prices.
  - Investment benefited from robust credit growth on the back of eased financial conditions.
  - High-frequency indicators, including strong Purchasing Managers Index (PMI) readings, point to continued healthy economic expansion.

### Financial conditions and markets
- Policy and market developments:
  - A cumulative 100 basis points (bps) cut in the main policy interest rate between October and March reduced borrowing costs.
  - Poland issued foreign-currency denominated bonds at a negative yield in April, helped by ample market liquidity following the European Central Bank’s quantitative easing (ECB QE) program.
- Credit and lending:
  - Credit expansion has been supported by recent easing of lending standards (except for housing loans, which saw tightening as loan-to-value (LTV) ratios were lowered); standards remain stricter than in the run-up to the global financial crisis.
- Asset prices and volatility:
  - Equity prices have risen, supported by improved outlook and equity fund flows.
  - Volatility in international financial markets has recently increased, partly reflecting a correction of stretched bond valuations.
  - Spreads of Polish and CE3 long-term government bond yields to German bunds have increased slightly while equity valuations have mainly followed improved economic conditions.

### Labor market
- Labor market improvements:
  - Seasonally-adjusted harmonized unemployment rate has fallen by about 3 percentage points from its early-2013 peak to 7.9 percent in April.
  - Nominal wages accelerated to 4.1 percent in the first quarter along with rising job vacancies.
- Cost and productivity:
  - Wage growth outpaced labor productivity growth, pushing up real unit labor costs.

### Inflation and price dynamics
- Headline inflation:
  - Headline inflation remained in negative territory; deflation slowed from a historic low of -1.6 percent in February to -1.1 percent in April.
- Core inflation:
  - Core inflation stood at 0.4 percent in April year-on-year.
- Drivers:
  - Low commodity prices and weak imported inflation, including from the euro area, have kept inflation subdued.
  - Negative external price shocks have fed into core inflation despite the rapidly closing output gap.

### External position (Box 1: External Sector Assessment)
- Current account:
  - Current account deficit declined from 3.5 percent in 2012 to 1.4 percent in 2014.
  - The current account deficit declined from around 5 percent of GDP in 2010–11 to 1.4 percent of GDP in 2014.
  - In 2015, the current account is projected to improve only marginally; improvement in the oil trade deficit is more than offset by higher non-oil imports due to strong domestic demand.
  - The cyclically-adjusted current account balance is consistent with fundamentals and desirable policies.
- Real exchange rate:
  - Real exchange rate assessed to be broadly in line with fundamentals and desirable policy settings.
  - Alternative approaches suggest a modest undervaluation of between 2 and 11 percent (2 percent using the current account norm; 6 percent using the external sustainability estimate of the REER gap; 2 percent and 11 percent using the REER index regression and levels approaches, respectively).
  - Capital inflows following ECB QE could result in zloty appreciation; the 50 bps policy interest rate cut in March could mitigate the impact.
- Capital and financial account:
  - Portfolio inflows into domestic bond and equity markets weakened in 2014.
  - Decrease in foreign direct investment (FDI) flows, primarily reflecting high income repatriation; EU funds remain stable.
  - Financing the widening current account could prove challenging should FDI inflows fall significantly below current projections.
- Foreign assets and liabilities:
  - Net international investment position (IIP) liabilities stabilized at 60 percent of GDP in 2014.
  - Vulnerabilities are mitigated by a large and diversified share of FDI liabilities and related intercompany lending (over 40 percent of foreign liabilities are FDI investments).
- Reserve adequacy:
  - Reserves are broadly adequate at about 114 percent of the IMF’s modified composite reserve adequacy metric at end-2014.

### Outlook and medium-term projections
- Growth and inflation outlook:
  - Healthy domestic demand is expected to maintain growth at around 3½ percent in 2015.
  - Private consumption and investment will continue driving growth over the medium term, supported by falling unemployment, robust wage growth, and a moderate pick-up in credit growth.
  - Output gap is projected to close in 2016.
  - Continued low commodity prices and still-low imported inflation, combined with subdued inflation expectations, will contain inflation below the target band (1.5 to 3.5 percent) until late-2016.
- Structural constraints:
  - Given adverse demographic trends, increasing labor participation (including of women), and boosting investment and productivity will be key to sustaining strong growth.

### Risks — external and domestic
- Risks have somewhat receded but remain tilted to the downside.
- External downside risks:
  - Volatile global financial conditions from asynchronous monetary policies could increase market volatility and affect capital flows; ample liquidity from ECB QE could attract inflows, potentially fueling asset price bubbles and sharp zloty appreciation, while U.S. monetary tightening could trigger outflows, zloty depreciation, and liquidity shortages.
  - Sovereign stress (particularly in Greece) or a protracted euro-area slowdown could spill over to Poland through trade and financial linkages, although direct links with Greece are limited and contagion could be mitigated by euro-area policy action.
  - Intensification of conflict in Russia and Ukraine could disrupt imported gas supplies to Poland’s heavy industry and precipitate confidence-driven capital outflows.
- External upside risk:
  - Stronger trading partner growth—faster-than-expected euro-area recovery supported by ECB QE and low oil prices—would boost Polish growth given synchronization with Germany and the euro area.
- Domestic risks:
  - Prolonged low inflation in Poland could fail to pick up due to external factors or entrenched low inflation expectations, with adverse balance-sheet implications: reduced household debt tolerance, weaker corporate and bank profits, and increased government deficit and debt.
  - In a tail-risk adverse scenario, protracted lowflation could trigger an adverse loop of lower demand, higher nonperforming loans (NPLs), lower bank lending, and lower growth.
  - Weaker impetus for structural reform from election uncertainty could undermine potential output growth if delays are protracted.

### Balance-sheet channels and sectoral effects from prolonged low inflation (Box 2)
- Near-term effects to date:
  - Low inflation has so far had limited economic impact; strong activity, healthy private and public sector balance sheets, and continued profitability in nonfinancial corporations and banks.
  - Household debt has increased but remains below debt tolerance thresholds; public sector debt is on a declining path.
- Potential adverse scenarios and transmission:
  - Households: Protracted lowflation could reduce debt servicing capacity, lower consumption, and increase NPLs.
  - Nonfinancial corporations: Low inflation with sticky wages could reduce profits and induce investment postponement.
  - Banks: Lower interest rates could squeeze margins; in adverse scenarios, rising NPLs and weaker credit demand could prompt reduced credit supply.
  - Public sector: Prolonged lowflation could reduce fiscal space, make fiscal targets harder to achieve, and potentially trigger procyclical fiscal consolidation, further harming growth.

*Source: IMF staff report excerpt (Republic of Poland).*

### Box 2. Republic of Poland: Balance Sheet Effects from Lowflation (concluded)

### Box 2. Republic of Poland: Balance Sheet Effects from Lowflation (concluded)

### Lowflation — balance-sheet and macro-financial risks
- Households: balance sheets described as "generally healthy" but lowflation risks include lower debt tolerance.
- Corporations and banks: protracted lowflation could reduce corporate profits and bank profitability.
- Public sector: risks to the fiscal balance could materialize under lowflation and result in an increase in debt.
- Key indicators and observations:
  - NPLs remain elevated at above 8 percent of total loans.
  - Around half of mortgages are denominated in FX (mostly Swiss franc).
  - The January episode: the zloty depreciated around 20 percent against the Swiss franc; high bank capital buffers and emergency liquidity (including NBP–SNB swap) mitigated risks.
  - Reserves are "broadly adequate" at about 114 percent of the IMF’s modified ARA metric.
  - Credit unions: assets correspond to about 1 percent of banking sector assets.

### Monetary policy stance and inflation outlook
- Recent policy actions:
  - The MPC cut the policy interest rate in March by 50 bps to a historic low of 1.5 percent.
  - Cumulative reduction in the main policy interest rate since October: 100 bps.
- Outlook and risks:
  - Staff projects inflation to gradually return to the target band by end-2016, taking into account monetary transmission lags of 6 to 8 quarters.
  - Weak inflation expectations point to downside risks to this forecast.
- Policy guidance:
  - Maintain an easing bias guided by data (monitor inflation expectations, wage growth, exchange-rate developments, and the outlook for activity).
  - NBP has ample policy space to cut rates further if inflation fails to pick up.
  - Monitor bank risk-taking for potential search-for-yield behavior in low-interest-rate conditions.
  - Moderate reserve accumulation recommended given downside external risks.

### Financial sector resilience, vulnerabilities, and reform priorities
- Positive assessments and metrics:
  - Banking sector capital adequacy: 14.7 percent in the fourth quarter.
  - Liquidity above regulatory minimum; declining loan-to-deposit ratio.
  - AQR and stress tests confirmed resilience, including to substantial exchange-rate depreciation.
- Legacy vulnerabilities:
  - Foreign-currency mortgages: large legacy stock (close to half of mortgages), exposure to zloty depreciation.
  - Nonperforming loans: above 8 percent, particularly in consumer loans and SME segments.
  - Credit unions (SKOKs): weak, under-capitalized; restructuring cost the budget about 0.1 percent of GDP in 2014 and BFG resources were dented.
- Reform and policy recommendations:
  - Finalize the macroprudential framework to allow early detection and prevention of systemic risk.
  - Expedite legislation on the bank resolution framework (current delays and legal challenges noted).
  - For FX mortgages: support case-by-case restructuring of distressed Swiss franc loans; implement recommendation for banks to pass negative Swiss franc LIBOR rates to customers and not require additional collateral.
  - For NPLs: use recent changes to consumer bankruptcy law and the new insolvency law (expected to take effect on January 1, 2016) to facilitate restructuring of viable firms.
  - Restructure credit unions and replenish BFG funds (doubled financial sector contributions in 2015 expected to help).
  - Strengthen macroprudential policies to reduce rapid household debt accumulation risks.

### Fiscal consolidation, risks, and structural revenue measures
- Recent fiscal outcomes and financing:
  - General government deficit declined to 3.2 percent of GDP in 2014 from 4.0 percent of GDP in 2013.
  - When adjusted for costs of the 1999 pension reform, the deficit declined to 2.8 percent of GDP.
  - Public debt declined by about 5.5 percentage points of GDP to 50.1 percent of GDP.
  - By end-April, about 70 percent of the 2015 gross borrowing needs had been pre-financed.
- Near-term and medium-term fiscal projections and risks:
  - Fiscal deficit expected to decline to around 2¾ percent of GDP in 2015.
  - Risks: lower-than-expected inflation, pre-election spending pressures, restructuring costs of the mining sector (assumed at about PLN3 billion during 2015–18).
  - Authorities’ Convergence Program envisages a decline in the fiscal deficit to 1.2 percent of GDP by 2018 but lacks identified concrete measures.
  - Staff estimate under unchanged policies: deficit would decline to around 2 percent of GDP by 2019—about 1 percentage point above the authorities’ MTO.
- Policy recommendations to reach fiscal objectives:
  - Identify contingency measures to mitigate short-term risks (pre-election spending and lower-than-expected inflation).
  - To reach the MTO of 1 percent of GDP structural deficit by 2019, additional measures of about 1 percent of GDP are needed.
  - Closing one-third of the VAT compliance gap could increase revenue by about 0.6 percent of GDP in the medium term.
  - IMF TA recommendations: develop industry-based compliance projects, implement strategies to fight the grey economy, follow-up TA for VAT administration and VAT gap analysis.
  - Consider reducing the number of VAT rates and prevent the 2011 VAT increase from expiring in 2017 to sustain revenues until administrative reforms take effect.
  - Strengthen credibility of the stabilizing expenditure rule by identifying measures supporting its implementation; improve expenditure efficiency to meet aging-related pressures.
  - Long-run demographic pressure: health expenditures estimated to rise by some 1.7 percentage points of GDP by 2030.
  - Promote voluntary savings through the third pillar and address imbalances in special occupational pension schemes to limit contingent liabilities.

*Sources: Eurostat, Haver Analytics, KNF, NBP, Statistics Poland, and IMF staff calculations.*

### 31.      The authorities broadly shared staff’s assessment and underscored the existence of

### _cr15182 - 31.      The authorities broadly shared staff’s assessment and underscored the existence of

### Fiscal risks and budget flexibility
- Authorities agreed with staff that short-term fiscal risks, including from lower-than-expected inflation, are manageable given upside risks to the growth forecast underpinning the budget.
- Authorities were confident that strict enforcement of the stabilizing expenditure rule would support the achievement of the MTO.
- Staff estimated that discretionary expenditures are around one-third of total expenditures, providing flexibility to cut expenditure over time.
- On revenues, authorities agreed on the need to reduce the VAT revenue gap and welcomed ongoing IMF TA. A new tax code recently proposed by the government aims to further strengthen tax compliance.
- Authorities acknowledged the need to reform special pension schemes for farmers and miners.

### Budget composition and key fiscal figures (as presented)
- Social benefits, 16.3 (Percent of GDP)
- Wage bill, 10.2 (Percent of GDP)
- Interest, 2.0 (Percent of GDP)
- Consumption, 6.0 (Percent of GDP)
- Investment, excl. defense, 4.0 (Percent of GDP)
- Other expenditures, 1.2 (Percent of GDP)
- Subsidies, 0.6 (Percent of GDP)
- Discretionary expenditures estimated by staff at around one-third of total expenditures.

### Structural reforms to boost productivity and facilitate convergence
- Progress noted:
  - Continued economic convergence with advanced European countries supported by integration with European supply chains and structural reforms.
  - Improvements in productivity and the business climate have made Poland an attractive investment destination in Central, Eastern, and Southeastern Europe.
- Reforms already in the pipeline:
  - Labor market policies:
    - Planned deregulation of professions to boost job creation.
    - Better alignment of social security contributions on temporary employment contracts with those on regular contracts from 2016.
    - Ongoing efforts to limit the duration of consecutive short-term contracts to reduce labor market segmentation and support sustainability of the social security system.
    - Reforms to public employment offices to increase job-matching efficiency.
  - Business climate:
    - Eased administrative requirements for business start-ups and reduced red tape.
    - Legislative work completed to ease regulations for construction permits starting in June.
    - New consumer insolvency law entered into effect in December 2014.
    - Privatization has slowed and state-ownership remains prevalent in strategic sectors, which appear broadly profitable.

Box 3 — Raising Productivity Growth: main findings and policy directions
- Sources of aggregate labor productivity growth:
  - Within-sector productivity gains accounted for the bulk of aggregate productivity growth over the past decade.
  - Structural transformation (reallocation of labor toward higher-productivity sectors) contributed the remaining one-fifth.
- Policies to sustain and raise productivity:
  - Facilitate labor mobility across sectors and promote economic diversification to complete structural transformation.
  - Secure large greenfield investments, improve the business climate, address labor market duality, and tackle long-term unemployment to encourage structural change.
  - Move up the value-added chain by encouraging innovation and increasing investment in research and development.
  - Better-targeted vocational training to facilitate absorption of new technologies.
  - Labor market measures: streamline the list of regulated professions, better target education and training to employer needs, develop the rental market to ease geographical mobility, reduce labor market segmentation to encourage on-the-job training, and encourage greater female labor force participation.
  - Business climate: strengthen contract enforcement and continue improvements to encourage greenfield investment.

### Authorities’ views on reform implementation
- Authorities highlighted measures to reduce labor market segmentation, including better aligning civil law and temporary contracts with regular contracts.
- Efforts to increase female labor force participation: affordable child care, subsidized telework, and programs to reintegrate women returning from maternity leave.
- New housing rental program financed by BGK expected to help develop the rental market and facilitate regional labor mobility.
- Ongoing efforts to promote innovation through increased allocation of EU funds to innovation programs (including for SMEs) and greater research and education synergies between universities and the private sector.

### Staff appraisal: outlook, risks, and policy recommendations
- Outlook and inflation:
  - The economy recovered from the 2012–13 slowdown; growth accelerated in Q1 this year on strong domestic demand.
  - Deflation persists amid low commodity prices and weak imported inflation.
  - Economic expansion is expected to continue, with growth projected at around 3½ percent in 2015 and over the medium term.
  - This growth should help gradually return inflation to the target band by end-2016.
- Risks:
  - External: an abrupt surge in global financial market volatility could propagate via substantial foreign participation in the government bond market and banking system; continued geopolitical tensions could weigh on confidence.
  - Mitigating factors: Poland’s stable and geographically diversified investor base and declining reliance on foreign bank funding.
  - Domestic: inflation could fail to pick up if low inflation expectations become entrenched, potentially squeezing profit margins and affecting investment, employment, and growth.
  - Upside: a stronger-than-expected euro-area recovery and low oil prices could lift growth in Poland.
- Monetary and reserve policy:
  - Additional monetary policy easing could be needed. The March policy interest rate cut is welcome; ECB quantitative easing should help lift inflation.
  - Additional policy interest rate cuts could be needed if inflation expectations continue to disappoint, or if persistent zloty appreciation jeopardizes the inflation objective.
  - Moderate reserve accumulation would be prudent in light of downside external risks.
- Financial sector recommendations:
  - Prompt adoption of the bank resolution framework is essential.
  - Implement a comprehensive macroprudential framework for early detection and prevention of systemic risks.
  - Continue restructuring the weak but non-systemic credit union segment.
- Fiscal policy recommendations:
  - Gradual fiscal adjustment should continue.
  - The fiscal deficit is expected to decline further to around 2¾ percent of GDP in 2015.
  - The medium-term objective (MTO) of 1 percent of GDP structural deficit remains an appropriate fiscal anchor.
  - Reaching the MTO would require additional measures of about 1 percent of GDP.
  - Important measures include identifying specific expenditure savings to support implementation of the fiscal rule and reducing the large VAT revenue gap.
- Structural reform priorities:
  - Continue focusing on moving up the value-added chain and redeploying resources toward higher-productivity sectors.
  - Promote innovation, encourage greenfield investment, and better target education and training to employer needs.
  - Recent actions to reduce red tape, streamline regulated professions, and better align civil law and regular contracts are welcomed.

*Source: Republic of Poland, INTERNATIONAL MONETARY FUND (excerpts from IMF staff assessment in the provided content).*

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

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

### Integration with the Global Economy
- Trade Openness (Sum of exports and imports of goods and services; Percent of GDP): chart timeframe 1995–2013 (no single summary value provided).
- Financial Integration (Sum of foreign assets and liabilities; Percent of GDP): chart timeframe 1995–2013 (no single summary value provided).
- Share of Polish Zloty in Global Currency Market (Percent of average daily turnover): data points for 1998, 2001, 2004, 2007, 2010, 2013 (no single summary value provided).
- Institutional distribution of non-resident holdings of domestic government bonds (Percent of total domestic government bonds; end-April 2015): selected shares shown (percent values): 36.4, 17.1, 11.2, 8.5, 6.6, 6.2, 5.0, 4.5, 3.9, 0.5, 0.0.
- Breakdown of foreign investors in the local government bond market (Percent; data as of end-April 2015): country shares listed (percent values): 27.7, 18.4, 12.6, 5.9, 5.7, 5.0, 4.4, 4.2, 2.5, 2.4, 1.5, 1.4, 1.2, 1.0, 6.2 (plus "Others").
- Convergence Toward EU Average Income (PPP income per capita as a percent of EU-28 average): series for Latvia, Lithuania, Estonia, Poland, Hungary, Czech Rep. (1995–2013 chart; no single summary value provided).

### Financial Market Developments
- Exchange Rate: Euro per National Currency (Jan. 1, 2009 = 100): series for Hungary, Poland, Czech Rep. (2009–2015).
- Implied Volatility of Exchange Rate vs. Euro (1-month options contract, percent): 2009–2015 series for Hungary, Poland, Czech Rep.
- Credit Default Swaps Spreads (Basis points): 2009–2015 series for Hungary, Poland, Czech Rep.
- Stock market indices (WIG total return index, WIG20 index) and realized volatility (30 days) shown for 2007–2015 (no single numeric summary).
- Spreads over German 10-Year Bonds (Yields in percent; spread in basis points): Poland 10Y yield and Germany 10Y yield series 2009–2015.
- 5-Year Government Bond Liquidity (Basis points, 30-day rolling bid-ask spread): series for Hungary, Poland, Czech Rep. (2009–2015).
- Observations in text: "The zloty has generally remained relatively stable despite bouts of turbulence... Credit default swap (CDS) spreads remain narrow... Spreads to German yields narrow despite recent widening... liquid market."

### Recent Economic and Labor Market Developments
- Trade Volume (Year-on-year percent change), Exports and Imports: 2009–2015 series.
- Nominal effective rate (Exchange Rate, 2000 = 100): 2009–2015 series.
- Retail Sales (Year-on-year percent change) and Consumer Confidence (Percent balance): 2009–2015 series.
- Industrial Production (YoY percent change) and Business Sentiment Indicator (Percent balance): 2009–2015 series.
- Contributions to Real GDP Growth (Percentage points, year-on-year): components: Private consumption, Public consumption, Fixed investment, Inventory, Net exports, GDP growth (Percent); 2009–2015 series.
- Enterprise Sector Employment and Wages (Year-on-year percent change): Employment and Nominal wages (rhs); 2009–2015 series.
- Unemployment Rate (Percent, seasonally adjusted): Registered and Harmonized (labor force survey): levels reported for 2009–2015 series; Table 1 average unemployment rate values: 2012: 10.1, 2013: 10.3, 2014: 9.0, 2015: 7.9, 2016: 7.7, 2017: 7.6, 2018: 7.7, 2019: 7.5, 2020: 7.5.
- Text observations: "Domestic demand supported growth in the first quarter... After a strong pick-up in Q1, retail sales slowed... jobless rate has continued to improve... wage growth has moderated."

### Balance of Payments (high-level findings)
- Current account balance (Percent of GDP, four-quarter rolling sum): chart 2009–2014; Table 2 shows numeric series (millions of U.S. dollars and percent of GDP).
- Portfolio flows: "Portfolio Flows, Net (Billions of US dollars, 3-month moving average, '+'=outflows)" series 2011–2015 with values in figure (no single summary value provided).
- International Investment Position (Percent of GDP): Net, Assets, Liabilities series 2009–2014.
- International Investment Position, Liabilities (Billions of US dollars): 2009–2014 series.
- Financial account balance (net flows) (Percent of GDP, four quarter rolling sum, '+' = outflows): series for Other investments, Portfolio, FDI, Financial account, CA deficit (2009–2014).
- Text observations: "The current account deficit has improved... and is mostly financed by EU transfers. Financial inflows have weakened... with net portfolio outflows recently. The IIP is stable... reflecting a levelling off in liabilities across all sectors."

### Recent Inflation Developments
- CPI Inflation (YoY percent changes) and Core CPI (excl. food and energy): series 2009–2015; target ±1 pp tolerance bands shown.
- Consumer Price Inflation components (Jan-09 to Jan-15): Electricity, gas, other fuels; Fuel; Food; Core inflation; Headline inflation contributions.
- CPI Inflation (Annualized percent change, 3m-on-3m, sa): series 2009–2015 for CPI and Core CPI.
- Inflation gap (inflation -2.5 percent) and Output gap (lagged two quarters): series 2004–2014.
- Inflation Expectations, One Year Ahead (Year-on-year inflation in percent): Consensus forecast (following year-average), Survey of professional forecasters 2009–2015 series.
- Longer-Term Inflation Expectations (Year-on-year inflation in percent): Consensus forecast (two years ahead, avg.), consensus forecast (five years ahead, avg.), survey of professional forecasters (8 quarters) 2009–2015.
- Text observations: "Headline and core inflation are well below the target... momentum remains weak. The decline occurred across all components... longer-term expectations have also weakened... inflation has recently decoupled from output gap developments. Inflation expectations are below the target band."

### Monetary Policy Developments
- Interest Rates (End of period, percent): 3-month Wibid, Reference rate, Deposit rate, Lombard rate: series 2009–2015.
- Real Policy Rate (Percent): Ex-post real policy rate; Ex-ante real policy rate; Ex-ante policy rate based on 12-month inflation expectations (consumers); Ex-post policy rate based on realized inflation: series 2009–2015.
- Lending and Deposit Rates (Percent): Lending margin, Deposit rate, Lending rate: series 2009–2015.
- Ex-Post Real Policy Rates (End of period, percent; based on HICP inflation): Poland, Czech Rep., Hungary, Romania, Euro area for Jan-14 to Apr-15.
- Nominal Policy Rates (End of period, percent) for same country set and period.
- Ex-Post Real Policy Rates, Risk-Adjusted (End of period, percent; nominal rate minus inflation minus CDS spreads): Poland, Czech Rep., Hungary, Romania: Jan-14 to Apr-15.
- Text observations: "The monetary easing cycle has fully transmitted to the key interbank rate, helping lending rates to decline. However, the real policy rate remains high... If needed, there is nominal room to ease further... including relative to peers, and when adjusting for risk."

### Banking Sector Capital and Asset Quality
- Non-Performing Loans by Sector (Percent of loans in given segment): Total, Households, Corporates, 2008–2015 series.
- Non-Performing Loans (Billion zloty): 2010–2015 series with breakdowns for Large firms, SMEs, Other household loans, Consumer loans, Housing.
- Nonfinancial Sector Impaired Loans (Percent of loans in given segment): Dec. 2010, Dec. 2012, Dec. 2014, Mar. 2015 by category: Housing, Consumer loans, Other household loans, SMEs, Large enterprises.
- Monthly Banking Sector Net Profits and Capital Adequacy Ratio: Banking sector net profits (billion zloty) and CAR (RHS) (percent) 2010–2015.
- Share of Foreign Currency Denominated Housing Loans (Percent of total housing loans outstanding): 2008–2015 series (declining).
- Banking Sector Profits: Profits (12-month moving average) and Return on assets 1/ (RHS) with scale 2011–2015 (profitability series values 0.9 to 1.3 shown).
- Text observations: "Bank profits remain strong and capital adequacy high, though profitability has recently weakened. Non-performing loans (NPLs) are sticky and remain high for SMEs and consumer loans, accounting for the bulk of impaired loans. Nonetheless, the foreign currency share of mortgages has declined."

### Credit Growth and Banking Sector Funding
- Private Sector Credit Growth (Year-on-year percent change; 2009–2015): Total, Corporates, Household mortgages, Consumer credit (series showing positive growth; no single summary values apart from chart).
- Banking Sector, On-balance Sheet Open FX Position (Share in total banking sector assets; Percent of GDP): series 2009–2015.
- Contribution to Private Sector Credit Growth (Percentage points): Net foreign assets, Net claim on government, Deposit growth, Others, Claims on private sector: series 2009–2014.
- Polish Banks' External Liabilities to Financial Sector (Billions of US$): 2009–2014 series (45–75 range in chart).
- Banking Sector Debt to Parents (Percent): 2010–2014 series (values 6–16 scale shown).
- Private Sector Deposit Growth (Year-on-year percent change): Total, Nonfinancial corporations, Households: series 2011–2015.
- Text observations: "Private sector credit expansion is healthy... with rising deposits an important funding source... by both households and nonfinancial corporations. As has also the reliance on parent bank funding, with reduced FX hedging needs. Alongside, external financial liabilities have declined."

### VAT Compliance
- VAT C-Efficiency Ratios in the OECD, 2011 (As a ratio of VAT potential revenues): ordered country list with Poland positioned among peers (chart scale 0.0–1.2; Poland shown).
- VAT Coverage in Europe, 2015 (Unweighted averages): Number of products exempted, Number of reduced VAT rates (incl. super reduced VAT rates): Poland compared to Average EU and Average CESEE: values in chart (examples shown: 7.7, 1.7, 7.0, 1.5).
- Poland: Decomposition of the C-Inefficiency of the VAT (Percent; average 2009–12 estimates): components Rate differentiation, Exemptions, C-inefficiency ratio, Compliance gap, Policy gaps with values 0.55, 0.21, 0.36, 0.11 (scale 0.0–0.7).
- VAT Compliance Gap (Percent of total VAT revenue liabilities in 2012): Increase from 2005 to 2012 across countries with Poland shown among others (chart scale -10 to 50).
- Text observations: "VAT efficiency in Poland is relatively low. Exemptions are limited but rate differentiation is above average. Compliance gap accounts for over a third of the VAT gap...... and has deteriorated more than elsewhere in Europe."

### Prevalence of State-Owned Enterprises (SOEs)
- Share of State-Owned Enterprises (SOEs) in Revenues of the Biggest Enterprises (Percent): cross-country chart including POL (Poland) compared to CZE, HUN, SVK, FRA, SWE, DEU, GBR (no single numeric summary).
- Public Ownership Indicator (scale 1–5, 5 corresponds to high share of public ownership): Poland 2013 vs 2003 shown (chart).
- Share of state-controlled enterprises in revenues by sector (Percent): sectors include Other, Mines, Rail, Electricity, Oil and gas (chart comparing POL, CZE, HUN, SVK).
- Share of State-Controlled Institutions in Financial Sector (Percent): Commercial banks and insurers shares shown; specific institutions cited: PKO BP, BOS bank, PZU SA.
- Profitability of SOEs (Percent, average 2004–13): Turnover profitability of non-financial SOEs and Return on equity of state-controlled financial companies charted (no single numeric value).
- Privatization Receipts and Dividends Paid to General Government (LHS: 2014 PLN billion; RHS: percent of GDP): series 1991–2012 with dividends annotated; note: "estimates for 2013 and 2014 dividends."
- Text observations: "The share of state-controlled enterprises in Poland is high... and has changed very little in the last decade. Energy companies have the largest share... state presence in the financial sector stands out. Profitability does not seem to be a concern... and the state budget continued to benefit from dividend payments and privatization receipts."

### Selected Economic Indicators, 2012–20 (Table 1 highlights)
- GDP (change in percent) 1/: 2012: 1.8, 2013: 1.7, 2014: 3.4, 2015: 3.6, 2016: 3.5, 2017: 3.6, 2018: 3.6, 2019: 3.6, 2020: 3.6.
- Domestic demand growth: 2012: -0.4, 2013: 0.4, 2014: 5.0, 2015: 3.6, 2016: 4.2, 2017: 4.0, 2018: 3.7, 2019: 3.8, 2020: 3.6.
- CPI inflation (percent) Average: 2012: 3.7, 2013: 0.9, 2014: 0.0, 2015: -1.0, 2016: 0.8, 2017: 1.8, 2018: 2.3, 2019: 2.5, 2020: 2.5.
- CPI inflation (percent) End of period: 2012: 2.4, 2013: 0.7, 2014: -1.0, 2015: -0.2, 2016: 1.5, 2017: 2.1, 2018: 2.5, 2019: 2.5, 2020: 2.5.
- Unemployment rate (average, according to LFS): 2012: 10.1, 2013: 10.3, 2014: 9.0, 2015: 7.9, 2016: 7.7, 2017: 7.6, 2018: 7.7, 2019: 7.5, 2020: 7.5.
- General government revenues (percent of GDP): 2012: 39.2, 2013: 38.2, 2014: 38.6, 2015: 39.1, 2016: 38.8, 2017: 38.6, 2018: 38.7, 2019: 38.9, 2020: 39.0.
- General government expenditures (percent of GDP): 2012: 42.9, 2013: 42.2, 2014: 41.8, 2015: 41.8, 2016: 41.4, 2017: 41.2, 2018: 41.0, 2019: 40.9, 2020: 40.9.
- General government balance (percent of GDP): 2012: -3.7, 2013: -4.0, 2014: -3.2, 2015: -2.8, 2016: -2.5, 2017: -2.6, 2018: -2.2, 2019: -2.0, 2020: -2.0.
- Public debt (percent of GDP): 2012: 54.4, 2013: 55.7, 2014: 50.1, 2015: 51.1, 2016: 51.0, 2017: 50.9, 2018: 50.5, 2019: 49.5, 2020: 48.5.
- Private credit (change in percent, end-period): 2012: 2.4, 2013: 4.5, 2014: 7.6, 2015: 7.5, 2016: 7.7, 2017: 8.1, 2018: 8.4, 2019: 8.6, 2020: 8.7.
- Deposits (change in percent, end-period): 2012: 5.1, 2013: 5.8, 2014: 7.8, 2015: 7.6, 2016: 7.7, 2017: 8.1, 2018: 8.4, 2019: 8.6, 2020: 8.6.
- Policy Rate (percent) 4/: 2012: 4.6, 2013: 2.9, 2014: 2.4, 2015: 1.5 (NBP Reference Rate avg; for 2015 as of June 4).
- Current account balance (transactions, billion U.S. dollars): 2012: -17.6, 2013: -6.9, 2014: -7.6, 2015: -6.5, 2016: -9.7, 2017: -13.6, 2018: -16.4, 2019: -21.3, 2020: -23.3.
- Current account (percent of GDP): 2012: -3.5, 2013: -1.3, 2014: -1.4, 2015: -1.3, 2016: -1.9, 2017: -2.5, 2018: -2.8, 2019: -3.4, 2020: -3.5.
- Exports of Goods (billion U.S. dollars): 2012: 181.0, 2013: 197.8, 2014: 208.8, 2015: 212.4, 2016: 228.3, 2017: 244.8, 2018: 262.5, 2019: 281.0, 2020: 300.7.
- Imports of Goods (billion U.S. dollars): 2012: 190.2, 2013: 197.0, 2014: 211.0, 2015: 213.9, 2016: 232.1, 2017: 252.2, 2018: 272.4, 2019: 295.3, 2020: 317.6.
- Official reserves (billion U.S. dollars): 2012: 108.9, 2013: 106.2, 2014: 100.4, 2015: 104.4, 2016: 106.8, 2017: 108.2, 2018: 108.3, 2019: 108.3, 2020: 107.8.
- Total external debt (billion U.S. dollars): 2012: 366.7, 2013: 382.8, 2014: 352.0, 2015: 352.4, 2016: 353.7, 2017: 355.9, 2018: 360.3, 2019: 371.9, 2020: 384.8.
- Total external debt (percent of GDP): 2012: 73.8, 2013: 72.7, 2014: 64.3, 2015: 72.9, 2016: 69.2, 2017: 65.2, 2018: 61.9, 2019: 59.7, 2020: 57.4.
- Exchange rate regime: Freely floating.
- Nominal GDP (billion zloty): 2012: 1,615.9; 2013: 1,662.7; 2014: 1,728.7; 2015: 1,791.1; 2016: 1,882.9; 2017: 1,987.3; 2018: 2,097.6; 2019: 2,225.0; 2020: 2,359.1.
- Notes: Real GDP at constant 2010 prices; public finance data according to ESA2010; NBP Reference Rate (avg); exchange rate as of June 4, 2015; Real effective exchange rate annual average (2000=100).

### Balance of Payments on Transaction Basis (Table 2 highlights)
- Current account balance (Millions of U.S. dollars): 2012: -17,631; 2013: -6,856; 2014: -7,578; 2015: -6,498; 2016: -9,668; 2017: -13,595; 2018: -16,446; 2019: -21,332; 2020: -23,332.
- Current account (percent of GDP): 2012: -3.5; 2013: -1.3; 2014: -1.4; 2015: -1.3; 2016: -1.9; 2017: -2.5; 2018: -2.8; 2019: -3.4; 2020: -3.5.
- Trade balance (Millions of U.S. dollars): 2012: -1,253; 2013: 11,328; 2014: 9,924; 2015: 10,885; 2016: 9,081; 2017: 5,968; 2018: 3,958; 2019: -59; 2020: -1,847.
- Balance on Goods (Millions of U.S. dollars): 2012: -9,233; 2013: 833; 2014: -2,133; 2015: -1,494; 2016: -3,841; 2017: -7,341; 2018: -9,955; 2019: -14,324; 2020: -16,855.
- Balance on Services (Millions of U.S. dollars): 2012: 7,980; 2013: 10,495; 2014: 12,057; 2015: 12,379; 2016: 12,923; 2017: 13,309; 2018: 13,912; 2019: 14,265; 2020: 15,008.
- Primary Income balance (Millions of U.S. dollars): 2012: -16,178; 2013: -17,644; 2014: -16,940; 2015: -16,815; 2016: -18,176; 2017: -18,984; 2018: -19,819; 2019: -20,682; 2020: -20,889.
- Secondary Income balance (Millions of U.S. dollars): 2012: -200; 2013: -540; 2014: -562; 2015: -568; 2016: -573; 2017: -579; 2018: -585; 2019: -591; 2020: -597.
- Capital and financial account balance (Millions of U.S. dollars): 2012: 3,224; 2013: 4,933; 2014: 9,485; 2015: 9,409; 2016: 2,675; 2017: 3,606; 2018: -1,320; 2019: -10,412; 2020: -14,222.
- Financial account balance (net) (Millions of U.S. dollars): 2012: -11,280; 2013: -7,031; 2014: -3,824; 2015: -2,169; 2016: -7,331; 2017: -9,092; 2018: -13,246; 2019: -20,545; 2020: -23,807.
- Foreign direct investment (net) [+=outflows] (Millions of U.S. dollars): 2012: -5,862; 2013: -3,334; 2014: -8,786; 2015: -8,584; 2016: -9,049; 2017: -9,537; 2018: -10,050; 2019: -10,589; 2020: -11,155.
- Portfolio investment (net) (Millions of U.S. dollars): 2012: -19,655; 2013: -1,251; 2014: 1,462; 2015: -1,065; 2016: -1,142; 2017: -1,511; 2018: -1,759; 2019: -6,790; 2020: -6,893.
- Other investment (net) (Millions of U.S. dollars): 2012: 5,766; 2013: -3,772; 2014: 3,211; 2015: 3,500; 2016: 500; 2017: 500; 2018: -1,500; 2019: -3,200; 2020: -5,200.
- Errors and omissions (Millions of U.S. dollars): 2012: -4,607; 2013: -12,139; 2014: -9,555; 2015: -7,250; 2016: -7,669; 2017: -8,195; 2018: -8,725; 2019: -9,348; 2020: -10,059.
- Reserve assets [Increase = +] (Millions of U.S. dollars): 2012: 11,203; 2013: 945; 2014: 304; 2015: 3,979; 2016: 2,359; 2017: 1,456; 2018: 633; 2019: 3; 2020: -559.
- Official reserves (Millions of U.S. dollars): 2012: 108,914; 2013: 106,220; 2014: 100,438; 2015: 104,417; 2016: 106,776; 2017: 108,233; 2018: 108,296; 2019: 108,329; 2020: 107,770.
- Official reserves in months of imports: 2012: 6.9; 2013: 6.5; 2014: 5.7; 2015: 5.9; 2016: 5.5; 2017: 5.2; 2018: 4.8; 2019: 4.4; 2020: 4.1.
- Ratios of reserves to short-term debt and to short-term debt plus CA deficit provided in table (series values shown in table).

### Risk Assessment Matrix
- A Table 3 is present titled "Republic of Poland: Risk Assessment Matrix" with columns: Risk; Relative Likelihood and Transmission Channels; Expected Impact of Risk; Policy Recommendations. (Content headings present; detailed cell contents not included in supplied extract.)

*Source: Republic of Poland; figures and tables from IMF staff calculations and Polish authorities, as presented in the supplied content unit.*

### 1. Side-effects from

### 1. Side-effects from global financial conditions

### Expected developments and transmission channels
- High relative likelihood: A surge in financial volatility could occur as investors reassess underlying risk and move to safe-haven assets given slow and uneven growth as well as asymmetric monetary exit. Both push and pull factors will affect capital flows in the months ahead.
- Outflows:
  - Monetary policy tightening in the U.S. could trigger capital outflows with high participation of foreign investors in the domestic bond market entailing a potential transmission channel.
  - Risks are mitigated by prudent public debt management.
- Inflows:
  - Ample liquidity in the context of the ongoing quantitative easing by the European Central Bank (ECB QE), combined with strong economic fundamentals in Poland, could attract excessively large capital inflows.

### Expected impacts
- Medium:
  - Outflows:
    - Investors could reallocate assets away from Poland, resulting in capital flow reversals and zloty depreciation.
    - Liquidity in the FX derivatives market could be adversely affected, increasing banks’ hedging costs. Risks are mitigated by strong liquidity positions in the banking sector.
  - Inflows:
    - Excess liquidity could increase exchange market pressure, exacerbate zloty appreciation and fuel asset bubbles.

### Policy recommendations
- Exchange rate policy:
  - The exchange rate should be allowed to float freely, but intervention could be used to dampen excessive volatility.
- Fiscal policy:
  - Fiscal policy should allow automatic stabilizers to work as needed.
- Specific measures:
  - Outflows: interest rate hikes could be used to stem capital outflow pressure. The NBP should provide liquidity support (including in FX) if needed. The FCL arrangement could be used under extreme circumstances.
  - Inflows: monetary policy should be eased to reduce interest-rate differentials and macroprudential policy should be tightened to manage potential risks of asset price bubbles.

---

### 2. Protracted period of slower growth in key advanced and emerging economies

### Expected developments and transmission channels
- In the euro area and Japan, weak demand and persistently low inflation could lead to “new mediocre” growth.

### Expected impacts on Poland
- Medium:
  - Significant trade linkages with Europe would weaken growth in Poland through lower exports and adverse confidence effects.
  - NPLs would increase as a result of the growth slowdown. Risks are mitigated by the banking sector’s strong capital position.

### Policy recommendations
- In the event of adverse growth effects:
  - Monetary policy should be further eased, unless Poland is faced with strong capital outflows.
  - Fiscal automatic stabilizers should be allowed to operate.
  - The exchange rate should be allowed to float freely, but intervention could be used to dampen excessive volatility.

---

### 3. Mounting conflict in Russia and Ukraine

### Expected developments and transmission channels
- Medium relative likelihood:
  - The mounting conflict could depress business confidence and heighten risk aversion amid disturbances in global financial, trade, and commodity markets.
  - Spillovers would materialize through trade, financial, and confidence channels.

### Expected impacts on Poland
- Medium:
  - Gas supply disruptions would adversely affect Poland, particularly heavy industry (which is more reliant on imported gas).
  - Financial market/confidence effects could lead to capital flow reversals and pressure on Polish financial markets. Risks are mitigated by Poland’s very strong fundamentals and policies.

### Policy recommendations
- Monetary policy should be further eased.
- Fiscal automatic stabilizers should be allowed to operate.

---

### 4. Sovereign stress in the euro area re-emerges due to political uncertainty, faltering reforms and political and social upheaval, particularly in Greece

### Expected developments and transmission channels
- Medium relative likelihood:
  - Bank-sovereign-real economy links could re-intensify because of stalled or incomplete delivery of policy commitments at the national or euro area level.
  - Strong market pressure on euro area economies would likely reverberate across financial markets.
  - High participation of foreign investors in the domestic bond market entails a potential transmission channel. Risks are mitigated by prudent public debt management.

### Expected impacts on Poland
- Medium:
  - Poland could face capital flow reversals and exchange rate pressure.
  - Liquidity in the FX derivatives market could be adversely affected, increasing banks’ hedging costs. Risks are mitigated by strong liquidity positions in the banking sector.

### Policy recommendations
- The exchange rate should be allowed to float freely, but intervention could be used to dampen excessive volatility.
- The NBP should provide liquidity support (including in FX) if needed.
- The FCL arrangement could be used under extreme circumstances.

---

### 5. Protracted period of low inflation

### Expected developments and transmission channels
- Medium relative likelihood: Inflation could fail to pick up as envisaged in the baseline—either on account of external factors (low imported inflation) or domestic factors (entrenched low inflation expectations)—and remain low for a protracted period.

### Expected impacts on Poland
- Medium:
  - Very low inflation would increase (ex-post) real interest rates and weigh on balance sheets, deterring investment and growth.
  - To the extent that household inflation expectations in Poland are adaptive, breaking out of a protracted low inflation environment could be more difficult than in countries where inflation expectations are well anchored. Risks are mitigated by still-strong domestic demand.

### Policy recommendations
- Monetary policy should be eased further. Forward guidance could help anchor inflation expectations.
- The exchange rate should be allowed to float freely.

---

### Implementation of past Fund advice (summary findings)

### Monetary policy
- To counter risks of protracted deflation, the MPC continued the easing cycle by cutting the policy interest rate in March by 50 bps to a historic low of 1.5 percent, bringing the cumulative reduction in policy interest rates since October to 100 bps.
- Staff view: announcing the end of the easing cycle was premature given weak inflation expectations and risks of second-round effects.

### Fiscal policy
- Fiscal consolidation has advanced further, supported by a robust economic recovery, recent changes to the pension system, and the implementation of the stabilizing expenditure rule in the 2015 budget.
- Authorities have remained committed to their MTO, which is deemed adequate to rebuild fiscal buffers and preserve fiscal sustainability. However additional measures are needed to reach this objective.
- Decision to reform large taxpayer administration and establish a single Large Taxpayer Office aligns with IMF TA recommendations.

### Financial sector
- Ongoing work to restructure the small non-systemic, but weak, credit union segment through takeovers and bankruptcy.
- Doubled financial sector contributions in 2015 should help mitigate fiscal risks.
- Work to put in place macroprudential and bank resolution frameworks has continued, though final legislation has been delayed.

### Structural reforms
- Labor market: streamlining regulated professions; measures to reduce labor market segmentation; reforms to public employment offices.
- Business climate: easing regulations for business start-ups.
- Insolvency: a new corporate insolvency regime to encourage restructuring is to take effect from January 1, 2016.

---

### Financial system indicators and policy follow-up

### Financial Soundness Indicators (selected exact series)
- Regulatory capital to risk-weighted assets: 12.0 11.1 13.3 13.9 13.1 14.8 15.7 14.7
- NPLs to gross loans (nonfinancial sector): 5.2 4.4 7.9 8.0 8.8 8.2 8.8 8.5 8.1 8.2
- Return on average assets (after tax): 1.7 1.5 0.8 1.0 1.3 1.2 1.1 1.1 1.1
- Loans to households (sectoral distribution): 59.3 62.0 65.3 68.0 66.4 65.7 66.1 65.6 65.6 65.8
- Liquid assets to total assets (liquid assets ratio): 17.1 17.0 20.3 20.8 19.5 20.9 21.4 20.6 20.3

### FSAP recommendations — status highlights
- Addressing impaired loans: KNF intensified oversight through an AQR, on-site credit file review, and guidance to banks on impairment and valuation modeling.
- Strengthening banking supervision: Pending; constitutional limits restrict KNF from issuing legally binding general acts; KNF issues recommendations.
- Strengthening credit unions (SKOKs): Rehabilitation plans being developed; 41 of 50 SKOKs obliged to prepare recovery plans; recent bankruptcies, takeovers, and merger activity.
- Macroprudential framework: A law on macroprudential supervision is progressing; draft assigns macroprudential supervision to the Financial Stability Committee (FSC) with combined macroprudential and crisis management functions.
- Bank resolution: Draft law progressing to ensure precedence of administrative powers, protection of BFG claims, and inclusion of Tier-1 and public interest triggers.
- Deposit insurance (BFG): Draft law under consultation; envisages expanded BFG resources and redistribution to DGS for resolution purposes; proposed target levels above DGS and BRRD requirements.
- Pension and capital markets: Pension system changes in 2014; draft law on covered bonds and mortgage banks progressing to eliminate tax barriers and facilitate investment by pension funds and credit unions.

---

### Key monetary and fiscal aggregates (selected exact figures and projections)

### Monetary accounts (central bank and banking system, selected levels and growth)
- Central bank official reserve assets: 185 228 277 337 337 321 356 386 (billions of zlotys for 2008–2015 series)
- Base money (levels): 126 138 140 138 167 164 192 203 (2008–2015)
- Deposit money banks claims on private sector (levels): 633 677 735 838 858 896 964 1,036
- Broad money (M3) levels: 666 720 784 882 921 979 1,059 1,136
- Broad money (M3) percentage changes: 52.2 52.9 54.5 56.7 57.0 58.9 61.3 63.5
- Deposit growth (percent change): 18.9 10.6 9.6 12.2 5.1 5.8 7.8 7.6

### General government operations (percent of GDP, selected series and projections)
- Revenue: 39.2 38.2 38.6 39.1 38.8 38.6 38.7 38.9 39.0 (2012–2020)
- Taxes (total): 20.0 19.5 19.7 19.8 19.9 19.5 19.6 19.7 19.8
- Social contributions: 13.0 13.2 13.2 13.4 13.4 13.4 13.4 13.4 13.4
- Expenditure: 42.9 42.2 41.8 41.8 41.4 41.2 41.0 40.9 40.9
- Net lending/borrowing (overall balance): -3.7 -4.0 -3.2 -2.8 -2.5 -2.6 -2.2 -2.0 -2.0
- General government debt: 54.4 55.7 50.1 51.1 51.0 50.9 50.5 49.5 48.5
- Nominal GDP in billions of zloty: 1,616 1,663 1,729 1,791 1,883 1,987 2,098 2,225 2,359

---

*Source: IMF staff report — Republic of Poland: Risk Assessment Matrix and associated monetary, fiscal, and financial system tables (excerpt).*

### Annex I. External Debt Sustainability Analysis

### Annex I. External Debt Sustainability Analysis

### Bound Tests and Stress Scenarios (2010–20)
- External debt (percent of GDP) baseline: 57
- Historical external debt: 62
- Interest rate shock scenario: i-rate shock shown up to 78 (figures plotted for 2010–2020)
- CA (current account) shock scenario: CA shock baseline 57, historical 65, scenario up to 82
- Combined shock (permanent 1/4 standard deviation shocks to real interest rate, growth rate, and current account balance): Combined shock baseline 57, combined 71
- Real depreciation shock: One-time real depreciation of 30 percent occurs in 2015; scenario label "30% depreciation"
- Gross financing need under baseline displayed on right scale (time series 2010–2020)
- Growth shock (Percent per year): Baseline: 3.1; Scenario: 3.4; Historical: 2.3
- Growth shock (alternate series): Baseline: 3.6; Scenario: 2.7; Historical: 3.9
- Current account (non-interest) shock (Percent of GDP): Baseline: -0.9; Scenario: -2.0; Historical: -2.8

Sources: International Monetary Fund, Country desk data, and staff estimates.
- Notes: Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.
- Historical scenarios: historical averages are calculated over the ten-year period and used to project debt dynamics five years ahead.
- Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.
- One-time real depreciation of 30 percent occurs in 2015.

### External Debt Sustainability Framework (2010–20) — Key Figures (Percent of GDP, unless otherwise indicated)
- 1 External debt: 2010: 66.8; 2011: 61.7; 2012: 73.8; 2013: 72.7; 2014: 64.3; 2015: 72.9; 2016: 69.2; 2017: 65.2; 2018: 61.9; 2019: 59.7; 2020: 57.4; Debt-stabilizing non-interest current account: -4.2
- 2 Change in external debt: 2010: 2.6; 2011: -5.1; 2012: 12.1; 2013: -1.1; 2014: -8.5; 2015: 8.7; 2016: -3.7; 2017: -4.0; 2018: -3.2; 2019: -2.3; 2020: -2.3
- 3 Identified external debt-creating flows (4+8+9): 2010: -2.5; 2011: -3.7; 2012: 2.2; 2013: -2.9; 2014: -3.6; 2015: 1.2; 2016: -4.6; 2017: -4.2; 2018: -3.7; 2019: -3.1; 2020: -2.9
- 4 Current account deficit, excluding interest payments: 2010: 4.5; 2011: 4.1; 2012: 1.8; 2013: -0.3; 2014: -0.2; 2015: -0.2; 2016: 0.3; 2017: 0.7; 2018: 0.9; 2019: 1.4; 2020: 1.4
- 5 Deficit in balance of goods and services: 2010: -8.2; 2011: -8.7; 2012: -8.9; 2013: -9.0; 2014: -9.2; 2015: -10.5; 2016: -10.8; 2017: -10.9; 2018: -11.0; 2019: -11.0; 2020: -11.0-6
- 6 Exports: 2010: 40.2; 2011: 42.9; 2012: 44.7; 2013: 46.1; 2014: 46.9; 2015: 54.1; 2016: 54.9; 2017: 55.1; 2018: 55.5; 2019: 55.5; 2020: 55.2
- 7 Imports: 2010: -42.2; 2011: -44.9; 2012: -45.0; 2013: -44.0; 2014: -45.1; 2015: -51.8; 2016: -53.2; 2017: -54.0; 2018: -54.8; 2019: -55.5; 2020: -55.4
- 8 Net non-debt creating capital inflows (negative): 2010: -3.4; 2011: -3.2; 2012: -1.9; 2013: -1.1; 2014: -2.2; 2015: -2.5; 2016: -2.8; 2017: -2.8; 2018: -2.9; 2019: -2.8; 2020: -2.7
- 9 Automatic debt dynamics 1/: 2010: -3.6; 2011: -4.6; 2012: 2.3; 2013: -1.4; 2014: -1.2; 2015: 3.9; 2016: -2.1; 2017: -2.2; 2018: -1.7; 2019: -1.7; 2020: -1.6
- 10 Contribution from nominal interest rate: 2010: 1.1; 2011: 1.1; 2012: 1.7; 2013: 1.6; 2014: 1.6; 2015: 1.6; 2016: 1.6; 2017: 1.8; 2018: 1.9; 2019: 2.0; 2020: 2.1
- 11 Contribution from real GDP growth: 2010: -2.2; 2011: -2.9; 2012: -1.1; 2013: -1.2; 2014: -2.4; 2015: -2.6; 2016: -2.4; 2017: -2.3; 2018: -2.2; 2019: -2.1; 2020: -2.0
- 12 Contribution from price and exchange rate changes 2/: 2010: -2.6; 2011: -2.7; 2012: 1.7; 2013: -1.8; 2014: -0.4; 2015: 4.9; 2016: -1.3; 2017: -1.6; 2018: -1.4; 2019: -1.7; 2020: -1.7
- 13 Residual, incl. change in gross foreign assets (2-3): 2010: 5.2; 2011: -1.5; 2012: 9.9; 2013: 1.8; 2014: -4.9; 2015: 7.5; 2016: 0.8; 2017: 0.2; 2018: 0.5; 2019: 0.8; 2020: 0.6
- External debt-to-exports ratio (in percent): 2010: 166.2; 2011: 143.7; 2012: 165.1; 2013: 157.7; 2014: 137.0; 2015: 134.9; 2016: 125.9; 2017: 118.2; 2018: 111.6; 2019: 107.6; 2020: 104.0
- Gross external financing need (in billions of US dollars) 3/: 2010: 123.1; 2011: 122.0; 2012: 136.9; 2013: 125.4; 2014: 137.1; 2015: 120.4; 2016: 127.0; 2017: 130.1; 2018: 127.0; 2019: 123.3; 2020: 118.1
- Gross external financing need (in percent of GDP): 2010: 25.8; 2011: 23.3; 2012: 27.6; 2013: 23.8; 2014: 25.0; 10-Year: 24.9; 10-Year: 24.8; 24.9; 23.8; 21.8; 19.8; 17.6

### Key Macroeconomic Assumptions (Average / Deviation series presented)
- Real GDP growth (in percent): 3.7 / 4.8 / 1.8 / 1.7 / 3.4 / 3.9 / 1.8 / 3.6 / 3.5 / 3.6 / 3.6 / 3.6
- Exchange rate appreciation (US dollar value of local currency, percent): 3.4 / 1.8 / -8.9 / 3.0 / 0.1 / 2.1 / 1.1 / -14.9 / 0.6 / 1.2 / 0.9 / 1.0 / 1.5
- GDP deflator in US dollars (change in percent): 5.2 / 5.0 / -6.9 / 4.1 / 0.6 / 4.6 / 11.6 / -14.8 / 2.2 / 3.2 / 2.8 / 3.4 / 3.9
- Nominal external interest rate (in percent): 1.9 / 1.7 / 2.7 / 2.3 / 2.3 / 2.3 / 0.6 / 2.2 / 2.4 / 2.7 / 3.2 / 3.5 / 3.7
- Growth of exports (US dollar terms, in percent): 16.6 / 17.4 / -1.3 / 9.3 / 5.9 / 11.3 / 14.8 / 1.7 / 7.5 / 7.2 / 7.2 / 7.0 / 7.0
- Growth of imports (US dollar terms, in percent): 19.9 / 17.0 / -5.0 / 3.6 / 6.8 / 11.2 / 18.9 / 1.4 / 8.5 / 8.6 / 8.4 / 7.5
- Current account balance, excluding interest payments: -4.5 / -4.1 / -1.8 / 0.3 / 0.2 / -2.8 / 2.1 / 0.2 / -0.3 / -0.7 / -0.9 / -1.4 / -1.4
- Net non-debt creating capital inflows: 3.4 / 3.2 / 1.9 / 1.1 / 2.2 / 2.5 / 0.8 / 2.5 / 2.8 / 2.8 / 2.9 / 2.8 / 2.7

### Alternative Scenarios and Bound Tests — Debt-stabilizing Non-interest Current Account
- A. Alternative Scenarios
  - A1. Key variables are at their historical averages in 2015-2020: 76.5 / 73.4 / 70.1 / 67.1 / 64.6 / 62.2 / -5.6
- B. Bound Tests
  - B1. Nominal interest rate is at baseline plus one-half standard deviation: 76.5 / 76.4 / 75.9 / 76.1 / 77.0 / 77.8 / -1.2
  - B2. Real GDP growth is at baseline minus one-half standard deviations: 76.5 / 73.3 / 69.7 / 66.9 / 65.0 / 63.0 / -4.0
  - B3. Non-interest current account at baseline minus one-half standard deviations: 76.5 / 77.2 / 77.4 / 78.4 / 80.1 / 81.6 / -1.6
  - B4. Combination of B1-B3 using 1/4 standard deviation shocks: 76.5 / 73.6 / 70.3 / 67.9 / 66.3 / 64.7 / -4.1
  - B5. One time 30 percent real depreciation in 2016: 76.5 / 86.2 / 80.8 / 76.5 / 73.5 / 70.5 / -5.9

- Formula notes:
  - 1/ Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.
  - 2/ Contribution from price and exchange rate changes defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock.
  - 3/ Gross external financing need defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.
  - 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/ Debt-stabilizing non-interest current account: Long-run, constant balance that stabilizes the debt ratio assuming key variables remain at their levels of the last projection year.

*Source: IMF staff calculations (Republic of Poland: External Debt Sustainability Framework, 2010–20).*

### 59.3 percent in 2018 and declines gradually afterward. In turn, gross financing needs increase to

### _cr15182 - 59.3 percent in 2018 and declines gradually afterward. In turn, gross financing needs increase to

### Public Sector DSA — Risk Assessment (Poland)
- Heat map indicators and conventions:
  - Cell colors: green if debt burden benchmark of 70% is not exceeded under specific shock or baseline; yellow if exceeded under specific shock but not baseline; red if benchmark is exceeded under baseline; white if stress test not relevant.
  - Gross financing needs benchmark: 15% of GDP (green if not exceeded under specific shock or baseline; yellow if exceeded under specific shock but not baseline; red if benchmark is exceeded under baseline; white if not relevant).
  - Other risk-assessment benchmarks: bond spreads 200 and 600 basis points; external financing requirement 5 and 15 percent of GDP; change in share of short-term debt 0.5 and 1 percent; public debt held by non-residents 15 and 45 percent; share of foreign-currency denominated debt 20 and 60 percent.
- Market perception indicators shown (values from table/figure):
  - Bond spread (long-term over German bonds, average Apr–Jun-15): 218 bp noted; EMBIG (bp) 238.
  - Public gross financing needs indicators: values presented across years (see Baseline Scenario table below).
  - External financing requirement defined as sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at end of previous period.

### Baseline Scenario — Key Projections and Indicators (Percent of GDP, unless otherwise indicated)
- As of June 05, 2015 (projections for 2013–2020 shown in table):
  - Nominal gross public debt: 2013: 49.4; 2014: 55.7; 2015: 50.1; 2016: 51.1; 2017: 51.0; 2018: 50.9; 2019: 49.5; 2020: 48.5.
  - Public gross financing needs: 2013: 15.1; 2014: 10.8; 2015: 8.1; 2016: 10.0; 2017: 9.1; 2018: 7.8; 2019: 7.8; 2020: 7.5; 2021: 6.8? (table shows through 2020 with values 7.5, 6.8 — preserve displayed sequence).
  - Real GDP growth (in percent): 2013: 4.3; 2014: 1.7; 2015: 3.4; 2016: 3.6; 2017: 3.5; 2018: 3.6; 2019: 3.6; 2020: 3.6.
  - Inflation (GDP deflator, in percent): 2013: 3.0; 2014: 1.1; 2015: 0.5; 2016: 0.0; 2017: 1.5; 2018: 1.9; 2019: 1.9; 2020: 2.3.
  - Nominal GDP growth (in percent): 2013: 7.5; 2014: 2.9; 2015: 4.0; 2016: 3.6; 2017: 5.1; 2018: 5.5; 2019: 5.5; 2020: 6.1; 2020 last shown as 6.0 in table heading—preserve listed sequence.
  - Effective interest rate (in percent, defined as interest payments divided by debt stock at end of previous year): 2013: 5.6; 2014: 4.7; 2015: 3.6; 2016: 3.6; 2017: 3.5; 2018: 3.2; 2019: 3.2; 2020: 3.3; 2020: 3.5 in some columns—values appear across rows in the table.
  - Sovereign spreads: EMBIG (bp) 238; 5Y CDS (bp) 66.
  - Ratings (Foreign / Local): Moody's A2 / A2; S&P's A- / A-; Fitch A- / A-.
- Contribution to changes in public debt (selected flows):
  - Change in gross public sector debt (cumulative): 2013: 0.8; 2014: 1.3; 2015: -5.6; 2016: 0.9; 2017: 0.0; 2018: -0.1; 2019: -0.4; 2020: -1.0; further cumulative to -1.6.
  - Identified debt-creating flows: 2013: 0.2; 2014: 1.4; 2015: -3.6; 2016: 0.7; 2017: -0.3; 2018: -0.4; 2019: -0.7; 2020: -1.2; cumulative -1.1; projection cumulative -3.0.
  - Primary deficit (percent of GDP): 2013: 2.2; 2014: 1.5; 2015: 1.2; 2016: 1.0; 2017: 0.8; 2018: 1.1; 2019: 0.7; 2020: 0.4; cumulative 0.3; projection cumulative 4.3.
  - Primary (noninterest) revenue and grants (percent of GDP): 2013: 39.5; 2014: 38.2; 2015: 38.6; 2016: 39.1; 2017: 38.8; 2018: 38.6; 2019: 38.7; 2020: 38.9; cumulative 39.0; total 233.1 across horizon.
  - Primary (noninterest) expenditure (percent of GDP): 2013: 41.7; 2014: 39.7; 2015: 39.9; 2016: 40.1; 2017: 39.7; 2018: 39.6; 2019: 39.4; 2020: 39.3; cumulative 39.3; total 237.4 across horizon.
  - Automatic debt dynamics (contribution): 2013: -1.1; 2014: 0.6; 2015: 2.7; 2016: 0.0; 2017: -0.8; 2018: -1.1; 2019: -1.1; 2020: -1.3; cumulative -1.2; projection cumulative -5.6.
  - Real interest rate (contribution) listed: 2013: 1.1; 2014: 1.9; 2015: 1.7; 2016: 1.7; 2017: 0.9; 2018: 0.6; 2019: 0.6; 2020: 0.4; projection cumulative 0.5; total 4.7.
  - Real GDP growth (contribution) listed: 2013: -1.9; 2014: -0.9; 2015: -1.8; 2016: -1.7; 2017: -1.7; 2018: -1.7; 2019: -1.7; 2020: -1.7; cumulative -10.3.
  - Exchange rate depreciation contribution examples: 2013: -0.3; 2014: -0.4; 2015: 2.9 (other years shown as dots).
  - Other identified debt-creating flows: 2013: -0.9; 2014: -0.7; 2015: -7.5; 2016: -0.3; 2017: -0.3; 2018: -0.3; 2019: -0.3; 2020: -0.3; cumulative -1.8.
  - Privatization (reduces financing needs): 2013: -0.7; 2014: -0.6; 2015: -0.1; 2016: -0.1; 2017: -0.1; 2018: -0.1; 2019: -0.1; 2020: -0.1; cumulative -0.5.
  - Contingent liabilities: 0.0 across years listed.
  - Liabilities not included in debt (reflecting transfer of pension fund assets and liabilities to social security administration from 2014 onwards): 2013: -0.2; 2014: -0.1; 2015: -7.4; 2016: -0.2; 2017: -0.2; 2018: -0.2; 2019: -0.2; 2020: -0.2; cumulative -1.2.
  - Residual, including asset changes: 2013: 0.6; 2014: -0.1; 2015: -2.0; 2016: 0.3; 2017: 0.3; 2018: 0.3; 2019: 0.3; 2020: 0.2; cumulative 0.2; projection cumulative 1.4.
- Footnotes and definitions preserved from source:
  - Public sector defined as general government.
  - Automatic debt dynamics formula provided in source (referenced variables r, π, g, a, e).
  - Projection assumption: key variables remain at level of last projection year.

### Composition of Public Debt and Alternative Scenarios
- Alternative scenarios presented: Baseline, Historical, Constant Primary Balance.
- Underlying assumptions (selected):
  - Baseline Real GDP growth: constant 3.6 across 2015–2020 (3.6, 3.5, 3.6, 3.6, 3.6, 3.6).
  - Baseline Inflation: 0.0, 1.5, 1.9, 1.9, 2.3, 2.3 for 2015–2020.
  - Baseline Primary Balance: -1.0, -0.8, -1.1, -0.7, -0.4, -0.3 for 2015–2020.
  - Baseline Effective interest rate: 3.6, 3.5, 3.2, 3.2, 3.3, 3.5 for 2015–2020.
  - Historical Scenario differences: Real GDP growth 3.6, 3.9, 3.9, 3.9, 3.9, 3.9; Primary Balance -1.0, -2.0, -2.0, -2.0, -2.0, -2.0; Effective interest rate 3.6, 3.5, 3.4, 3.6, 3.8, 4.1.
  - Constant Primary Balance Scenario: Primary Balance held at -1.0 across 2015–2020.
- Composition charts summarized (figures show):
  - Gross Nominal Public Debt (in percent of GDP) trajectory across scenarios for 2013–2020.
  - Public Gross Financing Needs (in percent of GDP) trajectory for 2013–2020.
  - By maturity: medium and long-term vs short-term debt (percent of GDP) historic and projection.
  - By currency: local currency-denominated vs foreign currency-denominated (percent of GDP) historic and projection.

### Macro-Fiscal Stress Tests
- Stress test scenarios and underlying assumptions (selected values preserved):
  - Primary Balance Shock scenario underlying assumptions (2015–2020): Real GDP growth 3.6, 3.5, 3.6, 3.6, 3.6, 3.6; Inflation 0.0, 1.5, 1.9, 1.9, 2.3, 2.3; Primary balance -1.0, -1.7, -1.9, -0.7, -0.4, -0.3; Effective interest rate 3.6, 3.5, 3.2, 3.3, 3.4, 3.6.
  - Real GDP Growth Shock scenario (2015–2020): Real GDP growth 3.6, 1.8, 1.8, 3.6, 3.6, 3.6; Inflation 0.0, 1.1, 1.5, 1.9, 2.3, 2.3; Primary balance -1.0, -1.7, -2.8, -0.7, -0.4, -0.3; Effective interest rate 3.6, 3.5, 3.2, 3.3, 3.4, 3.6.
  - Real Interest Rate Shock scenario: Effective interest rate path 3.6, 3.5, 3.6, 4.0, 4.4, 4.9.
  - Real Exchange Rate Shock scenario: Inflation path includes 0.0, 6.6, 1.9, 1.9, 2.3, 2.3 with effective interest rates 3.6, 3.7, 3.1, 3.1, 3.2, 3.4.
  - Combined Shock scenario combines adverse real GDP growth, inflation, primary balance, and effective interest rate shocks (values reflected in table).
- Stress test outputs presented in figures:
  - Gross Nominal Public Debt (in percent of GDP) under baseline and shocks for 2015–2020.
  - Gross Nominal Public Debt (in percent of Revenue) trajectories for 2015–2020 under scenarios.
  - Public Gross Financing Needs (in percent of GDP) under scenarios for 2015–2020.

### Appendix I — Evolution of Income Inequality Following EU Accession
- Key findings:
  - Income inequality trended up during the first fifteen years of economic transformation, then reversed after EU accession in 2004.
  - Gini coefficient (various sources: World Bank, GUS, Eurostat, OECD) gradually declined to levels consistent with the EU average.
  - EU common agricultural policy (CAP) appears to have contributed by elevating incomes of farmers relative to wealthier households.
  - Social transfers mitigate inequality but their role is minor; efficiency could be enhanced without increasing their size.
  - Pay discrimination of women in Poland is below levels prevailing in most EU countries.
- Supporting statistics and observations:
  - Farmers' disposable income: during 2004–13, rose from slightly above 70 percent to almost 90 percent of the average for all households (percent of average income indicators shown in figures).
  - CAP transfers grew from close to zero in 2004 to almost 40 percent of gross value added in agriculture by 2013 (figure data).
  - Cross-country position: Poland’s 2013 Gini coefficient broadly in line with EU average; lower than Baltics, Romania, Bulgaria; higher than Slovakia, Slovenia, Czech Republic, Hungary.
  - Social benefits, social contributions, and direct taxes contribute relatively little to reducing income inequality in Poland, with pensions being the largest contributor.
  - Gender pay gap:
    - Overall hourly earnings gap in Poland is well below EU levels; exception: youngest age group where gap slightly exceeds EU average.
    - Gender-specific gap in average monthly wages declined from 23 percent in 2008 to 17 percent in 2012.
    - Women worked more than four hours per week less than men in 2013 (GUS data).

### Appendix II — Foreign Currency Mortgages (Introductory note)
- Event and immediate impact:
  - Swiss National Bank (SNB) decision on January 15, 2015 to remove the cap on the value of the Swiss franc resulted in a 20 percent depreciation of the zloty against the Swiss franc.
  - After the SNB move, the zloty regained some ground but remained some 10 percent below its value before the SNB move.
  - SNB also lowered the marginal interest rate on central bank deposits by 50 bps to -0.75 percent and the target range for the three-month Libor to between - (text cuts off).

*Source: IMF staff (Republic of Poland: Public Sector DSA—Baseline Scenario, Risk Assessment, Stress Tests, Appendix I and start of Appendix II, as of June 05, 2015).*

### 1.25 and -0.25 percent.

### _cr15182 - 1.25 and -0.25 percent.

### Foreign-currency (FX) mortgage exposure and financial stability
- Depreciation of the zloty raised concerns about FX exposure on household and bank balance sheets.
- More than half a million Polish households hold Swiss franc-denominated mortgages.
- Swiss franc-denominated mortgages:
  - Peak: around 11 percent of GDP in November 2011.
  - March 2014: 8.3 percent of 2014 GDP.
  - March (portfolio share): close to 40 percent of the mortgage portfolio (all foreign currency mortgages accounted for around 47 percent of the portfolio in March).
  - Reported NPL ratios: around 3.5 percent in March.
  - Many mortgages issued before the crisis carry LTV ratios above 100 percent.
- Risks identified:
  - High LTVs combined with FX mismatches on household balance sheets pose credit risk to banks.
  - Hedging of banks’ open FX position partly through short-term FX swaps presents liquidity risk.

### Macroeconomic and financial-stability implications
- Macroeconomic implications:
  - Most Swiss franc-denominated mortgages are contracted at floating rates.
  - Higher debt-servicing costs from zloty depreciation may be mitigated by lower Swiss LIBOR rates, provided savings are passed on to mortgage holders.
  - Real wages have increased by more than 10 percent since the beginning of 2008.
  - Unemployment rate has declined markedly since its crisis peak.
  - Overall, any impact on consumption and economic growth is assessed as small.
- Financial stability implications:
  - KNF stress tests showed that bank capital and liquidity buffers are sufficient to prevent a significant increase in systemic risk, even under zloty depreciation well beyond the recent shock.

### Authorities’ response and policy measures
- Focus: mitigating impact on distressed households rather than broad macroprudential intervention.
- Financial Supervision Commission (FSC) recommendations to banks:
  - Pass on the negative Swiss franc interest rates to customers.
  - Narrow foreign-currency spreads.
  - Offer potential maturity extensions or payment holidays.
  - Offer provision-free conversions.
  - Do not require additional collateral.
  - Take a case-by-case approach to restructuring distressed mortgages.
- Banking association supported FSC recommendations; UOKiK and other authorities are closely monitoring bank responses.
- Fiscal/tax measures:
  - Ministry of Finance signed regulation to exempt gains from mortgage credit restructuring and negative interest rates from income taxation.
  - Correspondingly, banks would be allowed to deduct these amounts from taxable income.

### Cross-country assessment of public expenditure efficiency (health, education, social protection)
- Context:
  - Poland’s public expenditure has declined in recent years and stands below the EU average.
  - Expenditure-based fiscal consolidation during 2011–14 reduced the headline deficit by about 1.7 percentage points to 3.2 percent of GDP in 2014.
  - Additional consolidation of about 1 percent of GDP will be necessary to achieve the MTO; part must come from expenditure due to the stabilizing fiscal rule.
  - Poland’s public expenditure averaged 43¼ percent of GDP during 2008‒13.
  - Combined expenditure in health, education, and social protection accounts for about 60 percent of total expenditure; share in GDP has declined to about 26 percent.
- Methodology:
  - Data Envelopment Analysis (DEA) applied to cross-country inputs (public expenditures per capita) and measurable sectoral outcomes to estimate efficiency frontiers and Poland’s distance to those frontiers.
  - DEA provides first-order estimates of potential fiscal savings while maintaining observed quality of public services.

### Health sector findings and potential savings
- Poland spends around 4½ percent of GDP on health care.
  - Industrial EU countries: 6.6 percent of GDP.
  - CEE countries: 6.3 percent of GDP.
- Outcomes used: life expectancy at birth, neonatal mortality, under-5 mortality.
- Efficient frontier determined by Turkey, Switzerland, and Japan.
- Findings:
  - Poland is more efficient than CEE countries but substantially less efficient than industrial countries.
  - Bridging half of the efficiency gap with frontier countries could generate some 0.4 percent of GDP in savings over time, without compromising health outcomes.
  - Caution: differences in health systems and public-private responsibilities, and per capita income effects, limit comparability.

### Education sector findings
- Poland spends around 5½ percent of GDP on education.
  - Industrial EU countries: 5.6 percent of GDP.
  - CEE countries: 4.8 percent of GDP.
- Poland performs well on PISA (ranked 9 among 62 countries in the 2012 assessment) and, based on PISA scores alone (2008‒12 average), stands on the efficiency frontier.
- Shortcomings remain on other indicators:
  - Primary and secondary school enrollment and primary completion rates still lag peers.
  - Adult participation in lifelong learning and employability indicators are weaker, signaling potential skills mismatches.

### Social protection findings and potential savings
- Poland’s social protection expenditure: 15¾ percent of GDP.
  - Industrial EU countries: 17¾ percent of GDP.
  - CEE countries: 12¼ percent of GDP.
- Income distribution:
  - Poland ranks in the lowest 30 percentile worldwide in terms of income inequality (by Gini coefficient); distribution improved since 2004.
  - Coverage of social programs lags peer countries.
- DEA results:
  - Frontier defined by Slovakia, Hungary, and Sweden.
  - Distributive impact of Poland’s social expenditure is comparable to Slovakia, but Poland spends slightly more.
  - Bridging half of the efficiency gap could generate some 0.4 percent of GDP in savings over time, without compromising income distribution outcomes.

### Overall policy implications and priorities
- There is room to improve technical efficiency in public spending in health, education, and social protection.
- Potential fiscal savings from bridging half of identified efficiency gaps:
  - Health: some 0.4 percent of GDP.
  - Social protection: some 0.4 percent of GDP.
- Complementary policy actions:
  - In health: continue reforms to increase managerial and financial accountability in the hospital system and pursue additional efficiency-enhancing measures.
  - In education and social protection: address enrollment/completion shortfalls, lifelong learning participation, targeting and coverage of social transfers, and pension-scheme reforms where relevant.

*Prepared by Lone Christiansen (EUR) and Francisco Vazquez (ICD); source: IMF staff analysis in the provided content.*

### introduction of a robust costing system and a top-down assessment of infrastructure needs to help

### introduction of a robust costing system and a top-down assessment of infrastructure needs to help

### Health sector: guidance for investment and provider organization
- Introduce a robust costing system and a top-down assessment of infrastructure needs to guide investment and optimize the organization of health care providers, including hospitals.
- Countries with well-performing health systems have managed to balance market-based incentives with strong regulations, monitoring mechanisms, and institutions to facilitate coordination and help improve efficiency, while ensuring the delivery of high-quality health services (World Bank, 2014).

### Education: consolidation and alignment with labor market
- Scope for consolidation of schools and classrooms as the student population in primary and secondary schools continues to fall in line with demographic trends.
- Further efforts needed to:
  - increase school enrollment;
  - improve the matching between the educational and vocational systems and the job market;
  - better align lifelong learning programs with labor market needs to increase participation among the adult population and low-skilled workers.

### Social protection: coverage, targeting, and pension scheme reform
- Increase efficiency of social expenditures by broadening coverage and adequacy of social assistance and improving targeting by reducing leakage of benefits to non-poor groups.
- Tackle reform in special pension schemes for farmers and miners by seeking better alignment of benefits with those of the core pension system to contribute to improving the efficiency of social expenditures.

### Fund relations — institutional and financial position (as of May 31, 2015)
- Membership Status: Joined 6/12/1986; Article VIII.
- General Resources Account:
  - Quota: 1,688.40 SDR Million (100.00 percent)
  - Fund Holdings of Currency: 1,417.37 SDR Million (83.95 percent)
  - Reserve Tranche Position: 271.04 SDR Million (16.05 percent)
- Lending to the Fund: New Arrangement to Borrow 257.07 SDR Million.
- SDR Department:
  - Net Cumulative Allocation: 1,304.64 SDR Million (100.00 percent)
  - Holdings: 946.65 SDR Million (72.56 percent)
- Outstanding Purchases and Loans: None.

### Latest financial arrangements (In Millions of SDR)
- FCL, Approval Date 1/14/2015, Expiration Date 1/13/2017, Amount Approved 15,500.00, Amount Drawn 0.00.
- FCL, Approval Date 1/18/2013, Expiration Date 1/17/2015, Amount Approved 22,000.00, Amount Drawn 0.00.
- FCL, Approval Date 1/21/2011, Expiration Date 1/17/2013, Amount Approved 19,166.00, Amount Drawn 0.00.
- FCL, Approval Date 7/02/2010, Expiration Date 1/20/2011, Amount Approved 13,690.00, Amount Drawn 0.00.

### Projected payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
- Forthcoming charges/interest:
  - 2015: 0.09
  - 2016: 0.20
  - 2017: 0.20
  - 2018: 0.20
  - 2019: 0.20
- Total (each year equals the charges/interest listed above).

### Exchange arrangements and Article IV summary points
- The zloty is freely floating.
- Poland accepted the obligation of Article VIII, Sections 2, 3, and 4 on June 1, 1995.
- Poland maintains an exchange system free of restrictions on current international transactions, except for EU-imposed exchange restrictions for preservation of national or international security.
- Article IV consultation (concluded June 23, 2014) key points from Directors:
  - Poland’s very strong fundamentals and economic policies helped weather financial market turmoil and paved the way for recovery.
  - The Precautionary Flexible Credit Line (FCL) provided important insurance against external risks.
  - External risks remain elevated; advised a measured pace for fiscal consolidation to reduce the fiscal deficit and preserve growth.
  - Medium-term objective: structural deficit of 1 percent of GDP remains appropriate; could be achieved through better expenditure prioritization, review of public expenditures, improved tax compliance and tax administration efficiency.
  - Urged authorities to address legacy flaws in the pension system and consider measures for the sharp drop in future replacement rates.
  - Monitoring of liquidity in government bond and equity markets recommended given the reduced presence of pension funds.
  - Monetary stance broadly appropriate given limited inflationary pressures; some Directors called for heightened vigilance and potential further rate reductions if recovery falters or inflation remains below target.
  - Recommended moderate reserve accumulation in light of external risks.
  - Banking system commended as well capitalized, profitable, and liquid; called for enhanced financial sector supervision by expediting macroprudential and bank resolution frameworks, including legislation to create a Systemic Risk Board.
  - Encouraged deepening structural reforms for more inclusive sustainable growth.

### Technical assistance (1992–2014) — thematic highlights
- Multiple departments (MAE, FAD, STA, MCM, IMF/IBRD) provided assistance on central bank modernization, payments system, tax administration, monetary programming and operations, government finance statistics, balance of payments, fiscal frameworks, stress testing, macroprudential framework, and FSAP-related activities across 1992–2014.
- Examples of actions and dates (selection):
  - Resident expert-Advisor to President of NBP: November 1991–92.
  - MAE Payments system, banking supervision mission: May 1992.
  - FAD Tax administration―Nine short-term assignments: August 1992–October 1994.
  - IMF/IBRD FSAP Mission: May/Sept 2000.
  - MCM Detailed assessment of observance of BCP for effective banking supervision: Mission Feb/March 2011.
  - FAD Tax administration—Modernization challenges and strategic priorities: Mission November 2014.

### Statistical issues — data adequacy and practices (as of May 2015)
- General: Data provision is adequate for surveillance.
- National Accounts:
  - GUS compiles annual and quarterly GDP by production and expenditure approaches at current and previous year’s prices following the 2008 SNA and ESA 2010.
  - A supply and use table is available only for the year 2010.
  - Annual financial accounts and quarterly financial accounts by institutional sectors compiled by NBP following ESA 2010 and released according to an advance release calendar: annual financial accounts on the 20th of October the following year; quarterly financial accounts on the 20th calendar day of the 4th month following the end of the reference quarter (i.e., on the 20th of January, April, July, and October).
- Price Statistics:
  - Consumer price index does not cover imputed rents of owner-occupied dwellings.
  - Scope covers all resident households except those in some rural areas.
  - Producer price index does not include estimation for missing prices; quality and seasonal adjustment techniques are not implemented.
- Government Finance Statistics:
  - MoF compiles monthly and annual data in accordance with the IMF's Government Finance Statistics Manual 2001.
  - Monthly cash data cover “core” central government.
  - Annual reports present comprehensive fiscal data for general government divided by central government (budgetary, extra-budgetary, and social security accounts) and local government; revenue and expense by economic type; financing by sector and debt instrument; functions of government classified using UN, 2000.
  - Starting in 2015 (annual data for 2014) GUS will assume responsibilities for collecting, processing, and disseminating annual government finance statistics.
  - General government data released on a quarterly basis, derived from detailed ESA data.
- Monetary and Financial Statistics:
  - Since January 2004, NBP provides the ECB with monetary accounts according to the ECB’s framework using the national residency approach.
  - A ROSC mission recommended regular reconciliation of monetary and government finance statistics by NBP in cooperation with MoF.
- Financial Sector Surveillance:
  - Since November 2009, NBP in cooperation with GUS, KNF and MoF report financial soundness indicators on a quarterly basis with a lag of approximately one quarter.
  - NBP implemented EU regulation 680/2014 for supervisory reporting; first data collected for March 2014 for own funds and liquidity reporting; consolidated reporting first for September 2014.
- External Sector Statistics:
  - From Q1 2010, NBP fully depends on survey-based source data.
  - Errors and omissions reduced from 4 percent of GDP in 2004 to around 2 percent of GDP in recent years.
  - Poland disseminates balance of payments data in accordance with BPM6 and external debt statistics in line with the 2013 EDS Guide.
  - Poland reports Coordinated Direct Investment Survey and Coordinated Portfolio Investment Survey data to the IMF.
- Data Standards:
  - Subscriber to the Fund’s Special Data Dissemination Standard (SDDS) since April 17, 1996.
  - Uses SDDS flexibility option on timeliness of data on general government and central government operations.
  - Data ROSC published in 2003.

### Key economic outlook statements (excerpt from July 10, 2015 statement)
- The Polish economy recovered from the temporary slowdown in 2012-13 and continued progress in rebuilding policy buffers.
- Economic growth last year slightly exceeded expectations.
- Continued fiscal consolidation resulted in Poland’s exit from the EU’s Excessive Deficit Procedure (EDP) one year ahead of schedule.
- External position is consistent with fundamentals and appropriate policies.
- Financial sector remains sound and resilient.
- Inflationary pressures subsided; in the second half of last year inflation turned negative.
- Outlook: robust growth and gradual return of inflation towards the target over the medium term.
- Risks remain tilted to the downside and dominated by external factors.
- Economic growth last year amounted to 3.4 percent.

*Source: Republic of Poland — STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (June 22, 2015).*

### 2013. The key factor behind this acceleration was domestic demand, which effectively

### _cr15182 - 2013. The key factor behind this acceleration was domestic demand, which effectively

### Growth and domestic demand
- Domestic demand replaced net exports as the main growth engine in 2013.
- Domestic demand drivers:
  - Higher growth rate of private consumption.
  - A boost in investment driven by robust recovery in credit growth on the back of eased financial conditions.
  - Relatively high competitiveness of Polish companies and high capacity utilization.
- Consumption stimulants:
  - Rising employment.
  - Higher wages.
  - Low inflation leading to higher disposable income.
- Investment drivers:
  - Recovery in credit growth.
  - Strong capacity utilization and competitiveness.
- Recent performance and outlook:
  - In Q1 2015, real GDP growth accelerated to 1.0 percent (q-o-q, sa).
  - Real GDP level was 3.5 percent higher than a year ago (year-on-year).
  - Economic growth performance in 2015 forecast to reach at least 3.4 percent.
  - Growth forecast to gradually rise to 4 percent in 2018.
  - Growth supported by increased inflow of EU structural funds; Poland set to be the biggest beneficiary of the European multi-annual financial framework for the years 2014-2020.

### Labor market
- Labor market conditions have gradually improved since mid-2013.
- Key indicators:
  - Unemployment reached 7.8 percent in May—well below the EU average.
  - Employment and activity rates have been increasing.
  - Steady growth in labor productivity.

### External sector
- Current account (CA) developments:
  - CA deficit reached its lowest level in over a decade at 1.3 percent of GDP in 2013.
  - CA deficit remained unchanged in the following year.
  - In April (preliminary), the CA deficit decreased to 0.6 percent of 12-month GDP.
- Trade dynamics:
  - Since Q2 2013 exports supported by rebound in euro area activity.
  - Negative trade impact from Russia/Ukraine crisis largely counterbalanced by redirection of exports to other markets and gains in price competitiveness.
  - Imports strengthened recently due to rapid acceleration of domestic demand; partly mitigated by lower oil prices.
- Capital flows and reserves:
  - CA deficit comfortably covered by capital account surplus, driven mainly by stable inflow of EU funds.
  - External debt remains relatively stable at around 70 percent of GDP.
  - Around two-thirds of corporate external debt is either intercompany or trade credit.
  - Official foreign reserves broadly adequate at about 114 percent of the IMF’s modified composite reserve adequacy metric, as of end-2014.
  - Reserves slightly increased since the beginning of the year to around 94 and 103 billion, respectively (in EUR and USD terms).
  - Poland benefits from a precautionary Flexible Credit Line (FCL) arrangement with the Fund, since January this year with a substantially lowered level of access.

### Fiscal policy
- Fiscal outcomes:
  - General government deficit reduced to 3.2 percent of GDP last year.
  - EU Council recommended level for that year under EDP rules was 3.9 percent.
  - Costs of the 1999 pension reform still incurred in the first half of 2014 amounted to 0.4 percent of GDP; taking this into account, the deficit was effectively reduced below the 3.0 percent of GDP reference value.
  - Exit from the EDP achieved one year ahead of the deadline set by the EU Council.
  - General government debt declined to 50.1 percent of GDP last year, mainly on account of earlier changes in the pension system.
- Policy stance and commitments:
  - Authorities committed to further reducing the remaining imbalance in public finances without threatening medium-term growth prospects.
  - Fiscal policy guided by progressing towards the medium-term objective (MTO) of a structural deficit of 1 percent of GDP.
  - Aim to keep government debt significantly below the Maastricht reference value of 60 percent of GDP.
  - Full compliance with the new stabilizing expenditure rule envisaged to ensure fiscal goals.
  - Structural fiscal measures: an action plan to improve tax compliance and effectiveness of tax administration implemented since last year to foster budget revenues in the near term.

### Monetary policy
- Inflation and external context:
  - Monetary policy in 2014 and early 2015 conducted amid low growth in main trading partners and falling global commodity prices.
  - Core inflation continuously low due to still negative output gap and moderate wage pressures.
  - Average CPI inflation for 2014 remained constant at 0.0 percent.
  - CPI inflation negative since July 2014; deflation has eased somewhat in recent months.
- Policy actions:
  - Narodowy Bank Polski (NBP) cut the reference rate by 50 bps in 2014 and by another 50 bps in 2015.
  - Main policy rate reached 1.50 percent in March 2015.
  - Cumulative policy rate reduction of 325 bps since the onset of the easing cycle in late 2012.
  - MPC expects gradual acceleration of growth and strong labor market to bring inflation back to NBP’s target in the medium term.
  - MPC considers current level of NBP interest rates consistent with price stability while discouraging macroeconomic imbalances.

### Financial sector
- Stability and soundness:
  - Financial sector remained stable and resilient, supported by economic recovery.
  - Banks maintain low leverage ratios, are liquid, well-capitalized and highly profitable.
  - Net profits of Polish banks stable at record high level since 2011 despite record-low interest rates.
- Capital and funding:
  - Capital adequacy ratio reached 14.9 percent at end-Q1 2015.
  - Tier 1 capital represents around 90 percent of total capital.
  - Liability structure improved as deposits grew faster than loans, reducing reliance on other funding sources.
  - Reliance on parent bank funding declined alongside reduction in outstanding FX loans.
- Credit and risks:
  - As of May 2015, overall credit to the non-financial sector grew by 3.5 percent (y-o-y, after exchange rate adjustment).
  - Pace of credit growth close to nominal GDP growth rate; does not create imbalances nor unnecessarily restrain growth.
  - FX mortgage portfolio in runoff mode since mid-2012; regulatory and supervisory actions reduced share of FX loans in new mortgage lending.
  - Effects of recent Swiss franc appreciation counterbalanced by lower Swiss interest rates.
  - Authorities do not view remaining FX mortgage portfolio as a systemic problem.
  - Loan-to-value limits for housing and commercial real estate loans in force since early 2014 and to be gradually tightened until 2017.
  - Share of NPLs in non-financial sector slightly decreased over past three years; NPL coverage by provisions at a comfortable level.
- Ongoing measures:
  - Progress on strengthening supervision, including macroprudential and bank resolution frameworks.

### Structural reforms
- Reform agenda implementation:
  - Authorities continued implementing measures based on integrated strategies to enhance growth potential.
  - Measures aim to improve access of companies to capital, stimulate entrepreneurship, strengthen business climate, counteract demographic effects on labor market and public finances, and promote R&D and innovation.
- Labor and product market measures:
  - Deregulation of professions continued.
  - Measures to reduce labor market segmentation, including better aligning civil law and temporary contracts with regular contracts and limiting excessive use of fixed-term contracts.
  - Continued efforts to reduce youth unemployment.
  - New housing rental program in the pipeline to help develop rental market and facilitate regional labor mobility.
  - Pro-family package being carried out combining different benefits for families with children, along with measures to increase female labor force participation—expected to increase fertility rate and growth of labor supply in the long term.

*IMF staff report content (excerpt).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15182.pdf_