## _cr16210

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### External sector assessment and recent developments
- Overall assessment:
  - External position in 2015 was broadly consistent with medium-term fundamentals and desirable policies, but vulnerabilities exist.
  - Current account deficit: 2 percent of GDP in 2014 → 0.2 percent of GDP in 2015.
  - Oil deficit: 3.2 percent of GDP in 2014 → 2 percent of GDP in 2015.
  - Reserves: about 107 percent of the IMF’s composite reserve adequacy metric at end-2015.
- Real exchange rate (REER) and valuation:
  - Average REER depreciated by 3 percent in 2015 relative to 2014.
  - REER depreciated about 2 percent as of April 2016 relative to end-2015.
  - REER gap estimates (various approaches): between -2 percent and -14 percent.
  - Staff assessment: REER in 2015 close to level consistent with fundamentals; REER gap centered around -5 percent within a range of -10 to 0 percent.
- Capital and financial flows:
  - Portfolio investment outflows since Q2 2015; larger outflows in early 2016 partly driven by maturing external debt and general EM asset sell-off.
  - FDI declined, mainly reflecting reinvestment of earnings by special purpose vehicles.
  - EU funds temporarily declined in 2015 at end of EU budget cycle; expected to increase in 2016.
- Net international investment position (NIIP):
  - NIIP around -60 percent of GDP in 2014 and 2015.
  - Diversified FDI liabilities (over 40 percent of foreign liabilities) and intercompany lending mitigate vulnerabilities.

### Recent macroeconomic developments and outlook
- Growth and demand:
  - Real GDP growth: 3.6 percent in 2015 (up from 3.3 percent in 2014).
  - Growth slowed to 2.6 percent in Q1 (year-on-year) after 4 percent y/y in Q4.
  - Baseline outlook: real growth 3½ percent in 2016; 3.7 percent in 2017.
- Labor market and wages:
  - Harmonized unemployment rate: 6.3 percent in April (historical low).
  - Year-on-year nominal wage growth: above 3 percent in the first quarter.
  - Nominal wages and credit growth reported at 4½ percent and 6½ percent in April, respectively.
- Inflation:
  - Headline inflation: -0.9 percent in May; CPI average 2015: -0.9 percent.
  - Core inflation: -0.4 percent in May.
  - Inflation projected to nudge toward lower bound of 1.5–3.5 percent target band by end-2017.
- Financial conditions:
  - Policy interest rate cut in March 2015 to 1.5 percent maintained since (historical low); policy rate history: 2013 2.9; 2014 2.4; 2015 1.6; 2016 1.5 (as of June 2).
  - Polish equities as of mid-May remained more than 15 percent below the level one year earlier.
  - Spreads to German bunds widened by some 70 basis points between end-September 2015 and end-May 2016.
- External projections (selected from transaction basis Table):
  - Current account (millions USD): 2015 -1,117; 2016 -3,228; 2017 -6,596; 2018 -10,433; 2019 -13,610.
  - Current account percent of GDP: 2015 -0.2; 2016 -0.7; 2017 -1.3; 2018 -2.0; 2019 -2.5.
  - Official reserves (million USD): 2015 94,922; 2016 106,864; 2017 113,731.
- Staff appraisal summary:
  - Poland enjoying strong expansion; economy operating at full capacity; external factors have kept headline inflation well below target, expected to dissipate over time.
  - Downside risks have intensified (external and domestic); long-term aging and regional disparities are important structural challenges.

### Risks to the outlook: scenarios, likelihoods, and transmission
- External downside risks:
  - Tighter/more volatile global financial conditions — Relative Likelihood: Medium; Expected impact: Medium.
    - Transmission: sharp asset price adjustment; capital outflows with high foreign investor participation in domestic bond market; zloty depreciation; FX derivatives liquidity stress.
  - Sharper-than-expected global growth slowdown — Relative Likelihood: Low/Medium (table entries reflect scenario differences); Expected impact: Medium.
    - Transmission: weaker exports via indirect links to Germany; financial volatility and capital outflows; higher NPLs.
  - Protracted low inflation — Relative Likelihood: Medium; Expected impact: Medium.
    - Transmission: higher ex-post real interest rates; deter investment; adaptive expectations risk.
  - British vote to leave the EU — Relative Likelihood: High; Expected impact: Medium.
    - U.K. accounts for 7 percent of Polish exports; indirect euro-area spillovers; lower EU fund transfers; migration and remittance effects.
- Domestic risks:
  - Domestic policy uncertainty and missteps — Relative Likelihood: Medium; Expected impact: High.
    - Risks: weakening institutions → ratings downgrades and higher financing costs; bank tax reducing profits and shifting lending to shadow banks; costly blanket FX mortgage conversion; lowering retirement age reducing labor participation and raising fiscal costs.
  - Upside domestic risk: expansionary measures could boost growth and inflation more than expected.

### Risk matrix (selected policy recommendations)
- For tighter/more volatile global financial conditions:
  - Allow exchange rate to float freely; intervene to dampen excessive volatility.
  - Fiscal policy: allow automatic stabilizers to work.
  - NBP: provide liquidity support (including in FX) if needed; use FCL arrangement if necessary.
  - Interest rate hikes could stem capital outflow pressure.
- For global growth slowdown or protracted low inflation:
  - Further ease monetary policy; use forward guidance; allow exchange rate to float.
  - Allow fiscal automatic stabilizers to operate.
- For domestic policy uncertainty:
  - Maintain strong institutions, credible fiscal policy, and central bank independence.
  - Refrain from blanket conversion of foreign-currency mortgages.
  - Reconsider reducing retirement age.

### Fiscal outlook, vulnerabilities, and staff recommendations
- Fiscal outturns and projections:
  - General government deficit narrowed to 2.6 percent in 2015; public debt 51.3 percent of GDP at end-2015.
  - Staff baseline: 2017 fiscal deficit will increase to 3.1 percent of GDP; decline to 2.3 percent of GDP by 2020.
  - Authorities’ Convergence Program envisages deficit just under 3 percent in 2017 and consolidation to 1.3 percent of GDP by 2019.
- Child benefits program (Family 500+):
  - Expected to cost about 1 percent of GDP annually.
  - CenEA estimates: disposable income of poorest households with at least one child (lower decile) will increase by 30 percent; richest households (top decile) increase by 2 percent.
  - Median household with children will receive an additional PLN400 per month, yielding 9 percent higher disposable income.
- Fiscal risks not in staff baseline:
  - Reversing 2013 retirement age increases could cost 0.5 percent of GDP per year.
  - Increasing PIT tax-free allowance could initially cost 0.2 percent of GDP per year, increasing to 0.5 percent by 2019.
- Staff consolidation requirements and measures:
  - Staff recommends MTO of 1 percent of GDP structural deficit as fiscal anchor.
  - Measures of around 2 percent of GDP required relative to 2017 to reach MTO.
  - Consolidation starting in 2017 at ~0.5 percent of GDP annually would reach MTO by 2020.
  - Short-term recommended measures:
    - Identify specific measures to keep deficit below 3 percent in 2017.
    - Maintain 2011 VAT increase scheduled to expire in 2017: 0.4 percent of GDP.
    - Refrain from lowering retirement age: 0.5 percent of GDP.
    - Rationalize 5 percent of discretionary government consumption: 0.3 percent of GDP.
  - Medium-term menu:
    - Close ⅓ of VAT policy gap (reduced rates and exemptions): 1.2 percent of GDP.
    - Gradually phase out preferential pension regimes of miners and farmers: 1.5 percent of GDP.
    - Close ½ of efficiency gap in health spending: 0.4 percent of GDP.
    - Close ⅓ of VAT compliance gap: 0.6 percent of GDP.
  - Fiscal sizing from Text-Table 4:
    - Structural gap to MTO in 2017: 2.1 percent of GDP.
    - Planned additional expenditure increases and tax cuts (rolling back retirement age: 0.5; higher PIT tax-free allowance: 0.2).
    - Total measures needed to reach MTO: 2.8; possible measures total: 4.9.

### Public debt sustainability and stress tests (summary)
- Public debt level and trajectory:
  - Public debt 51.3 percent of GDP at end-2015.
  - Debt projected to increase by 1.9 percentage points of GDP between 2015 and 2018, then decline to 51.6 percent of GDP by 2021.
- Public gross financing needs (percent of GDP, selected):
  - 2014 13.7; 2015 8.3; 2016 7.8; 2017 9.0; 2018 9.5; 2019 8.7.
- Stress-test scenarios (selected outcomes):
  - Primary balance shock: deterioration by 1 percentage point during 2016 pushes public debt-to-revenue up to ~140 percent during 2018; gross financing needs peak at ~10.4 percent of GDP in 2017.
  - Growth shock: drop in GDP growth by about 1.8 percentage points in two years (2017–18) increases public debt to about 58.4 percent of GDP in 2018; gross financing needs rise to ~11 percent of GDP in 2017–18.
  - Interest rate shock: permanent 250 bps increase starting 2017 raises public debt by 1.9 percentage points relative to baseline by 2021.
  - Exchange rate shock: ~20 percent depreciation in 2017 increases gross public debt by 1 percentage point to 54 percent of GDP in 2018.
- DSA risk highlights:
  - Relatively large external financing requirements (~22 percent of GDP in 2015).
  - Share of public debt held by non-residents about 57 percent at end-2015.
  - Fan-chart: debt-to-GDP could drop below 50 percent by 2020 with 25 percent probability; could surpass 60 percent by 2020 with 10 percent probability.

### Banking sector soundness, bank tax, and FX mortgage risks
- Banking sector fundamentals:
  - Capital adequacy: CAR above 15 percent in Q4 2015; capital ratio 16.7 percent at end-Q1 2016.
  - Tier 1 capital represents around 90 percent of total capital.
  - Liquid assets to total assets: more than 22 percent in Q1 2016.
  - Loans-to-deposits ratio declining; almost all banks complying with LCR.
  - NPLs gradually coming down; NPLs to gross loans: 7.5 percent in 2015; 7.4 percent in 2016Q1.
  - Return on average assets (after tax): 0.8 percent in 2015 and 2016Q1.
- Bank asset tax (February 2016) — empirical impacts and projections:
  - 2016 tax outlays paid by banks could double relative to 2015.
  - Combined tax and regulatory costs could reduce bank profitability by 30 percent relative to 2015 (System GMM result).
  - Reduced profitability could reduce credit growth by 3 to 4 percentage points relative to a no-tax scenario (VAR-based analysis).
  - Lower credit growth could reduce GDP growth by up to 0.4 percentage points by end-2016 (OLS linking GDP to lagged credit growth).
  - Bank tax incentives: increase holdings of government bonds → crowding out private credit; incentivize month-end asset size management → potential interbank liquidity constraints.
- KNF assessment and potential costs:
  - Outstanding FX mortgages: about 9¼ percent of 2015 GDP at end-March 2016.
  - KNF estimates blanket conversion could cost banking sector PLN 67 billion (3.7 percent of 2015 GDP) — close to six times 2015 banking sector profits; could result in several bank bankruptcies and fiscal costs from deposit guarantees.
- Alternative tax design (FAT) recommended:
  - FAT levied on sum of profits and remuneration less distortionary than asset tax.
  - Example: a 10–13 percent levy on bank profits and remunerations could generate PLN 4 billion expected from current bank asset tax.
  - Country examples: Israel 17 percent FAT; Iceland 5.5 percent on wages and 6 percent on profits above ISK 1 billion; Denmark 10.5 percent on wages.
- Staff policy recommendations for financial sector:
  - Replace or redesign bank asset tax with FAT on profits and remuneration.
  - Avoid blanket FX mortgage conversion; focus on case-by-case restructuring and allow temporary payment relief scheme time to work.
  - Continue restricting new FX loans to individuals without adequate corresponding currency earnings; enforce consumer protection amendments (effective April 2016).
  - Continue restructuring credit union segment and implement bank resolution framework expeditiously.
- Authorities’ views:
  - NBP shared staff concerns about stability risks.
  - MoF more optimistic on FX mortgage conversion and bank tax effects; intends to evaluate and adjust bank tax if necessary.
  - President’s office acknowledged risks of costly blanket FX conversion and indicated plans to preserve financial stability while helping FX mortgage holders.

### Demographics, pensions, and labor supply
- Demographic projections:
  - Working-age (15–64) population set to shrink by more than 30 percent by 2060 (Eurostat projections).
  - Old-age dependency ratio projected to nearly triple by 2060.
  - Fertility among the lowest in Europe.
- Pension replacement rate scenarios:
  - Under unchanged policies, average replacement rates projected to decline by about 25 percentage points to below 30 percent by 2060.
  - Maintaining average replacement rate at 2013 level of 53 percent would increase pension expenditure by nearly 8½ percent of GDP per year by 2060.
  - Maintaining replacement rate at 40 percent would increase pension expenditure by about 4½ percent of GDP per year by 2060.
  - Reversing gradual increase in retirement age could reduce replacement rate to less than 25 percent; maintaining replacement rate at 40 percent while reversing reform would increase pension expenditure by about 6½ percent of GDP per year by 2060.
- Female labor force participation (Box 6 conclusions):
  - Polish women work significantly less than Polish men and less than women in peer economies.
  - Childcare and preschool spending positively associated with fertility (regression reported: y = 0.3555x + 1.4384; R² = 0.1735).
  - Cash benefits do not appear associated with fertility (regression: y = 0.0656x + 1.6138; R² = 0.0172).
  - Staff recommends redirecting family cash benefits toward childcare and preschool education to boost female labor force participation.

### Structural reforms and policy readiness
- Government priorities (Responsible Development Plan) focus on:
  - (i) reindustrialization; (ii) development of innovative firms; (iii) mobilizing capital for development; (iv) foreign expansion by Polish companies; (v) social and regional development (including reversing unfavorable demographic trends, strengthening vocational education, and developing infrastructure in poorer regions).
- Structural reform recommendations:
  - Increase labor force participation of women and seniors; maintain retirement age increases envisaged by 2013 reforms.
  - Improve education and reduce skill mismatches in eastern regions; invest in infrastructure to attract FDI.
  - Phase out special tax and pension regimes for farmers to facilitate labor reallocation.
  - Promote innovation via targeted tax incentives for start-ups and better utilization of EU funds.
- Policy readiness and institutional developments:
  - Macroprudential framework finalized; law on covered bonds adopted; bank resolution framework progressing in line with BRRD.
  - Financial Stability Committee operational since November 2015 with "comply or explain" mechanism.
  - Authorities committed to keep deficit below 3 percent of GDP in 2017 and resume consolidation from 2018.

*Source: IMF staff report — "1. External Sector Assessment" and accompanying chapters from the provided IMF Country Report excerpt (Poland).*

### 1. External Sector Assessment ___________________________________________________________________ 10

### 1. External Sector Assessment

### Context and structural challenges
- Poland has closed more than a quarter of its per-capita income gap with the EU during the past two decades.
- Enduring regional disparities:
  - Eastern regions: lower per-capita GDP, productivity, and educational attainment; higher poverty and long-term unemployment; higher share of small-scale farming.
  - West: higher FDI share, higher educational attainment, higher labor productivity.
- Demographic pressures:
  - Working-age (15–64) population is set to shrink by more than 30 percent by 2060.
  - Old-age dependency ratio is projected to nearly triple by 2060.
  - Fertility is among the lowest in Europe.

### Recent policy environment and risks to confidence
- New government priorities (Responsible Development Plan) focus on five pillars:
  - (i) reindustrialization;
  - (ii) development of innovative firms;
  - (iii) mobilizing capital for development;
  - (iv) foreign expansion by Polish companies;
  - (v) social and regional development (including reversing unfavorable demographic trends, strengthening vocational education, and developing infrastructure in poorer regions).
- Recent policy initiatives raising market concerns:
  - New tax on banks could undermine credit expansion, investment, and growth.
  - Consideration of conversion of foreign currency mortgages into zloty, with potential adverse financial-stability implications depending on design and implementation.
  - New child benefits program likely to reduce inequality and poverty but will complicate fiscal consolidation and could discourage female labor force participation.
  - Institutional reforms have raised rule-of-law concerns (Venice Commission opinion; European Commission dialogue within the Rule of Law Framework), contributing to a rating downgrade by S&P in January and a downward outlook revision by Moody’s in May.
  - Consequences: increased financial market volatility, souring foreign investor sentiment, and widening spreads vis-à-vis German bunds.

### Recent economic developments (selected indicators and dynamics)
- Growth and demand:
  - Real GDP growth: 3.6 percent in 2015, up from 3.3 percent in 2014.
  - Growth slowed to 2.6 percent in Q1 (year-on-year) after 4 percent y/y in Q4.
  - PMI remained in expansionary territory into 2016.
  - Retail sales grew at 5½ percent year-on-year in April.
- Labor market and wages:
  - Seasonally-adjusted harmonized unemployment rate: 6.3 percent in April (historical low).
  - Year-on-year nominal wage growth: above 3 percent in the first quarter; real wages outpacing labor productivity.
- Inflation:
  - Headline inflation: -0.9 percent in May.
  - Core inflation: -0.4 percent in May.
  - Longer-term inflation expectations remain anchored within the 1.5–3.5 percent tolerance band.
- Financial conditions and credit:
  - Historically low policy interest rate since March 2015.
  - Credit expansion moderated recently but generally held up; housing loans saw tighter standards.
  - Polish equities as of mid-May remained more than 15 percent below the level one year earlier.
  - Spreads to German bunds widened by some 70 basis points between end-September 2015 and end-May 2016.
- External position and reserves:
  - Current account deficit: 2 percent of GDP in 2014 → 0.2 percent of GDP in 2015.
  - Oil deficit: 3.2 percent of GDP in 2014 → 2 percent of GDP in 2015 (reflecting close to 50 percent drop in oil prices).
  - Reserves: about 107 percent of the IMF’s composite reserve adequacy metric at end-2015.

### Outlook and projections
- Baseline outlook (on current policies):
  - Real growth: 3½ percent in 2016; 3.7 percent in 2017.
  - Inflation: expected to nudge toward the lower bound of the target band (1.5–3.5 percent) by end-2017 as the output gap opens and external price shocks dissipate.
  - New child benefits program expected to boost private consumption and contribute to a positive output gap.
- Fiscal and distributional note on child benefits program (CenEA estimates):
  - Disposable income of poorest households with at least one child (lower decile) will increase by 30 percent.
  - Disposable income of the richest households (top decile) will increase by 2 percent.
  - Median household with children will receive an additional PLN400 per month, yielding 9 percent higher disposable income.

### External Sector Assessment: findings and vulnerabilities (Box 1)
- Overall assessment: The external position in 2015 was broadly consistent with medium-term fundamentals and desirable policies, but vulnerabilities exist.
- Current account:
  - Declined from 2 percent of GDP in 2014 to 0.2 percent of GDP in 2015 due to improved terms of trade and weaker non-oil import volume.
  - Projected to widen in 2016 on stronger domestic demand.
- Real exchange rate (REER):
  - Average REER depreciated by 3 percent in 2015 relative to 2014.
  - REER had depreciated about 2 percent as of April 2016 relative to end-2015.
  - Various approaches suggest modest undervaluation between 2 and 14 percent:
    - Current account approach REER gap: -2 percent.
    - External sustainability approach REER gap: -6 percent.
    - REER index regression approach: -5 percent.
    - Levels approach: -14 percent.
  - Staff assessment: REER in 2015 close to a level consistent with fundamentals and desirable policy settings, with the REER gap centered around -5 percent within a range of -10 to 0 percent.
- Capital and financial account:
  - Portfolio investment outflows since Q2 2015; larger outflows in early 2016 partly driven by maturing external debt and general EM asset sell-off.
  - FDI declined, mainly reflecting reinvestment of earnings by special purpose vehicles.
  - EU funds temporarily declined in 2015 at the end of the EU budget cycle but are expected to increase in 2016.
  - Risk: financing a widening current account could be challenging if FDI inflows fall significantly below projections.
- Net international investment position (NIIP):
  - Large negative NIIP around -60 percent of GDP in 2014 and 2015; valuation effects largely offset by improved current account.
  - Vulnerabilities mitigated by diversified FDI liabilities (over 40 percent of foreign liabilities) and intercompany lending.
- Reserve adequacy:
  - Reserves broadly adequate at about 107 percent of the IMF’s modified composite reserve adequacy metric at end-2015.

*Source: IMF staff report — "1. External Sector Assessment" (Poland).*

### 11.      Risks to the outlook are increasingly on the downside (Text-Table 1).

### _cr16210 - 11.      Risks to the outlook are increasingly on the downside (Text-Table 1).

### External risks and outlook
- Downside external risks have increased moderately since the 2016 Flexible Credit Line (FCL) review.
- Downside scenarios and transmission channels:
  - Unanticipated changes in growth and financial fundamentals in large economies could heighten financial volatility.
  - A British vote to leave the European Union could further exacerbate volatility.
  - Persistently low inflation and debt overhang in the euro area could result in a protracted growth slowdown, spilling over to Poland through both trade and financial channels.
  - A significant slowdown in large emerging markets (EMs) could raise risk aversion and trigger an EM asset sell-off, propagating to Poland through high foreign investor participation in the bond market.
- Upside scenarios:
  - Stronger-than-expected growth in the euro area on the back of ECB QE could lift growth and inflation in Poland.
  - A faster pick-up in oil prices could speed up convergence of inflation to target.

### Domestic risks and outlook
- Some new policy measures may boost near-term growth, but domestic policies have increased uncertainty.
- Downside domestic risks:
  - Distortionary sectoral taxes could weigh on investor sentiment.
  - Lending activity could shift to less regulated non-banks, increasing vulnerabilities.
  - Conversion of foreign-currency mortgages into zloty, depending on its design and implementation, could wipe out bank profits and significantly dent capital adequacy, putting financial stability at risk.
  - Fiscal slippages could occur given uncertain yield of announced measures, legal risks, and additional measures under consideration (e.g., a potential reduction in the pension age).
  - A higher perceived risk of political and social instability and policy unpredictability could make Poland less attractive to foreign investors, triggering rating downgrades and increase debt servicing costs.
  - External factors could continue to depress inflation and weigh on interest margins, bank profitability, and growth. In a tail-risk scenario, inflation expectations could become dislodged and have negative implications for the real economy.
- Upside domestic risk:
  - Near-term expansionary measures could provide a larger-than-expected boost to growth and earlier pickup of inflation.

### Text-Table 1 — Risk Assessment Matrix: summary of key risks, likelihoods, impacts, and policy recommendations
- Risk 1: Tighter or more volatile global financial conditions
  - Relative Likelihood: Medium
  - Transmission channels:
    - Sharp asset price adjustment as investors reassess risk, Fed policy path, and U.S. term premia.
    - Capital outflows with high foreign investor participation in the domestic bond market.
    - ECB QE and strong Polish fundamentals could mitigate impact.
  - Expected impact: Medium
    - Capital flow reversals and zloty depreciation.
    - Adverse effects on FX derivatives market liquidity and banks’ hedging costs.
    - Mitigated by strong liquidity positions in banking sector and prudent public debt management.
  - Policy recommendations:
    - Allow the exchange rate to float freely; intervene to dampen excessive volatility.
    - Fiscal policy should allow automatic stabilizers to work.
    - Interest rate hikes could stem capital outflow pressure.
    - NBP should provide liquidity support (including in FX) if needed.
    - The FCL arrangement could be used if necessary.

- Risk 2: Sharper-than-expected global growth slowdown
  - Relative Likelihood: Low/Medium and High/Medium entries appear in the table reflecting different scenarios.
  - Transmission channels:
    - Slowdown in China could suppress commodity prices and roil global financial markets.
    - Structurally weak growth in key advanced and emerging economies, especially the euro area, could undermine medium-term EM growth.
  - Expected impact: Medium
    - Lower exports via indirect trade linkages to Germany and other CEE countries.
    - Financial volatility causing capital outflows from EMs, including Poland.
    - Increase in NPLs as growth slows.
    - Mitigation: relatively stable investor base and strong banking sector capital position.
  - Policy recommendations:
    - Further ease monetary policy.
    - Allow fiscal automatic stabilizers to operate.

- Risk 3: Protracted period of low inflation
  - Relative Likelihood: Medium
  - Transmission channels:
    - Inflation could remain low due to external (low imported inflation) or domestic (entrenched low inflation expectations) factors.
  - Expected impact: Medium
    - Very low inflation would increase (ex-post) real interest rates, weigh on balance sheets, deter investment and growth.
    - Adaptive household inflation expectations could make recovery harder.
    - Mitigation: still-strong domestic demand.
  - Policy recommendations:
    - Further ease monetary policy.
    - Use forward guidance to help anchor inflation expectations.
    - Allow the exchange rate to float freely.

- Risk 4: Domestic policy uncertainty and policy missteps
  - Relative Likelihood: Medium
  - Transmission channels:
    - Weakening of key institutions could result in ratings downgrades and higher perceived political and social instability.
    - New bank tax could reduce profits, deter credit expansion, and shift lending to shadow banks.
    - Retail sales tax could discourage retail activity and cause cascading taxation.
    - Costly conversion of foreign currency mortgages could put financial stability at risk.
    - Lowering the retirement age would reduce pension replacement rates and labor force participation.
  - Expected impact: High
    - Ratings downgrades could raise financing costs and reduce foreign investor attractiveness.
    - Interaction of fiscal and financial measures could create a vicious cycle of weaker public finances and financial sector health and lower growth.
    - Reduced pension replacement rates would increase the risk of old-age poverty and significantly weaken public finances; lower labor force participation would reduce potential growth.
  - Policy recommendations:
    - Maintain strong policies and institutions, including credible fiscal policy and central bank independence.
    - Refrain from introducing destabilizing policies, including blanket conversion of foreign currency mortgages.
    - Reconsider reducing pension age.

- Risk 5: British voters elect to leave the EU
  - Relative Likelihood: High
  - Transmission channels:
    - Heightened global financial volatility and potential liquidity/funding freezes in global markets.
    - Slowdown of direct trade with the U.K. and indirect trade via other EU partners.
    - Lower EU fund transfers, assuming no compensation for lost U.K. contribution.
    - Restrictions on migration to the U.K.
  - Expected impact: Medium
    - Limited direct financial links to the U.K., but indirect spillovers through the euro area could affect Polish banks and corporates that rely on foreign funding.
    - U.K. is Poland’s second largest trading partner, accounting for 7 percent of exports; indirect trade links via other EU economies imply economically important negative impact on Poland’s exports and growth.
    - Reduction of EU fund inflows could weigh on medium-term growth.
    - Restricted migration and higher return migration could increase domestic labor supply and short-term unemployment; lower remittances would worsen the current account.
    - Return migration could increase skill transfer; migration to the U.K. could be replaced by other destinations.
  - Policy recommendations:
    - Near term:
      - Allow the exchange rate to cushion shocks.
      - Fiscal policy should allow automatic stabilizers to work.
      - NBP should provide liquidity support (including in FX) if needed; the FCL arrangement could be used if necessary.
      - Active labor market policies to mitigate changing migration flows.
    - Medium term:
      - Continue fiscal consolidation with growth-friendly measures.
      - Maintain financial stability to weather external financial shocks.

### Policy responses and readiness
- External policy guidance:
  - Poland’s strong fundamentals, reserve buffers, and stable/diversified foreign investor base mitigate spillovers.
  - The flexible exchange rate should be the main line of defense, while considering household exposures to foreign-currency debt.
  - Fiscal automatic stabilizers should be allowed to operate along the medium-term consolidation path.
  - In significant capital outflows, NBP should provide zloty and FX liquidity to the banking sector as needed.
  - Poland’s FCL arrangement with the IMF provides added insurance against adverse external shocks.
- Domestic policy guidance:
  - Focus on maintaining economic and financial stability; refrain from introducing destabilizing policies.
  - Identify growth-friendly measures to support a credible medium-term fiscal consolidation plan to bolster market confidence.
  - Authorities should be ready to cut policy interest rates if inflation expectations disappoint on the downside.

### Authorities’ views and policy discussion
- Authorities’ assessment:
  - Broad agreement with staff on external risks; the Ministry of Finance (MoF) more optimistic on the domestic outlook.
  - MoF expects growth to remain at around 4 percent over the medium term.
  - MoF reiterated commitment to keep the deficit below 3 percent this year and next and to resume fiscal consolidation from 2018.
  - NBP and KNF agreed that blanket conversion of foreign currency mortgages could pose financial stability risks.
  - Authorities noted Poland is well equipped to manage capital flows via adequate reserves, stable investor base, flexible exchange rate, and FCL arrangement with the IMF.
- Policy discussions emphasized:
  - Safeguarding strong institutions, fiscal sustainability, and financial sector stability as prerequisites for stable growth.
  - Further structural reforms to secure potential growth and income convergence while reducing regional disparities.
  - Near-term policy mix: maintain accommodative monetary policy stance and continue gradual fiscal consolidation while the output gap is closed and inflation remains low.

### Monetary policy stance and indicators
- Policy interest rate:
  - Policy interest rate cut in March 2015 to 1.5 percent (a historical low for Poland) has been maintained since.
  - Nominal wages and credit growth reported at 4½ percent and 6½ percent in April, respectively.
- Monetary policy recommendation:
  - Remain accommodative and data-dependent.
  - Maintain policy rates on hold for now, but be prepared to cut rates if inflation expectations fall or growth slows sharply.
  - Forward guidance could help anchor inflation expectations.
- Fiscal stance and past advice:
  - Authorities committed to a Medium-Term Objective (MTO) of 1 percent of GDP structural deficit.
  - Some recent measures are of poor quality: 2016 budget financed partly with one-off measures; expenditure rule modified; a distortionary bank tax implemented; reversal of 2013 retirement age increases being considered.
  - Financial sector: macroprudential framework finalized; conversion scheme for foreign-currency mortgages under design despite staff recommendation for case-by-case restructuring.

*Source: _cr16210 - 11.      Risks to the outlook are increasingly on the downside (Text-Table 1).*

### 17.      The authorities shared staff’s view of continued accommodative monetary policy.

### 17.      The authorities shared staff’s view of continued accommodative monetary policy.

### Monetary policy assessment
- Authorities and staff agreed on continued accommodative monetary policy.
- While inflation remains very low, authorities noted:
  - Imported deflation had supported consumers’ purchasing power.
  - So far imported deflation has not had negative implications for the real economy.
  - Balance sheets remained healthy.
- Policy stance:
  - Authorities argued for maintaining policy interest rates on hold in the absence of any sharp changes to growth or inflation expectations, in line with staff’s view.

### Ensuring growth-friendly fiscal consolidation (Overview)
- 2015 outcomes:
  - General government deficit narrowed to 2.6 percent (a cyclical primary adjustment of 0.3 percent of GDP).
  - Public debt increased modestly to 51.3 percent of GDP at end-2015.
- 2016 developments:
  - As the output gap closed in 2016, the fiscal stance became procyclical.
  - Staff estimates that implementation of election promises will increase the deficit to 2.8 percent of GDP in 2016 (a cyclical primary relaxation of 0.2 percent of GDP).
  - Government’s new child benefits program, beginning in April 2016, is expected to cost about 1 percent of GDP annually.
  - Financing for the child benefits program: a tax on bank assets and a retail tax (¼ percent of GDP) and one-off mobile frequencies auction revenues (0.4 percent of GDP).

### Authorities’ Convergence Program and staff projections
- Authorities’ Convergence Program update envisages:
  - Increase in the fiscal deficit to just under 3 percent in 2017.
  - Subsequent consolidation to 1.3 percent of GDP by 2019 (Text-Table 2 assumptions).
  - Assumptions include strong nominal GDP growth, revenue outpacing moderate increases in social benefits and wages and salaries (authorities intend to keep wages and salaries constant in real terms), and sizable revenue gains from tax administration improvements estimated at 0.3 percent of GDP by 2017 and increasing to 1 percent of GDP by 2019.
- Staff baseline projections (unchanged policies):
  - 2017 fiscal deficit will increase to 3.1 percent of GDP.
  - Staff projects a less ambitious deficit reduction over the medium term:
    - Deficit would decline to 2.3 percent of GDP by 2020.
    - This is 1.3 percentage points of GDP above the government’s medium-term objective (MTO) of 1 percent of GDP structural deficit.
  - General government debt is projected to increase until 2018, then decline over subsequent years.

### Risks to fiscal stance and policy implications
- Additional downside fiscal risks not included in staff baseline:
  - Government intends to reverse the 2013 retirement age increases, which could cost an additional 0.5 percent of GDP per year.
  - Increase the Constitutional Court-mandated PIT tax-free allowance, which if introduced gradually could initially cost 0.2 percent of GDP per year, increasing to 0.5 percent of GDP by 2019.
- Fiscal rule implications:
  - Without offsetting measures, these changes would imply breaching the Excessive Deficit Procedure (EDP) threshold by a wide margin.

### Staff policy recommendations and required consolidation
- Fiscal anchor:
  - Staff recommends the government’s MTO of 1 percent of GDP structural deficit as an appropriate fiscal anchor.
  - Measures of around 2 percent of GDP would be required relative to 2017 to reach this objective.
  - Consolidation starting in 2017 at an annual pace of around 0.5 percent of GDP would reach the MTO by 2020.
- Quality of measures:
  - Staff noted that measures underlying the 2016 budget are of poor quality and pose risks to the 2017 fiscal outcome because the 2016 budget is partly financed through one-off revenues and distortionary sectoral taxes.
  - Recommendation: replace one-off and distortionary measures with higher-quality, growth-friendly measures to avoid adverse effects on trade and credit expansion.
- Specific short-term recommendations:
  - Identify specific measures to keep the deficit below 3 percent in 2017.
  - Maintain the 2011 VAT increase, scheduled to expire in 2017, until higher revenues materialize.
  - Rationalize discretionary government consumption (sizable at around 6 percent of GDP) through the ongoing expenditure review.
- Menu of medium-term measures recommended by staff:
  - (i) Close ⅓ of the VAT policy gap by reducing preferential rates and exemptions.
  - (ii) Close ½ of the efficiency gap in health spending, including by shifting towards ambulatory and primary care.
  - (iii) Gradually close ⅓ of the VAT compliance gap through tax administration improvements.
  - (iv) Gradually phase out preferential pension regimes of miners and farmers.
- Fiscal sizing from Text-Table 4 (Percent of GDP):
  - Structural gap to MTO in 2017: 2.1
  - Planned additional expenditure increases and tax cuts:
    - Rolling back of retirement age increase: 0.5
    - Higher PIT tax-free allowance: 0.2
  - Total measures needed to reach MTO: 2.8
  - Possible measures total: 4.9
  - Short-term measures:
    - Maintain the 2011 VAT increase: 0.4
    - Refrain from lowering retirement age: 0.5
    - Rationalize 5 percent of discretionary government consumption: 0.3
  - Medium-term measures:
    - Close one-third of VAT policy gap (reduced rates and exemptions): 1.2
    - Gradually phase out preferential pension regimes of miners and farmers: 1.5
    - Close half of efficiency gap in health spending: 0.4
    - Close one-third of VAT compliance gap: 0.6

### Pension and demographic implications (Box 3)
- Demographic projections:
  - Poland’s population is expected to decline by 30 percent between 2015 and 2060 (Eurostat projections).
  - The old-age dependency ratio is expected to almost triple.
- Replacement rate and fiscal cost scenarios:
  - Under unchanged policies, average replacement rates are projected to decline by about 25 percentage points to below 30 percent by 2060.
  - Maintaining the average replacement rate at the 2013 level of 53 percent would increase pension expenditure by nearly 8½ percent of GDP per year by 2060.
  - Maintaining the replacement rate at 40 percent (ILO minimum recommended) would increase pension expenditure by about 4½ percent of GDP per year by 2060.
  - Reversing the gradual increase in the retirement age could reduce the replacement rate to less than 25 percent.
  - Maintaining the replacement rate at 40 percent while reversing the reform would increase pension expenditure by about 6½ percent of GDP per year by 2060.

### Authorities’ views on fiscal stance and measures
- Authorities’ commitments:
  - Keep the deficit below 3 percent of GDP in 2017.
  - Resume consolidation in 2018 to put public debt on a firm downward path.
  - No new spending measures without first identifying financing through revenue measures or expenditure cuts.
- Specific authorities’ positions:
  - Would consider maintaining the 2011 VAT increase, scheduled to expire in 2017.
  - Noted large share of discretionary government consumption affords flexibility to cut expenditure over time.
  - Initiatives to improve tax administration:
    - Introduce a General Anti-Avoidance Rule.
    - Reduce the limit on cash transactions between companies.
    - Introduce an integrated IT system to track VAT invoices.
  - Increasing the PIT tax-free allowance could be part of a more comprehensive income tax reform, with lost revenues offset by a more progressive tax regime.
  - Authorities were more optimistic than staff on timing and magnitude of expected revenue gains from tax administration improvements and on macroeconomic assumptions.
  - On retirement age reversal: concurred it could reduce the pension replacement rate but noted that adjusting parametric conditions for entitlement to retirement would mitigate this impact.

### Maintaining financial stability
- Banking sector fundamentals:
  - Banking sector remains well-capitalized amid weakening profitability.
  - Profitability has declined markedly during the past year amid narrowing interest margins and other costs, including additional contributions to the Bank Guarantee Fund (BFG).
  - Capital adequacy remained robust (above 15 percent in the fourth quarter of 2015).
  - Liquidity sufficient:
    - Liquid assets to total assets of more than 22 percent in the first quarter of this year.
    - Declining loans-to-deposits ratio.
    - Almost all banks complying with the Liquidity Coverage Ratio (LCR) requirement.
  - Reliance on foreign funding manageable.
  - NPLs are gradually coming down, though still high in some segments.
  - Credit standards broadly unchanged, except for housing loans where standards tightened.
- Risks from new policies:
  - NBP assessment: sector’s resilience to shocks has weakened substantially on the back of new fiscal measures imposed on banks.
  - Bank tax impacts (NBP estimates):
    - Bank tax, combined with regulatory costs, could increase the share of banks with negative net earnings from 2 to 22 percent of banking sector assets.
    - Could reduce net earnings of the commercial banking sector by 60 percent.
    - Potential consequences: slow credit expansion and adverse macro-financial implications.

### Bank tax: macro-financial implications (Box 4 summary)
- February 2016 bank asset tax:
  - Tax levied on total assets (less PLN 4 billion, own funds, and purchased sovereign debt) at a monthly rate (text truncated in source).
- Staff analysis conclusions:
  - The tax will likely significantly reduce bank profits with negative implications for credit and economic growth.
  - Negative economic effects can be mitigated through better design of the tax.

*Source: IMF staff and authorities’ discussions as presented in the IMF Country Report excerpt.*

### 0.0366 percent. In turn, 2016 tax outlays paid by banks

### _cr16210 - 0.0366 percent. In turn, 2016 tax outlays paid by banks

### Bank asset tax: empirical findings and macroeconomic impact
- 2016 tax outlays paid by banks could double relative to 2015.
- Empirical analysis suggests that the tax, combined with recent regulatory costs on banks (including increased contributions to the BFG and contributions to finance the Borrower Support Fund), could reduce bank profitability by 30 percent relative to 2015.
- Reduced profitability could reduce credit growth by 3 to 4 percentage points relative to a no-tax scenario.
- Lower credit growth would reduce consumption and investment and ultimately lower GDP growth by up to 0.4 percentage points by end-2016.
- The tax creates incentives for banks to increase holdings of government bonds, potentially crowding out private sector credit and intensifying adverse feedback loops between the sovereign and banks if public finances come under pressure.
- Banks could shift away from corporate to more risky consumer lending or to less-regulated non-banks; corporates may obtain loans from other segments such as leasing companies.
- Incentives to limit asset size at the end of the month when the tax is levied could unduly constrain short-term liquidity in the interbank market.

### Mitigation via alternative tax design: Financial Activities Tax (FAT)
- A Financial Activities Tax (FAT) would be less distortionary for the private sector and the economy in general than a tax on assets.
- A FAT, levied on the sum of profits and remuneration of financial institutions, is similar to a value added tax (VAT) from which the financial sector is currently exempt.
- Unlike the current bank asset tax, a FAT does not distort the structure of activities undertaken by financial institutions, as the tax depends on the level of profit, and not on how profits are generated.
- For example, a 10–13 percent levy on bank profits and remunerations could generate the same revenue of PLN 4 billion expected from the current bank asset tax.
- Country examples cited:
  - Israel levies a 17 percent (standard VAT rate) FAT.
  - Iceland levies a 5.5 percent tax on financial institutions’ wages and a 6 percent tax on profits above ISK 1 billion.
  - Denmark levies a 10.5 percent tax on wages.

### Quantitative impact analyses (selected results presented)
- Private Credit Growth: Impact Analysis (Percent, year-on-year)
  - Estimated reduction in private credit growth of 3 to 4 percentage points relative to a no-tax scenario (see VAR-based analysis notes).
- Bank Profitability: Impact Analysis (Change in net income relative to average assets, percent)
  - Impact assessed via System GMM regression; combined tax and regulatory costs could reduce profitability by 30 percent relative to 2015.
- Real GDP Growth: Impact Analysis (Percent, year-on-year)
  - OLS regression linking real GDP growth to lagged real GDP growth and lagged credit growth suggests GDP growth could be up to 0.4 percentage points lower by end-2016.

### Financial sector vulnerabilities and related costs
- Foreign-currency (FX) mortgages:
  - Outstanding stock of FX mortgages accounted for about 9¼ percent of 2015 GDP at end-March 2016.
  - KNF’s assessment: blanket conversion could cost the banking sector PLN 67 billion (3.7 percent of 2015 GDP) — close to six times the value of 2015 banking sector profits — and result in several bank bankruptcies and associated fiscal costs from deposit guarantees.
  - Several alternative options are being discussed; total cost remains unclear.
- Credit unions and cooperative banks:
  - Restructuring of non-systemic credit union sector continued (assets corresponding to less than 1 percent of banking sector assets).
  - Bankruptcy of a cooperative bank in fall 2015 added costs to banks of PLN 2 billion.
- Additional costs on banks include higher contributions to the BFG, expected to reduce bank profits.

### Policy recommendations and authorities’ views
- Staff recommendations:
  - Replace or redesign the bank asset tax with a FAT on profits and remuneration to be less distortionary.
  - Avoid blanket conversion schemes for FX mortgages; focus on case-by-case restructuring taking into account debtor distress and payment ability.
  - Allow the new temporary payment relief scheme for zloty and FX mortgages time to work before considering other measures.
  - Continue restricting new FX loans to individuals with adequate earnings in the corresponding currency and enforce recent consumer protection amendments (effective April 2016) to prevent misselling.
  - Continue restructuring the credit union segment and implement the new bank resolution framework expeditiously to ensure state-of-the-art resolution tools.
- Authorities’ views:
  - NBP shared many of staff’s concerns about stability risks.
  - MoF was more optimistic regarding FX mortgage conversion and the effects of the bank tax, but acknowledged liquidity squeezes toward month-end and increased holdings of government bonds; noted no notable shift toward riskier lending so far and intends to evaluate and adjust the bank tax if necessary.
  - President’s office acknowledged risks of a costly blanket FX conversion and indicated plans to preserve financial stability while helping FX mortgage holders.

### Financial sector framework and other regulatory measures
- Macroprudential framework completed to allow early detection and prevention of systemic risk.
- Law on covered bonds adopted to support stable funding over time.
- New bank resolution framework progressing in accordance with the European Bank Recovery and Resolution Directive (BRRD).
- Recent regulation on non-banks limited non-interest costs of loans and constrained the practice of rolling over credit to prevent escalating debts, particularly for consumer lending.

### Structural reforms for inclusive growth (summary)
- Recent reforms focused on reducing labor market duality and improving business climate:
  - Temporary job contracts better aligned with regular contracts (shorter maximum duration and higher social security contributions).
  - Draft law to introduce an hourly minimum wage for civil law contracts starting next year.
  - Corporate insolvency law adopted to promote restructuring of viable firms.
  - Tax code changes favoring taxpayers in cases of legal uncertainty and tax assistance for start-ups.
- Going forward:
  - Promote regional growth by addressing productivity gaps in the east through improved education, reduced skill mismatches, and infrastructure investment to attract FDI.
  - Phase out special tax and pension regimes for farmers to facilitate labor reallocation and scale-up of farms.
  - Increase access to vocational training, promote innovation via targeted tax incentives for start-ups, and better utilize EU funds.
  - Boost female labor force participation via measures such as redirecting family cash benefits toward childcare and preschool education; maintain retirement age increases envisaged by 2013 pension reforms.

*Source: _cr16210 - 0.0366 percent. In turn, 2016 tax outlays paid by banks*

### Box 6. Poland: Female Labor Force Participation (concluded)

### Box 6. Poland: Female Labor Force Participation (concluded)

### Patterns of female labor force participation and gender gap
- Polish women work significantly less than Polish men and less than women in peer economies.
- Female Labor Force Participation and the Gender Gap, 2014 (Based on women and men aged 15 to 64): chart data points shown for country codes (AUT BEL CZE DNK EST FIN FRA DEU GRC HUN ISL IRL ITA LUX NLD NOR POL PRT SVK SVN ESP SWE CHE GBR OECD LVA LTU EU15 BGR HRV CYP MKD MLT ROU RUS NMS7) with axes labelled:
  - Female labor force participation rate (percent): range shown from 5 to 95 (tick labels 05 10 15 20 25 30).
  - Gender gap (percentage points).
- Labor Force Participation Among Women Aged 15-64, 2000–2014:
  - Time series labels include years 2000 2002 2004 2006 2008 2010 2012 2014.
  - Lines shown for Poland, NMS7, EU15.
  - Vertical axis tick labels include 54 56 58 60 62 64 66 68 70.
- Poland: Labor Force Participation by Age, 2014 (Percent of population in the given age group):
  - Age groups: 15-64, 25-54, 15-19, 20-24, 25-29, 30-34, 35-39, 40-44, 45-49, 50-54, 55-59, 60-64, 65+.
  - Separate series for Women and Men with percent axis from 0 to 100.
- The gender gap is notable among women older than 55 but narrows with the level of education.
- Poland: Labor Force Participation by Level of Education, 2014 (Percent of population in the given group):
  - Education groups: Less than primary, primary, and lower secondary education; Upper secondary and post-secondary non-tertiary education; Tertiary education.
  - Separate series for Women and Men with percent axis from 0 to 100.

### Fertility, cash benefits, and childcare spending (cross-country comparisons)
- Fertility and Family Allowances (Fertility rate, 2012 versus public spending on cash benefits for families, 2011 (percent of GDP)):
  - Scatter plot includes country codes (AUS AUT BEL CHL CZE DNK EST FIN FRA DEU GRC HUN ISL IRL ISR ITA JPN KOR LUX MEX NLD NZL NOR POL PRT SVK SVN ESP SWE GBR USA).
  - Regression line: y = 0.0656x + 1.6138
  - R² = 0.0172
  - Axes: Fertility rate, 2012 (range 1.0 to 3.5) and Public spending on cash benefits for families, 2011 (percent of GDP) (range 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5).
  - Interpretation: Cash benefits do not appear associated with fertility.
- Fertility and Childcare Expenditure (Fertility rate, 2012 versus public spending on childcare and preschool, 2011 (percent of GDP)):
  - Same country set as above.
  - Regression line: y = 0.3555x + 1.4384
  - R² = 0.1735
  - Axes: Fertility rate, 2012 (range 1.0 to 3.5) and Public spending on childcare and preschool, 2011 (percent of GDP) (range 0.0 0.5 1.0 1.5 2.0 2.5).
  - Interpretation: Childcare and fertility are positively associated.

### Authorities’ views (excerpts)
- Authorities highlighted addressing structural challenges as vital to their reform agenda.
- The Responsible Development Plan identifies barriers to growth, including the need to counteract adverse demographic trends and to promote inclusive regional growth; it envisages promoting innovation, improving the business environment, and improving the quality of public services.
- EU funds are an important financing source; authorities envisage increasing private sector involvement to ensure funds are invested in viable projects.
- The new child benefits program (Family 500+) is expected to:
  - increase fertility to counteract negative demographic prospects,
  - reduce income inequality and child poverty,
  - help cover some of the cost of childcare, thereby having positive effects on female labor force participation.
- Authorities voiced commitment to continue increasing access to childcare facilities.

### Staff appraisal — macroeconomic assessment and risks
- Macro stance and outlook:
  - Poland is enjoying a strong economic expansion.
  - Growth reached 3.6 percent in 2015 driven by robust domestic demand, supported by healthy wage and credit expansion.
  - Unemployment has come down rapidly and the economy is operating at full capacity.
  - External factors have kept headline inflation significantly below the target but these are expected to dissipate over time.
  - Despite some weakening in the first quarter, growth is projected to remain strong, opening a positive output gap next year.
  - Inflation should gradually strengthen and enter the target band by end-2017.
- Downside risks to the outlook have intensified:
  - External risks: a marked slowdown in emerging markets with financial market volatility, and a protracted growth slowdown in the euro area that could spill over to Poland through trade and financial linkages.
  - Domestic risks: recent policy initiatives could negatively affect growth prospects; weakening of institutions and policies or fiscal slippages could worsen investor sentiment and hinder economic expansion.
  - Long-term challenges: a rapidly aging population poses important challenges to potential growth and fiscal sustainability.
  - Regional disparities: enduring income disparities between Poland’s prosperous west and the lagging east could undermine the quality of growth.
- Policy stance recommendations:
  - Continued monetary accommodation should go hand-in-hand with gradual fiscal consolidation, given the favorable cyclical position alongside weak inflation.
  - Safeguarding financial sector stability and strong institutions is essential.
  - Structural reforms are key to sustainable convergence to western European income levels.
  - The FCL arrangement with the IMF provides added insurance against external shocks.

### Staff appraisal — policy recommendations (specific)
- Monetary policy:
  - The current accommodative monetary policy stance is appropriate.
  - Although the recent period of deflation does not appear to have had adverse spillovers to the real economy, getting inflation back to the target is important to ensure that inflation expectations do not become unanchored.
  - Further interest rate cuts should be considered in the event of a sharp growth slowdown or if inflation expectations were to disappoint.
- Fiscal policy:
  - Gradual fiscal consolidation should resume next year.
  - The implementation of election promises has turned the fiscal stance procyclical, potentially pushing the deficit above 3 percent of GDP in 2017.
  - Staff recommends resuming deficit reduction in 2017 underpinned by credible growth-friendly measures to take advantage of the favorable cyclical position.
  - Suggested measures include rationalizing discretionary government consumption and unifying multiple VAT rates.
  - The distortionary tax on bank assets should be replaced with a more growth-friendly tax on bank profits and remuneration to avoid adverse effects on credit and growth.
  - The planned reversal of the 2013 retirement age increases is ill-advised and should be reconsidered; such a step would reduce the pension replacement rate, increasing the risk of old-age poverty and adversely impacting the budget.
- Financial sector stability:
  - Maintaining financial sector stability is essential.
  - While banking sector capital ratios are healthy, narrowing interest margins have reduced profitability.
  - The bank tax may further reduce profits, potentially spilling over to the real economy through reduced credit expansion.
  - Blanket conversion schemes for foreign-currency mortgages should be avoided as they risk undermining financial stability and economic activity; instead, focus on supporting distressed mortgage holders on a case-by-case basis.
  - A prompt completion of the bank resolution framework would ensure the availability of modern resolution tools.
- Structural reforms to address demographic challenges and regional disparities:
  - Increase labor force participation, particularly of women and seniors, and boost productivity.
  - Authorities’ intention to move up the value-added chain by increasing access to vocational training and promoting innovation is welcomed.
  - Redirecting family cash benefits toward childcare and preschool education would help boost female labor force participation.
  - Maintaining the retirement age increases envisaged by the 2013 pension reforms would encourage participation of seniors.
  - Reducing regional disparities requires improving educational attainment in the east, reducing skill mismatches, and investing in infrastructure to attract FDI to poorer regions.

*Source: IMF staff and OECD data as presented in Box 6. Poland: Female Labor Force Participation (concluded) in the provided material.*

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

### _cr16210 - 40. It is recommended that the next Article IV consultation be held on the standard 12-month cycle.

### Financial market developments (2011–16)
- Exchange rate (Euro per national currency, Jan. 1, 2009 = 100): charts compare Hungary, Poland, Czech Rep. (figure summary; charts included in source).
- Implied volatility of exchange rate vs. Euro (1-month options contract, percent): series for Hungary, Poland, Czech Rep. (figure summary).
- Credit Default Swap Spreads (Basis points): series for Hungary, Poland, Czech Rep. (figure summary).
- Spreads over 10Y German bonds: Poland 10Y yield vs. Germany 10Y yield; spreads shown in basis points (figure summary).
- Warsaw Stock Exchange indices: WIG total return index, WIG20 index, realized volatility (30 days) (figure summary).

### Recent economic and labor market developments (2011–16)
- Trade volume (year-on-year percent change): exports and imports series; nominal effective rate shown (figure summary).
- Retail sales (year-on-year percent change): retail sales and consumer confidence (percent balance) series (figure summary).
- Industrial production (yoy percent change) and manufacturing sentiment (business sentiment indicator) series (figure summary).
- Contributions to real GDP growth (percentage points, year-on-year): private consumption, public consumption, fixed investment, inventory, net exports; GDP growth series (figure summary).
- Enterprise sector employment and wages (year-on-year percent change): employment and nominal wages (rhs) series (figure summary).
- Unemployment rate (percent, seasonally adjusted): Registered and Harmonized (labor force survey) series (figure summary).
- Source captions: Haver Analytics, Poland Central Statistical Office, IMF staff calculations.

### Inflation developments (2004–16)
- CPI inflation (year-on-year percent changes): CPI and core CPI (excl. food and energy); Target ±1 pp tolerance bands (figure summary).
- Consumer price inflation contributions: electricity, gas, other fuels; fuel; food; core inflation (percentage point contribution to overall yoy inflation) (figure summary).
- CPI inflation (annualized percent change, 3m-on-3m, sa): CPI and core CPI (excl. food and energy) (figure summary).
- Inflation gap (inflation - 2.5 percent) and output gap (lagged two quarters): series 2004–2016 (figure summary).
- Inflation expectations, one year ahead and longer-term (consensus forecasts and survey of professional forecasters): series with Target ±1 ppt tolerance bands (figure summary).
- Key qualitative notes from figures:
  - "Headline and core inflation are well below the target... as momentum remains weak."
  - "Fuel price inflation is particularly weak."
  - "Near-term inflation expectations are below the target band... but longer-term expectations remain within the tolerance band."
  - "Inflation has decoupled from output gap developments."

### Balance of payments and external sector (2011–16; transaction basis 2013–21)
- Current account balance (percent of GDP, four-quarter rolling sum): series showing improvement attributed to lower oil prices (figure summary).
- Current account financing: financed primarily by FDI and EU transfers; portfolio outflows weakening (figure summary).
- International investment position (percent of GDP): net assets and liabilities series; liabilities by sector (billions of US dollars) (figure summary).
- Financial account balance (net outflows, percent of GDP, four-quarter rolling sum): other investments, portfolio, FDI, financial account series (figure summary).
- Selected Table 2 highlights (Balance of Payments on Transaction Basis, Millions of U.S. dollars, 2013–21):
  - Current account balance: 2013 -6,744; 2014 -11,125; 2015 -1,117; 2016 -3,228; 2017 -6,596; 2018 -10,433; 2019 -13,610; 2020 -15,676; 2021 -17,449.
  - Current account percent of GDP: 2013 -1.3; 2014 -2.0; 2015 -0.2; 2016 -0.7; 2017 -1.3; 2018 -2.0; 2019 -2.5; 2020 -2.7; 2021 -2.8.
  - Trade balance (billions USD): 2013 9,692; 2014 7,110; 2015 13,277; 2016 14,140; 2017 10,675; 2018 7,258; 2019 4,750; 2020 3,167; 2021 1,982.
  - Balance on Goods (millions USD): 2013 -453; 2014 -4,291; 2015 2,376; 2016 2,945; 2017 -661; 2018 -4,211; 2019 -7,035; 2020 -9,085; 2021 -10,830.
  - Balance on Services (millions USD): 2013 10,145; 2014 11,401; 2015 10,901; 2016 11,195; 2017 11,336; 2018 11,469; 2019 11,785; 2020 12,252; 2021 12,812.
  - Primary income balance: 2013 -15,896; 2014 -17,661; 2015 -13,414; 2016 -16,326; 2017 -16,896; 2018 -17,280; 2019 -18,192; 2020 -18,673; 2021 -19,378.
  - Capital and financial account balance: 2013 5,947; 2014 8,760; 2015 19,810; 2016 20,248; 2017 17,442; 2018 15,316; 2019 7,582; 2020 5,373; 2021 2,685.
  - Official reserves (million USD): 2013 106,220; 2014 100,438; 2015 94,922; 2016 106,864; 2017 113,731; 2018 122,221; 2019 122,468; 2020 125,396; 2021 128,539.

### Monetary policy developments (2011–16)
- Policy rates (end of period, percent): 3-month Wibid, Reference rate, Deposit rate, Lombard rate series (figure summary).
- Real policy rate: ex-post and ex-ante real policy rates (figure summary).
- Lending and deposit rates (percent): lending margin, lending rate, deposit rate series (figure summary).
- Cross-country comparisons (Jan-14 to Jan-16): ex-post real policy rates, nominal policy rates, risk-adjusted ex-post real policy rates for Poland, Czech Rep., Hungary, Romania, Euro area (figure summary).
- Qualitative notes from figures:
  - "Policy rates remain at historical lows,......reducing lending rates."
  - "However, the real policy rate remains high,... If needed, there is nominal room to ease further."
  - "Including relative to several peers,... and when adjusting for risk."

### Banking sector capital, asset quality, and profitability (2011–16)
- Capital adequacy: CAR and CAR (CRD IV) series; capital adequacy remains high (figure summary).
- Non-Performing Loans (NPLs) by sector (percent of loans): total, households, corporates series; NPLs slowly declining but remain high for SMEs and consumer loans (figure summary).
- Nonfinancial sector impaired loans by segment (billion zloty): large firms, SMEs, other household loans, consumer loans, housing (figure summary).
- Banking sector net profits (billion zloty) and CAR (percent): monthly net profits and capital adequacy ratio series; profitability has weakened (figure summary).
- Foreign-currency denominated housing loans (percent of total housing loans outstanding): series showing decline (figure summary).
- Banking sector profits: profits (12-month moving sum) and return on assets (percent) series (figure summary).

### Credit growth and banking sector funding (2011–16)
- Private sector credit growth (year-on-year percent change): total, corporates, household mortgages, consumer credit series (figure summary).
  - "Credit continues to expand, though with some recent weakening."
- Deposit growth (year-on-year percent change): total, nonfinancial corporations, households series (figure summary).
  - "Deposits remain an important funding source... by both households and nonfinancial corporations."
- Banking sector on-balance sheet open FX position (percent of banking sector assets; percent of GDP): series show FX hedging needs remain below recent levels (figure summary).
- Contributions to private sector credit growth (percentage points): net foreign assets, net claim on government, deposit growth, others, claims on private sector series (figure summary).
- External liabilities and debt to parents: Polish banks' external liabilities to financial sector (billions of US$) and banking sector debt to parents (percent) series; external financial liabilities have declined (figure summary).

### Selected macroeconomic projections and indicators (Table 1: Selected Economic Indicators, 2013–21)
- GDP (change in percent, real GDP at constant 2010 prices): 2013 1.3; 2014 3.3; 2015 3.6; 2016 3.5; 2017 3.7; 2018 3.4; 2019 3.2; 2020 3.1; 2021 3.1.
- Domestic demand: 2013 -0.7; 2014 5.0; 2015 3.4; 2016 3.9; 2017 4.0; 2018 3.8; 2019 3.5; 2020 3.2; 2021 3.2.
- Private consumption growth: 2013 0.2; 2014 2.4; 2015 3.0; 2016 3.8; 2017 4.1; 2018 3.9; 2019 3.5; 2020 3.1; 2021 3.1.
- CPI inflation (average, percent): 2013 0.9; 2014 0.0; 2015 -0.9; 2016 -0.7; 2017 1.1; 2018 1.9; 2019 2.4; 2020 2.5; 2021 2.5.
- Unemployment rate (average, LFS, percent): 2013 10.3; 2014 9.0; 2015 7.5; 2016 6.4; 2017 6.2; 2018 6.3; 2019 6.3; 2020 6.4; 2021 6.5.
- Current account balance (transactions, billion U.S. dollars): 2013 -6.7; 2014 -11.1; 2015 -1.1; 2016 -3.2; 2017 -6.6; 2018 -10.4; 2019 -13.6; 2020 -15.7; 2021 -17.4.
- Current account percent of GDP: 2013 -1.3; 2014 -2.0; 2015 -0.2; 2016 -0.7; 2017 -1.3; 2018 -2.0; 2019 -2.5; 2020 -2.7; 2021 -2.8.
- Official reserves (billion U.S. dollars): 2013 106.2; 2014 100.4; 2015 94.9; 2016 106.9; 2017 113.7; 2018 122.2; 2019 122.5; 2020 125.4; 2021 128.5.
- Total external debt (billion U.S. dollars): 2013 384.1; 2014 354.7; 2015 328.4; 2016 330.9; 2017 332.1; 2018 335.1; 2019 334.9; 2020 337.7; 2021 341.2.
- Exchange rate regime: Freely floating.
- Policy Rate (percent, NBP Reference Rate (avg). For 2016, as of June 2): 2013 2.9; 2014 2.4; 2015 1.6; 2016 1.5.

### Monetary accounts and banking sector monetary aggregates (Table 3, 2010–16)
- Broad money (M3, billions of zlotys): 2010 784; 2011 882; 2012 921; 2013 979; 2014 1,059; 2015 1,155; 2016 Proj. 1,227.
- Base money (billions of zlotys): 2010 140; 2011 138; 2012 167; 2013 164; 2014 192; 2015 212; 2016 Proj. 226.
- Claims on private sector (billions of zlotys, consolidated banking system): 2010 789; 2011 911; 2012 936; 2013 968; 2014 1,052; 2015 1,115; 2016 1,167.
- Deposits (billions of zlotys): 2010 687; 2011 771; 2012 810; 2013 857; 2014 924; 2015 1,001; 2016 1,062.
- Memorandum growth rates (percent change from end of previous year): Base money 2016 Proj. 6.6; Broad money (M3) 2016 Proj. 6.2; Deposit growth 2016 Proj. 6.1; Claims on private sector 2016 Proj. 4.6.

### Financial soundness indicators (Table 4, 2008–2016 Q1)
- Regulatory capital to risk-weighted assets (percent): 2008 11.1; 2009 13.3; 2010 13.9; 2011 13.1; 2012 14.8; 2013 15.7; 2014 14.7; 2015 16.0; 2016Q1 data not available in table for all series.
- NPLs to gross loans (nonfinancial sector, percent): 2008 4.4; 2009 7.9; 2010 8.8; 2011 8.2; 2012 8.8; 2013 8.5; 2014 8.1; 2015 7.5; 2016Q1 7.4.
- Provisioning coverage for nonperforming loans (percent): 2008 74.3; 2009 58.9; 2010 54.6; 2011 55.0; 2012 54.3; 2013 55.0; 2014 54.8; 2015 54.4; 2016Q1 54.8.
- Return on average assets (after tax, percent): 2008 1.5; 2009 0.8; 2010 1.0; 2011 1.3; 2012 1.2; 2013 1.1; 2014 1.1; 2015 0.8; 2016Q1 0.8.
- Loans to deposits (percent): 2008 112.6; 2009 109.2; 2010 114.5; 2011 119.8; 2012 117.7; 2013 115.7; 2014 112.9; 2015 112.1; 2016Q1 108.8.

### General government operations and fiscal balances (Tables 5–6)
- General government revenue (percent of GDP): 2013 38.4; 2014 38.9; 2015 38.9; 2016 39.2; 2017 39.0; 2018 39.1; 2019 39.2; 2020 39.2; 2021 39.2.
- General government expenditures (percent of GDP): 2013 42.4; 2014 42.2; 2015 41.5; 2016 41.9; 2017 42.1; 2018 41.9; 2019 41.7; 2020 41.5; 2021 41.3.
- General government net lending/borrowing (percent of GDP): 2013 -4.0; 2014 -3.3; 2015 -2.6; 2016 -2.8; 2017 -3.1; 2018 -2.8; 2019 -2.5; 2020 -2.3; 2021 -2.1.
- General government debt (percent of GDP): 2013 56.0; 2014 50.5; 2015 51.3; 2016 51.9; 2017 52.9; 2018 53.2; 2019 52.8; 2020 52.3; 2021 51.6.
- Table 6 (General Government Financial Balance Sheets, millions of zloty) contains detailed opening balances, transactions, and other economic flows for 2015–21 (figure summary; includes net financial worth, financial assets, liabilities, memorandum items).

### FSAP 2013 recommendations and status (Table 7)
- Addressing impaired loans:
  - Recommendations: intensify oversight of credit risk management and restructuring; standardize and enhance transparency of bank accounting practices; standardize debt-to-income (DTI) ratio calculation.
  - Status: KNF continued oversight; follow-up on inspections and AQR; all 15 banks in AQR requested to provide quantitative impact information; KNF found AQR had significant measurable impact on impairment losses.
- Strengthening banking supervision:
  - Recommendations: expand KNF scope to issue legally binding prudential regulations; allow KNF Board to delegate decisions; increase independence and governance; increase flexibility for budgetary/staff resources and analytical capabilities.
  - Status: Constitutional constraints prevent KNF issuing legally binding general acts (regulations); KNF issues recommendations specifying how banks should mitigate risk.
- Strengthening credit unions (SKOK):
  - Recommendations: eliminate dual supervision; require solvency ratio of 8 percent in 5 years; clarify stabilization fund governance; develop SKOK regulations and accounting; capital rehabilitation for weak SKOKs.
  - Status: Dual supervision solved; KNF sole supervisor; 33 of 42 credit unions obliged to prepare capital rehabilitation plans; restructuring included bankruptcy and take-overs; draft bank resolution framework awaiting president’s signature; accounting regulation for SKOKs effective Jan. 1, 2015.
- Macroprudential policy:
  - Recommendations: ensure macroprudential supervisory law provides SRB independence with leading role for NBP; accountability to Parliament; "act or explain" mechanism; develop clear macroprudential objectives distinct from monetary and microprudential policy.
  - Status: Act on macroprudential supervision and crisis management effective Nov. 1, 2015; Financial Stability Committee (FSC) designated macroprudential authority; FSC membership: Governor of NBP, Minister of Finance, Chairperson of KNF, President of BFG; FSC chaired by Governor of NBP for macroprudential supervision; FSC issues recommendations with "comply or explain" mechanism; FSC does not implement tools directly—member institutions implement; Chair obliged to present annual report to Parliament; Act sets macroprudential policy objective to strengthen financial system resilience supporting long-term sustainable growth.
- Bank resolution framework:
  - Recommendations: precedence of administrative powers over corporate insolvency; creditor claims hierarchy protect BFG claims; include Tier-1 capital trigger and link "public interest" trigger to financial stability.
  - Status: Draft law adopted by Sejm on May 20, 2016; adopted by parliament on June 10, currently awaiting president’s signature; draft covers FSAP issues (i), (ii), (iii).
- Deposit insurance system:
  - Recommendations: remove Polish Bank Association from BFG Council; ensure adequate funding and capacity; revise and introduce regulations; amend code of conduct to restrict employment in member institutions.
  - Status: Draft law on BFG adopted by Sejm on May 20, 2016; adopted by parliament on June 10, awaiting president’s signature; draft removes PBA from BFG Council; BFG expanding staff; proposed target levels of BFG funds above DGSD and BRRD requirements.
- Pension reform and capital markets:
  - Recommendations: allow lifecycle strategies in pension funds; benchmark pension fund performance; amend covered bond framework; adopt legal framework for mortgage securitization; strengthen enforcement of security interests and judicial decisions.
  - Status: Pension funds do not offer lifecycle strategies; assets to be transferred gradually to Social Security Fund starting 10 years before retirement to protect final saving period; pension fund performance measured against external benchmark; Act amending covered bonds and mortgage banks adopted July 2015, effective Jan. 1, 2016; tax changes effective Jan. 1, 2014 improved securitization economics for banks.

*Source: Republic of Poland — IMF staff report and accompanying figures and tables (excerpts from the provided PDF content)._

### Annex I. External Debt Sustainability Analysis

### Annex I. External Debt Sustainability Analysis

### Poland: External Debt Sustainability — Bound Tests, 2011–21
- Individual shocks are permanent one-half standard deviation shocks. Permanent 1/4 standard deviation shocks are applied to real interest rate, growth rate, and current account balance. One-time real depreciation of 30 percent occurs in 2016.
- Interest rate shock (Percent): chart labels show baseline at 55 and interest-rate-shock path at 59 in the figure axis context for 2011–2021.
- Growth shock (Percent per year): historical, baseline, and scenario averages reported as:
  - Baseline: 2.4
  - Scenario: 2.7
  - Historical: 2.3
  - Baseline: 3.3
  - Scenario: 2.4
  - Historical: 3.8
  - Baseline: -0.8
  - Scenario: -2.0
  - Historical: -2.5
- Non-interest current account shock (Percent of GDP): gross financing need under baseline shown on right scale in the figure; combined shock scenarios depicted for 2011–2021.
- Real depreciation shock: 30% depreciation one-time shock illustrated for 2016.

### External Debt Sustainability Framework, 2013–21 (selected lines from framework table)
- 1 External debt: 73.3, 65.1, 69.2, 69.7, 67.4, 64.3, 60.7, 58.8, 55.4
- 2 Change in external debt: -0.4, -8.2, 4.1, 0.5, -1.7, -3.1, -3.6, -2.9, -2.4
- 3 Identified external debt-creating flows (4+8+9): -2.2, -3.3, 1.3, -2.4, -3.6, -3.5, -3.0, -2.6, -2.3
- 4 Current account deficit, excluding interest payments: -0.3, 0.4, -1.4, -0.7, -0.1, 0.4, 0.7, 0.9, 2.1
- 5 Deficit in balance of goods and services: -90.8, -93.7, -95.9, -97.5, -101.6, -103.2, -104.4, -105.1, -106.1
- 6 Exports: 46.3, 47.5, 49.3, 50.2, 51.9, 52.3, 52.7, 52.8, 53.2
- 7 Imports: -44.5, -46.2, -46.5, -47.3, -49.7, -50.9, -51.8, -52.3, -52.9
- 8 Net non-debt creating capital inflows (negative): -1.3, -2.6, -1.6, -1.6, -2.3, -2.1, -2.1, -2.1, -2.1
- 9 Automatic debt dynamics 1/: -0.6, -1.1, 4.3, -0.2, -1.3, -1.9, -1.6, -1.5, -2.3
- 10 Contribution from nominal interest rate: 1.6, 1.6, 1.6, 1.3, 1.4, 1.6, 1.7, 1.7, 0.7
- 11 Contribution from real GDP growth: -0.9, -2.3, -2.7, -2.3, -2.5, -2.2, -1.9, -1.8, -1.7
- 12 Contribution from price and exchange rate changes 2/: -1.3, -0.4, 5.4, 0.8, -0.2, -1.2, -1.4, -1.4, -1.3
- 13 Residual, incl. change in gross foreign assets (2-3): 1.8, -4.8, 2.8, 2.9, 1.9, 0.4, -0.6, -0.3, -0.1
- External debt-to-exports ratio (in percent): 158.2, 137.1, 140.2, 138.7, 129.9, 123.0, 115.3, 109.4, 104.1
- Gross external financing need (in billions of US dollars) 3/: 133.9, 123.8, 101.8, 109.1, 110.6, 110.3, 115.8, 113.6, 114.5
- Gross external financing need (in percent of GDP): 25.5, 22.7, 21.4, 10-Year, 10-Year, 23.0, 22.5, 21.2, 21.0, 19.4, 18.6 (table shows a mix of decade labels and numbers)

### Key Macroeconomic Assumptions (Historical, Average, Deviation entries)
- Real GDP growth (in percent): 1.3, 3.3, 3.6, 3.8, 1.8, 3.5, 3.7, 3.4, 3.2, 3.1, 3.1
- Exchange rate appreciation (US dollar value of local currency, percent): 3.0, 0.1, -16.3, 0.4, 12.0, -3.9, -0.5, 0.6, 0.4, 0.5, 0.0
- GDP deflator in US dollars (change in percent): 3.4, 0.6, -15.9, 2.7, 12.6, -3.4, 0.0, 2.3, 2.6, 2.8, 2.3
- Nominal external interest rate (in percent): 2.3, 2.3, 2.2, 2.3, 0.6, 2.0, 2.2, 2.5, 2.8, 3.0, 1.3
- Growth of exports (US dollar terms, in percent): 9.2, 6.6, -9.5, 9.3, 15.4, 1.9, 7.2, 6.5, 6.6, 6.3, 6.2
- Growth of imports (US dollar terms, in percent): 3.5, 8.0, -12.2, 9.0, 19.3, 1.6, 9.2, 8.2, 7.7, 7.0, 6.7
- Current account balance, excluding interest payments: 0.3, -0.4, 1.4, -2.5, 2.3, 0.7, 0.1, -0.4, -0.7, -0.9, -2.1
- Net non-debt creating capital inflows: 1.3, 2.6, 1.6, 2.5, 0.8, 1.6, 2.3, 2.1, 2.1, 2.1, 2.1

### Alternative Scenarios and Bound Tests (selected results)
- A. Alternative Scenarios (A1. Key variables at historical averages in 2016-2021 4/): 72.7, 73.5, 71.3, 68.0, 65.1, 62.3, -5.0 (table row entries)
- B. Bound Tests:
  - B1. Nominal interest rate at baseline plus one-half standard deviation: 72.7, 71.4, 68.2, 64.5, 61.4, 58.8, -4.5
  - B2. Real GDP growth at baseline minus one-half standard deviations: 72.7, 71.6, 69.6, 66.3, 63.5, 62.2, -3.2
  - B3. Non-interest current account at baseline minus one-half standard deviations: 72.7, 72.0, 71.2, 68.4, 66.2, 64.3, -4.8
  - B4. Combination of B1-B3 using 1/4 standard deviation shocks: 72.7, 72.0, 71.1, 68.2, 65.9, 63.9, -4.4
  - B5. One time 30 percent real depreciation in 2017: 72.7, 80.6, 78.0, 73.0, 68.6, 64.5, -5.6

- Definitions and methodological notes:
  - 1/ Derived formula for automatic debt dynamics uses r = nominal effective interest rate on external debt; g = real GDP growth rate; e = nominal appreciation; a = share of domestic-currency denominated 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 short-term and medium- and long-term debt.
  - 4/ Key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.
  - 5/ 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.

### Annex II. Public Sector Debt Sustainability Analysis — Summary of Findings and Stress Tests
- Public debt level and trajectory:
  - Public debt was 51.3 percent of GDP at end-2015.
  - Debt is projected to increase by 1.9 percentage points of GDP between 2015 and 2018, then decline by 1.6 percentage points to 51.6 percent of GDP by 2021.
- Drivers of debt dynamics:
  - Primary deficit initially increases and then declines by 2018.
  - Favorable differential between projected GDP growth and the real interest rate contributes to decreasing debt levels.
- GDP growth assumptions and realism:
  - Projections assume acceleration to 3.7 percent by 2017 and slowdown to 3.1 percent thereafter as output trends toward potential.
  - Output gap expected to close in the current year referenced.
- Fiscal adjustment and primary deficit:
  - Primary deficit expected to increase to 1.4 percent of GDP by 2017, then decline to 0.4 percent of GDP by 2021.
- Sovereign yields and market signals:
  - Effective interest rate on public debt: 6.6 percent in 2005, 5.9 percent in 2009, about 3.7 percent in 2015.
  - Projected effective interest rate: 3.5 percent in 2016 and similar in the medium term.
  - Yields on 10‒year bonds: increased by 25 basis points year-to-date to 3.2 percent.
  - Spreads of Polish euro-denominated bonds over 10‒year German bonds: 110 basis points.
  - CDS spreads: increased by 10 basis points year-to-date to 82 basis points.
- Maturity and rollover:
  - Average maturity of outstanding debt: 5.4 years.
  - Share of short-term debt in total government debt: under 1 percent as of May 2016.
  - 68 percent of gross borrowing requirements for 2016 pre-financed.
  - T-bill issuance resumed in January 2016 after no outstanding t-bills since August 2013.
- Investor composition and external debt shares:
  - Treasury securities held by domestic banks increased by almost 5 percent of GDP over January to March 2016, versus an increase of 1.3 percent over same period in 2015.
  - Share of foreign investors in domestic treasury market: decreased from 38 percent in January to 35 percent in March 2016.
  - Overall share of external debt in total public debt: about 57 percent as of Q4 2015.
  - Share of foreign currency debt in state debt: about 34 percent as of February 2016.
  - Baseline assumes gradual convergence toward ~30 percent foreign currency debt and ~50 percent external debt in total debt.
- DSA risk assessment highlights:
  - Risks associated with relatively large external financing requirements (about 22 percent of GDP in 2015).
  - Risk from share of public debt held by non-residents (about 57 percent at end-2015); U.S. investors comprise 25 percent of foreign investors.
- Fan-chart outcomes:
  - Debt-to-GDP ratio could drop below 50 percent by 2020 with a 25 percent probability.
  - Upper bands: debt-to-GDP could surpass 60 percent by 2020 with a 10 percent probability.
  - A more stringent exercise restricting upside shocks (200 bps to interest rates and 1 percent to GDP growth) increases probability of surpassing 60 percent in 2020 to 50 percent.
- Stress test scenarios (selected quantitative impacts):
  - Primary balance shock: deterioration in primary balance by 1 percentage point during 2016 pushes public debt-to-revenue ratio up to about 140 percent during 2018. Gross financing needs peak at about 10.4 percent of GDP in 2017 and converge to baseline by 2021.
  - Growth shock: drop in GDP growth by about 1.8 percentage points in two consecutive years (2017–18) relative to baseline, combined with a 0.5 percentage point drop in inflation and deterioration in the primary balance by 1.4 percent in 2017 and 0.6 percent in 2018 — public debt increases to about 58.4 percent of GDP in 2018, then trends downward to about 56.7 percent of GDP by 2021. Gross financing needs increase to about 11 percent of GDP during 2017–18, then converge to baseline.
  - Interest rate shock: permanent 250 bps increase in nominal interest rate starting in 2017 leads to an increase in the effective interest rate on debt by 45 bps in 2018 (compared to baseline) and gradual increases to 148 bps by 2021. Public debt increases by 1.9 percentage points relative to baseline by 2021.
  - Exchange rate shock: assumed depreciation of about 20 percent in 2017 (from 3.9 PLN/US$ to 4.7 PLN/US$) — gross public debt increases by 1 percentage point to 54 percent of GDP in 2018, then trends down to about 52.3 percent by 2021. Resilience reflects predominance of public debt in local currency.
  - Combined shock: public-debt-to-GDP ratio jumps (combined shock description continued in source).

*Source: IMF staff calculations.*

### 62.2 percent in 2017 and maintains that level until 2021. In turn, gross financing needs increase

### _cr16210 - 62.2 percent in 2017 and maintains that level until 2021. In turn, gross financing needs increase

### Debt profile and key projections
- Gross nominal public debt projections (Percent of GDP, As of June 08, 2016):
  - 2014: 50.2
  - 2015: 50.5
  - 2016: 51.3
  - 2017: 51.9
  - 2018: 52.9
  - 2019: 53.2
  - 2020: 52.8
  - 2021: 52.3
  - 2022: 51.6
- Public gross financing needs (in percent of GDP):
  - 2014: 13.7
  - 2015: 8.3
  - 2016: 7.8
  - 2017: 9.0
  - 2018: 9.5
  - 2019: 8.7
  - 2020: 8.7
  - 2021: 8.7
  - 2022: 7.8
  - 2023: 7.1
- Evolution of predictive densities of gross nominal public debt shown across percentiles (10th–90th) for 2014–2021, with baseline and symmetric/asymmetric distributions represented.
- Composition of public debt by maturity and currency displayed for 2005–2021 (medium and long-term vs. short-term; local currency-denominated vs. foreign currency-denominated).

### Baseline scenario assumptions and fiscal arithmetic
- Macro assumptions (Underlying Assumptions, in percent):
  - Real GDP growth: 2014: 3.9; 2015: 3.3; 2016: 3.6; 2017: 3.5; 2018: 3.7; 2019: 3.4; 2020: 3.2; 2021: 3.1; (additional rows for alternative scenarios included separately).
  - Inflation (GDP deflator): 2014: 2.7; 2015: 0.5; 2016: 0.4; 2017: 0.6; 2018: 0.5; 2019: 1.7; 2020: 2.1; 2021: 2.3; 2022: 2.4
  - Nominal GDP growth: 2014: 6.7; 2015: 3.8; 2016: 4.1; 2017: 4.1; 2018: 4.2; 2019: 5.2; 2020: 5.4; 2021: 5.4; 2022: 5.5
  - Effective interest rate (defined as interest payments divided by debt stock at end of previous year): 2014: 5.3; 2015: 3.6; 2016: 3.7; 2017: 3.5; 2018: 3.4; 2019: 3.4; 2020: 3.4; 2021: 3.4
- Fiscal flow decomposition (Percent of GDP, cumulative where indicated):
  - Change in gross public sector debt: 2014: 1.2; 2015: -5.5; 2016: 0.8; 2017: 0.7; 2018: 1.0; 2019: 0.3; 2020: -0.3; 2021: -0.5; 2022: -0.7; cumulative: 0.3
  - Identified debt-creating flows: 2014: 0.8; 2015: -4.9; 2016: 2.5; 2017: 0.5; 2018: 0.8; 2019: 0.0; 2020: -0.4; 2021: -0.6; 2022: -0.8; cumulative: -0.6
  - Primary deficit: 2014: 2.1; 2015: 1.4; 2016: 0.8; 2017: 1.0; 2018: 1.4; 2019: 1.1; 2020: 0.8; 2021: 0.6; 2022: 0.4; cumulative: 5.4
  - Primary (noninterest) revenue and grants (percent of GDP): 2014: 39.6; 2015: 38.9; 2016: 38.9; 2017: 39.2; 2018: 39.0; 2019: 39.1; 2020: 39.2; 2021: 39.2; 2022: 39.2; cumulative: 34.9
  - Primary (noninterest) expenditure (percent of GDP): 2014: 41.6; 2015: 40.2; 2016: 39.7; 2017: 40.2; 2018: 40.4; 2019: 40.2; 2020: 40.0; 2021: 39.8; 2022: 39.6; cumulative: 40.3
- Automatic debt dynamics (derived formula provided):
  - Automatic debt dynamics contributions: 2014: -0.5; 2015: 2.8; 2016: 1.7; 2017: -0.3; 2018: -0.4; 2019: -0.9; 2020: -1.0; 2021: -1.0; 2022: -1.1; cumulative: -4.7
  - Interest rate/growth differential: 2014: -0.6; 2015: -0.1; 2016: -0.2; 2017: -0.3; 2018: -0.4; 2019: -0.9; 2020: -1.0; 2021: -1.0; 2022: -1.1; cumulative: -4.7
  - Of which: real interest rate: 2014: 1.2; 2015: 1.7; 2016: 1.6; 2017: 1.4; 2018: 1.4; 2019: 0.8; 2020: 0.6; 2021: 0.5; 2022: 0.5; cumulative: 5.2
  - Of which: real GDP growth: 2014: -1.7; 2015: -1.8; 2016: -1.8; 2017: -1.7; 2018: -1.8; 2019: -1.7; 2020: -1.6; 2021: -1.5; 2022: -1.5; cumulative: -10.0
- Other identified debt-creating flows and liabilities not included in debt (Percent of GDP):
  - Other identified debt-creating flows: 2014: -0.7; 2015: -9.1; 2016: 0.0; 2017: -0.2; 2018: -0.2; 2019: -0.2; 2020: -0.2; 2021: -0.2; 2022: -0.2; cumulative: -1.2
  - Privatization (negative reduces financing needs): 2014: -0.6; 2015: 0.2; 2016: 0.0; 2017–2022: 0.0; cumulative: 0.0
  - Contingent liabilities: 2014–2022: 0.00 each year; cumulative: 0.0
  - Liabilities not included in debt (from 2014 onwards reflecting transfer of pension fund assets and liabilities to social security administration): 2014: -0.1; 2015: -9.3; 2016: 0.0; 2017: -0.2; 2018: -0.2; 2019: -0.2; 2020: -0.2; 2021: -0.2; 2022: -0.2; cumulative: -1.2
  - Residual, including asset changes: 2014: 0.4; 2015: -0.6; 2016: -1.7; 2017: 0.2; 2018: 0.2; 2019: 0.2; 2020: 0.1; 2021: 0.1; 2022: 0.1; cumulative: 0.8

### Alternative scenarios and underlying assumptions
- Alternative scenario assumptions (selected):
  - Historical Scenario:
    - Real GDP growth: 2016–2021: 3.5, 3.8, 3.8, 3.8, 3.8, 3.8
    - Inflation: same as baseline (0.6, 0.5, 1.7, 2.1, 2.3, 2.4)
    - Primary Balance: -1.0, -1.9, -1.9, -1.9, -1.9, -1.9
    - Effective interest rate: 3.5, 3.4, 3.5, 3.7, 3.8, 3.9
  - Constant Primary Balance Scenario:
    - Primary Balance held at -1.0 for 2016–2021
    - Other variables as baseline.

### Stress tests and risk assessments
- Heat map and indicators vis-à-vis risk assessment benchmarks are provided, with cells highlighted green/yellow/red/white per rules:
  - Gross financing needs benchmark: 15 percent of GDP (cells green if not exceeded, yellow if exceeded under specific shock but not baseline, red if exceeded under baseline).
  - External financing requirement benchmarks: 5 and 15 percent of GDP.
  - Bond spreads stress: 200 and 600 basis points.
  - Change in share of short-term debt benchmarks: 0.5 and 1 percent.
  - Public debt held by non-residents benchmarks: 15 and 45 percent.
  - Share of foreign-currency denominated debt benchmarks: 20 and 60 percent.
- Macro-fiscal stress tests include scenarios:
  - Primary Balance Shock (2016–2021 assumptions provided)
  - Real GDP Growth Shock (2016–2021 assumptions provided)
  - Real Interest Rate Shock (2016–2021 assumptions provided)
  - Real Exchange Rate Shock (2016–2021 assumptions provided)
  - Combined Macro-Fiscal Shock (assumptions: Real GDP growth series, Inflation series, Primary balance series, Effective interest rate series shown)
- Example stress-test paths (selected values):
  - Real GDP growth under Real GDP Growth Shock: 2016: 3.5; 2017: 1.8; 2018: 1.6; 2019: 3.2; 2020: 3.1; 2021: 3.1
  - Primary balance under Real GDP Growth Shock: 2016: -1.0; 2017: -2.4; 2018: -3.0; 2019: -0.8; 2020: -0.6; 2021: -0.4
  - Effective interest rate under Real Interest Rate Shock: 2016: 3.5; 2017: 3.4; 2018: 3.8; 2019: 4.2; 2020: 4.6; 2021: 4.9
  - Effective interest rate under Combined Shock: 2016: 3.5; 2017: 3.5; 2018: 3.8; 2019: 4.2; 2020: 4.5; 2021: 4.8
- Stress-test outputs illustrated for:
  - Gross nominal public debt (in percent of GDP) under baseline and shocks for 2016–2021.
  - Gross nominal public debt (in percent of Revenue) under baseline and shocks for 2016–2021.
  - Public gross financing needs (in percent of GDP) under baseline and shocks for 2016–2021.

### Market perception and external financing
- Market indicators and benchmarks:
  - Long-term spread of Polish euro-denominated bonds over German bonds (EMBIG): 110 (bp) reported in table for sovereign spreads.
  - Y CDS (bp): 82 reported.
  - Bond spread examples: 99 bp indicated in figure annotations.
- External financing requirement definition and benchmarks:
  - External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.
  - External financing requirement benchmarks used in risk assessment: 5 and 15 percent of GDP.

### Fund relations and institutional context (selected facts)
- Membership Status: Joined 6/12/1986; Article VIII.
- Quota and holdings (SDR Million Percent Quota):
  - Quota: 4,095.40 (100.00)
  - Fund Holdings of Currency: 3,865.88 (94.40)
  - Reserve Tranche Position: 229.52 (5.60)
- SDR Department:
  - Net Cumulative Allocation: 1,304.64 (100.00)
  - Holdings: 313.06 (24.00)
- Latest Financial Arrangements (In Millions of SDR):
  - FCL 1/14/2015–1/13/2017: Amount Approved 13,000.00; Amount Drawn 0.00
  - Prior FCLs listed with approval and expiration dates and amounts approved: 1/18/2013–1/17/2015: 22,000.00; 1/21/2011–1/17/2013: 19,166.00; 7/02/2010–1/20/2011: 13,690.00 (all Amount Drawn 0.00)
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 2016: 0.38; 2017: 0.54; 2018: 0.54; 2019: 0.54; 2020: 0.54
  - Total (per year): 2016: 0.38; 2017: 0.54; 2018: 0.54; 2019: 0.54; 2020: 0.54
- Exchange Arrangements: The zloty is freely floating. Poland accepted the obligation of Article VIII, Sections 2, 3, and 4 on June 1, 1995.

*Source: IMF staff; STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX (As of June 08, 2016).*

### Introduction of expert

### Introduction of expert

### Technical assistance and missions (selected timeline)
- Missions and actions listed (1999–2016) covering MoF, NBP, CSO, KNF, BFG and others, including:
  - Administering Social Security Mission March 2000 — MoF
  - IMF/IBRD FSAP Mission May/Sept 2000 — MoF/NBP
  - MAE Monetary Operations Mission July 2001 — NBP
  - FAD Expenditure restructuring Mission December 2001 — MoF
  - MAE Stress testing Mission January 2002 — NBP
  - STA Data ROSC Mission January 2003 — CSO/MoF/NBP
  - STA Government finance statistics (GFSM 2001) Mission October 2003 — MoF
  - IMF/IBRD FSAP Update Mission April/May 2006 — MoF/NBP
  - FAD Developing a multi-annual fiscal framework Mission June 2008 — MoF
  - STA Errors and omissions in balance of payments accounts Mission July 2009 — NBP
  - FAD Medium-term fiscal framework Mission April 2010 — MoF
  - MCM Detailed assessment of observance of BCP for effective banking supervision Mission Feb/March 2011 — KNF
  - FAD Developing the fiscal regime for oil and gas Mission April 2012 — MoF
  - MCM Macroprudential framework Mission May 2012 — NBP
  - IMF/WB FSAP update Mission Feb/March 2013 — MoF/KNF/NBP
  - FAD Tax administration—Modernization challenges and strategic priorities Mission November 2014 — MoF
  - MCM Bank Resolution Mission March 2016 — BFG

### Statistical issues and data adequacy
- General: "Data provision is adequate for surveillance."
- National Accounts:
  - GUS compiles annual and quarterly GDP by production and expenditure, current and previous year’s prices following the 2008 SNA and ESA 2010.
  - A supply and use table is only available for the year 2010.
  - Quarterly financial accounts of general government: compiled by GUS.
  - Annual and quarterly financial accounts by institutional sectors: compiled by NBP following ESA 2010 and disseminated 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:
  - CPI does not cover imputed rents of owner-occupied dwellings.
  - Scope covers all resident households, except those in some rural areas.
  - PPI does not include estimation for missing prices; quality and seasonal adjustment techniques are not implemented.
- Government Finance Statistics:
  - MoF compiles monthly data in accordance with GFSM 2001. Monthly cash data cover “core” central government.
  - Starting in 2015 (annual data for 2014), GUS responsible for annual GFS compiled according to ESA2010 and adjusted to GFSM2014. Annual reports present general government operations by central government, local government, and social security funds.
  - Monthly and annual data are regularly disseminated on the SDDS website.
  - Data for 2013 prepared by MoF according to GFS2001; data for 2014 prepared by GUS according to GFSM2014.
- Monetary and Financial Statistics:
  - Since January 2004, NBP provides ECB monetary accounts using national residency approach. Data on other financial corporations (OFC) not available.
  - Prior ROSC recommended reconciliation of monetary and government finance statistics on a regular basis.
- Financial Sector Surveillance:
  - Since November 2009 NBP, GUS, KNF and MoF report FSIs based on IMF Guide: all core FSIs and 19 of 28 encouraged FSIs quarterly with ~one quarter lag.
  - NBP implemented EU regulation 680/2014; first ITS data collection for March 2014; consolidated ITS reporting first for September 2014.
- External Sector Statistics:
  - NBP relies fully on survey-based source data starting Q1 2010.
  - 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 according to 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 and quality:
  - Subscriber to SDDS since April 17, 1996, using flexibility option on timeliness of general government and central government operations.
  - Data ROSC published in 2003.

### Table of Common Indicators (as of May 31, 2016) — selected entries (dates preserved)
- Exchange Rates: Date of latest observation 5/31/2016; Date received 5/31/2016; Frequency D/D/D
- International Reserve Assets and Reserve Liabilities of the Monetary Authorities: 4/2016; received 5/20/2016; Frequency M/M/M
- Reserve/Base Money: 4/2016; received 5/6/2016; Frequency M/M/M
- Broad Money: 4/2016; received 5/13/2016; Frequency M/M/M
- Central Bank Balance Sheet: 4/2016; received 5/6/2016; Frequency M/M/M
- Consolidated Balance Sheet of the Banking System: 4/2016; received 5/13/2016; Frequency M/M/M
- Consumer Price Index: 4/2016; received 5/12/2016; Frequency M/M/M
- Revenue, Expenditure, Balance, and Composition of Financing – General Government: Q4/2015; received 5/20/2016; Frequency A/A/A
- Revenue, Expenditure, Balance and Composition of Financing – Central Government: 3/2016; received 5/20/2016; Frequency M/M/M
- Stocks of Central Government and Central Government-Guaranteed Debt: 3/2016; received 5/20/2016; Frequency M/M/M
- External Current Account Balance: 3/2016; received 5/13/2016; Frequency M/M/M
- Exports and Imports of Goods and Services: 3/2016; received 5/13/2016; Frequency M/M/M
- GDP/GNP: Q1/2016; received 5/31/2016; Frequency Q/Q/Q
- Gross External Debt: Q4/2015; received 3/31/2016; Frequency Q/Q/Q
- International Investment Position: Q4/2015; received 3/31/2016; Frequency Q/Q/Q

### IMF staff updates and government statements (June 2016)
- IMF Staff Representative (Statement dated June 27, 2016):
  - New information since the Staff Report (circulated June 14, 2016) does not alter the thrust of the staff appraisal.
  - Authorities indicated they will support legislation later in the year to reverse the 2013 retirement age increases and increase the constitutional court-mandated PIT tax-free allowance, but these changes are unlikely to take effect before 2018.
  - Postponement will delay the fiscal impact of the retirement age increase, about 0.5 percent of GDP per annum, by one year.
  - Government will reform the PIT framework to introduce a unified tax on income, and social security and health contributions.
  - The staff report treats these measures as fiscal risks not included in baseline projections.

- Statement by Ludwik Kotecki and Joanna Osinska (June 27, 2016) — on behalf of Polish authorities:
  - Highlights:
    - Fiscal deficit dropped to 2.6 percent of GDP in 2015.
    - Current account deficit and unemployment reached historically low levels.
    - Financial sector remains sound and resilient.
    - Inflation driven mostly by external factors remains subdued.
    - New government (since November 2015) focused on strong and inclusive growth while maintaining fiscal sustainability.
    - Outlook: robust growth and gradual return of inflation toward target over the medium term.

### Economic outlook and external sector
- Real GDP growth:
  - 2015: "3.6 percent"
  - Forecasts: "3.8 percent in 2016", increasing gradually to "4.1 percent in 2019"
  - Drivers: domestic demand, private consumption (higher disposable income from declining prices and growing wages), decreasing unemployment, healthy credit expansion, accommodative financial conditions, competitiveness of Polish companies, increased inflow of EU structural funds (Poland set to be the biggest beneficiary of the European multi-annual financial framework 2014-2020).
- Unemployment:
  - Reached "6.3 percent" in March/April 2016 — historically low and well below EU average; lowest since early-1990s transition.
- External sector:
  - 2015 current account deficit: "0.2 percent of GDP" — lowest in two decades.
  - Drivers: record high trade surplus reflecting lower oil prices and improved terms-of-trade; exports supported by stronger activity in other EU countries; imports strengthening with domestic demand.
  - External position in 2015 consistent with fundamentals and desirable policies.
  - CA deficit covered by capital account surplus, mainly EU funds inflows.
- Official foreign reserves:
  - "about 107 percent" of IMF’s modified composite reserve adequacy metric, as of end-2015.
  - Reserve levels increased since the beginning of the year to "around 97 and 108 billion, respectively, at end-May" (EUR- and USD-terms).
  - Poland benefits from the precautionary Flexible Credit Line (FCL) arrangement with the Fund since January this year, with a further lowered level of access consistent with authorities’ request and exit strategy.

### Fiscal policy and reforms
- Fiscal outlook:
  - General government deficit: expected to remain at "2.6 percent of GDP" in 2016, increase to "2.9" in 2017, and decrease gradually thereafter to "1.3 percent of GDP in 2019".
  - Authorities committed to keeping the deficit below "3 percent of GDP" in line with EU rules and obeying the domestic expenditure rule.
  - General government debt at end-2015: "51.3 percent of GDP" — intended to remain significantly below the "60 percent of GDP" threshold.
- Major policy measures and fiscal priorities:
  - Family 500 plus program implemented from April 2016 to support fertility, disposable incomes of families with children, reduce poverty and inequality, and improve future labor supply.
  - Revenue measures and tax administration strengthening to fund new expenditures:
    - New tax on financial institutions’ assets (already implemented).
    - Comprehensive strategy to improve tax administration and fight tax evasion, including:
      - Introduction of a General Anti-Avoidance rule.
      - Reduction of the limit on cash transactions between companies from "EUR 15,000" to "PLN 15,000".
      - Reorganization of tax and customs administration and establishment of the National Fiscal Administration (drawing on Fund TA recommendation to establish a single and unified national tax administration).
      - Introduction of an integrated IT system to track VAT invoices.
  - Authorities note the "VAT gap" in Poland remains one of the highest in the EU; improving tax collection effectiveness is crucial and could create fiscal space.
  - Two debated proposals: (i) revision of 2013 retirement age increases and (ii) increase in PIT tax-free allowance mandated by constitutional court — both at conceptual stage with draft legislation intended by year-end but unlikely to be implemented before 2018.
  - Authorities view mitigation options for retirement age changes via adjusting parametric entitlement conditions; increase in PIT tax-free allowance could be part of a comprehensive income tax reform with lost revenues offset by a more progressive tax regime.

### Monetary policy
- Inflation:
  - 2015 average CPI: "-0.9 percent".
  - CPI as of May: "-0.9 percent".
  - Core inflation as of May: "-0.4 percent".
  - Weak price dynamics linked to pass-through from low commodity prices and a slightly negative output gap.
- Monetary stance:
  - NBP uses flexible inflation targeting to maintain medium-term price stability while supporting balanced growth.
  - Since March 2015, the Monetary Policy Council has kept the policy rate at "1.50 percent" (all-time low), completing an easing cycle of "325 bps" initiated in late-2012.
  - MPC considers current interest rates conducive to sustainable growth and macroeconomic balance.

### Financial sector
- System soundness:
  - Financial sector stable and resilient, supported by solid economic growth.
  - Banks remain liquid, well-capitalized and maintain low leverage due to high regulatory capital and conservative risk weights.
  - Banks have maintained capital buffers in line with Financial Supervisory Authority recommendations; capital adequacy ratio reported to have reached (text truncates before a numeric value).

*Source: Introduction of expert, Republic of Poland: Technical Assistance from the Fund, 1992–2016; Statistical Issues Appendix; IMF staff and authorities statements (as of June 27, 2016).*

### 16.7 percent at the end of Q1 2016 and Tier 1 capital representing around 90 percent of total

### _cr16210 - 16.7 percent at the end of Q1 2016 and Tier 1 capital representing around 90 percent of total

### Banking sector soundness and capitalization
- Capital adequacy and structure:
  - Capital ratio: 16.7 percent at the end of Q1 2016.
  - Tier 1 capital representing around 90 percent of total capital.
- Funding structure:
  - Low funding gap.
  - Large share of household deposits in liabilities.
  - Low reliance on potentially less stable market funding.
- Non-performing loans (NPLs):
  - The share of NPLs is slowly, yet steadily decreasing.
  - Coverage of NPLs by provisions remains at a comfortable level.

### Earnings, profitability, and taxes
- Profitability trends:
  - Earnings and profitability ratios decreased in Q4 2015 and Q1 2016 but remain at comfortable levels.
  - The decrease was mainly due to a less favorable environment (low interest rates) and higher costs of banking activity.
- One-off and new costs:
  - Higher costs included a one-off contribution to the Bank Guarantee Fund due to deposit payouts and initial contributions to the Borrower Support Fund.
  - In Q1 2016, for the first time, banks had to pay the new asset tax introduced in February.
  - Contrary to market expectations, the additional tax has not significantly influenced profitability in the first months after its introduction.
  - Authorities intend to evaluate the performance of the new tax and adjust it if deemed necessary.
- Credit flow:
  - Credit flow to the economy has been growing at a steady pace.
  - More time is needed to more thoroughly assess the overall impact of the new tax.

### Macroprudential framework, supervision, and resolution
- Institutional developments:
  - The new macroprudential authority (Financial Stability Committee) became fully operational in November 2015.
  - The bank resolution framework—in line with the European Bank Recovery and Resolution Directive (BRRD)—has just been completed and finally approved by the Parliament.
- Macroprudential measures:
  - Loan-to-value limits for housing and commercial real estate loans, in force since early 2014, are gradually being tightened.
  - Since January 2016, the borrowers’ contribution should constitute at least 15 percent of the real estate’s value.
  - These measures aim to help further enhance loan quality.

### Foreign-currency mortgages and policy considerations
- Outstanding stock and lending:
  - Virtually no new foreign-currency (FX) lending is taking place following the introduction of stronger macroprudential measures.
  - Outstanding stock of FX mortgages accounts for around 9 percent of GDP, as of April, and the portfolio is in runoff mode.
- Government stance and options:
  - The government expressed commitment to help FX mortgage holders in difficult situations, recognizing concerns about inadequate consumer information at origination.
  - Several alternative options for addressing this issue are being discussed with multiple stakeholders; no specific proposal has been subject to official consideration yet.
  - The government is cognizant of the importance of ensuring that any future proposal safeguards financial stability and considers that potential costs for banks would likely have to be extended over a longer time horizon.

### Structural reforms and development strategy
- Plan for Responsible Development:
  - Directions of Poland’s economic development indicated in the new government’s Plan for Responsible Development.
  - Objectives include increasing potential through mobilizing domestic human and financial capital, fostering innovations via increased R&D spending, developing highly specialized industries, and creating highly paid jobs.
  - The aim is to substantially increase the level of investment over the next decade.
- Institutional instruments and measures:
  - Development of financial instruments offered by the Polish Development Fund—newly established entity integrating currently existing development institutions to increase their effectiveness.
  - Creating a favorable institutional and legal environment to increase Poland’s investment attractiveness for foreign capital.
  - Focus on social (demography and education) and regional development promoting inclusion of small cities and rural areas.
  - Specific measures underpinning the Plan’s objectives will be reflected in the Strategy for Responsible Development expected to follow by the end of the year.

*Source: _cr16210 - 16.7 percent at the end of Q1 2016 and Tier 1 capital representing around 90 percent of total*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16210.pdf_