Public Information Notice: IMF Concludes 2003 Article IV Consultation with the Republic of Poland

June 19, 2003

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board.

On June 9, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Poland.1


During 2002, the economy began to recover from the sharp weakening of growth in 2000-01, but the recovery is fragile. Private consumption picked up gradually, fueled by rising real fiscal transfers, easing monetary policy and a drop in the savings ratio. Exports outpaced rather weak market growth as competitiveness improved. The recovery also reflected a lessening of negative influences: a sharp drop in inventories ended, and the contraction of fixed investment lessened. However, without signs of a leading force behind the recovery, its robustness remains in doubt. Investment appears to be weighed down by an overhang from the late-1990s, rising unemployment and moderating wage increases threaten consumption growth, and weak European markets constrain the scope for exports. The slack in the economy remained evident. Consumer price inflation fell below 1 percent. Falling food prices played a role, but more important were moderating cost (especially wage) increases. Employment continued to drop and, even with falling labor force participation, the unemployment rate rose to almost 19 percent. The external current account deficit remained moderate by transition country standards.

Monetary policy was deliberately and substantially relaxed. The interest rate easing cycle that began in early-2001 continued, and as of April 2003 the main policy interest rate had fallen by a cumulative 1325 basis points to 5.75 percent, but with falling inflation, real interest rates dropped more gradually. In addition, falling interest rates, together with political uncertainties and the need to attract sharply higher portfolio and other capital inflows as foreign direct investment slowed to a trickle, contributed to a welcome 15 percent depreciation of the real effective value of the zloty since early 2002. Nevertheless, credit growth, particularly to enterprises was low reflecting banks' caution in the face of rising non-performing loans and weaker demand as enterprises delayed investment plans.

Fiscal policy also eased slightly, though unintentionally. Financial plans of the general government for 2002 aimed for a withdrawal of stimulus of around 2/3 percent of GDP. In the event, lower-than-expected economy-wide wage increases cut into the tax and contribution base while expenditure commitments—most significantly transfers to households and public sector wages—could not be reduced commensurately with lower-than-expected inflation. Thus, the structural fiscal deficit rose slightly to 5 percent of GDP, the actual deficit widened from 5½  to over 6½ percent of GDP, and the public debt rose sharply.

The origins of the recent weakness in economic activity are complex and a robust recovery will await corrections on several fronts. At the heart of the slowdown was a long slide in investment growth as the torrid pace of early-transition investment cooled. The fiscal-monetary policy mix remains a problem—even as monetary policy has eased, the risk of a tightening, if the fiscal adjustment is delayed, creates market uncertainty. Privatization and redressing the problems of state enterprises where privatization prospects are remote, largely ground to a halt in 2001-02.The banking system, which is well supervised and largely foreign-owned, was strained by the slowdown. Political uncertainties also cloud the situation. The President and the Prime Minister have called for a general election, originally scheduled for late-2005, in June 2004, and speculation about an earlier date is rife. The need to reconstitute the Monetary Policy Council (MPC) in early 2004 when the terms of all current members expire adds to the uncertainty.

Notwithstanding these weaknesses, the economy enters this upturn with distinct strengths. The recent signing of the agreement on EU accession opens an era of policy coordination with Europe with potentially powerful channels for speeding income convergence. This, together with modest external indebtedness, prompted declining spreads and an upgrade in Moody's ratings of external debt to A2 in November 2002. The structural revamping of private industry following the Russia crisis, when firms had to cut costs and turn to Western markets, left it leaner and more competitive. Wages proved responsive to developments in the labor market, while the zloty depreciation in 2002 further bolstered export profitability. Reforms to the labor code introduced in mid-2002 should stimulate labor demand once the recovery takes hold. And inflation expectations have been tamed. With a moderate current account deficit and a floating exchange rate, these developments have diminished important sources of vulnerability.

Executive Board Assessment

Executive Directors noted that the strong upturn in industrial output, the continued decline in inflation and the strengthening of the external position create favorable conditions for a cyclical recovery of the Polish economy notwithstanding a difficult external environment. Particularly encouraging is the strong increase in productivity, which together with wage moderation and the depreciation of the zloty, have resulted in a welcome strengthening of export competitiveness.

Notwithstanding these improvements, Directors cautioned that turning the nascent recovery into durable growth will be a major challenge, and will require decisive action to address Poland's problems of high unemployment, insufficient progress in structural reform, and a persistently high structural fiscal deficit. They therefore urged the authorities to use the opportunity provided by the improving cyclical position and imminent EU accession to further strengthen macroeconomic policies and speed up structural reforms. Directors welcomed in this regard the strongly positive outcome of the national referendum on Poland's accession to the EU, which they hoped will help create a new momentum in the reform effort.

Directors stressed the need for a substantial fiscal adjustment, in particular a deep reform of public expenditure policies, to reverse the recent deterioration in public finances and contain the rapid increase in public debt. They welcomed the recent fiscal reform proposals which, if fully implemented, would be an important first step toward budget consolidation. By improving the flexibility of budget formulation, the proposed measures would help redress recent real public sector wage and social transfer increases and permit expenditure restructuring needed to absorb EU funds. The reforms of the personal and corporate income taxes would reduce distortions in the tax system and lower poorly targeted tax expenditure.

Looking ahead, Directors emphasized that more extensive measures will be needed soon to ensure that public debt remains within constitutional limits, reduce the vulnerability of public finances, and create further room for significantly easier monetary policy. They urged the government to build the required political and social support for a well-structured fiscal reform agenda, based on prudent growth assumptions, and focusing on pensions and social benefits, including farmer pensions and support, further reductions in subsidies, and cuts in public employment. Directors noted that substantial savings in these areas, along with measures to widen the tax base and further improve tax administration, will be key to containing the fiscal deficit while at the same time creating room for raising infrastructure investment.

Directors commended the National Bank of Poland (NBP) for achieving price stability and continuing to ease monetary conditions as inflationary expectations subside. With a still widening output gap, high unemployment and continued wage discipline in the corporate sector, they saw scope for further interest rate cuts without jeopardizing the inflation target. In light of the uncertainties about the effects still in the pipeline of past interest rate cuts, Directors considered the NBP's approach of small cuts appropriate, but urged against excessive caution in assessing inflationary pressures. The recent depreciation of the zloty has resulted in a welcome improvement in export competitiveness, but Directors noted that, to secure this gain and avoid undue appreciation of the zloty in the coming years, it will be crucial to continue to improve the macroeconomic policy mix, in particular through sustained fiscal consolidation.

Directors welcomed the authorities' intention to continue with inflation targeting after 2003 when the current target expires. They regarded the continuous inflation target of 2½ percent _1 percentage point as broadly adequate, although a number of Directors considered that a somewhat higher target and wider band would be advisable given the scope for price shocks and structural influences on inflation. Directors also generally supported the NBP's strategy of not intervening in the foreign exchange markets and felt that it helped address the risks associated with large capital flows.

Directors urged the authorities to work towards a satisfactory solution of the dispute between the NBP and the government over the use of the NBP's revaluation reserve. Drawing on international best practices, they emphasized that in dealing with this issue, careful consideration should be given to optimal debt management, the appropriate capitalization of the NBP, and a prudent level of foreign exchange reserves, particularly as participation in ERM2 approaches. Directors stressed the importance of ensuring the unfettered ability of the NBP to conduct monetary policy independently, and avoiding any delay in fiscal adjustment.

Directors welcomed the prudent way in which the Polish banks have responded to the difficult economic environment of the past few years, including the pressure on earnings resulting from the increase in classified loans. Continued vigilant supervision will nevertheless be needed, in particular, since the pressure on bank earnings might continue, and foreign currency-denominated housing loans remain sizeable. The formation of a special monitoring unit at the NBP was therefore welcome. Directors also welcomed the authorities' decision to include collective action clauses in international sovereign bond issues not later than upon joining the EU. They supported ongoing efforts to further strengthen the capacity to combat money laundering and the financing of terrorism.

Directors noted the authorities' objective of early adoption of the euro. While recognizing that decisions in this regard will be taken based on the rules and procedures within the competent European fora, Directors stressed that, to realize the benefits of adopting the euro, Poland will need to undertake major expenditure reforms and speed up the structural reforms that are key to strengthening its growth and employment prospects. Some Directors observed that, in view of the still considerable challenges ahead, Poland may need time to achieve greater convergence with the EU before adopting the euro.

Among priorities for structural reform, Directors highlighted in particular the importance of labor and product market reforms, stepped up privatization, and agriculture reform. They welcomed the recent changes to the Labor Code, but, in light of Poland's very high unemployment rate, saw a need for further steps to eliminate remaining rigidities, improve incentives to work, and enhance regional mobility and job training. Directors viewed with concern the slowdown of progress with privatization, and urged the authorities to push ahead with delayed privatization projects.

While Poland's statistical base is adequate for surveillance, Directors encouraged the authorities to improve the periodicity and timeliness of fiscal data for the general government. They welcomed the significant progress made in improving fiscal transparency, but highlighted the importance of a transparent recapitalization of loss making state-owned enterprises.

Poland: Main Economic Indicators








Real economy (change in percent)


Real GDP






Real domestic demand






CPI (end-year)






Unemployment rate (in percent)






Gross national saving (percent of GDP) 1/






Gross domestic investment (percent of GDP)







Public finance (in percent of GDP)


General government balance (commitment)






Public debt 2/







Money and credit (end of period, percent change)


Private credit (12-month change)






Broad money (12-month change)






Money market rate (end of period, in percent)







Balance of payments in convertible currencies


Trade balance (in percent of GDP)






Current account (in percent of GDP)






Official reserves (in billions of U.S. dollars)






Reserve cover (months of merchandise imports)






Total external debt (percent of GDP)







Fund position (in millions of SDRs)





Fund holdings of currency (March 31, 2003)



Holdings of SDRs (March 31, 2003)




Exchange rate


Exchange rate regime

Floating Rate

Present rate

Zl 3.898 per US$1 (April 28, 2003)

Zloty per U.S. dollar


(period average, in percent)






Appreciation (+) of real effective exchange rate


(relative CPIs, in percent)






Sources: Central Statistical Office; data provided by the authorities; and IMF staff estimates.
1/ Derived as a difference between total savings and current account.
2/ Including risk weighted stock of outstanding guarantees.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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