Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with the Republic of Poland

July 22, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On July 22, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Poland.1


In 2004 annual growth reached 5½ percent, with a surge in growth in the run-up to EU accession dissipating in the second half of 2004. Both domestic and net external demand contributed to the slowdown. Consumption and inventory accumulation had supported output growth as contribution of net external demand diminished, but by mid-2004 these sources of demand growth slackened. Private fixed investment has lagged behind the cycle, indicating that potential investors remained cautious. Strong corporate profits thus translated mostly into an accumulation of financial assets and a reduction in bank credit to the corporate sector. Export growth, which led the 2002-03 recovery, hit a soft spot in mid 2004, but by end-year had rebounded to annual rates of about 40 percent despite the slackening demand in Western Europe and the appreciation of the zloty during the second half of the year. Preliminary official data for the first quarter of 2005 show flat domestic demand, mostly owing to a decline in highly import intensive investment and inventory—with little immediate negative effect on domestic production.

The recovery has started to produce jobs, but the employment rate remains low owing to structural rigidities and demographic pressures. The Russia crisis and the rapid appreciation of the zloty in 2001 created two large waves of job destruction as a baby-boom generation entered the labor market. Job creation was stymied by supply side problems—skill mismatches, immobility between regions, and disincentives to work—while demand was weakened by the cycle, poor infrastructure particularly in high unemployment regions, and high non-wage costs of employment. Thus, the employment rate, which was close to the euro area average until 1998, is now 52 percent—the lowest in the EU. These developments have their counterpart in impressive productivity gains during the recovery, and, as high unemployment has kept wage growth low, falling unit labor costs.

Resource constraints have not been evident in either inflation or the current account. A pickup in nominal wage growth combined with a sizable upward shift in food prices resulting from the full liberalization of agricultural exports and high oil prices created price pressures. Monetary policy reacted swiftly with a cumulative 125-basis point rate hike during June-August. This, together with apparently tame inflation expectations, a deceleration of demand, contained inflation and wage increases. Meanwhile the current account deficit narrowed for the year as a whole. Against export growth which on average was strong, import growth picked up modestly with investment.

Fiscal policy remained adrift in 2004. Adding EU-accession related spending to a cut in the corporate tax rate and upward drift in non-discretionary spending resulted in a sizable (though lower-than-initially projected) procyclical rise in the general government deficit. Despite strong efforts of the Belka government to secure Parliamentary approval of fiscal reforms (Hausner Plan), about a third (in terms of potential savings) of the plan was implemented. Some key reforms-reform of the farmer pension scheme, closing social security contribution loopholes and reining in disability programs were among the unsuccessful—though pre-retirement benefits were reined in and pension indexation rules were changed. Notwithstanding the large deficit, a renewal of the privatization program alongside the zloty appreciation and strong growth resulted in the first drop in the debt ratio in four years.

Despite low inflation, long-term interest rates rose sharply in mid-2003 and a two-year depreciation of the zloty persisted following the announcement of an expansionary 2004 budget. But the simultaneous EU accession, formation of the pro-reform Belka government, and signs of stronger-than expected budgetary developments (including privatization) turned financial markets strongly positive during 2004. Thus despite narrowing interest rate differentials vis-à-vis the euro and the dollar, the zloty appreciated through early 2005.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They congratulated the Polish authorities on a successful first year in the European Union. They noted the positive market reactions to the government's efforts to contain the budget deficit and gain parliamentary approval of fiscal reforms, reinvigorate privatization, and improve debt management. Directors agreed that the many strengths of Poland's macroeconomic position provide a basis for sustained high growth in the future.

At the same time, Directors noted that the stalling of growth momentum since mid-2004 might reflect remaining impediments to growth. While the slowdown from the heady growth rates a year ago is likely to be temporary if underlying conditions remain broadly favorable, it had dampened hopes that Poland had entered a period of substantially higher investment and growth sufficient to make a serious dent in its strikingly low employment rate. Directors therefore emphasized that more needs to be done to enable the economy to achieve its full potential, building on the steps already taken in recent years. This requires a strong commitment to fiscal and structural reforms aimed at ensuring long-term sustainability of public finances, enhancing the flexibility of the economy, particularly in the labor market, and improving the business climate. These steps should also help secure a favorable setting for euro adoption.

Directors felt that the immediate post-election period offers a window of opportunity for fiscal consolidation and expenditure reform. They encouraged the authorities to consider further steps to keep the fiscal deficit and the public debt ratio on a downward track, while protecting investment plans envisaged in the convergence program. In this regard, Directors stressed that the most important macroeconomic challenge for the next government would be to set clear medium-term fiscal policy goals and secure parliamentary support for them. Achieving these targets in a manner that would enhance growth potential requires a well-formulated fiscal strategy, focused on a restructuring of poorly-targeted social transfers, as well as the reform of the farmers' pension scheme and the disability program. The positive economic impact of such reforms could be further supported by a well-designed tax reform, aimed at simplifying the tax system in a revenue-neutral manner. The proposals for single-rate personal and corporate income and value-added taxes from both sides of the political spectrum provide a good starting point. Directors urged the authorities to resist the adoption of recent pre-election legislative initiatives that would hinder fiscal consolidation in the medium term.

Directors agreed that a fiscal responsibility law would help buttress political resolve and bring forward the beneficial effects of fiscal consolidation. Such a law should encompass a fiscal rule, ideally an expenditure rule, to supplement the current constitutional public debt limit; a requirement to supplement the budget with rolling three-year budget projections; and transparency requirements, including norms for independent assessment of macroeconomic assumptions and fiscal projections.

Directors emphasized that a multi-pronged approach to job creation is essential to address Poland's persistently high unemployment rate. On the fiscal front, Directors stressed the importance of reducing the tax wedge on labor and reforming the social benefit system to remove disincentives to work. In the labor market, Directors called on the authorities to further enhance flexibility and increase labor participation, particularly by making the minimum wage less binding for low-skill and young workers, differentiating it across regions, and removing unduly restrictive regulation of regular labor contracts. In this context, they expressed concern about the recent legislative initiative to increase the minimum wage relative to the average wage.

Directors considered it imperative that the new government complete the process of privatization, particularly for the financial and energy sectors, to ensure the long-term viability of companies within the competitive environment of the EU. They welcomed the progress made in privatizing the largest commercial bank and attached particular importance to setting a timetable for its full privatization.

Directors felt that a credible commitment to early euro adoption could amplify the potential benefits of fiscal consolidation and structural reforms. They also agreed that euro adoption would bring substantial benefits for trade and output growth, provided that the budget deficit remains well below the Maastricht limit, the conversion rate affords strong competitiveness, inflation is low, and labor market flexibility improves. Directors stressed that the new government should work closely with the social partners and the National Bank of Poland to reach an agreement on a timetable for euro adoption and secure broad support for required reforms.

Directors commended the authorities for their timely action to stabilize inflation expectations following the inflation fillip in 2004. Given the benign inflation outlook, they considered the recent interest rate cuts as appropriate. Looking ahead, Directors agreed that the inflation targeting framework continues to serve Poland well until ERM2 entry. They encouraged the authorities to gear interest rate decisions toward keeping inflation within a symmetric band around the inflation target to limit undue upward pressure on the zloty in the approach to ERM2. The Monetary Policy Council was also advised to improve the communication of its views and future policy intentions to markets. Directors noted steps to develop capacity for foreign exchange market intervention in preparation for ERM2, but stressed that such intervention should be avoided in the interim period. While agreeing that Poland's competitiveness is not a problem for the near term, Directors underscored the importance of basing ongoing assessments of competitiveness on a careful analysis of the medium- to longer-term outlook.

Directors welcomed the recent improvements in banking sector performance and noted the encouraging prospects for their continuation. They also welcomed the halt in the trend increase in foreign currency lending. To preserve these achievements, they encouraged the authorities to continue to carefully monitor trends in foreign currency lending and banks' lending policies and to take early action if necessary. Efforts to address institutional weaknesses, including in the commercial court system, should also help improve the soundness of the financial sector.

Notwithstanding the improvements EU accession had brought about in statistics, Directors encouraged the authorities to make further efforts to strengthen quarterly national accounts and fiscal accounts for the general government.

Poland: Main Economic Indicators







Real economy (change in percent)






Real GDP






Real domestic demand






CPI (end-year)






Unemployment rate (in percent)






Gross domestic saving (percent of GDP) 1/






Gross domestic investment (percent of GDP)












Public finance (in percent of GDP)






General government balance 2/






Public debt 3/












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 (April 30, 2005)






Holdings of SDRs (April 30, 2005)












Exchange rate






Exchange rate regime


Present exchange rate (June 8, 2005)

Zl 3.3 = US$1

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 Polish authorities; and IMF staff estimates. 
1/ Derived as the difference between total savings and current account deficit less capital transfers.
2/ General government overall balance on a cash basis including payments in compensation for insufficient indexation in the 1990s.
3/ Polish definition of debt including risk weighted stock of outstanding guarantees and excluding second-pillar pension funds.

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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