Factory in Grodzisk Wielkopolski, Poland: tighter retirement requirements will help address low labor participation (photo: Katarina Stoltz/Retuers/Corbis)
FLEXIBLE CREDIT LINE
Poland is the second country, after Mexico, to be granted access under the IMF’s new Flexible Credit Line (FCL), which is being offered to strongly performing economies with a solid record of timely and effective policy adjustments. The Polish government has announced it intends to treat the credit line as precautionary.
“While Poland is being hit hard by the global crisis, it has preserved access to international capital markets, contrary to many peers in the region,” Poul Thomsen, the IMF’s mission chief for Poland, said. “We agree with the authorities that the FCL will help preserve its access to capital markets, by signaling the IMF’s strong endorsement of policies and by providing assurances that the national bank has adequate reserves to intervene if the situation gets worse than expected.”
The IMF is already deeply involved in lending to those countries most hit by the crisis. IMF-supported programs are helping countries such as Hungary, Latvia, Romania, and Ukraine fill financing gaps, ease the burden of fiscal adjustment, and repair banking systems. Counting the new credit line to Poland, the IMF has to date extended loans to Europe worth more than $77 billion dollars.
Solid performance
Poland has not escaped the global financial crisis. The country is being hit both through the export channel—most of Poland’s trading partners are in deep recession—and through the financial channel. A large share of the Polish banking system is foreign owned and global deleveraging is causing a significant slowdown in credit growth. Still, the Polish economy is better placed to weather the crisis than many other countries in the region.
The country’s macroeconomic performance has been very strong in recent years. Growth has averaged about 6 percent from 2006 to 2008, as membership of the European Union (EU) bolstered business confidence and spurred investment. Private consumption also grew strongly, driven by rapidly rising real wages, the creation of new jobs, and record high credit growth.
But unlike many other countries in central and eastern Europe, Poland managed to keep its current account deficit relatively low and its external debt also remained stable at about 40–50 percent of GDP. How did Poland avoid the imbalances that are now haunting other emerging market economies?
Much of the answer lies in a determined and timely policy response.
• A determined anti-inflationary focus, facilitated by a long-standing and effective inflation-targeting regime and a freely floating exchange rate, helped build confidence. Inflation has been kept low and stable, peaking at 4.8 percent before the onset of the crisis.
• The government’s commitment to adopt the euro has provided a strong anchor for fiscal policy, with the deficit being reduced to 2 percent of GDP in 2007—well below the Maastricht criterion of 3 percent of GDP.
• Banking supervision was strengthened to be in full compliance with EU laws and directives. And as foreign currency-denominated mortgage lending gained pace, the government acted to slow lending in foreign currency.
• The government also continued to pursue important structural reforms despite the difficult economic environment. In particular, a tightening of early retirement requirements will help Poland overcome its very low labor participation.
Sound crisis response
In sum, the Polish authorities’ response to the crisis has been very good. Monetary policy has been loosened significantly, which was the right thing to do as the economy slowed. As to fiscal policy, the authorities have underscored their determination to limit the increase in the deficit. This is important for Poland’s euro adoption aspirations and will limit the government’s financing requirement.
That said, an increase in the deficit appears unavoidable as the economy and tax revenues slow sharply. “Some increase is desirable as it helps offset the sudden slump in demand due to the external shocks,” Thomsen said.
Comments on this article should be sent to imfsurvey@imf.org
