Transcript of a Conference Call on Article IV Consultation Report: Poland

April 18, 2008

Washington, D.C.
Friday, April 18, 2008

MR. BÜNEMANN: Good morning to everyone here in the U.S. time zone and "dzien dobry" to those who are joining from Europe—I am Niels Bünemann of the IMF Media Relations Division and I am here with Poul Thomsen, Senior Adviser of the IMF's European Department and leading the Fund's work on the Republic of Poland.

It's now 9:00 a.m. here in Washington and I would like to welcome you to this conference call on the staff report on the occasion of the latest Article IV consultation with Polish authorities. As you know, Article IV consultations are an important part of the IMF's task in monitoring member countries' economies. The staff report was made available yesterday evening Washington time via the IMF's Online Media Briefing Center along with the Public Information Notice that summarizes the Executive Board's assessment. This report and the contents of this conference call will be under embargo until 11:00 a.m. Washington time which is 1500 GMT, and that's 2 hours from now. Before I give the floor to Poul Thomsen, let me mention that Ajai Chopra, Deputy Director of the IMF's European Department, will present another IMF product in a press briefing in Warsaw on Wednesday next week, and that is the Regional Economic Outlook for Europe which is obviously dealing with the economy of the entire European continent and not only with Poland. And now I would like to give the floor to Poul for some introductory remarks. Poul?

MR. THOMSEN: Thank you very much. Welcome to our conference call this morning. I had the opportunity to speak to you on January 21 when the mission wrapped up its work in Poland. In the meantime we have now had the Board discussion and I want to briefly summarize that discussion. Before I do so though let me make one point. There is one area, namely as far as economic growth is concerned, where we see things slightly different compared to what we did when we were in Warsaw.

On the one hand, high-frequency indicators suggest that economic growth was stronger going into 2008 than anticipated in the staff report. However, we expect this stronger momentum to be offset by slower than expected growth in exports starting in the second half of 2008. This is because we have marked down our growth forecast for the Euro Area to about 1¼ percent since the mission came back. Stronger growth going into 2008 and lower exports in the second half of 2008 translates into a largely unchanged growth rate in 2008. But in 2009 we now have a lower growth rate assumption than before, we reduced it to 4½ from 4.7 in 2009.

With that remark let me just briefly tell you what happened at the Executive Board, and I will quickly mention five areas. First, the directors noted that Poland is showing strong and well-balanced growth, largely reflecting an investment boom following EU accession. They noted that the current account deficit is still relatively low, and that the zloty remains within its estimated equilibrium rates. They also noted that until recently there had been no significant upward pressures on inflation. However, they noted that resource constraints are emerging, not least in the labor market. In this regard, the focus was the recent uptick in core inflation that might be suggesting that there is diminishing scope for profits to absorb rising unit labor cost. From this comes some concern about competitiveness going forward unless labor market pressures are contained. The directors noted that the challenge facing the new government is a dual one: on the one hand of containing demand pressures, while at the same time taking steps to boosting the economy's supply response over the medium term—not least by raising the exceptionally low rate of labor participation in Poland.

Second, as far as monetary policy is concerned, given the rising inflationary pressures and the continued strength of the economy, Directors welcomed the cycle of tightening monetary policy that has been underway since April 2007, including the three additional interest rate increases that have taken place since the departure of the mission. They stressed the importance of ensuring that higher inflation expectations do not get entrenched and thus supported the authorities' intention to maintain the tightening of monetary policy in order to bring inflation back to target.

Third, turning to fiscal policy, the Directors welcomed the authorities' determination to speed up fiscal consolidation and reduce the structural deficit to 1 percent of GDP over the medium term. They noted that this would help to (1)unburden monetary policy, (2) create appropriate safety margins going forward to allow automatic stabilizers to work, and (3) reduce the risk to external sustainability over the medium term if the private sector savings and investment imbalance was to deteriorate faster than expected.

Fourth, turning to the financial sector, they noted that the negative spillovers on the Polish economy from the current global financial turbulence have been limited so far. Three factors in this regard have contributed to the robustness of Poland's financial sector: (1) the absence of exposure to the U.S. subprime market, (2) the limited use of advanced structured products, and (3) the high profitability of Polish banks, including the Polish subsidiaries of major international banks. Directors also noted that the banking system is well capitalized and that the share of foreign liabilities is small. Of course, they emphasized that the situation has to be kept under close review.

Regarding the recent unification of supervisory functions under the auspices of the Financial Supervision Authority, the KNF, they noted this is coming at a time when it's particularly important to monitor the situation in the financial sector very closely. In this regard, they called on the authorities to ensure that there are no disruptions in the timeliness and effectiveness of supervision related to this unification of supervision.

Fifth and finally, under structural reform and as far as the challenge of posting long-term growth is concerned, they emphasized the need to raise labor participation. In this regard they welcomed the authorities' intention to pursue reforms that would enhance work incentives and encouraged them to move ahead with the formulation of such policies.

Let me conclude with the point that I made during the press conference in Warsaw. We think that the medium-term outlook for Poland is fundamentally favorable, the improvement in the investment climate following EU accession, the prospects of increasing EU funds, the new government's commitment to reinvigorate reforms, and its determination to adopt the euro as soon as circumstances permit, all point toward Poland putting itself in a situation where it will be able to take full advantage of EU membership and ensure that income convergence continues apace. With that, let me stop here and take your questions.

QUESTIONER: Can you just confirm, you have revised 2009 annual GDP growth to 4.5 percent?

MR. THOMSEN: That's correct.

QUESTIONER: And you have left 2008 unchanged at 5 percent?

MR. THOMSEN: That's correct.

QUESTIONER: The main reason for the downward revision for 2009 is slowing growth to the Euro Area?

MR. THOMSEN: That's right and that is consistent with our downward revision of EU growth that we have in our World Economic Outlook.

QUESTIONER: What do you think when would be the best time for Poland to join the Euro Area and the currency? Thank you.

MR. THOMSEN: I think the government's policy on this is the right one. They have reaffirmed their commitment. They have also stressed that they don't want to adopt or commit to a timetable before they are convinced that the Polish economy is able to function well within the euro before the necessary structural reforms are in place. And I think that's the right approach as I also said when we were in Warsaw .

QUESTIONER: What would you say would be the right date because this is the date that many government officials think would be appropriate, the Finance Ministry and the Prime Minister? So would it be the right time (inaudible)?

MR. THOMSEN: When we were in Warsaw, it was clear that they were not ready to commit to a date, a concrete date, and I think that's right. They need to be assured that the economy will function well within the euro.

QUESTIONER: And when will that be? When will be the time that the economy, the Polish economy will function well within the euro?

MR. THOMSEN: Well, it would depend on the implementation of structural reforms, among other things. I think what one needs to focus on the policies that need to be in place. I think that the government's objectives in this regard are the right ones. It is targeting inflation and targeting an ambitious, but appropriately ambitious, path for medium-term fiscal consolidation and is commitment to structural reform, that I think is very important.

Now, it's still a new government. The government is in the process of fleshing out concrete measures in this regard. So let's see, once the government has made a decision and talked to social partners, what is the plan as they move forward. It's just not right for me to speculate on dates.

QUESTIONER: What would you say would be the most important reform that the government should implement to make the way for the euro?

MR. THOMSEN: What I think is the most important structural reform—and here I am not thinking in particular with regard to the euro adoption but for Poland in general—is to increase labor market participation. As you know, labor market participation in Poland is the lowest in the OECD area, and that is an obstacle to long-term growth.

As we speak, we think that the economy is beginning to run into capacity constraints, which are emerging not least in the labor market; we are getting close to full employment at least in parts of the labor market. So it's very important that they take measures to boost labor participation.

If you want to be technical, what has happened is that growth has been linked largely to labor utilization in the last couple of years. I think the scope for doing that might have run its course soon. We need the most, the largest share of the population to enter into the labor force.

QUESTIONER: I have one very quick question. It's something a colleague said just now. Did you say that the 2008 projection is now for GDP growth of 5 percent because the press release that I was received earlier was 4.9?

MR. THOMSEN: Well, I heard and confirmed it was "about 5 percent". But you are right, growth is 4.9 percent for 2008 and 4.5 percent for 2009.


MR. THOMSEN: That 4.9 percent is the same number we had the whole time. As I said, going into this year, growth is running faster than we expected, but we expect to start seeing the slowdown in the second half of the year. This is entirely driven by the slowdown that we project in our World Economic Outlook.

QUESTIONER: My second question is: do you still favor continuing tightening of monetary policy in Poland? Isn't there a danger that this could further dampen economic growth if you're expecting it to start slowing in the second half anyway?

MR. THOMSEN: Well, that is a very good question. I think certainly that one needs to move ahead quite cautiously. We still expect inflation to remain above the upper end of the band in 2008 and thus well above the central target.

What we are concerned about is that, even though the economy has been slowing gradually already since the beginning of last year, we still see double digit increases in wages; wage increases well above productivity. Another way of saying that is that unit labor costs are increasing, whereas until a few months ago, it appeared that this increase in unit labor costs was being absorbed by squeezing profit margins. The increase in inflation in the last couple of months suggests that there is not much more scope for this going forward and therefore that there are these upward pressures that are now starting to reassert themselves in inflation, despite the fact that the economy is slowing.

So from that perspective, we do think that there might be a need for continuing the monetary tightening. The point to watch is clearly the labor market. If double digit wage increases continue, then I do think that continuing tightening in the monetary policy is warranted.

QUESTIONER: Could you say something about how many more, maybe more rate hikes you're expecting to see?

MR. THOMSEN: No. The point here is that unless there is an easing of labor market pressure, I think further tightening would be warranted. If that pressure is easing, well, one could stop. So, watch the labor market. That is the only thing I can say.

QUESTIONER: On the Fund's report, it says monetary policy should retain a tightening bias to prevent higher inflation expectations from becoming entrenched.


QUESTIONER: Does that seem a bit stronger than what you're saying now?

MR. THOMSEN: Well, I think it's the same. What I'm saying is that if we still have double digit wage increases going forward, I do think that there is a case for continuing the tightening cycle because otherwise, if we keep double digit wage increases, I think there is a real risk of a wage-price spiral and of inflation expectations getting entrenched at higher levels.

MR. BÜNEMANN: So, if we don't have any further questions, I think we can wrap it up at this point in time. Thank you all for participating and please be reminded that the embargo time is 11:00 a.m. Washington time, in 95 minutes from now. Thank you.


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