Poland: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, December 14, 2021
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- Published: December 14, 2021
Macroeconomic assessment and outlook
- After contracting 2½ percent in 2020, the economy has already surpassed the pre-recession peak and is projected to grow 5.2 percent in 2021.
- Near term risks: the fourth wave of the pandemic may slow growth over the winter months; authorities should consider strategies to increase vaccination coverage to reduce health risks and mitigate potential economic disruptions.
- Medium-term outlook: economic growth is projected to average 3¼ percent over 2023-26; minimal scarring from the pandemic is expected.
- External sector: the current account is projected to return to deficit at 0.3 percent of GDP in 2021 and is preliminarily assessed to be moderately stronger than the level implied by medium-term fundamentals and desirable policies.
- Foreign exchange reserves are assessed as adequate to insulate against external shocks and disorderly market conditions.
Fiscal policy findings and recommendations
- Fiscal support was initially broad-based and became more targeted as the pandemic evolved, supporting employment and corporate balance sheets.
- The general government fiscal deficit is projected to decline from 7.1 percent of GDP in 2020 to 2.9 percent of GDP in 2021, driven mainly by the reduction in pandemic-related fiscal support.
- General government gross debt is projected at 56 percent of GDP in 2021.
- The mission advises avoiding an expansionary fiscal stance in 2022 amid overheating risks.
- Specific policy notes:
- The “Polish Deal” initiatives are estimated to cost around 1 percent of GDP; their impact on the deficit is only partly offset by other factors.
- The PIT reform increases tax progressivity and could increase labor supply for the working age population, with a less clear impact on those near retirement age.
- The announced “anti-inflation shield” (tax and excise reductions on fuels and electricity and vouchers for lower income households) will temporarily reduce inflation but tax reductions are inefficient and should be temporary; energy poverty risks are better addressed through targeted instruments such as the vouchers.
- Medium-term fiscal stance:
- Based on current and announced policies, general government debt is projected to stabilize around 50 percent of GDP, with the general government deficit around 2½ percent of GDP.
- The mission suggests additional reduction in the deficit toward a medium-term objective of 1 percent of GDP (similar to pre-pandemic level) to create more policy space for future shocks and long-term pressures (population aging, energy transition).
- Consider improvements to expenditure policies, including reversing the previous reduction in the pension age and improved targeting of social benefits.
Inflation, monetary policy, and central bank guidance
- Inflation developments:
- Headline inflation increased to 7.7 percent in November 2021, primarily driven by external factors including energy prices; core inflation has also increased and broadened.
- Headline inflation is projected to peak in late 2021 and decline over 2022, assisted in the near term by “anti-inflation shield” measures projected to temporarily reduce inflation by about 1 percentage point in early 2022, and by base effects as energy prices stabilize.
- After averaging 5.6 percent in 2022, inflation is projected to return close to the target by the end of 2023, supported by a slow moderation of core inflation.
- Monetary policy recommendations:
- The National Bank of Poland (NBP) should continue to tighten monetary policies to drive inflation back to the target.
- Beginning in October, the NBP increased interest rates from 0.1 percent to 1.75 percent.
- Further rate increases are considered necessary to minimize second-round effects and stave off overheating as output moves above potential.
- Monetary policy decisions in 2022 must account for evolving economic and pandemic-related conditions.
- The recent conclusion of regular asset purchases is welcome; the NBP should provide timely guidance on its bond portfolio as initial maturity dates approach.
- Foreign exchange intervention should be reserved for periods of disorderly market conditions.
Financial sector resilience and FX mortgage issue
- Bank asset quality:
- Non-performing loan ratios have been broadly stable; loan performance did not deteriorate after the end of pandemic payment holiday schemes.
- Capital adequacy improved in 2020 to 20 percent of risk-weighted assets (significantly above the regulatory minimum), largely due to temporary suspension of dividend payments and increased holdings of low-risk government bonds.
- The gradual phasing out of crisis-related financial sector measures is appropriate.
- Housing market: returned to pre-pandemic robust conditions; exit from monetary stimulus may discourage excessive new borrowing but could overstretch some households as interest rates rise.
- Policy guidance for banks: vigorously test prospective borrowers’ ability to service loans in scenarios of significant interest rate increases.
- FX mortgages:
- Legal risks of FX mortgages are the main source of risk to the banking system; severity appears moderated by recent legal guidance and improving bank profitability.
- The Polish Financial Supervisory Authority proposed banks offer clients conversion of FX mortgages to zloty; the Financial Stability Committee proposes temporarily lowering FX mortgage risk weights for banks that implement such programs.
- The mission supports voluntary restructuring/conversion of FX mortgages: conversion would be costly for the banking system but manageable for most banks given strong capitalization and rising provisions.
Energy transition, climate policy, and labor market
- Energy and emissions:
- Poland is one of the 20 largest emitters of greenhouse gases; the power sector (where coal accounts for a large share) is the main contributor.
- Poland’s 2021 energy strategy envisages a 30 percent reduction in emissions by 2030 relative to the 1990 level and pledges to significantly reduce coal power by the 2040s.
- The transition will demand substantial investments, mostly in power generation, for more than a decade; large investments are also needed to replace aging capacity and meet a growing economy’s needs.
- EU financing will support the transition but will not be sufficient alone; a long-term financing strategy is needed.
- The authorities should consider carbon taxation and rebates to incentivize private sector decarbonization while shielding the most vulnerable households from higher carbon prices.
- Labor market and ALMPs:
- The decline in output in high-contact sectors exceeded declines in employment; expanding sectors increasingly demand skilled labor.
- Decarbonization presents longer-run regional challenges for coal mining employment.
- The mission welcomes authorities’ plans to modernize job search assistance and strengthen access to training, focusing on digital skills, including via the Recovery and Resilience Plan.
- The mission encourages implementing measures to allow longer periods of employment for foreign workers to help offset long-term population dynamics.
Key projections and indicators (Republic of Poland: Selected Economic Indicators, 2020–26)
- Activity and Prices
- GDP (change in percent) 1/: 2020: -2.6; 2021: 5.2; 2022: 4.5; 2023: 3.9; 2024: 3.0; 2025: 3.0; 2026: 0.0
- Output gap (percent of potential GDP): 2020: -2.9; 2021: -0.8; 2022: 0.3; 2023: 0.7; 2024: 0.2; 2025: 0.1; 2026: 0.0
- CPI inflation (percent) — Average: 2020: 3.4; 2021: 5.0; 2022: 5.6; 2023: 2.7; 2024: 2.6; 2025: 2.5
- CPI inflation (percent) — End of period: 2020: 2.4; 2021: 7.7; 2022: 3.7
- Unemployment rate (average, according to LFS): 2020: 3.2; 2021: 3.5; 2022: 3.3
- Public Finances (percent of GDP) 2/
- General government net lending/borrowing: 2020: -7.1
- General government cyclically adjusted overall balance: 2021: -5.6; 2022: -2.5; 2023: -2.8; 2024: -3.0; 2025: -2.7
- General government primary balance: 2020: -5.8; 2021: -1.8; 2022: -1.4; 2023: -1.3; 2024: -1.2
- General government debt: 2020: 57.4; 2021: 55.9; 2022: 52.4; 2023: 50.4; 2024: 50.2
- Balance of Payments
- Current account balance, percent of GDP: 2020: 2.9; 2021: -0.3; 2022: -0.6; 2023: -0.9; 2024: -1.0
- Total external debt, percent of GDP: 2020: 62.9; 2021: 62.5; 2022: 57.3; 2023: 53.5; 2024: 50.6; 2025: 47.8; 2026: 45.2
- Memorandum item:
- Nominal GDP (billion zloty): 2020: 2326.7; 2021: 2585.5; 2022: 2848.6; 2023: 3051.1; 2024: 3229.9; 2025: 3416.3; 2026: 3605.6
Source: Poland: Staff Concluding Statement of the 2021 Article IV Mission (December 14, 2021).