Poland: Staff Concluding Statement of the 2024 Article IV Mission
IMF News, October 17, 2024
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- Published: October 17, 2024
Mission overview and near-term assessment
- Mission dates: October 8-17, 2024.
- Near-term outlook is positive and improved relative to last year despite sluggish growth across Europe and Russia’s war in Ukraine.
- A consumption-led recovery is underway, supported by recently unlocked NextGen EU Funds (NGEU).
- Inflation has declined helped by a tight monetary stance; descent to the target range by close to end-2025 is on track, provided prudent policies are maintained.
- Key near- and medium-term policy priorities: balancing the mix of monetary and fiscal policy, preserving debt sustainability, and strengthening the economy to face longer-term challenges.
Growth outlook and macroeconomic projections
- 2023 growth: around 0.
- 2024 growth: 3 percent.
- 2025 growth: 3.5 percent.
- 2026 growth: 3.4 percent.
- Medium-term: growth expected to moderate and converge to potential, decelerating to slightly below 3 percent by 2029.
- Drivers and composition:
- 2024 acceleration led by recovering domestic demand: private consumption rebound due to strong nominal wage growth and lower inflation; fixed investment gradually recovering but remains below pre-pandemic shares of GDP.
- Net exports are a drag as imports recover and exports are held back by weak Euro Area demand.
- 2025–26: real and nominal wage growth expected to gradually decelerate; profits expected to continue declining due to limited pass-through of wage costs given a negative output gap.
- Support for imports and narrowing current account surplus: stronger consumption, inventory normalization, lagged impact of real exchange rate appreciation, and release of EU funds.
- Risks (tilted towards lower growth and higher inflation):
- Downside: slower Euro Area recovery, delayed absorption of EU funds, heightened geopolitical tensions.
- Upside: stronger catalytic role of EU funds on private investment and productivity, larger-than-expected workforce from higher immigration, potential nearshoring from geoeconomic fragmentation.
- Mitigants: ample foreign exchange reserves, flexible exchange rate, modest debt levels, robust financial sector buffers.
Inflation and monetary policy
- Policy rate: on hold at 5.75 percent since November 2023.
- Monetary stance: appropriately tight; tightened further as inflation expectations declined.
- Inflation path and guidance:
- Both core and headline inflation should peak in year-on-year terms before mid-2025, significantly above the target, before moderating around the upper end of the target range of 2.5±1 percent by end-2025, absent surprises.
- Monetary policy should remain tight at least through 2025.
- Rate cuts should commence only when there is clear evidence that wage growth is decelerating and that inflation is firmly on track towards the target.
- There may be scope for limited and gradual policy rate cuts to start around mid-2025, contingent on realized inflation declining towards target over several months on the back of decelerating wages.
- Uncertainties: energy prices, labor market developments, and pace of economic recovery contribute substantial uncertainty to the inflation trajectory.
Fiscal outlook and recommendations
- General government (GG) deficit projections:
- 2023: 5.1 percent of GDP.
- 2024: 5.7 percent of GDP (widening due to expansionary policies; fiscal impulse of 0.4 percent of GDP).
- 2025 budget target: 5.5 percent of GDP (largely owing to higher growth).
- Staff recommendation: tighter fiscal stance by around 0.5 percent of GDP in 2025, achievable within the 2025 budget by saving possible revenue overperformance and limiting non-priority spending.
- Rationale: lower debt, rebuild fiscal space, mitigate future shocks, and reduce the burden on tight monetary policy to rein in inflation, potentially allowing additional policy rate cuts.
- Fiscal Structural Plan:
- The medium-term Fiscal Structural Plan is welcome; it targets sufficient cumulative fiscal consolidation by 2028 to meet the EU’s new fiscal rules.
- Targets an adjustment of about 2½ percent of GDP from 2024 in terms of the structural fiscal balance.
- Would allow exiting the EU’s Excessive Deficit Procedure and stabilize debt at levels close to 60 percent of GDP notwithstanding large increases in defense spending.
- Full set of measures to achieve this is yet to be identified; bringing more of the planned fiscal consolidation upfront into 2025 would strengthen credibility.
- Potential consolidation measures that could also reduce inequality:
- raising Personal Income Tax revenues by increasing progressivity to bring them more in line with EU peers,
- addressing the preferential and regressive treatment of the self-employed,
- better targeting of social benefits to more effectively support the vulnerable,
- raising property tax revenues closer to EU comparators, and
- taxing more non-essential items at the standard VAT rate.
- Note on PIT threshold: raising the PIT tax-exempt threshold, currently under consideration, would require even stronger consolidation measures to offset the fiscal cost.
- Pensions: aligning the retirement age for men and women and then adjusting it over time in line with longevity would help limit the expected shortfall in pensions’ adequacy over the longer-term.
- Fiscal governance: authorities have expanded the coverage of the stabilizing expenditure rule, improved oversight over extrabudgetary funds, and the planned establishment of a fiscal council would strengthen accountability and governance.
Financial sector and credit recovery
- Banking sector: well-capitalized and liquid; systemic risks have moderated.
- Past prudential policies have tightened regulation to buttress stability; however, large legal costs and regulatory burdens (e.g., mortgage credit holidays) plus weak credit demand and legal/regulatory uncertainties have contributed to a steep decline in private sector credit-to-GDP in the EU.
- Policy recommendations to safeguard the nascent credit recovery:
- take into account the impact of possible further tightening of regulations on credit recovery while enhancing regulatory stability;
- proactively reduce legal risks to financial sector stability, including by exploring legislative solutions;
- even the playing field for private sector credit by replacing the bank asset tax in a manner that eliminates the preferential treatment of public debt;
- allow the mortgage credit holiday to expire.
Structural challenges, competitiveness, and labor market
- Structural headwinds:
- Population ageing, diminishing cost-competitiveness, and the climate transition challenge Poland’s export-driven growth model.
- Sizable real appreciation over the past two years weighs on cost-competitiveness.
- Regional growth outlook is subdued; geopolitical conflicts and geoeconomic fragmentation hinder new market penetration.
- Shallow domestic capital markets and low savings weigh on investment; population ageing will reduce future workforce size.
- Policy priorities to sustain growth:
- deepen capital markets (including steps towards a capital market union within the EU),
- lower barriers to resource reallocation (for example by strengthening re-skilling programs for adults),
- foster innovation capacity (including by promoting private equity and venture capital),
- support higher labor participation especially for women (by ensuring adequate child and elderly care).
- Labor supply measures:
- the new program supporting young parents’ return to the labor market aims to address participation gaps.
- building on successful absorption of refugees from Ukraine, ongoing efforts to enhance integration of immigrants can help contain labor shortages.
Climate, energy transition, and competitiveness
- Authorities’ new decarbonization targets are appropriate; meeting them while safeguarding competitiveness and social cohesion will require strong measures.
- Context:
- Poland’s costly dependence on coal undercuts competitiveness.
- Recent draft energy strategy update outlines additional targets/measures to align emissions with EU climate goals.
- Success depends on EU funds and removing barriers to private investment in renewable energy.
- Policy measures to accelerate transition and protect competitiveness:
- adopt EU legislation on faster permitting for green projects,
- liberalize regulations for onshore windfarms,
- prioritize NextGen EU funds for expanding electricity grids,
- extend carbon pricing to transportation and heating, with an early and gradual introduction to limit adjustment costs.
- Social dimension: authorities must cushion social impacts on coal mining regions and reduce energy poverty.
Concluding remarks
- Near-term momentum offers an opportunity to rebuild buffers and complete disinflation by tightening fiscal policies while keeping monetary policy appropriately tight.
- Full identification and earlier implementation of medium-term fiscal consolidation measures would strengthen credibility, reduce debt, and support more rapid interest rate reductions to foster private investment and growth.
- The mission thanked the authorities and counterparts for fruitful discussions.
Source: IMF staff concluding statement, Poland: Staff Concluding Statement of the 2024 Article IV Mission (October 17, 2024).