## Poland: Staff Concluding Statement of the 2024 Article IV Mission

_IMF News, October 17, 2024_

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## Bibliographic details
- Published: October 17, 2024

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### 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).*

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## References

- [Republic of Poland and the IMF](http://www.imf.org/external/country/POL/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Mission Concluding Statements](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2024/10/17/cs-poland-2024_