On behalf of the Polish authorities, we would like to thank staff for the constructive discussions held in Warsaw and for the report recommending completion of the review under the Flexible Credit Line Arrangement. The FCL arrangement has served the Polish economy well by providing insurance against adverse external spillovers. Developments over recent months confirmed that Poland’s fundamentals and policy frameworks are strong amidst an uncertain external environment. Given the global risks, particularly negative spillovers from the euro-area sovereign debt crisis, our authorities continue to regard the arrangement as an important buffer supporting their macroeconomic policy framework. As in the past, the authorities intend to treat the arrangement as precautionary.
Economic growth in 2011 remained strong but given the deteriorating outlook for the euro area, it is expected to slow down to 2.5 percent in 2012. Private consumption supported by net exports is expected to be a major driver of growth while the ambitious fiscal consolidation is ongoing. The sound financial sector continues to support credit growth. The balance of risks for growth is, however, on the downside, given developments in Poland’s key trading partners and bank deleveraging across Europe.
Reducing fiscal imbalance and ensuring long-term fiscal sustainability continue to be the priorities for the Polish authorities. The smooth implementation of the consolidation measures envisaged by the authorities for 2011 resulted in a sharp—over 2 percentage points—reduction in the general government deficit. The authorities remain determined to eliminate the excessive deficit in 2012 and to its further reduction to the level of the medium term objective (MTO), i.e., -1 percent of GDP. Fiscal policy measures will thus ensure that the general government debt is put on a declining path and remain sustainable below the threshold of 60 percent of GDP.
To this aim, the draft 2012 budget, which was submitted to Parliament at end-2011, extends the already introduced consolidation measures. Particularly, the 2011-enacted expenditure regime will be maintained and all discretionary and new legally mandated spending will remain subject to a temporary expenditure rule (CPI plus 1 percent). This fiscal constraint, together with the abolition of the early retirement scheme, will continue to translate into a significant decline in the general government expenditure-to-GDP ratio. On the revenue side, additional sources of revenues will contribute to the reduction of the general government deficit, including an increase by 2 percentage points in the disability insurance contribution paid by employers and an introduction of a royalty levy on minerals. Moreover, measures have been taken to broaden the tax base by phasing out some tax expenditure and improving the quality and transparency of the entire tax system.
Reinforcing long-term fiscal sustainability will be enhanced by the introduction of a permanent fiscal rule (expected by 2013). The rule, which limits the growth of expenditure, will seek to stabilize the general government balance over the medium-term, consistent with the MTO level. Fiscal sustainability will further be supported by structural reforms, including a gradual increase and equalization of the retirement age to 67 years for men and women (from current levels of 65 and 60 respectively), charges in the pension scheme for uniformed services, and a reform of the health care insurance system for farmers.
In 2011 CPI inflation averaged above the upper bound of the central bank inflation target (2.5 percent) and was mainly driven by external factors, i.e., developments of prices of energy and agriculture products in the global market, and by a noticeable depreciation of the Polish zloty in the second half of the year. Given deteriorating global demand, the continued fiscal consolidation and the monetary tightening in the first half of 2011, inflation is expected to return to the target over the next 18—24 months. Should the inflation outlook deteriorate, further monetary policy adjustments cannot be ruled out.
The Polish central bank has recently sold some of its foreign currencies in exchange for the Polish zloty. These occasional interventions did not have a significant impact on the level of foreign exchange reserves.
Polish banks remain liquid and profitable, and the level of capital remains broadly adequate to absorb potential losses. Despite robust capital adequacy and high quality of capital, the Polish supervisory authorities recommended banks to retain profits, which are expected to have reached a historically record-high level in 2011.
Given the relatively large foreign liabilities of some banks, banks’ liquidity is closely monitored and the authorities stand ready to provide liquidity support, should a need arise. The existing law provides protection against the heightened risks of foreign shareholders’ withdrawal, which could be triggered by an escalation of difficulties in parent euro-area banks.
The quality of assets remains the key concern of the supervisory authorities. Although the upward trend of the non-performing loans has recently stabilized, the economic slowdown and depreciation of the zloty pose some risks to banks’ balance sheets. It should be stressed, however, that the tightening of Recommendation S on the standards of mortgage lending has effectively contained the growth of the FX-denominated loans, which currently comprise less than 30 percent of new mortgage loans.
Lastly, upon the request of the Polish authorities in November 2011 for an update of the assessment of Poland’s financial system under the Financial Sector Assessment Program (FSAP), the assessment is scheduled to take place in early 2013