Journal Issue

Republic of Poland: Review under the Flexible Credit Line Arrangement

International Monetary Fund. European Dept.
Published Date:
January 2014
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1. The Polish economy has been resilient in the face of substantial shocks, helped by very strong fundamentals, a robust policy framework that supported forceful policy responses, and insurance provided by the FCL arrangement. Poland was the only EU country to avoid recession during the 2008–09 global financial crisis. This resilience was anchored on healthy household and corporate balance sheets, a sound banking sector, and decisive countercyclical fiscal and monetary policy. But, as growth weakened in Poland’s main trading partners as a result of the euro area crisis, heightened uncertainty weighed on household consumption and firms’ hiring and investment decisions. As a result, growth slowed substantially in 2012 and is expected to be lower in 2013 than in 2009. The authorities took action to ameliorate the effects of adverse external shocks on the economy through flexible macroeconomic management: policy interest rates were cut substantially and automatic fiscal stabilizers were allowed to operate. Meanwhile, effective financial sector policies continued to enhance the resilience of the banking system.

2. Nevertheless, Poland’s substantial linkages with core euro area countries and global financial markets continue to make it susceptible to external shocks.

  • About 70 percent of Poland’s domestic value added is exported to, and finally consumed in, Europe. Poland’s key role in supply chain linkages with Germany represents one of the main channels of exposure to core euro area countries and the rest of the world. Sizable FDI inflows also originate predominantly from Europe, and European banks’ presence in the Polish banking system is significant.

  • Poland is highly integrated with international capital markets through relatively large participation of foreign investors in the domestic government bond market (the foreign share is about 34 percent), sizable gross external financing needs (estimated at around 21 percent of GDP in 2014), and Poland’s role as proxy for investors seeking exposure to the CEE region. This exposes Poland to more generalized shifts in investor sentiment, including on account of turbulence in global financial markets or shifts in risk appetite for emerging market assets, including those stemming from eventual U.S. monetary policy normalization.

3. Sustained precautionary access to the FCL has supported the authorities’ macroeconomic framework and provided an additional buffer against external risks. The Fund has supported the authorities’ policies with four successive FCL arrangements. The initial FCL arrangement was approved in May 2009 for an amount of SDR 13.7 billion (1000 percent of quota). A successor arrangement of the same amount was approved in July 2010. In January 2011, a new two-year arrangement was approved with access increased to SDR 19.2 billion (1400 percent of quota) on account of heightened external risks. The current two-year arrangement, approved in January 2013, provides access of SDR 22 billion (1303 percent of quota). The authorities stressed that the FCL arrangements have helped preserve favorable access to capital markets, facilitating a more flexible policy response. Staff analysis indicates that the FCL arrangement has helped reduce the volatility of local-currency government bond yields, particularly during periods of high stress in global financial markets.

Recent Economic and Policy Developments

A. A Recovery is Underway

4. The economy is starting to recover after a cyclical slowdown. Domestic demand was sluggish in the first half of 2013 (reflecting very weak investment and inventory destocking) with net exports driving growth (Figure 1, Table 1). An improvement in economic activity in main trading partners, particularly Germany, provided support for an incipient rebound that started in mid-2013. More recently, household consumption has started to gain traction, underpinned by improving confidence and rising real wages (as nominal wage growth has outpaced inflation). High-frequency data also point to a recovery in retail sales and industrial production, and a moderation of the decline in construction activity.

Figure 1.Poland: Recent Economic Developments, 2009–13

Sources: Haver, Central Statistical Office, and IMF staff calculations.

Table 1.Poland: Selected Economic Indicators, 2011–18
Activity and prices
GDP (change in percent) 1/
Domestic demand3.6−0.1−
Private consumption growth2.
Public consumption growth−
Domestic fixed investment growth8.5−1.7−
Inventories (contribution to growth)0.7−0.6−
Net external demand (contribution to growth)−0.6−
Output gap0.8−0.3−1.5−1.0−0.8−
CPI inflation (percent)
End of period4.
Unemployment rate (average, according to LFS)9.610.110.610.510.310.19.79.3
Public finances (percent of GDP) 2/
General government revenues38.438.437.437.738.038.738.639.0
General government expenditures43.442.342.041.341.040.941.041.1
General government balance−5.0−3.9−4.6−3.6−3.0−2.2−2.4−2.2
Public debt56.255.657.549.450.150.048.947.7
National definition 3/53.452.752.8
Money and credit
Private credit (change in percent)
Broad money (change in percent)
Policy Rate (percent) 4/
Balance of payments
Current account balance (transactions, billion U.S. dollars)−25.0−17.2−13.8−16.4−19.3−21.5−22.7−24.1
Percent of GDP−4.9−3.5−2.7−3.0−3.3−3.5−3.5−3.5
Exports of Goods (billion U.S. dollars)195.2188.4196.9207.5221.0237.8256.0275.5
Export volume growth7.
Imports of Goods (billion U.S. dollars)209.2195.3199.5211.1226.6242.5260.5280.1
Import volume growth5.5−
Net oil imports (billion U.S. dollars)22.823.523.624.223.623.223.223.4
Terms of trade (index 1995=100)96.294.794.293.794.495.495.695.6
FDI, net (in percent of GDP)
Official reserves (billion U.S. dollars)97.9108.9107.7111.6123.9136.0144.1151.3
In percent of short-term debt plus CA deficit84.991.098.9103.1118.0122.2125.8128.3
Total external debt (billion U.S. dollars)320.6364.2372.6374.3387.5402.1413.6425.6
In percent of GDP62.274.472.868.867.065.563.561.6
Exchange rate
Exchange rate regimeFloating
Zloty per USD, period average 5/
Zloty per Euro, period average 5/
Real effective exchange rate (INS, CPI based) 6/110.4107.6
Appreciation (percent change)−1.5−2.6
Memorandum item:
Nominal GDP (billion zloty)1528.11595.21629.71709.21801.81902.42014.72134.6
Sources: Polish authorities and IMF staff calculations.

5. The labor market has improved somewhat (but is still weak) and inflation remains subdued. In the third quarter, labor market conditions continued to improve with the (seasonally adjusted) jobless rate dropping to 10.2 percent from a high of 10.6 percent in the first quarter. Real wage growth has accelerated modestly, supported by low inflation. Price pressures and inflation expectations have been muted. While CPI inflation rose from its record low of 0.2 percent (yoy) in June, inflation in October (0.8 percent, yoy) remains well below the 2½ percent target. Core inflation has also remained subdued.

Activity Indicators

Sources: HSBC/MKT, Eurostat, and IMF staff calculations.

6. The current account deficit narrowed sharply in the first half of 2013, led by an improvement in the trade balance. A strong pick-up in export growth was supported by improving activity in main trading partners and gradual but continuous expansion toward Eastern European markets. In contrast, import growth was affected by weak domestic demand, leading to an unprecedented trade surplus. Net external liabilities, which include substantial cross-border intra-company loans, have stabilized at around 68 percent of GDP (Figure 2, Table 2).

Figure 2.Poland: Balance of Payments Developments, 2009–13

Sources: National Bank of Poland and IMF staff calculations.

1/ Excludes NBP.

Table 2.Poland: Balance of Payments on Transaction Basis, 2011–18(Millions of US dollars)
Current account balance-25,023-17,169-13,822-16,417-19,269-21,518-22,724-24,065
percent of GDP−4.9−3.5−2.7−3.0−3.3−3.5−3.5−3.5
Trade balance−14,042−6,879−2,644−3,618−5,585−4,730−4,431−4,650
percent of GDP−2.7−1.4−0.5−0.7−1.0−0.8−0.7−0.7
percentage change in unit values15.
percentage volume growth9.
growth in foreign demand8.
percentage change in unit values15.7−
percentage volume growth7.5−
growth in domestic demand3.6−0.1−
Terms of trade percentage change−1.6−1.5−0.6−
Services balance5,6686,1917,2036,9577,1307,8788,5909,261
Net Income−22,880−21,742−23,356−24,683−27,286−29,480−31,993−34,395
Net transfers6,2315,2614,9764,9276,4724,8145,1105,718
o/w EU receipts8,3978,5299,73710,08010,7786,5818,1588,124
o/w payment to EU−5,004−4,893−5,937−6,139−6,596−6,685−6,754−6,831
Capital and financial account balance40,45031,23217,73325,73137,37739,79337,28538,134
Capital account balance10,01710,95313,23015,64716,82316,65516,48916,324
o/w net EU transfers8,8908,80812,75015,05616,18310,56515,20318,039
Financial account balance30,43320,2794,50410,08420,55423,13820,79721,810
Foreign direct investment (net)11,5523,6043,4745,9767,7268,9269,62610,126
by nonresidents18,8873,0921,50714,06116,06117,26118,46119,461
o/w privatization2,3392,5812,5812,5812,5812,5812,5812,581
Portfolio investment (net)16,83519,75016,9977,60715,32714,21211,17011,184
by non-residents16,10920,18217,5518,44416,18915,05612,00012,000
o/w equities3,0523,6121,1865,1822,0002,0002,0002,000
Other investment (net)2,608−5,929−15,968−3,500−2,50000500
Financial derivatives−5622,854000000
Errors and omissions−9,144−2,862−5,121−5,437−5,781−6,139−6,516−6,906
Overall balance6,28311,201−1,2093,87612,32712,1368,0457,163
Reserve assets−6,283−11,2011,209−3,876−12,327−12,136−8,045−7,163
Memorandum items:
Current plus capital account (percent of GDP)−2.9−1.3−0.1−0.1−0.4−0.8−1.0−1.1
Official reserves97,866108,914107,705111,581123,908136,044144,089151,252
in months of imports5.
Ratio of reserves to short-term debt 1/108.4106.2113.3121.5144.5151.4156.9161.2
Ratio of reserves to ST debt plus CA deficit 1/84.991.098.9103.1118.0122.2125.8128.3
Total external debt (percent of GDP)62.274.472.868.867.065.563.561.6
Total external debt (percent of exports) 2/137.8161.0157.7150.6146.4141.2134.9129.0
External debt service (percent of exports) 2/ 3/43.249.345.542.334.634.533.933.1
Gross FDI inflows (percent of GDP)
Net FDI inflows (percent of GDP)
Sources: National Bank of Poland and IMF staff calculations.

7. The economy continues to face a volatile external environment. The emerging market sell-off that took place over the summer affected Poland less than many other emerging economies (Table 3). The floating exchange rate regime played a stabilizing role, while broadly adequate international reserves and the precautionary FCL arrangement boosted market confidence. Nonetheless, cumulative capital outflows of about $2.9 billion were registered between June and September. Foreign investors reduced their holdings of local government bonds by about $2.8 billion (a 1.7 percentage point drop in their holdings to 34 percent). Yields on 10-year local government bonds increased by 100 bps (in line with the increase in long-term US treasury yields) from the very low levels achieved in early May, but they nonetheless remain low by historical standards (Figure 3). More recently, capital outflows continued at a more moderate pace, but the equity market has performed well (surpassing its spring 2011 level).

Table 3.Poland: Monetary Accounts (eop), 2007–13
2007200820092010201120122013 Proj.
(Billions of zlotys)
Central Bank
Net foreign assets141177212257317321317
Net domestic assets−38−51−74−117−179−153−146
Net claims on government−26−21−23−12−19−16−16
Claims on banks−49−25−74−93−100−93
Other items, net−7−38−26−31−67−37−37
Base money103126138140138167171
o/w Currency issued86102100103112113114
o/w Bank reserves17253837265457
Deposit Money Banks
Net foreign assets−19−113−135−156−169−143−107
Net domestic assets496679762842939953970
Net claims on the central bank393775121130167163
Net claims on government107153171177191177178
Claims on private sector464633677735838858894
Claims on corporates173224217215253257273
Claims on households260376421480537538556
Claims on other31334041476365
Other items, net−114−143−161−191−219−248−265
Consolidated Banking System
Net foreign assets1216476101149177209
Net domestic assets441602644683733744765
Claims on government80131148164172161162
Claims on private sector464633677735838858894
Other items, net−104−162−182−217−276−274−291
Broad money (M3)562666720784882921974
Memorandum items:(Percentage change from end of previous year)
Base money18.−
Broad money (M3)13.418.68.18.812.54.55.7
Net domestic assets34.
Net foreign assets−27.5−46.918.832.646.919.418.1
Net claim on government−13.463.412.811.04.5−6.60.8
Claims on private sector31.536.47.08.513.92.44.2
Deposit growth13.118.910.69.612.25.16.5
(Percent of GDP, unless otherwise noted)
Broad money (M3)47.752.253.655.357.757.859.8
Private sector credit39.449.650.451.954.853.854.8
Broad money Velocity (GDP/M3)
Money multiplier (M3/base money)
Sources: Haver, IFS, National Bank of Poland, and IMF staff calculations.

Figure 3.Poland: Financial Market Developments, 2007–13

Sources: Bloomberg, Haver Analytics, Polish Ministry of Finance, and IMF staff calculations.

8. The banking system has remained profitable and well-capitalized (Figure 4, Table 4). Average capital to risk-weighted assets increased further to 15.7 percent in the third quarter (with tier 1 capital at 14.2 percent of risk-weighted assets), helped by retained earnings. Profitability has held up well, despite some compression in net interest margins associated with the drop in policy rates. Overall zloty liquidity in the banking system has remained ample and the gradual withdrawal of foreign funding that started in mid-2011 has stopped. Credit growth has remained weak, particularly with respect to non-financial corporations, but is starting to recover in the household segment (Figure 5). New foreign currency mortgage lending has effectively come to a halt. The impaired loan ratio declined slightly to 8½ percent at end-September from close to 9 percent six months earlier, helped by a drop in impaired consumer loans. But, the stock of impaired consumer and small and medium-sized enterprise loans remains high (at around 15 percent for both).

Figure 4.Poland: Banking Sector Developments, 2005–13

Sources: KNF, NBP, and Fund staff calculations.

1/ Billion zloty. 2/ Percent.

Table 4.Poland: Financial Soundness Indicators, 2007–13(Percent)
Capital adequacy 1/
Regulatory capital to risk-weighted assets12.011.113.313.913.114.815.7
Regulatory Tier I capital to risk-weighted assets11.810.012.012.511.713.114.2
NPLs net of provisions to capital11.48.313.811.511.612.912.6
Bank capital to assets8.
Asset composition and quality
NPLs to gross loans (non-financial sector)
Sectoral distribution of loans to non-financial setor
Loans to households59.362.065.368.066.465.765.9
Loans to non-financial corporations40.337.634.331.533.133.733.5
Earnings and profitability
Return on average assets (after tax)
Return on average equity (after tax) 1/22.420.711.213.316.114.012.5
Interest margin to gross income59.455.751.953.055.855.054.0
Noninterest expenses to gross income68.758.458.556.054.554.556.8
Liquid assets to total assets (liquid assets ratio)
Liquid assets to total short-term liabilities24.225.329.831.228.831.133.5
Loans to deposits98.0112.6109.2114.5119.8117.7115.1
Sensitivity to market risk
Net open positions in FX to capital 1/−0.30.2−0.1
Sources: National Bank of Poland and KNF.

Figure 5.Poland: Banking Credit Growth and Funding, 2007–13

Sources: Haver Analytics, NBP, KNF, and IMF staff calculations.

Poland's Business Cycle Synchronization

(Correlation coefficient)

Source: IMF staff calculations.

Foreign Ownership of Polish Government Bonds


Sources: Datastream, Haver Analytics, and IMF staff calculations.

B. Macroeconomic Management has been Appropriate

9. In the context of a difficult external environment and weak growth, the authorities have carefully managed macroeconomic policies. The policy mix has appropriately combined supportive monetary policy with the use of automatic fiscal stabilizers around a consolidation path. This has helped pave the way for the recovery that is now underway, which is essential for further rebuilding policy buffers and preparing for an exit from the FCL arrangement once external risks recede.

10. Substantial monetary easing since end-2012 has provided support to the economy. The Monetary Policy Council (MPC) completed an easing cycle that delivered 225 bps of rate cuts between November 2012 and July 2013. The MPC has expressed its intention to keep policy rates on hold at the current 2.5 percent until at least mid-2014. Maintaining an accommodative stance should be facilitated by the new Monetary Policy Guidelines, which allow the MPC to accept longer periods of deviation of inflation from the target range of 1½–3½ percent. Work is also underway to strengthen the MPC, including by possibly introducing staggered terms for MPC members.

11. The flexible exchange rate played its stabilizing role, notably during the recent episode of turmoil in emerging markets. Despite significant monetary easing, the zloty remained relatively stable throughout the summer. This likely reflected confidence in Poland’s policy framework. International reserves remain broadly adequate based on standard metrics of reserve adequacy (Figure 6). Updated estimates for Poland, using EBA methodologies based on data available as of November 2013, suggest that the exchange rate is broadly consistent with medium-term fundamentals and appropriate policies, with the current account deficit close to its norm and the real effective exchange rate (REER) close to the model estimate. Aside from the insurance provided by the FCL and broadly adequate international reserves, the NBP also has a swap line with the Swiss National Bank to help cover liquidity needs in the event of major Swiss franc funding pressures associated with foreign currency mortgages.

Figure 6.Poland: Reserve Coverage in International Perspective, 2012 1/


Sources: World Economic Outlook and IMF staff calculations.

1/ Horizontal lines represent median in all the charts.

2/ Reserves at the end in percent of short-term debt at remaining maturity and estimated current account deficit in 2012. The current account is set to zero if it is in surplus.

Figure 6.Poland: Reserve Coverage in International Perspective, 2012 1/ (concluded)


Sources: World Economic Outlook, Balance of Payments Statistics Database, and IMF staff calculations.

1/ Horizontal lines represent median in all the charts.

2/ The ARA metric was developed by SPR to assess reserve adequacy. For the stock of porfolio liabilities, data on 2011 or 2012 is used, depending on data availability.

12. Fiscal policy is rightly balancing the need to avoid being a drag on growth with further consolidation (Tables 5 and 6).

Table 5.Poland: General Government Statement of Operations, 2011–18(Percent of GDP)
Personal income tax4.
Corporate income tax2.
Other taxes2.
Social contributions11.412.312.412.712.913.013.113.2
Other revenue 1/
Capital revenue1.
Sales of goods and services2.
Other current revenue2.
Compensation of employees9.
Use of goods and services5.
Social benefits16.216.416.816.616.516.516.416.3
Other expense 1/
Other current expenditure2.
Capital transfers0.
Net acquisition of nonfinancial assets5.
Gross Operating Balance0.70.7−
Net lending/borrowing (overall balance)−5.0−3.9−4.6−3.6−3.0−2.2−2.4−2.2
Net financial transactions−5.0−3.6−4.6−3.6−3.0−2.2−2.4−2.2
Net acquisition of financial assets−1.3−0.9−1.6−−0.4−0.4
Currency and deposits−1.30.9−1.7−−0.7−0.6
Debt securities0.
Equity and investment fund shares−1.3−1.0−0.2−0.1−0.1−0.1−0.1−0.1
Other financial assets1.
Net incurrence of liabilities3.
Currency and deposits0.
Debt securities2.12.61.7−
Other liabilities0.
Adjustment and statistical discrepancies-0.1-
Memorandum items:
Cyclically-adjusted balance−5.4−3.8−3.4−2.3−2.3−2.0−2.4−2.2
Primary balance−2.3−1.1−1.9−1.3−0.80.0−0.10.0
Cyclically-adjusted primary balance−2.7−1.0−−0.10.0
General government debt56.255.657.549.450.150.048.947.6
General government liabilities63.062.664.756.657.457.356.254.8
General government financial assets−33.0−34.5−36.0−28.9−30.6−31.5−31.4−31.1
Nominal GDP in billions of Zlotys1,5281,5951,6301,7091,8021,9022,0152,135
Sources: Eurostat and IMF staff calculations.
Table 6.Poland: General Government Financial Balance Sheet, 2011–18(Millions of Zlotys)
TransactionsOEFClosing Opening balanceTransactionsOEFClosing Opening balanceProjections
Net worth and its changes….….….….….….….….….….….….
Nonfinancial assets….….….….….….….….….….….….
Net Financial Worth−75,242−33,092−503,942−59,84312,826−550,959−586,358−493,656−551,494−599,075−632,928−662,980
Financial Assets−20,593−6,774459,025−284−11,543447,198468,806474,579482,288490,187498,979507,318
Currency and deposits−19,323−57243,16614,076−7,74349,49950,56853,03555,91059,03162,51666,235
Debt securities−59−9175,772357−1,0325,0975,2075,4615,7576,0786,4376,820
Equity and inv. fund shares−19,82287287,195−16,5920270,603298,561296,031294,061291,453288,512284,330
Other financial assets17,712−7,445107,0102,304111109,425101,409106,354112,120118,379125,368132,826
Currency and deposits000000000000
Debt securities32,31521,233719,27341,865−18,482742,656824,659726,487778,929820,182846,941868,379
Other liabilities1,100−2,765100,4975,7790106,276118,516124,297131,035138,350146,517155,234
Memorandum items:
Net financial worth (percent of GDP)−33.0−34.5−36.0−28.9−30.6−31.5−31.4−31.1
Financial assets (percent of GDP)
Liabilities (percent of GDP)63.062.664.756.657.457.356.254.8
GDP nominal prices (billion PLN)1528.11595.21629.71709.21801.81902.42014.72134.6
Sources: National Authorities and IMF Staff calculations.
  • In 2013, automatic stabilizers were appropriately allowed to operate in response to the cyclical slowdown. Preliminary staff estimates suggest that the fiscal deficit would widen by ¾ percent of GDP to about 4.6 percent of GDP in 2013, mainly reflecting the impact of the economic slowdown on tax collections (notably VAT). As a result, the public debt ratio is expected to increase (after declining in 2012). Sound public debt management allowed the government to cover all 2013 financing needs by October, and pre-financing of 2014 needs is underway.

  • For 2014, the fiscal deficit is expected to decline to 3.6 percent of GDP, which is appropriate at this stage of the recovery. The fiscal improvement reflects consolidation measures of about ½ percent of GDP, some cyclical recovery in revenue, and changes to the pension system’s second pillar (Box 1). The latter are expected to lead to a drop in public debt by about 9 percent of GDP and a decline in the deficit by about ½ percent of GDP in 2014 (the improvement in the deficit will rise to 1 percent of GDP in 2015), with a corresponding increase in future pension liabilities.

  • To help entrench fiscal consolidation, the authorities introduced a permanent fiscal rule that constrains the growth of public expenditure, while allowing for countercyclical fiscal policy. In particular, the rule caps the growth of public expenditure at trend GDP growth (or below trend GDP growth under certain conditions, including if public debt surpasses pre-defined thresholds).

13. Additional steps were taken to further strengthen the resilience of the financial sector. Following the incorporation of credit unions into the bank supervisory perimeter, the authorities implemented a series of audits and rehabilitation measures to strengthen this small, but nonetheless important, segment. Banking supervision was further reinforced by increasing the frequency of targeted inspections and enhancing the coordination between onsite and offsite work. In line with FSAP recommendations, the financial supervisory authority (KNF) has also engaged in a thematic review of banks’ credit risk policies as part of its efforts to address impaired loans. In parallel, work has continued on the establishment of a systemic risk board (SRB)—essential for establishing a macroprudential framework—and on legislation to overhaul the bank resolution framework.

Box 1.Changes to Poland’s Second Pension Pillar

Poland currently has a three pillar pension system: (i) the first pillar is mandatory, pay as you go, notional defined contribution, and public; (ii) the second pillar is mandatory, funded, and privately managed; and (iii) the third pillar is voluntary, funded, and barely used. The second pillar is funded by diverting a portion of social contributions collected by the general government to the privately managed pension funds. Assets in the second pillar currently amount to about 18 percent of GDP—half of which is represented by holdings of government securities and government-guaranteed debt. In September, the Polish authorities announced significant changes to the second pillar. The changes—which will begin to take effect in 2014—are as follows:

  • Private pension funds’ holdings of Treasury bonds and Treasury-guaranteed bonds will be transferred to the social security administration and cancelled;

  • Corresponding pension fund liabilities will be transferred to individual notional accounts in the first pillar and thereafter indexed by the five-year average nominal GDP growth;

  • All new pension contributions will be channeled to the social security administration, unless contributors “opt in” to the second pillar;

  • Pension funds will be banned from investing in government bonds, and current benchmarking and penalty systems will be removed to encourage more active portfolio management;

  • Limits on holdings of foreign securities will be lifted over time, from the current 5 percent of pension funds’ portfolios to 30 percent by 2016;1 and

  • Pension payouts will be centralized in the public system, with a gradual transfer of assets to the first pillar starting ten years before retirement.

The proposed changes were passed by parliament in early December. The law is likely to be challenged in Poland’s Constitutional Court (but would still be implemented in the meantime).

Notwithstanding these changes to the pension system, additional steps will still be needed to reform the social security system and put the public debt ratio on a downward path.

  • Improving the financial strength of the social security system will require further reforms of the special occupational pensions and better alignment of disability and survivor pensions with the core pension system;

  • Despite the near-term fiscal gains from the proposed changes to the pension system, it is essential that fiscal policy remains prudent and that public debt is reduced further over time;

  • As the planned changes to the pension system are implemented, careful attention will need to be paid to potential implications for the government bond and equity markets; and

  • Given the expected decline of replacement rates under the defined-contribution system, additional voluntary pension savings would help reduce the risk of old age poverty.

1 The current 5 percent limit is non-binding, as foreign securities constitute about 1½ percent of pension fund assets. Staff calculations indicate that the lifting of the ceiling on foreign securities’ holdings is not likely to have a destabilizing effect on the balance of payments, as portfolio outflows would likely represent less than 1 percent of GDP per year.


14. Risks to the outlook remain dominated by external factors. The economy has substantial trade and financial linkages with core euro area countries, including through supply chains and foreign bank ownership. This makes Poland susceptible to spillovers stemming from a protracted period of low growth in Western Europe, or a re-emergence of financial stress in the euro area. Unsettled global financial conditions or higher-than-expected increases in long-term rates as advanced countries exit unconventional monetary policy would affect Poland through financial market volatility and capital outflows. The banking system also remains exposed to foreign currency-induced credit and liquidity risks, and to contagion from potential distress in their parents. Conversely, on the upside, domestic demand could recover more quickly than projected as confidence returns, boosting growth by more than currently expected.

15. The authorities continue to view the FCL arrangement as an effective insurance against external downside risks. They underscored the usefulness of the FCL arrangement as a temporary complement to reserves and a signal of Poland’s very strong policy frameworks, institutions, and track record of policy implementation. The authorities consider that external risks remain elevated, notably with respect to the possibility of a prolonged period of weak growth in Europe or financial volatility facing emerging markets.

16. The authorities remain committed to exiting from the FCL arrangement when external conditions allow. They reaffirmed their commitment to maintaining very strong policies and underscored their intention to rebuild policy space to counter adverse shocks, notably through ongoing fiscal consolidation at a pace consistent with the economic cycle, an appropriate monetary policy stance, and continued vigilance regarding the state of the banking system. At the same time, given the early phase of the economic recovery and heightened external risks, the authorities believe that the FCL provides important “breathing space” for Poland to continue to rebuild buffers at a pace consistent with economic and financial conditions (Tables 7 and 8). They consider that these steps are sufficient to help prepare for an exit from the FCL arrangement when external conditions allow.

Table 7.Poland: External Financing Requirements and Sources, 2009–15(Millions of US dollars)
Gross financing requirements96,516122,644112,263120,461110,934118,839109,639
Current account deficit17,15524,03025,02317,16913,82216,41719,269
Medium and long-term debt amortization12,67526,24318,48432,73431,11934,08626,042
Public sector6976,8214,92313,94713,45615,98513,193
Non-bank Corporates8,77612,7859,11410,15014,2769,6388,075
Short-term debt amortization66,68672,37168,75670,55865,99368,33564,329
Public sector1,1471,1695082,4822,7304,0955,119
Banks (inc. s.t. deposits)29,91223,49521,36819,25014,43814,43815,882
Non-bank Corporates35,62747,70746,88048,82648,82649,80243,328
o/w trade credit28,62731,15331,45732,76332,76333,41829,074
Sources of financing111,258137,776118,546131,662109,725122,715121,967
Foreign direct investment (net)8,4606,86111,5523,6043,4745,9767,726
o/w inward (net)13,02214,34518,8873,0921,50714,06116,061
Equities (net)−2836,8723,7323,0465864,2991,091
by nonresidents1,5797,8753,0523,6121,1865,1822,000
New borrowing and debt rollover113,647153,67398,551107,059114,34391,249108,437
Medium and long-term borrowing41,27684,91727,99341,06546,00826,92042,109
Public sector19,64729,53612,50819,57124,0628,20315,308
Non-bank Corporates18,0496,05611,86815,22518,5599,83120,016
Short-term borrowing72,37168,75670,55865,99368,33564,32966,329
Public sector1,1695082,4822,7304,0955,1195,119
Foreign subsidiaries to parent banks12,67511,52810,3857,7897,7898,5688,568
Non-bank Corporates47,70746,88048,82648,82649,80243,32845,328
EU transfers7,1916,8738,8908,80812,75015,05616,183
of which: Errors and omissions−10,045−10,462−9,144−2,862−5,121−5,437−5,781
Use of official reserves−14,742−15,132−6,283−11,2011,209−3,876−12,327
Financing gap0000000
Sources: National authorities and IMF staff calculations.
Table 8.Poland: Capacity to Repay the Fund, 2014–19
Stocks from prospective drawings 1/
Fund credit (millions SDR)22,00022,00022,00013,7502,7500
in percent of quota1,3031,3031,3038141630
in percent of GDP666310
in percent of exports of goods and services141312710
in percent of gross reserves 2/3027251530
Flows from prospective drawings 3/
GRA Charges1912422422151016
Level Based Surcharge2673393394001260
Service Charges11000000
Debt Service due on GRA credit (millions SDR)5685815818,86511,2272,756
in percent of quota343434525665163
in percent of GDP000231
in percent of exports of goods and services000451
in percent of gross reserves 2/1119113
Memorandum item:
Total external debt, assuming full drawing (percent of GDP)757371676260
Sources: IMF Finance Department, Polish authorities, and IMF staff calculations.

FCL Qualification Criteria

17. In staff’s view, Poland continues to fully meet the qualification criteria for an arrangement under the FCL. Very strong policy frameworks have allowed the authorities to effectively adjust policies, as needed, in response to adverse external shocks and economic developments. Monetary policy is conducted within the context of the well-established inflation targeting framework. Fiscal policies remain guided by the medium-term objective of achieving a fiscal deficit of 1 percent of GDP in structural terms, which staff deems appropriate to ensure fiscal sustainability. The financial supervisory framework continues to enhance the resilience of the banking system, including by promoting strong capitalization. The authorities remain committed to maintaining strong policies going forward and taking appropriate actions should downside risks materialize. The Executive Board commended Poland’s policy track record at the conclusion of the 2013 Article IV consultation. As to the relevant criteria for the purpose of assessing qualification under the FCL arrangement, identified in ¶2 of the FCL decision, staff’s assessment is as follows (Figure 7):

Figure 7.Poland: Qualification Criteria, 2009–18

Sources: Bloomberg, Poland authorities, and IMF staff calculations.

1/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

  • The external position is sustainable. External debt, though relatively high at 74 percent of GDP at end-2012, is expected to decline. The updated external debt sustainability analysis (Annex I) suggests that external debt ratios will decline over the medium term and remain manageable under adverse shocks. The current account deficit has narrowed to 2.7 percent of GDP and is projected to rise to 3.5 percent of GDP in the medium term.

  • The capital account is dominated by private flows. The bulk of capital flows to Poland originates from the private sector, with official creditors accounting for less than 5½ percent of external debt in 2013.

  • Uninterrupted access to capital markets at favorable terms. Poland has maintained one of the highest credit ratings among emerging market countries and constant access to international capital markets at favorable terms. In 2013, the government successfully issued about €2 billion of sovereign debt in international capital markets, including a 20-year bond. Spreads vis-à-vis German bonds have remained narrow and stable (reaching a minimum of 176 bps on 10-year bonds in mid-May 2013) and, despite the recent increase, yields on government bonds remain low by historical standards.

  • Reserves are relatively comfortable. Gross international reserves stood at $106 billion at end-October and are broadly adequate relative to standard reserve metrics. They have declined slightly since the current FCL arrangement was approved, largely reflecting shifts in government foreign currency deposits.

  • Sound public finances, including a sustainable public debt position. Fiscal policy is underpinned by Poland’s strong policy framework, which will be reinforced by the implementation of the new fiscal rule. To a large extent, the widening fiscal deficit in 2013 was cyclical in nature: the structural deficit still dropped by about ½ percent of GDP to 3½ percent of GDP and, under current policies, is projected to reach about 2 percent of GDP by 2016. Public debt should drop below 50 percent of GDP in 2014 and further to about 47½ percent of GDP by 2018. Debt sustainability analysis, conducted under the new framework for market-access countries, indicates that the baseline fiscal path is consistent with sustainable debt under a variety of macroeconomic scenarios (Annex II). The analysis also suggests that risks stemming from the currency composition and duration profile of public debt are limited, reflecting the authorities’ strong debt management strategy.

  • Low and stable inflation, in the context of a sound monetary and exchange rate policy framework. Both headline and core inflation remain low (and the former is below its target), but are expected to rise as the economy recovers. The authorities remain committed to preserving their credible and transparent inflation-targeting framework.

  • The absence of bank-solvency problems that pose an immediate threat of a systemic banking crisis. Poland’s banking system continues to be liquid, well capitalized, and profitable. The 2013 FSAP Update concluded that the banking system is resilient to a variety of large but plausible adverse shocks without threatening financial stability. However, the large presence of foreign banks headquartered in the EU continues to pose a source of risk and a channel for the transmission of external shocks to domestic credit markets.

  • Effective financial sector supervision. The 2013 FSAP Update concluded that Poland’s banking system appears to be resilient. It found that Poland is broadly compliant with Basel Core Principles for effective Banking Supervision (BCP), Insurance Core Principles (ICP), and International Association of Deposit Insurers (IADI). The observed resilience of the banking sector is backed by a proactive supervisory approach to limiting risks related to consumer and foreign currency lending, and by a conservative stance on credit risk policies and capital buffers.

  • Data integrity and transparency. The overall quality of Poland's macroeconomic data remains good, consistent with the findings of the 2003 data ROSC, and Poland remains in observance of the Special Data Dissemination Standard (SDDS). Concerns about the large errors and omissions in the balance of payment have been addressed with the support of Fund Technical Assistance (TA) and stood at 0.6 percent of GDP in 2012 (down from 4 percent of GDP prior to Fund TA).

Safeguard Assessment

18. Staff has completed the safeguard procedures for Poland’s 2013 FCL arrangement. The authorities provided the necessary authorization for Fund staff to communicate directly with the NBP's external auditor, PricewaterhouseCoopers (PwC) Warsaw. PwC issued an unqualified audit opinion on the NBP’s 2012 financial statements on March 28, 2013. Staff reviewed the 2012 audit results and discussed these with PwC. No significant safeguards issues emerged from the conduct of these procedures.

Staff Appraissal

19. Poland continues to benefit from the FCL arrangement. The FCL has helped sustain access to global capital markets and bolster confidence in the country’s fundamentals and polices. It has also provided Poland with additional flexibility in the implementation of sound macroeconomic policies, helping to ameliorate the effects of adverse external shocks. Poland’s macro-financial stability is likely to bring positive externalities to the CEE region, as validated by its recent inclusion in the Fund’s list of countries with systemically important financial sectors.

20. Poland continues to meet the qualification criteria for access to FCL resources. The authorities have continued to implement very strong policies and remain committed to respond appropriately to actual or potential balance of payments difficulties. Therefore, staff recommends completion of the review under the FCL arrangement for Poland.

Annex I. External Debt Sustainability Analysis

Poland: External Debt Sustainability: Bound Tests, 2008–18 1/ 2/

(External debt, percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviationshocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2014.

Poland: External Debt Sustainability Framework, 2008–18(Percent of GDP, unless otherwise indicated)
20082009201020112012201320142015201620172018Debt-stabilizing non-interest current account 6/
1Baseline: External debt46.264.967.162.274.472.868.867.065.563.461.6-2.8
2Change in external debt−8.618.72.2−4.912.2−1.6−3.9−1.8−1.5−2.0−1.9
3Identified external debt-creating flows (4+8+9)−5.411.1−3.1−−1.0−0.3−0.2−0.4−0.4
4Current account deficit, excluding interest payments5.
5Deficit in balance of goods and services−85.7−80.0−86.3−91.9−92.5−91.4−90.8−91.3−92.3−93.5−94.8
8Net non-debt creating capital inflows (negative)−2.1−2.3−3.1−2.8−1.5−0.9−2.1−1.7−1.8−1.8−1.8
9Automatic debt dynamics 1/−8.710.1−4.0−−0.6−0.6−
10Contribution from nominal interest rate1.
11Contribution from real GDP growth−2.3−0.9−2.3−2.8−1.3−1.0−1.9−1.9−2.0−2.1−2.1
12Contribution from price and exchange rate changes 2/−7.610.4−2.8−3.13.7
13Residual, incl. change in gross foreign assets (2-3) 3/−−1.17.7−2.4−3.0−1.5−1.3−1.6−1.5
External debt-to-exports ratio (in percent)114.4163.8158.9137.8161.0157.7150.6146.4141.2134.9129.0
Gross external financing need (in billions of US dollars) 4/125.895.7120.3120.0121.7114.8114.4103.0109.4112.6115.9
in percent of GDP23.822.225.623.324.810-Year10-Year22.421.017.817.817.316.8
Scenario with key variables at their historical averages 5/72.867.563.960.556.853.3-6.5
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard Deviation
Real GDP growth (in percent)
GDP deflator in US dollars (change in percent)18.4−−6.85.611.
Nominal external interest rate (in percent)
Growth of exports (US dollar terms, in percent)22.8−−2.915.915.
Growth of imports (US dollar terms, in percent)27.1−27.419.116.4−5.915.
Current account balance, excluding interest payments−5.4−3.4−4.0−3.8−2.1−3.31.4−1.4−1.7−2.0−1.8−1.3−1.0
Net non-debt creating capital inflows2.
Annex II. Public Sector Debt Sustainability Analysis

Public debt is moderately high, at 58 percent of GDP in 2013, but sustainable. Forthcoming modifications to the pension system’s second pillar will lead to a sizable one-off drop in the public debt-to-GDP ratio to 49 percent of GDP in 2014. Gross public financing needs are also projected to decline from 9.5 percent of GDP in 2013 to 8 percent of GDP in 2014, helped by the pension system changes. The profile of public debt appears robust to interest, rollover, and foreign currency risks. The main risk to the debt outlook stems from a negative shock to GDP growth. In addition, the relatively large share of foreign investors in the domestic debt market—which is set to increase as a result of the pension changes—entails a channel of transmission from global shocks, albeit the composition of the investor base is a mitigating factor.

A. Baseline and Realism of Projections

  • Debt levels. Poland’s favorable public debt dynamics are underpinned by a decline in the primary deficit, a favorable differential between projected GDP growth and the real interest rate, and the effects of forthcoming changes to the pension system. Gross financing needs are estimated at 9.5 percent of GDP in 2013 (down from an average of 15.5 percent of GDP in 2000–12), and are projected to drop further to 8 percent of GDP in 2014 and around 6 percent of GDP in 2018.

  • Changes to the pension system. Public debt projections under the baseline are strongly influenced by forthcoming changes to the pension system (see Box 1 in the main text). From the fiscal perspective, these changes will generate a one-off drop in (explicit) public debt in 2014 of 9 percent of GDP (with a matching increase in implicit public pension liabilities), plus a reduction in public financing needs over the medium term (rising to about 2¾ percent of GDP by 2018). The latter reflects the combined effect of lower public debt service, a partial redirection of pension contributions from the second pillar to the social security administration, and a gradual transfer of assets to the social security administration ten years before retirement. By contrast, the associated increase in public pension payments will gather pace in the long run, well beyond the projection period (staff is in the process of preparing a comprehensive analysis of the long-run fiscal implications of the changes to the pension system, which will be reported at the time of the 2014 Article IV consultation).

  • GDP Growth. The projections assume a gradual acceleration of GDP growth, from 1.3 percent in 2013 to 2.8 percent in 2014 and further to 3.5 percent in 2018. The output gap is expected to close gradually over the medium term. In recent years, staff projections of growth have displayed small forecast errors, with some pessimistic bias relative to other countries.

  • Fiscal Adjustment. Under the baseline, the primary deficit is expected to decline from 1.9 percent of GDP in 2013 to about balance in 2015–18, reflecting modest fiscal measures already in the pipeline, the changes to the pension system, and the gradual recovery in tax revenue (to bring it closer to recent historical levels). Pension changes account for the bulk of the improvement in fiscal aggregates and the associated drop in debt under the baseline. In the recent past, staff forecast errors of the primary deficit in Poland have not displayed an apparent bias and have been more conservative than those of other countries. Warning benchmarks highlight the size of the projected three-year improvement in the cyclically adjusted primary balance (4.4 percent), which takes place in 2013 and reflects the impressive fiscal consolidation achieved since 2010.

  • Sovereign yields. The effective interest rate on public debt dropped from 6.6 percent in 2005 to 5.9 percent in 2009 and further to about 5 percent in 2013. It is projected to remain stable at around 4.8 percent over the projection period. In recent years, Poland has maintained access to capital markets at favorable terms, even during periods of global financial distress. In 2013, bond yields dropped to historic lows and have remained low—notwithstanding an increase during the recent episode of turmoil in emerging markets. Spreads over 10–year German bonds stand close to their yearly average 236 bps (after reaching a minimum of 176 bps in May and a maximum of 285 bps in September), while EMBI and CDS spreads have remained at around 130 bps and 80 bps, respectively. While there is uncertainty about the impact of eventual Fed tapering on market conditions, pass-through from interest increases to the budget would be very slow, as about 80 percent of debt carries a fixed interest rate and the average duration stands at 3.6 years. A 100 bps parallel shift in the yield curve will lead to an increase in the interest bill of about 0.1 percent of GDP in the first year.

  • Maturity and rollover risks. The share of short-term debt in total government debt is negligible (there have been no t-bills outstanding since August 2013) and, after covering the full 2013 financing needs by October, the authorities have started to pre-finance 2014 needs. Going forward, however, rollover risk may increase somewhat as a result of the pension changes: the share of foreign investors in the domestic market is set to increase from about 34 percent in 2013 to 38 percent in 2014 and the overall share of external debt in total public debt will rise from 52 percent in 2013 to almost 60 percent in 2014. In addition, the share of foreign currency debt in total public debt will also increase from 30 percent in 2013 to 35 percent in 2014. The baseline assumes gradual convergence toward the current structure of public debt in terms of the share of foreign currency debt in total public debt (30 percent) and external debt in total public debt (about 50 percent).

  • DSA risk assessment. The heat map highlights risks associated with the share of public debt held by non-residents, plus the relatively large external financing requirements (25 percent of GDP in 2012). The latter, however, is heavily influenced by the external gross financing needs of the private sector, which include a substantial share of cross-border, intra-company, financing.

  • Fan charts. Symmetric fan charts, which treat upside and downside risks equally likely, show that public debt is more likely to enter a downward trajectory during the projection period. The lower bands indicate that the debt-to-GDP ratio could drop to around 40 percent by 2018 with a 25 percent probability. On the other hand, the upper bands indicate that debt-to-GDP ratios could surpass 60 percent by 2018 with a 5 percent probability. A more stringent exercise, however, combining restrictions to the upside shocks to interest rates and GDP growth (200 bps and 1 percent, respectively), increases the probability of debt-to-GDP surpassing 60 percent in 2018 to 25 percent. This result is still commensurate with a sustainable debt path, but it illustrates the degree of uncertainty around the baseline.

B. Shocks and Stress Tests

  • Growth Shock. The stress scenario assumes a drop in GDP growth by 1.7 percentage points in two consecutive years (2014–15) relative to the baseline, combined with a 0.4 percent drop in inflation and deterioration in the primary balance by 0.8 percent in 2014 and further by 1.6 percent in 2015. Under these assumptions, public debt increases to about 54 percent of GDP in 2015 before trending downward slightly to 52 percent of GDP by 2018. Gross financing needs increase to about 11 percent of GDP in 2015, but then converge quickly toward the baseline in the outer years.

  • Primary balance shock. An assumed deterioration in the primary balance by 0.9 percentage points in 2014–15 delays by two years the downward trend of the debt-to-GDP ratio and pushes up public debt to revenues to about 136 percent in 2015 (from 133 in 2014) but still well below current levels. Similarly, gross financing needs peak to about 10 percent of GDP in 2015 but converge to the baseline by 2018.

  • Interest rate shock. A permanent 438 bps increase in the nominal interest rate starting in 2014 (equivalent to the difference between the maximum real interest rate during 2002–12 and the average real interest rate over the projection), would lead to an increase in the effective interest rate on debt by 71 bps in 2015 and further gradual increases to 252 bps by 2018. Under this scenario, public debt dynamics deteriorate gradually relative to the baseline. Public debt increases to about 52 percent of GDP by 2018, while gross financing needs reach about 8 percent of GDP at the end of the projection period.

  • Combined shock. Under the combined shock, the public-debt-to-GDP ratio jumps sharply to about 60 percent in 2016 and remains broadly stable afterward. In turn, gross financing needs increase to about 12 percent of GDP in 2015, before trending downward to about 8.5 percent in 2018.

Poland: Public Sector Debt Sustainability Analysis (DSA)—Risk Assessment

Source: IMF staff.

1/ The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

2/ The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

3/ The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are:

200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

4/ Long-term bond spread over German bonds, an average over the last 3 months, 30-Jul-13 through 28-Oct-13.

5/ External financing requirement is defined as the sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at the end of previous period.

Poland: Public DSA—Realism of Baseline Assumptions

Source: IMF Staff.

1/ Plotted distribution includes all countries, percentile rank refers to all countries.

2/ Projections made in the spring WEO vintage of the preceding year.

3/ Not applicable for Poland.

4/ Data cover annual obervations from 1990 to 2011 for advanced and emerging economies with debt greater than 60 percent of GDP. Percent of sample on vertical axis

Poland: Public DSA—Baseline Scenario

(Percent of GDP, unless otherwise indicated)

Source: IMF staff.

1/ Public sector is defined as general government.

2/ Based on available data.

3/ Long-term bond spread over German bonds.

4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

5/ Derived as [(r - π(1+g) - g + ae(1 + r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.

7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).

8/ From 2014 onwards, reflects the transfer of pension fund assets and liabilities to the social security administration.

9/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.

10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Poland: Public DSA—Composition of Public Debt and Alternative Scenarios

Source: IMF staff.

Poland: Public DSA—Stress Tests

Source: IMF staff.

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