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IMF Executive Board Concludes 2016 Article IV Consultation with the Republic of Poland

Author(s):
International Monetary Fund. European Dept.
Published Date:
July 2016
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On June 27, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation1 with Poland.

The economy is enjoying a strong economic expansion, but external factors continue to weigh on inflation. Unemployment has come down rapidly, and the economy is operating at close to full capacity. Growth is projected to remain strong in 2016 and accelerate to 3.7 percent in 2017, on the back of strong private consumption supported by the new child benefit scheme, before moderating over the medium term. A positive output gap next year should help gradually nudge inflation toward the central bank’s target by end-2017.

Downside risks have intensified. Externally, a protracted period of slow growth in the euro area, accompanied by financial market volatility, and a marked slowdown in emerging markets could propagate into Poland. Domestically, controversial policy initiatives or fiscal slippages could worsen investor sentiment and hinder economic expansion. Over the longer term, a rapidly aging population poses important challenges to potential growth and fiscal sustainability. At the same time, enduring income disparities between Poland’s prosperous west and the lagging east could undermine the quality of growth.

The government’s declared policy priorities focus on supporting a strong and inclusive growth, but some recent initiatives have weakened market sentiment. Fulfillment of election promises is expected to increase the budget deficit to 2.8 percent of GDP in 2016 and to over 3 percent of GDP in 2017, resulting in a pro-cyclical fiscal stance. The government plans to resume fiscal consolidation at a rate of ¾ percentage points of GDP a year from 2018. The banking sector remains well capitalized amid weakening profitability, but recent proposals to convert FX mortgages into zloty, if implemented, could undermine financial stability and further dent market confidence.

Executive Board Assessment2

Executive Directors noted that Poland is enjoying a strong economic expansion, with the economy operating at close to full capacity and unemployment coming down rapidly, reflecting Poland’s progress in building strong fundamentals and policy buffers in recent years. They cautioned, however, that a weakening of institutions and policies or fiscal slippages could worsen investor sentiment and hinder economic expansion. They, therefore, encouraged the authorities to maintain sound institutions and growth-friendly policies, and advance structural reforms to support inclusive growth. Such policies would enhance resilience and, together with the Fund-supported Flexible Credit Line arrangement, provide strong insurance against external shocks.

Directors noted that the current accommodative monetary policy stance is appropriate and has helped support growth and maintain longer-term inflation expectations within the inflation target band. They urged the authorities to remain vigilant, noting that additional monetary easing could be needed if inflation expectations were to disappoint or if growth were to slow down sharply.

Directors observed that the banking sector remains well-capitalized amid weakening profitability. They stressed the importance of safeguarding financial sector stability, and welcomed the strengthened financial sector framework now in place, including the new bank resolution framework, which should now be implemented. However, Directors generally expressed concern that the new bank asset tax could undermine credit expansion and growth. They welcomed the authorities’ willingness to assess the performance of the new tax and adjust its design if necessary, and encouraged them to consider a more growth-friendly tax. They also took note of the proposals to restructure foreign exchange-denominated mortgages and stressed that any decision in this regard should be mindful of the potential impact on banks and financial stability. They noted that a case-by-case approach to restructuring mortgages held by distressed borrowers rather than a blanket mortgage conversion would avoid risks of destabilizing the financial sector.

Directors concurred that the authorities’ medium-term objective of 1 percent of GDP structural deficit remains appropriate, allowing for sufficient fiscal space to deal with external shocks and to address looming demographic challenges. In this regard, most Directors considered it necessary to resume fiscal consolidation without delay to take advantage of favorable cyclical conditions. Directors stressed that deficit reduction should be underpinned by growth-friendly measures to help support market confidence and maintain budget financing on favorable terms. They recommended maintaining the 2011 VAT increase, rationalizing discretionary government consumption, and reducing sizable VAT policy and compliance gaps. In this context, they welcomed the authorities’ plans to strengthen tax administration. Noting the need to reduce the risk of old-age poverty under the current pension system, Directors encouraged the authorities to maintain the legislated retirement age increases, which would also avoid adversely impacting the budget and improve labor force participation.

Directors encouraged the authorities to continue to implement structural reforms to boost productivity and promote inclusive growth. In this regard, they welcomed the authorities’ plans to increase access to vocational training and promote innovation, including through targeted tax incentives for start-ups. Directors advised that reducing regional disparities would require improving educational attainment in Poland’s east, scaling up public infrastructure to attract investment to poorer regions, and facilitating labor mobility.

Poland: Selected Economic Indicators, 2013–21
201320142015201620172018201920202021
Projections
Activity and prices
GDP (change in percent) 1/1.33.33.63.53.73.43.23.13.1
Domestic demand−0.75.03.43.94.03.83.53.23.2
Private consumption growth0.22.43.03.84.13.93.53.13.1
Public consumption growth2.24.73.43.12.82.62.32.11.8
Domestic fixed investment growth−1.110.05.83.85.14.84.44.44.4
Inventories (contribution to growth)−1.00.6−0.20.4−0.10.00.00.00.0
Net external demand (contribution to growth)2.0−1.60.3−0.4−0.3−0.4−0.3−0.1−0.1
Output gap−1.1−0.7−0.10.00.20.40.30.10.0
CPI inflation (percent)
Average0.90.0−0.9−0.71.11.92.42.52.5
End of period0.7−1.0−0.50.11.52.22.52.52.5
Unemployment rate (average, according to LFS)10.39.07.56.46.26.36.36.46.5
Public finances (percent of GDP) 2/
General government revenues38.438.938.939.239.039.139.239.239.2
General government expenditures42.442.241.541.942.141.941.741.541.3
General government net lending/borrowing−4.0−3.3−2.6−2.8−3.1−2.8−2.5−2.3−2.1
General government debt56.050.551.351.952.953.252.852.351.6
National definition 3/53.348.149.0
Money and credit
Private credit (change in percent, end-period) 4/3.58.66.04.65.05.55.85.85.9
Credit to GDP (percent)58.561.262.362.663.163.363.563.764.0
Deposits (change in percent, end-period)5.87.88.46.16.16.26.36.36.4
Broad money (change in percent, end-period)6.28.29.16.26.16.26.36.36.4
Policy Rate (percent) 5/2.92.41.61.5
Balance of payments
Current account balance
(transactions, billion U.S. dollars)−6.7−11.1−1.1−3.2−6.6−10.4−13.6−15.7−17.4
Percent of GDP−1.3−2.0−0.2−0.7−1.3−2.0−2.5−2.7−2.8
Exports of Goods (billion U.S. dollars)198.1210.6190.7194.3208.2221.8236.4251.4267.0
Export volume growth6.16.46.86.16.56.05.85.65.4
Imports of Goods (billion U.S. dollars)198.6214.9188.4191.3208.9226.0243.4260.5277.9
Import volume growth1.710.06.37.77.46.96.45.95.6
Terms of trade (index 1995=100)99.4101.5104.6106.5105.4104.7104.2103.8103.6
Official reserves (billion U.S. dollars)106.2100.494.9106.9113.7122.2122.5125.4128.5
In percent of short-term debt plus CA deficit74.994.087.096.6103.1105.6107.9111.3112.6
Total external debt (billion U.S. dollars)384.1354.7328.4330.9332.1335.1334.9337.7341.2
In percent of GDP73.365.169.269.767.464.360.757.855.4
Exchange rate
Exchange rate regimeFreely floating
Zloty per USD, period average 6/3.23.23.83.9
Zloty per Euro, period average 6/4.24.24.24.4
Real effective exchange rate (INS, CPI based) 7/108.3109.1105.3
Appreciation (percent change)0.70.7−3.5
Memorandum item:
Nominal GDP (billion zloty)1656.31719.11789.71863.61942.52043.12153.92270.72396.0
Sources: Polish authorities and IMF staff calculations.

Real GDP is calculated at constant 2010 prices.

According to ESA2010.

Excluding debts of the National Road Fund.

Credit defined as in IFS: “Claims on other sectors.”

NBP Reference Rate (avg). For 2016, as of June 2.

For 2016, exchange rate as of June 2.

Annual average (2000=100).

Sources: Polish authorities and IMF staff calculations.

Real GDP is calculated at constant 2010 prices.

According to ESA2010.

Excluding debts of the National Road Fund.

Credit defined as in IFS: “Claims on other sectors.”

NBP Reference Rate (avg). For 2016, as of June 2.

For 2016, exchange rate as of June 2.

Annual average (2000=100).

1Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
2At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.

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