- International Monetary Fund
- Published Date:
- August 2003
Developing a Sound Governance and Institutional Framework
In 2001, the evaluation of the existing objectives and changes in macroeconomic conditions led to revision of the existing objectives.2 The new objectives were incorporated in the strategy of debt management for the years 2002–04. The major change in comparison with the previous strategy was a shift in emphasis regarding the goal of cost minimization, from reducing the cost burden in the three-year time horizon to long-term cost minimization. The objectives are divided into two groups with three main objectives and four complementary (conditional) objectives. The fulfillment of the conditional goals will depend on the situation in the financial markets.
The main objectives are:
Minimization of debt service costs: This is to be achieved through an optimal selection of debt management instruments, their structure, and issue dates. The time horizon is determined by the maturities of debt management instruments with the longest maturity.
Limitation of the exchange rate risk and the risk of refinancing in foreign currencies: This objective is to be met mainly through reducing the share of foreign debt.
Optimization of state budget liquidity management.
The complementary (conditional) objectives are:
Limitation of the refinancing risk in the domestic currency is to be mainly achieved through the rise in the average maturity of domestic debt.
Limitation of the interest rate risk is to be met through increasing the share of long-term fixed-rate instruments in total debt.
Increasing flexibility of debt structure is to be achieved mainly through conversion of nonmarketable debt into marketable instruments.
Decrease in debt monetization is to be met through increased share of the nonbanking sector in total debt.
The debt management policy pursued by the central government encompasses all activities involving the management of state budget debt. This includes the issuance, management, and service of treasury securities as well as the management and monitoring of other liabilities of the state budget. The influence on the central government debt, other than state budget debt, as well as on the local government debt, is indirect only (unless special procedures of recovering sound financial policies are executed) and includes imposing legal and formal regulations.
Coordination with monetary and fiscal policies
To coordinate the debt management policy with monetary and fiscal policies, the committee of public debt management was founded in 1994. The committee comprises members from the ministry of finance (MoF), the National Bank of Poland (NBP), and the ministry of state treasury. The meetings of the committee are held monthly and have an advisory character. However, the participation of directors of crucial departments of the MoF and the NBP, responsible for implementing and executing the policies, ensures a strong informal authority of the conclusions drawn by the committee. The main fields discussed by the committee include monthly plans for financing the state budget borrowing needs, the budgetary situation, and the situation of the money market.
The management of liquidity is coordinated on an interdepartmental level within the MoF. Under the constraint of a predetermined safe level of the balance of the account (excluding the risk of losing liquidity), the coordination ensures the minimization of alternative costs of holding cash on the central government account. The main instruments of the liquidity management are short-term deposits of surplus cash and issuance of short-term treasury bills.
The Constitution of the Republic of Poland, Article 216 forbids the acceptance of loans and grant guarantees and sureties, as a result of which the relation between public debt augmented by the amount of the anticipated disbursements on sureties and guarantees to the annual gross domestic product would exceed 60 percent. With the purpose of not exceeding the limit referred to in the principal rule, a provision of similar content was included in Article 37 of the Public Finance Act and reinforced in Article 45 by the definition of the so-called prudence and recovery procedures that come into play if the 50 and 55 percent thresholds are exceeded. The minister of finance must control the public finance sector in general and, to ensure the principal rule, the state treasury debt.
The basic legislation governing the conditions of the government debt managers is the Public Finance Act. Under this act, only the minister of finance is authorized to draw financial commitment on behalf of the state treasury, repay the drawn commitment, and carry out other financial transactions connected with debt management, including transactions related to derivative financial instruments.
The Public Finance Act requires the minister of finance to develop a three-year strategy of public finance sector debt management. At the same time, the minister of finance also presents a strategy for influencing public sector debt. These two topics are presented in one document. The need for these regulations was a consequence of the provisions of the Constitution of the Republic of Poland.
To govern the general conditions of issuing bonds, in 1999, the minister of finance issued five ordinances under the delegation laid down in the Public Finance Act.
The debt management unit in Poland is situated within the MoF. As one of the units of the ministry, the public debt department (PDD) manages day-today debt policy, prepares the strategy of debt management, and cooperates with the Polish and international financial markets in the fields of borrowing and development of the treasury securities market.
The position of the PDD as a part of the MoF has advantages and disadvantages. At the very early stage of development of the domestic financial market, when the transition to the free market economy had just begun, the PDD (the unit with administrative power) had more instruments to support development of the market, cooperate with other regulatory institutions, and prepare efficient legal and infrastructure environments.
Along with the development of the market in Poland, the situation has changed. The number of sophisticated market participants has increased, the base of securities is well developed, and hedging instruments are available. Together with challenges in the risk management of the debt, a more flexible and active approach to debt management is required. The bureaucratic structure in the MoF, subjected to long procedures, hampers the flexibility of debt management. The tendency in Organisation for Economic Co-operation and Development (OECD) countries to separate debt management offices from the MoF is based on experience of being a unit of the MoF, which makes it hard to avoid the conflict between short-term objectives of the fiscal policy and the longer-term ones for debt management. Lessons learned from the yearly meetings of the OECD working group indicate that acting outside the MoF as a separate debt office makes it possible to avoid direct intervention in the borrowing policy, the structure of offered instruments, and the policy of minimization of debt-servicing costs on the medium- and long-term horizon.
In 1998, domestic and foreign debt management were concentrated in the PDD and divided into four functional units: front office, middle office, back office, and the foreign debt unit. The decision to develop a separate unit for foreign debt was the result of the sizable percentage of foreign debt within total debt. However, external financial institutions perform a large part of the traditional front and back offices operations, and the work of the PDD retains a rather analytical character. Currently, 49 people work at the PDD.
The framework and the point of reference for daily debt management will be described in the next section, where objectives and tasks of debt management are clearly defined. The formal procedures of daily management are still a work in progress.
The main operating risk of debt management is the lack of an integrated information system for debt management, because the databases are fragmented and not fully compatible with each other. The integrated debt management system was implemented by the end of 2002.
The financial accounts of the public debt, as well as other parts of the state budget, are subject to annual audit by the supreme audit office, reporting to parliament. Regardless of that reporting structure, the supreme audit office has the authority to carry out additional control in any area of public finances. Thee minister of finance submits the report on execution of debt-servicing costs quarterly to parliament’s commission of the public finance.
Debt Management Strategy and the Risk Management Framework
Policies are implemented to ensure that the public debt management is carried out in a prudent and predictable way, with the aim of minimizing any possible threats to public finances and the country’s economy.
Public debt management is one of the crucial areas where the accountability of applied policies and macroeconomic prospects of the economy are subject to scrutiny. To prevent excessive levels of debt by legal measures, the limits of the public debt to GDP ratio were imposed, including special procedures if the debt exceeds 50 percent and 55 percent. As mentioned, these rules and regulations were set forth in the Public Finance Act, and an upper limit of 60 percent was set by the Constitution of the Republic of Poland.
To increase the credibility of public debt management, each year the council of ministers submits to parliament the debt management strategy for the coming three years, which includes a set of clear goals of debt management, the assessment of executing the objectives of previous strategies, and analysis of possible scenarios regarding public debt.
The main risks that the government faces with respect to its foreign currency debt portfolio are the refinancing risk and the exchange rate risk. For the domestic currency debt portfolio, the main risks are the refinancing risk and the interest rate risk.
The policy of reducing the foreign debt outstanding and financing mainly in the domestic market results in the development of a large and stable domestic debt market, which reduces the country’s exposure to foreign currency crises and adverse external shocks.
Strategy for managing the costs and risks
Despite considerably higher service costs of the domestic debt, limitation of the exchange rate risk and the refinancing risk in foreign currencies is among the primary goals in the public finance sector debt management strategy for 2002–04. The basic measure of these two types of risk is the share of foreign debt in total debt. Hence, the main means of reducing the exposure to both these risks is decreasing this foreign debt share.
Consequently, the overall strategy states that the borrowing needs of the government should be satisfied to the greatest possible extent in the domestic market. Funds raised in the foreign market should not be higher than the amount of principal of the foreign debt due in the given fiscal year. However, additional borrowing can be executed in the foreign market to facilitate early repayment of the foreign currency debt. The maturity of the newly issued debt should avoid the years with the highest foreign debt repayments, namely 2004–09. Furthermore, proceeds from privatization obtained in foreign currencies are used for foreign debt service and repayment.
The percentage of foreign debt (according to the place of issue) as part of total debt decreased from 49 percent in 1999 to 35 percent at the end of November 2001. During the same period, the debt expressed in terms of U.S. dollars fell from US$31.3 billion to US$24.7 billion in November 2001. These significant declines were mainly the result of the early redemption of Brady bonds. In addition, Poland signed an agreement with Brazil in October 2001, under which, by exception and approval of the Paris Club, debt with nominal value of $US3.32 billion was repaid early for the amount of $US2.46 billion.
Currently, an important issue is the preparation of the foreign debt refinancing for the period of peak payments to the Paris Club in the years 2004–09. Owing to the very strong dependence of the debt repayment manner on Poland’s political and economic situation, the actions undertaken should be geared to the current situation. Poland’s entry into the European Union (EU) will strengthen the country’s credibility and broaden its access to international markets, and subsequently joining the European Economic and Monetary Union will mean a substantial decrease in the share of foreign debt.
The strategy of establishing and maintaining access to the most important segments of the international capital market is continuing because of the possible necessity of having to refinance most or all of the maturing foreign debt in the period under consideration. This will be conducted through the placement of issues of treasury securities in the key market segments. Moreover, to upgrade its credit rating, the state treasury conducts operations, within its current capabilities, of early repayment of some debt aimed at reducing foreign debt, minimizing service costs, and reducing principal repayments in the years 2004–09.
In the future, when zlotys will be replaced with euros, the situation will change. Because 43 percent of the external debt consists of euros, the exchange rate risk connected with foreign debt will be reduced substantially. The possibilities of raising funds in financial markets will also change greatly. Poland’s entry into the EU will have a considerable influence on the country’s credit rating, which will enable financing costs to be reduced. The inflow of the EU funds could also help lower foreign refinancing by allocating the EU funds for repayment of the foreign debt and enlarging domestic debt to raise money to finance goals for which the EU funds were originally intended.
To avoid distorting the exchange rate resulting from large inflows of foreign currency to the market, the privatization proceeds in foreign currencies are put into the special account used for foreign debt servicing.
The refinancing risk is most often measured by the average term to maturity. Hence, limiting refinancing risk in domestic currency can be achieved by increasing the average maturity of domestic debt. The average term to maturity of domestic market debt in February 2002 was 2.52 years; at the same time, the duration of the market debt denominated in zlotys amounted to 1.90 years. These maturities do not guarantee the appropriate level of safety in the medium term. Extension of the average maturity of domestic debt should be done gradually, along with the development of financial market in Poland, increase in demand for long-term instruments, and fall in long-term interest rates.
The refinancing risk can also be assessed by the time structure of the future redemptions. The policy of reduction of debt in treasury bills in favor of increased debt in medium- to long-term bonds results in the smoothing of a redemption profile or a reduction of redemptions in the next few years (increasing simultaneously the redemptions in the years afterward). This same policy of increased debt in fixed-rate bonds and a decline of debt in treasury bills caused a reduction in interest rate risk. The share of fixed-rate marketable bonds in the domestic debt of the state treasury grew from 39 percent in 1999 to 53 percent at the end of February 2002. The increase was mainly a result of increased sales and the effects of conversion of the nonmarketable securities into fixed-rate marketable securities. The share of treasury bills in domestic debt amounted to 20 percent in February 2002 and has not changed since 1999.
These measures have led to a decreased sensitivity of debt-service costs to the fluctuations of interest rates on the financial market, as well as an increase in the rate of predictability of these costs, in both the current years and future years.
Risk analysis undertaken
When the debt management strategy and the budget act were formulated, different scenarios were considered. Several included the possible macroeconomic and market risks of adverse events, as well as the budget environment. Possible threats to the realization of the strategy were also taken into account.
The main concern in applying the debt management strategy involved a trade-off between minimizing costs and reducing risks. The risks are especially interest rate risk, refinancing risk and exchange rate risk, as well as liquidity management. This requires a dynamic approach, taking current market and budget conditions into consideration. The process of decision making is heuristic, rather than involving the use of formal procedures, although some quantitative measures and formalized models are used as a support (a system of formal procedures is still a work in progress).
The risk measures are computed historically, and forecasts are made. The desired characteristics concerning foreign/domestic and fixed/floating ratios, as well as duration, are modified according to the market situation and financing needs. Currently, these measures of risk are used:
the debt-to-GDP ratio and the ratio of debt-service costs to GDP—the most general measures, summarizing the overall ability to service public debt;
the share of foreign debt in total debt—mainly as a measure of exchange rate risk;
the average maturity of the domestic debt—as a measure of refinancing risk;
duration of the domestic market debt—as a measure of refinancing and interest rate risk; and
other measures, mainly descriptive statistics, such as the share of floating- and fixed-rate debt, maturity profile by months and years, and similar data.
Econometric and other quantitative3 models, developed within the PDD, are also used. Formalized optimization problems solved periodically are also used to support various decisions made. However, the results derived from these models depend heavily on the assumptions regarding future interest rates and other forecasted variables, which can be subjective at times.
The quantification of risks is subject to further methodological research. A breakthrough in this area is expected after the implementation of the integrated debt management system. Currently, information systems used to assess and monitor risk are highly fragmented and are not automated. The input data are manually collected from different databases. The tools of risk monitoring also are not integrated.
The quality of risk assessment and monitoring, as well as other aspects of data management, are expected to improve significantly when the integrated debt management system, financed by PHARE 2000 program funds, is introduced, as well as a loan from the World Bank. The objective of the project is to prepare (in cooperation with the Finnish Ministry of Finance) for a more effective and efficient debt management through an integrated information technology (IT) system in conformity with standards in place in the EU member countries. The system will support the public debt management and the budget process, including defining financing needs and debt-service costs. It will also reduce debt-service costs by using sophisticated analytical tools provided by the system. Furthermore, it will improve the knowledge of the development in the capital markets and strengthen the market approach to debt management. The system will also enhance risk management and control.
Currently, no benchmark portfolio is in use. The comparison of the actual portfolio and forecasts is often informative because of high market volatility and frequent changes of long-term assumptions concerning budget deficits and market conditions.
Active debt management
Public debt management does not encompass activity in the domestic secondary market. The primary concern is cost minimization over the long term, and the current policy is subordinated to it. Active debt management includes actions undertaken besides the regular calendar of debt issuance and servicing, aimed at executing the goals of the debt management strategy. These include occasional buybacks of the domestic and foreign debt before its maturity, regular switch auctions of treasury bonds, swap transactions, and use of other derivative instruments. The last two options are planned.
Active debt management is not used to generate returns in foreign currency debt. The only exception involves buybacks of collateralized Brady bonds, which generate proceeds from sold collateral.
A separate department within the MoF coordinates the management of contingent liabilities, especially granting sureties and guaranties by the state treasury. The disbursements effected under this department constitute a service cost of public debt as a whole. The anticipated amount is important for the debt management process.
The management of risks associated with embedded options
A put option (the possibility for an investor to receive an early redemption) is used only in savings bonds, namely the two-year fixed-rate bonds and the four-year inflation-indexed savings bonds. The relatively small share of these instruments in total debt, as well as historical data on the share of bonds where the option was executed, shows that the risk involved was insignificant. Early redemption accounts for about 4 percent of the total value of bonds with this option. One of reasons for this low percentage is the relatively low sensitivity of retail investors to changes in market conditions. However, the potential threats connected with the options are taken into account, and suitable precautions are made to reduce the liquidity risk.
Early redemption is financed by the interest accrued from not taking back funds by bondholders, which is then placed in a bank account maintained by the issue agent. In addition, the issuer has a one week to submit cash to the bondholder executing the options.
Developing the Markets for Government Securities
According to the public finance sector debt management strategy for the years 2002–04, government borrowing should be realized mainly in the domestic market. Borrowing in the foreign market is limited to refinancing maturing debt. In the future, the funds raised in the foreign market will gradually increase along with the increasing repayments of the debt to the creditors associated within the Paris Club.
The increasing significance of minimizing costs, over a time determined by the maturities of debt management instruments with the longest maturity, affected the structure of sales of treasury securities, especially in 2001. Decisions concerning the choice between the issuance of short- and long-term instruments was determined by market conditions and the predicted future shape of the yield curve. The increase in the average term to maturity is acknowledged to be the main means of reducing the refinancing risk of domestic debt.
Marketable and savings treasury securities issued on the domestic market in 2001 included these instruments:
treasury bills with maturities ranging from 1 to 52 weeks;
Treasury bonds offered at auction (“wholesale bonds”):
– 2-year zero-coupon bonds,
– 5-year fixed-rate bonds,
– 10-year fixed-rate bonds, and
– 10-year floating-rate bonds;4
treasury bonds offered in the retail network (“retail bonds”):
– 2-year fixed-rate savings bonds
– 3-year floating-rate bonds
– 4-year savings bonds indexed to inflation, and
– 5-year fixed-rate bonds.
In 2002, a 20-year fixed-rate bond was introduced. The first auction took place on April 17, 2002.
Retail instruments are used to back up the sales of wholesale instruments, widen the investor base, and promote the propensity for saving. The tasks within this area will include the diversification of instruments offered and the increase in their accessibility to potential investors through the implementation of the new IT. The sale of retail indexed bonds accounted for about 1.0 percent of the total value of all bonds sold by the MoF and approximately 5.8 percent of retail bonds.
The maturity of bonds issued on international capital markets is constrained by the existing foreign debt redemption profile. Until 2001, because of very low funding needs, the MoF executed only one benchmark transaction a year in the international market, not exceeding the amount of principal payments. The main reasons for issuing bonds in the international market are to maintain access to the most important segments of the international capital market because of the possible necessity of refinancing most or all of the foreign debt in the years 2004–09 and to create a benchmark for issues of Polish corporate bonds.
Consolidation of public debt
Data on Polish public debt (debt of units included in the sector of public finance)5 have been available since 1999 (since 2001 in a consolidated form). Since then, based on the Public Finance Act, two ordinances regulating the recording of debt have been issued. The first ordinance regulates the recording of debt of units included in budgetary entities. The second regulates the recording of debt of the rest of the units of the public finance sector. These regulations make it possible for the MoF (which has the obligation of publishing data on public debt twice a year) to calculate the entire amount of debt of the public sector after consolidation. The regulations also aim to obtain the data needed to meet the requirements of international reporting (e.g., reports prepared for the EUROSTAT, IMF, and OECD).
Mechanisms used to issue debt
Treasury bills and treasury bonds are offered for sale in the primary market at auctions organized and held by the NBP. Bids are submitted to the NBP by 11:00 a.m. on the auction day. Upon receipt of a bid summary, the MoF makes a decision on the minimum price with a given maturity. Bids with prices that are higher than the minimum price are accepted in their entirety, and bids with the minimum price can be reduced or accepted in whole. Each bidder buys bonds at the proposed price.
Dates of auctions are announced at the beginning of each year in a calendar of issuance, published on the MoF’s web site.6 The detailed information on forthcoming auction is published on the MoF’s web site and on Reuter’s two days before the date of the tender. The announcement contains the type and maturity of the instrument offered, value of the offer, a brief description of terms of issue, and the time and place for submitting bids.
Treasury bills are sold at a discount at auctions, which are held on the first business day of each week (i.e., usually on Mondays). However, extra auctions can be held on other days. Participants allowed to submit bids in the auctions are entities that purchased at least 0.2 percent of all bills sold in the primary market in the previous quarter. They are verified every quarter according to this criterion. Other investors can participate through their intermediation. Payment for bills purchased and redemption of maturing bills are usually effected on the second day after the auction through banks’ current accounts maintained by the NBP payment system department.
Treasury bonds auctions are usually held on Wednesday.7 Additional auctions can be held on other days. Entities allowed to submit bids in the auctions are direct participants of the national depository for securities (NDS); other interested parties can participate through their intermediation. Auctions of treasury bonds are settled in cash and in securities through the NDS; cash settlements of bonds auctions are handled directly by the NDS through its account with the NBP.
The sale and management of retail bonds intended for small investors is handled by the central brokerage house of Bank Pekao S.A. (CDM Pekao S.A.) under agreements signed with the minister of finance. CDM Pekao S.A. is the issuing agent and also the organizer of a consortium of the largest banking and nonbanking brokerage houses, a total of 21. Bonds are offered through a network of customer service outlets—at the beginning of 2000, about 550 units throughout the country—and via the Internet.
The marketable bonds (three-year floating-rate and five-year fixed-rate bonds) are sold at the issue price published before the commencement of sale. The sales price contains, in addition to the issue price, interest accrued from the sale commencement date to the purchase date. There are four series issued every year, with distribution taking place in the following three months. The sales price for five-year bonds is settled monthly. The savings bonds (the two-year fixed-rate and the four-year indexed) are sold at Zl 100 polish on every business day. During each month, the issuer introduces a new series for each type of savings bond.
Disbursement of interest and repurchase of bonds take place at the point of purchase or via the bank account indicated. It is also possible to deposit the three-year floating rate and five-year fixed-rate bonds in an investment account at any stock brokerage house, wherethe servicing and redemption of the bonds takes place via the same account. Both types of bonds are admitted to official listing on the regulated market (the Warsaw Stock Exchange).
The standard mechanism of foreign bond issuance is used, including a syndicate of international investment banks. Each transaction in the international market is carefully prepared, using the public debt management’s and investment banks’ expertise to select the best timing and segment of the market. The pricing of bonds is based on market conditions and takes into account the secondary market performance of the bonds.
Development of the secondary market
The main actions taken to increase the liquidity, effectiveness, and transparency of the treasury securities in the secondary market are
elimination or reduction of restrictions in the settlement infrastructure—for example, the implementation of the real-time gross settlement (RTGS) system and securities borrowing, the reduction of transaction fees and commissions, and the development of the repo market;8
support of trading on the electronic platform for debt instruments and their smooth incorporation into the registration and settlement system;
continuation of the policy to increase the depth of the treasury securities market through sizable issues of different series, which means fewer maturity dates for different types of treasury securities and an increase in their value in the individual series;
support of the activity toward elimination of regulations aimed to subject repo transactions to the system of mandatory reserves; and
introduction of switch operations.
The introduction of a primary dealer system is a work in progress. In 2001, the rules of governing, selecting, and properly assessing primary dealers, and an evaluation of the scope of their rights and duties, were prepared, and then verified during meetings with the banks. The cooperation with primary dealers will also lead to the identification of risks for public debt management and the development of the treasury securities market. The process of monitoring and evaluating the candidates began on April 26, 2002.
Contacts with the financial community
A proper relationship between debt managers and investors is crucial to the effective management of public debt. To achieve this, regular meetings with groups of domestic investors such as banks, brokerage houses, pension funds, investment funds, and insurance companies are held. Individual meetings with important domestic and foreign participant in the treasury securities market are also held.
Relation to the private sector market
The debt market in Poland is dominated by government securities (treasury bonds and treasury bills account for about 90 percent of the total debt outstanding). The issues of nontreasury bonds are mainly private placements. The modest significance of private sector debt makes public debt management independent of considerations regarding the current situation in the private debt market. On the contrary, the development of the public debt market constitutes a key condition of the development of private debt markets.
Rules of taxation
Interest and discount income as well as income from the sale of treasury securities were subject to income tax under general principles, that is, at the rate of income tax applicable to income realized by legal entities in the year in which the income was obtained (in 2001, the rate amounted to 28 percent).
Interest or discount on securities issued by the state treasury and acquired by private persons before December 1, 2001, was exempt from tax. Interest or discount on securities issued by the state treasury and acquired by taxpayers after November 31, 2001, are subject to withholding tax of 20 percent.
Income from the sale of domestic treasury bonds (issued after January 1, 1989, and acquired before January 1, 2003) received by December 31, 2003, is not subject to income tax unless the sale is the object of business activity. Income from the sale of securities other than bonds issued by the state treasury is subject to personal income tax.
Persons realizing income from treasury securities purchased on the domestic market were subject to the provisions of treaties on the avoidance of double taxation between Poland and the country of residence or domicile of the nonresident earning income in Poland. Where no such treaty existed, the following principles applied.
Interest and discount were subject to withholding tax of 20 percent. Income from the sale of treasury bonds or bills was subject to income tax under general principles, that is, at the rate of income tax applicable to income realized by legal entities in the year in which the income was obtained (in 2001, the rate amounted to 28 percent).
Income realized by legal entities based abroad from the sale, conversion, or other legal transaction transferring rights in bonds issued by the State Treasury of the Republic of Poland on foreign markets since the year 1995 has been exempt from tax.
Foreign private persons with a domicile other than Poland or those with no right of permanent or temporary residence in the territory of Poland (temporary residence being a sojourn with a duration of not more than 183 days in a tax year) were liable to tax only on income from work performed in the territory of Poland under a service-based relationship or employment relationship, irrespective of where the remuneration is paid, and on other income realized in Poland.
Interest and discounts on securities issued by the state treasury in the domestic market acquired by taxpayers before December 1, 2001, were exempt from tax. Interest or discounts on securities issued by the state treasury and acquired by taxpayers after November 31, 2001, are subject to withholding tax of 20 percent.
Income from the sale of domestic treasury bonds (issued after January 1, 1989, and acquired before January 1, 2003) received by December 31, 2003, is not liable to income tax unless such sale was the object of business activity. Income from the sale of other domestic securities issued by the state treasury was liable to personal income tax.
Income realized by foreign private persons having their domicile abroad from the sale, conversion, or other legal transaction transferring rights in bonds issued by the State Treasury of the Republic of Poland on foreign markets in the years 1995–01 was exempt from tax.
Currently, the sale of government securities is not affected by taxation because of the relief from the tax on civil actions, which has been in force since 1998.
Therefore, it is difficult to give an estimate of the effect of taxation on private persons’ trading because of the short period of tax law that is binding. At the same time, income from all kinds of bank deposits was taxed; therefore both of these forms of investment are treated equally. This pattern is also applied in the EU.
Development and Changes in Debt Management Objectives Before 2001
The debt management strategy was first prepared in 1999, as a document submitted to parliament with justification of the draft State Budget Act. Long- and short-term objectives were formulated. The long-term horizon of the strategy corresponded to the maturity profile of most of Poland’s external debt (to the Paris Club), and it coincided with the horizon adopted for the Public Finance and Economic Development Strategy: Poland 2000–2010. The primary objectives of the debt management strategy for the period were:
reduce the share of external debt in total debt by refinancing part of the debt due with internal debt and early redemption of certain external liabilities;
achieve the desirable value of the indicators describing the debt maturity structure—average maturity, duration, and the ratio of debt due in a given year to total debt;
ensure even distribution of debt repayments and debt-servicing costs over time—in particular, to eliminate peaks of payments;
reduce the risk related to variability of debt-servicing costs (increase their predictability) by increasing the share of fixed-income instruments in total debt; and
make the external debt structure more flexible.
The following objectives were set forth in the strategy for the three-year horizon:
Minimize the debt servicing costs under constraints on
– the borrowing needs of the state budget (net cash requirements);
– the level of risk involved in debt financing, including exchange risk, refinancing risk, and interest rate risk;
– the ability of the domestic market to absorb medium- and long-term instruments, given that the national budget does not displace credit for the economy);
– the conditions prevailing on the international financial market related to a country credit rating; and
– compliance with the monetary policy of the central bank.
Develop an optimum schedule of external debt payments for the years 2004–09 (i.e., during the period of high intensity of the payments).
Reduce the degree of debt monetization by increasing the nonbanking sector’s share in total debt.
The goals presented in the first strategy were modified in 2000 as a result of conditions that arose in relation to the need to lay greater emphasis on the minimization of the burden of debt-service costs for public finance in the period of the next two to three years.
Goals formulated in the strategy were as follows:
Minimization of the debt service costs over the adopted horizon—understood as
– minimization of the burden of debt-service costs for public finance in 2001–03, mainly through the rising share of the fixed-rate bonds in total debt and the limitation of the share of treasury bills and floating-rate bonds;
– costs minimization over a time limit determined by the maturities of debt management instruments with the longest maturity and with the preset parameters (including those arising from the need to minimize the costs in the period between 2001 and 2003)—through an optimal selection of debt management instruments and their structure and issue dates;
– minimization of the service costs to eliminate the reasons causing fixing of debt interest rates at a level higher than the minimal one, which can be attained on the market through increased liquidity and depth of the secondary market for treasury securities, increase in the transparency and safety of trade in debt instruments, and actions aimed at elimination of the technical hindrances in the trade in treasury securities (fees, settlement system, and so forth).
Limitation of the exchange rate risk and the risk of refinancing in foreign currencies as a result of the lowering of the foreign debt share.
Limitation of the refinancing risk, mainly through the rise in the average maturity of domestic debt.
Limitation of the interest rate risk through an increase in the share of medium- and long-term fixed-rate instruments in total debt.
Increasing flexibility of debt structure as a result of the conversion of nonmarketable debt into marketable instruments.
Decrease in the debt monetization through an increased share of the nonbanking sector in total debt.
Optimization of the foreign debt amortization schedule for years 2004–09.
Optimization of state budget liquidity management.
The case study was prepared by the Public Debt Department of the Ministry of Finance.
See Appendix for a detailed description of the previous objectives.
The models use applications of mathematical programming, game theory, and neural networks, among others.
The sales of DZ were suspended in 2002.
The NBP is not included in the sector of public finance.
Specifically, the auctions are held on the first Wednesday of every month for 2- and 5-year fixed-rate and zero-coupon bonds, the second Wednesday of the even months for 10-year floating-rate bonds, and the third Wednesday of the odd months for 10-year fixed-rate bonds.
The RTGS system was launched on April 26, 2002.