III. The National Bank of Poland in 1990
- Piero Ugolini
- Published Date:
- November 1996
The dramatic systemic reforms introduced in all sectors of the Polish economy in late 1989 aimed at building a market-oriented economy. However, as also recently shown by the breakdown of the former Soviet Union, the transition from a centrally planned to a market-oriented economy requires drastic reforms as well as a strong program of economic stabilization. In the case of Poland, the stabilization plan was aiming at bringing down hyperinflationary pressures, which rose from about 60 percent a year in 1988 to some 640 percent a year in 1990, and to elicit or stimulate an early supply response to eliminate long queues and food shortages. The main pillars of the reform were the reduction in the fiscal deficit, improvement in the balance of payments, and control over the excess liquidity in the economy. The price and interest rates liberalization and the exchange rate regime were among the main instruments used to meet these targets, together with the reform of the banking sector and the modernization of the central bank. The latter is the subject of the remainder of this chapter.
Status of the National Bank of Poland in 1990
In the case of Poland, the National Bank was officially vested with the power of conducting and executing monetary policy in January 1990. The latter National Bank of Poland Act also gave the central bank the authority of conducting all those functions typical of a modern central bank, such as bank supervision, payments systems, and management of foreign reserves. In the midst of the rapid changes occurring in the Polish economy in 1990, reforms in the monetary control and banking supervision systems became urgent as well as more complex owing both to the rapid transformation and changes in the economy and to the alarming situation in the macro-economic situation. The National Bank had to face two challenges: the halting of the deterioration in the monetary sector, and the establishment of a modern full-fledged central bank capable of implementing monetary management by using indirect instruments. The National Bank had to face all this at a moment when the entire economy was being transformed, the environment was inflationary, and the obsolete financial sector was plagued by nonperforming loans of inefficient public enterprises.
To face the first challenge, the main instruments of monetary control available to the National Bank in 1990 were reserve requirements and refinance facilities. The bank raised reserve requirements to their legal limit of 30 percent and introduced a tighter refinance policy. Following partial interest rate liberalization in 1989, auction of the National Bank’s bills was started in July 1990 in an attempt to absorb excess reserves. In view of the large dependence of the financial sector on the National Bank’s refinancing, tighter controls were introduced at an early stage and some refinancing was converted into medium-term credit. In particular, the National Bank had also to deal with low-interest, long-maturity housing and agricultural loans, when the economic stabilization required major increases in interest rates in 1989. The National Bank also used moral suasion and continually adjusted the refinance rate monthly in an effort to get a grip on the situation. Nevertheless, it became clear that these measures could only have a limited impact and were particularly ineffective in reducing credit demand from loss-making state enterprises.
Apart from either the lack of or the delay in introducing accompanying measures to reform the financial sector and public enterprises, which should support the efforts of the monetary authorities, the National Bank was also handicapped in its efforts by endogenous factors strictly related to its own organization and structure. The National Bank was performing both central banking and commercial banking activities. Besides the new responsibilities assumed in January 1990, the National Bank continued to hold private accounts and to provide banking services to the nonbank public, in addition to providing budgetary cash, banking, and accounting services to the central government. It also offered banking clearing and other services, including accounting and computing, to the branches of the commercial banks.
The National Bank had a great need to be restructured. The Bank had 49 branches, of which only about half were performing strict branch functions. The new duties and responsibilities assigned to the National Bank required a new organizational structure and functional allocations of its departments, major retraining programs for its existing staff, and hiring of new personnel with specific skills.
Objective of Modernization
The ultimate target for the National Bank of Poland modernization plan was the development of a market-based system of monetary control through the use of indirect instruments. Although the Polish authorities wanted to reach their objectives rapidly and in the most efficient fashion, it became clear, even at the outset, that the road to their ultimate goal was bumpy and difficult.
The National Bank Act did not give enough flexibility to the Bank for it to make some of the required changes without the approval of the Parliament. Moreover, the change in reserves requirements, the creation of an interbank market in foreign exchange, the introduction of a book-entry system, and the introduction of special reserve accounts proved to be very time consuming. Further, all the operational areas of the National Bank (accounting, payment systems, banking supervision, liquidity forecast, foreign exchange operations), which are fundamental to the development of a market-based monetary system with indirect instruments, needed to be redesigned or completely built from scratch.
In support of its modernization efforts, the National Bank requested technical assistance from the Central Banking Department (presently the Monetary and Exchange Affairs Department—MAE—of the International Monetary Fund). To cope with the new request, MAE followed a pioneering approach, which is now being implemented in virtually all former Soviet Union (FSU) countries. The new approach focused on delivering a comprehensive technical assistance program in all interrelated operational areas of the central bank, while introducing regulations and procedures to improve existing structures. The comprehensiveness of the technical assistance delivered was dictated by the close links between operational areas in a market-oriented central bank and the need to make progress simultaneously in all areas in order to avoid undue delays.
The MAE technical assistance was initiated with cooperation from six central banks, each helping in a specific area.7 The cooperating central banks agreed to make expert staff available as MAE consultants for short-term visits to Poland. In addition, they provided managerial and technical support to their experts and allowed them time from their normal duties to prepare for and to follow up on their visits to Poland. Many experts also arranged training opportunities abroad for National Bank staff at their own institutions and elsewhere.8