Poland
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
30 Apr 1997
eISBN:
9781451831795
Language:
English
Keywords:
ISCR; CR; exchange rate; broad money; monetary policy; state enterprise; balance of payments; budget deficit; capital market
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This paper reviews economic developments in Poland during 1995–96. The focus is on macroeconomic developments in the real, fiscal, monetary, and external sectors, respectively, while structural policies are also reviewed. The paper examines the Polish tax system, the exchange and trade system, and poverty. It highlights that in 1996, Poland experienced its fifth consecutive year of economic growth. From late 1993 to about mid-1995, inflation remained in the 30–35 percent range as large external surpluses weakened monetary control.

Abstract

This paper reviews economic developments in Poland during 1995–96. The focus is on macroeconomic developments in the real, fiscal, monetary, and external sectors, respectively, while structural policies are also reviewed. The paper examines the Polish tax system, the exchange and trade system, and poverty. It highlights that in 1996, Poland experienced its fifth consecutive year of economic growth. From late 1993 to about mid-1995, inflation remained in the 30–35 percent range as large external surpluses weakened monetary control.

I. Introduction

1. It has become commonplace in recent years to name Poland as one of the most successful of the transition economies. A pioneer in transition from the very start, the country has since confirmed this status on numerous occasions, most importantly in being the first to reverse the output decline in 1992 and then to surpass the pretransition level of output in 1996. Rooted in the bold and comprehensive reforms of the initial “big-bang”, this success owes equally to the remarkable continuity of commitment to the principles of market orientation and financial stability, irrespective of the composition of the seven governments that have been in power since 1990. Two particular milestones in this regard were a major “second round” of fiscal adjustment and structural reforms in 1992–93, and sustained adherence to those principles by the new left-wing coalition that came to power in late 1993, embodied in the medium-term Strategy for Poland adopted in mid-1994. The results have been five successive years of economic growth, averaging 6 percent over the past three years; steady, even if gradual, progress to moderate inflation; and a dramatic shift from a chronically weak external position to one of fundamental strength with a large reserves cushion and an appreciating currency (Figure 1).

Figure 1.
Figure 1.

Poland: Selected Economic Indicators, 1990–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish authorities; and staff estimates.

2. While much has been achieved, transition is by far not finished, in part reflecting the somewhat fitful progress in structural reforms after the initial “big bang”. Increasingly, moreover, the agenda of outstanding reforms is dominated by Poland’s over-arching goal of full integration with the most advanced industrial economies, in particular its objective of early accession to the European Union (EU). From a macroeconomic perspective, key issues here include Poland’s relatively low savings and investment ratios (both below 20 percent of GDP) and its still high inflation rate (just below 20 percent), both obstacles to the kind of sustained rapid growth required for smooth integration. A strategy to overcome these obstacles should center around further fiscal consolidation, tight monetary policy, and structural measures to bolster private savings, most important among them comprehensive and deep pension reform. Another key policy imperative arises from the still pervasive role of the state in the economy; in particular, rapid privatization of most of the remaining 4,000 or so enterprises still under the umbrella of the state will be pivotal in raising efficiency and attracting private capital on the scale required to ensure continued rapid economic growth.

3. Recent economic developments can be divided broadly into two phases: a period of accelerating, export-led growth (1994–95), followed by a period in which rising domestic demand became the main engine of growth (1996).1 Strong improvements in competitiveness combined with the recovery in western markets to produce the export boom of 1994–95, with official export earnings up by about two thirds and a near tripling of inflows from unrecorded trade. Transformation-induced rapid productivity growth, together with a devaluation and large fiscal adjustment in 1993, were the main factors boosting Polish competitiveness during this period. The downside of this was a halt in disinflation as the progressively undervalued exchange rate produced external surpluses that proved difficult to sterilize, pushing monetary expansion and keeping inflation at 30–35 percent for nearly two years.

4. In fact, persistent inflation as well as a strong recovery of investment were signs already in 1995 that macroeconomic forces were at work to reverse the necessarilyt emporary boom in net exports and competitiveness. The basic policy question then was essentially whether to restore equilibrium through nominal currency appreciation or inflation-induced real appreciation (barring further fiscal adjustment). The authorities’ decision in 1995 to opt for nominal appreciation set the stage for the transition first to sharply lower inflation, followed by a weakening in the external accounts, accelerating real wages and consumption, and sustained strong investment growth in 1996. The exchange rate-induced rebalancing of growth from external to domestic demand was compounded by the slowdown in western Europe and an unexpectedly sharp acceleration of domestic credit, fueled by lower interest rates (lowered by the National Bank mainly in an effort to contain capital inflows and limit the costs of sterilization), largely successful completion of commercial bank restructuring, and generally improved confidence. The outcome in 1996 was sustained rapid GDP growth of about 6 percent, notwithstanding a 4 percent of GDP swing in the external current account (to a small deficit of less than 1 percent of GDP) as domestic demand expanded by nearly 10 percent. Reflecting the exchange-rate based stabilization strategy, inflation came in under 20 percent, down from over 30 percent in mid-1995. By end-1996, a key policy issue was how to ensure a smooth completion of the transition to a moderate current account deficit, with continued progress on disinflation and high investment to provide for sustained mediumterm growth.

5. The following five sections of this paper examine Poland’s recent transition experience in greater detail, with particular emphasis on developments in 1995–96. In Chapters II–V, the focus is on macro-economic developments in the real, fiscal, monetary, and external sectors, respectively, while structural policies are reviewed in Chapter VI. Brief Appendices on the Polish tax system, the exchange and trade system, and poverty provide additional factual information. Four background studies attached to this paper analyze selected key issues particularly relevant to the 1996 Article IV consultation for Poland (SM/97/41 (2/11/97)). Attachment I examines targets and instruments of Poland’s monetary policy in recent years; estimates of the demand for money are presented in Attachment II; Attachment III contains an empirical analysis of the effectiveness of sterilization; and Attachment IV discusses factors influencing external trade performance.

II. Output, Employment, and Prices2

A. Overview

6. Seven years into transition, Poland in 1996 experienced its fifth consecutive year of economic growth. After falling almost 18 percent in 1990–91, Poland’s gross domestic product has recovered significantly, and now exceeds the levels recorded before embarking on transition. In terms of growth performance, Poland has established itself as the clear leader among the transition economies of Central and Eastern Europe (Figure 1). Indeed, the true picture may be even stronger, since recent research by the Central Statistical Office finds that official data may have exaggerated the severity of Poland’s initial recession. This impressive record, moreover, has been achieved despite the wholesale economic restructuring and changes in the product mix needed to bring the capacity to supply goods more closely into line with underlying investment and consumption demands. These very real—but difficult to quantify—effects mean that macroeconomic statistics may even understate performance over the last seven years.

Figure 1.
Figure 1.

Visegrad Countries: Gross Domestic Product and Inflation, 1988–96

(GDP Peak = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: IMF, World Economic Outlook, October 1996.

7. Despite these achievements, Poland’s economic record during transition has not been without blemish. In particular, inflation has proven more resilient than anticipated and remains significantly higher than in many of the advanced central and eastern European economies. Though there was considerable success in fighting inflation in the first year of transition—conditions of near-hyperinflation being brought swiftly under control—subsequent progress has been more modest. In particular, from late 1993 to about mid-1995, inflation remained in the 30–35 percent range as large external surpluses weakened monetary control. This was followed by several months of rapid disinflation (to the low 20 percent range) mainly as a result of a hardened exchange rate and a good harvest in 1995. However, progress slowed again in 1996, with inflation ending the year at just under 20 percent. High unemployment, with large regional disparities, and a heavy social cost for certain parts of the population were other strains that have marked Poland’s transition experience. More generally, and partly related to these shortcomings, progress with structural reforms has been mixed, which continues to distort the economy’s true growth potential and makes the fight against inflation more difficult.

8. These problems notwithstanding, Poland’s record of accelerating recovery and sustained, if somewhat slow and fitful, disinflation testifies to the overall success of its transition strategy. As is well known, this strategy combined wide-ranging external and domestic liberalization with generally tight financial policies, under a “multiple-anchor” approach that included low fiscal deficits, hard budget constraints on enterprises, an incomes policy, and an exchange rate anchor. Over the past two years, in particular, the hardening of the exchange rate has brought with it firmly lower inflation and, with falling interest rates, a welcome rebalancing of growth toward domestic demand. A key challenge for economic policy at this juncture is to manage this rebalancing in a way that sustains growth while maintaining progress with disinflation. From a medium-term perspective, policies aimed at raising Poland’s relatively low savings rate (below 20 percent of GDP) and removing the major structural barriers to growth will be necessary to sustain the recent pace of output performance.

B. Demand and Supply

9. Poland’s economic recovery started back in 1992, only two years after the “big bang” of macroeconomic stabilization and economic liberalization. At first the recovery was tentative, consumption-led and vulnerable to balance of payments constraints. The recovery strengthened in 1994 and 1995, led by sizeable increases in exports: the share of domestic demand in GDP fell, and the contribution of external demand to real GDP growth became strongly positive (Table 1). Sustained rapid increases in productivity, moderate real wage increases, and the lagged effects of devaluation in August 1993 boosted competitiveness, allowing Polish exports to benefit fully from the economic recovery in its main trading partners. The result was two consecutive years of 20 percent growth in export volumes, and a dramatic increase in unrecorded cross-border exports, with GDP growth averaging more than 6 percent in 1994 and 1995.3

Table 1.

Poland: Composition of Aggregate Demand, 1992-96

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Sources: Central Statistical Office; and staff estimates.

Excluding statistical discrepancy.

Contribution to GDP growth

10. Since then, the export-led recovery has broadened into a recovery fueled increasingly by domestic demand. Appreciation of the real exchange rate and the slowdown in Western Europe moderated export growth, while lower interest rates and strong real earnings growth strengthened domestic demand. Thus, while net exports made a sizeable negative contribution to growth in 1996, buoyant domestic demand was able to sustain GDP growth of around 6 percent.

11. Fixed investment increased by 9 percent in 1994 and 18.5 percent in 1995 (as measured on a national accounts basis), and is estimated to have grown by around 18 percent in 1996. The pickup in investment was encouraged by expanded investment tax credits, but also by rapid productivity gains coupled with modest real wage increases which increased profitability, particularly in the export sector. While retained earnings have been a major source of investment finance during the early stages of the upswing, more recently there has also been a rapid expansion of enterprise credit (Chapter IV). Finally, inflows of foreign direct investment (FDI) have also risen rapidly in recent years, albeit from a comparatively low base; at less than 2 percent of GDP (measured on a payments basis) there appears still ample scope for higher FDI inflows that should underpin sustained growth in the future.

12. Notwithstanding a sharp drop during the initial phase of transition, the manufacturing sector still dominates Polish investment, accounting for almost a quarter of total investment outlays, and increasing by half in real terms in 1994–95. Reflecting the increasingly broad-based recovery, investment growth in 1995 widened to include virtually all sectors, with higher than average increases in the service sectors (Table 2). During transition, the functional composition of investment has changed noticeably: while buildings and structures still account for around one-half of total investment expenditures, this ratio fell by ten percentage points from 1991–95, with the share of machinery and equipment increasing by almost twenty percentage points (Table 3). However, according to official statistics, the increase in the share of the private sector in total investment has been less pronounced, rising only 4 percentage points in the years 1991–95.

Table 2.

Poland: Sectoral Breakdown of Investment, 1991-95 1/

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Source: Data provided by the Polish authorities.

According to the Polish version of the NACE-EKD classification system.

Table 3.

Poland: Investment by Type and Decision-Making Entity, 1991-95

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Source: Data provided by the Polish authorities.

Data for 1991 refer to construction and assembly works.

13. Consumption too has contributed to the recent recovery in domestic demand, increasing by around 4 percent in real terms in both 1994 and 1995, and by an estimated 7 percent in 1996. Real retail sales have grown rapidly, owing to (i) substantial increases in real wages—the fruits of successful economic transition—and (ii) rapid increases in real household credit (though from a low base), aided by falling interest rates. These factors, together with increasing recognition of the success and permanence of the transition to a market economy, have helped strengthen consumer confidence (Figure 2).

Figure 2.
Figure 2.

Poland: Selected Consumption Indicators, 1993–96

(Index; 1993 = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish Central Statistical Office; Demoskop; and the National Bank of Poland.

14. The structure of Polish production has changed drastically with transition (Tables 4 and 5). The share of services in GDP has increased from little over one-third in 1989, to more than one-half in 1996, though part of this reflects statistical reclassification of economic activity. Despite this substantial increase, the share of services still remains low compared with the two-thirds share typical for OECD countries, though it should rise with the increasingly domestic demand-driven recovery.

Table 4.

Poland: Value Added by Sector, 1989-95

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Sources: Central Statistical Office, OECD, and staff estimates.

For 1989, in percent of GDP.

Table 5.

Poland: The Growth of Production, 1991-95

(Annual percent change in real terms)

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Sources: Central Statistical Office and staff estimates.

15. Though the share of industry in GDP has declined (measured in current prices), much of this reflects sharp adjustment in the early stage of transition, as well as some trend decline in the relative price of industrial products. In the early years, industrial output fell much more dramatically than in the more sheltered sectors of the economy, such as construction or services. Since then, industry has recovered strongly (Figure 3): in real terms, industrial value added has grown at close to 10 percent per annum from 1993 to 1995, and is estimated to have grown a little under 8 percent in 1996. Manufacturing continues to lead the way, with particularly rapid growth in 1995 and 1996 in such sectors as food products, leather goods, rubber goods, furniture, printing and publishing, and motor vehicles. While the volume of production in the mining sector has increased little, its share in value-added has increased largely because of sizeable increases in the domestic relative price of coal: unit labor costs are high relative to international standards, and large losses continue to be made. Measured in terms of value added, output in the construction sector was slower to recover, only rising strongly in 1995, when it increased 7.3 percent (Table 4). Growth slowed in the first quarter of 1996, the effect of a particularly harsh winter; however, with low real interest rates and the general pickup in domestic demand, the construction sector soon recovered in the remainder of the year, and is estimated to have recorded growth of around 4 percent for the year as a whole.

Figure 3.
Figure 3.

Poland: Selected Production Indicators, 1990–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish Central Statistical Office; and staff calculations.

16. Agriculture still plays a major role in the Polish economy. Though its share in GDP has fallen five percentage points since 1989, to only a little over 7 percent in 1995 (Table 4), it still makes up more than a quarter of total Polish civilian employment. In addition, the considerable room for productivity improvements means that the agricultural sector itself has substantial growth potential; also, if utilized effectively, surplus labor in the agricultural sector should help sustain growth in other sectors of the economy. Finally, with food making up 40 percent of the CPI basket, and given the high levels of trade protection in agriculture, agricultural conditions are still the source of frequent supply shocks to inflation.

17. Four crops dominate Polish agricultural production: grain, rape, sugar beet, and potatoes (Tables 6 and 7). Together, these account for 80–85 percent of land under cultivation. In 1995, favorable weather conditions, combined with the trend increase in yields reflecting increased usage of fertilizers, created a bumper crop. Real value added in agriculture increased 12 percent that year, well above the average rate of GDP growth. In addition, the fall in food prices that resulted meant that consumer prices fell 0.9 percent that July, and increased only modestly in subsequent months, ratcheting the annual rate of inflation down by around 5 percentage points.

Table 6.

Poland: Production and Yields of Selected Crops, 1989–95

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Source: Data provided by the Central Statistical Office.

At current prices; in percent of total.

From four cereals plus triticale.

Total fruit production.

Table 7.

Poland: The Growth and Structure of Agricultural Production, 1989-95 1/

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Sources: Central Statistical Office, Rocznik statystyczny (various issues); and data provided by the Polish authorities.

Excludes agricultural services.

According to the KGN classification.

According to the Polish version of NACE-EKD.

Provisional data.

Gross agricultural production minus intermediate consumption.

Final agricultural production minus value of products of agricultural origin bought by agricultural producers.

Gross agricultural production minus material costs.

Data for individual farms.

18. In 1996, the severe winter held back farm production. Output in agriculture is estimated to have barely increased, with value-added actually declining; grain production is expected to fall 2 million tons to only a little over 24 million tons. At the same time, world wheat prices also rose significantly. This has had a direct impact on the CPI but also, by raising the price of feed, it set in train a classic “hog cycle”. The price of pork fell early in the year as (unprofitable) pigs were sent to slaughter, but picked up later in the year, reflecting the reduction in pig supply. Finally, with food prices falling less this year than last, the annual inflation rate picked up in the summer. Even so, for the year as a whole, the increase in food prices in 1996 was still below the overall CPI inflation rate.

C. Wages and the Labor Market

19. Despite recent rapid growth in output, employment increases have been surprisingly modest: total employment first increased only in 1994—two years after the recovery in output had started—and then only by 1 percent (Tables 8, 9 and 10). The increase in private sector employment has been more substantial, though in part this reflects classification changes. These modest gains may reflect considerable labor hoarding in the early years of transition, as the collapse in output far exceeded the fall in employment. Measured labor productivity fell in the early years but, as output growth accelerated, more recently there have been significant increases in measured labor productivity, particularly in manufacturing, achieved initially with relatively little increase in investment.

Table 8.

Poland: Employment by Sectors, 1989-93

(Annual averages)

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Source: Data provided by the Polish authorities.

According to the KGN national classification.

Since 1993 in the public sector.

Table 9.

Poland: Total Employment by Sector, 1993-95

(Annual averages)

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Sources: Central Statistical Office and staff estimates.
Table 10.

Poland: Private Sector Employment by Sector, 1993-95

(Annual averages)

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Sources: Central Statistical Office and staff estimates.

20. Despite the small reported increases in employment, the unemployment rate has fallen significantly. After peaking at almost 17 percent in mid 1994, the unemployment rate has fallen to a little over 13 percent at the end of 1996. The divergence between figures for employment and unemployment in part reflects developments in the shadow economy, but also the progressive tightening of rules governing eligibility for unemployment benefits (Chapter VI). For example, in 1996 unemployment benefits for school-leavers were replaced with grants for training or apprenticeships: the result was 100–200,000 fewer school-leavers than usual registering as unemployed in the summer, reducing the unemployment rate by 0.5 to 0.9 percentage points. Existing eligibility rules have also been more tightly enforced, and the value of unemployment benefit has been reduced by indexing to prices instead of wages, bringing unemployment benefit indexation in line with the indexation of the minimum wage.

21. Correcting for these effects, the fall in Poland’s unemployment rate may have been more gradual than suggested by the official registered unemployed rate. The Labor Force Survey, conducted using ILO-based methods, counts as unemployed only those who actively seek work but who do not work at all, whereas the registered unemployed may include people with informal, part-time employment. This method suggests that the unemployment rate peaked at 15.9 percent in early 1994, and then fell gradually to 11.6 percent in August 1996 (Figure 4).

Figure 4.
Figure 4.

Poland: Unemployment Rates, 1992–96

(In percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Polish Central Statistical Office.

22. Figures from the Labor Force Survey present a complex pattern of Polish unemployment. As in its Western European neighbors, there is a significant share of long-term unemployed (just under 40 percent), the youth unemployment rate is relatively high, and unemployment rates are disproportionately high amongst the least educated. However, the increasing rate of flow into and out of unemployment (Table 12) suggests that a more fluid labor market may be emerging.

Table 11.

Poland: Population, Labor Force, Employment and Unemployment, 1989-95

(In thousands of persons; end of year)

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Source: Data provided by the Polish authorities.

The working age for men/women is defined to be between the ages of 18 and 64/59.

Employment statistics exclude workers doing military service, working in defense and public-safety related institutions, living abroad, or serving a jail sentence. These workers, however, are classified as part of the active labor force. Taking into account the different statistical treatment accorded to these workers, the calculated unemployment rate was close to zero through 1989.

Table 12.

Poland: Main Factors Determining Change in Unemployment, 1990-95

(In thousands of persons)

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Source: Data provided by the Central Statistical Office.

Inflows and outflows are estimates.

23. Regional disparities in Polish unemployment are immense, and reflect deep-rooted structural characteristics of the Polish economy. The disappearance of certain sections of heavy industry—especially when concentrated in one-company towns—and the liquidation of state farms have created regional pockets of high unemployment. In addition, the relatively small stock of housing and the lack of a well-developed housing market militate against labor mobility, making the problem of regional unemployment harder to solve.

24. Wage growth has picked up with the improved labor market conditions. After barely rising in 1994, latest official estimates suggest that economy-wide real wages increased 3.0 percent in 1995, net of income tax. This increase is estimated to have accelerated in 1996, to around 5 percent. Developments in the gross wage tell a similar story (Table 13), with wage growth outpacing consumer price inflation. Wage growth in the mining sector has been particularly erratic, rising much faster than average back in 1993 and 1994, before falling back a little in 1995. Wage growth in manufacturing has been consistently strong. Finally, while wage growth in the enterprise sector led the way in 1994, in 1995—reflecting indexation agreements and past election commitments—budgetary sector wages recovered to grow faster than average, narrowing the differential with the enterprise sector.

Table 13.

Poland: Wages and Salaries, 1992-96

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Sources: Central Statistical Office and staff estimates.

Figures for 1996 cover only the first nine months and, being based on a smaller statistical sample, are not directly comparable with figures for earlier years. However, the growth rates of wages for the first nine months of 1996 have been calculated using a consistent sample for both years, and hence are comparable.

25. The process of wage formation continues to evolve. In the early stages of transition, enterprise wages were controlled by the excess wages tax, or popiwek. This tax was designed to keep state enterprise wage growth in check, at a time when market mechanisms of control were still weak. At first, to bolster the macroeconomic stabilization, the marginal tax rate on enterprise average wage growth in excess of the pre-specified norm was set at the punitive rate of 500 percent. However, as hard budget constraints took hold, and the microeconomic distortions of the popiwek grew larger (disproportionate taxation of the most profitable firms, hindering their expansion), the system was progressively relaxed and finally abandoned at end-1994.

26. Under the present system of wage setting, increases in the base wages (excluding profit-related bonuses) of workers in firms with 50 or more employees are set by indicative wage norms, agreed on by a Tripartite Commission of government, trades unions, and employers’ organizations, taking into account government projections of such economic variables as real GDP growth, the inflation rate, and the maximum average wage increase. For example, the wage norm for 1996 was set at 21.8 percent, assuming 19.8 percent annual average inflation. Though the wage norms are not legally binding, the managers of state owned enterprises are subject to loss of pay or even dismissal for violating the wage norm if profitability deteriorates as a result. In extreme cases, sanctions might also include withdrawal of tax allowances to enterprises that violate the norm.

27. However, the wage norms have not proved particularly effective at restraining wage growth. First, they contain elements of de facto indexation. The initial wage norm allowed average annual increases of 16 percent, 22 percent, 26 percent and 30 percent in the four quarters of 1995: an average annual increase of 23.5 percent, against 22.7 percent projected consumer price inflation. However, when consumer price inflation looked set to exceed the initial assumptions, the wage norm was revised at midyear to permit increases of 32 percent and 38 percent in the last two quarters of 1995, an annual average increase of 27 percent. Second, the wage norms have not proved binding. In 1995, wages actually increased 32.9 percent in enterprises governed by the wage norm, after substantial wage increases in the fourth quarter. Third, given the marked seasonal pattern of Polish wage growth, the quarterly phasing of the wage norm has been too generous in the first half of the year, and unrealistically harsh—and hence disregarded—toward February 19, 1997 the end of the year. Even so, the flexibility inherent in the wage norm system does at least offer the potential for greater relative wage flexibility, and for strengthening the link between wages and enterprise profitability.

28. In contrast, budgetary wages have been formally indexed to the rate of inflation for three consecutive years. This reflects the government’s commitment to raise budgetary wages relative to wages paid in the enterprise sector, so as to move closer to the pretransition pattern of relative wages. Indeed, the government is under a legal obligation to provide real growth in budgetary wages for the years 1995–98. For 1995, agreement was reached on an increase of average budgetary wages of some six percentage points above actual inflation; for 1996, and again in 1997, the increase was set at 5.5 percentage points. The amount of the real increase, and the timing of payment, is negotiated within the Tripartite Commission.

29. Thus, it is fair to conclude that considerable indexation remains in the Polish economy.4 Certainly pensions and unemployment benefits, and the minimum wage are indexed—initially to average wages, but increasingly to prices. In addition, budgetary wages have also been explicitly linked to actual inflation. The wage norm is more complex: it contains elements of forward looking indexation, but in practice it is revised with actual inflation developments. On the whole, it would seem that, as long as the authorities meet their inflation targets and the wage norm is adhered to, wage growth should not prove an obstacle to inflation reduction. However, there are at least two caveats. First, if the authorities miss their inflation target, the system will generate a rapid wage response, making subsequent inflation reduction even more difficult. Second, the wage norm has so far failed to bind. In fact, it may inadvertently establish a floor for wage increases, even in inefficient or loss-making enterprises.

D. Inflation and Prices

30. Against the impressive growth record of recent years, Poland’s inflation performance has lagged somewhat. Although hyperinflation has long since disappeared, inflation in Poland remains well above the average of its fellow Visegrad countries, let alone the average inflation rate in the European Union. Even so, generally tight financial policies have ensured a continued downward path for inflation, even if immediate progress has at times been complicated by undervaluation of the exchange rate (1994–95) or supply side shocks to the economy.

31. After declining sharply from over 600 percent during 1989 to 38 percent during 1993, inflation became stuck in the 30–35 percent range (Tables 14 and 15, Figure 5). In part, this was because gradual reductions in the rate of crawl were unable to resolve the underlying inflation problem caused by undervaluation of the level of the exchange rate. In addition, part of the explanation lies in the poor harvest of 1994: agricultural production fell, and food prices increased.

Table 14.

Poland: Price Developments, 1989-96

(Percent change)

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Source: Data provided by the Polish authorities, and staff calculations.

Final consumption expenditure.

Gross fixed capital formation.

For industry, producer prices are defined by the index of sales prices for sold output; for agriculture and construction, by the price index of gross output produced. According to the national classification (KGN).

According to the Polish version of the NACE-EKD classification system. Until 1993 indices include VAT; 1994-95 excluding VAT, including excise tax; from 1996 onwards excluding VAT and excise tax.

Producer prices in commercial heating plants.

The range of prices administered by the state has fallen over time. In 1996: the price of spirit alcohol is controlled; furnace fuels (coal, wood) are no longer controlled; control of medicine prices applies to a limited range of domestically produced pharmaceutical goods; the price of natural gas delivered through municipal installations is controlled; the state sets maximum prices for central heating and hot water—the index measures actual prices in force, which are sometimes below the state-set maximum.

Table 15.

Poland: Recent Price Developments

(Percent change from a year earlier)

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Source: Data provided by the Polish authorities.

According to the Polish version of the NACE-EKD classification system. Data in 1995 excluding VAT, including excise tax; from 1996 onwards excluding VAT and excise tax.

Figure 5.
Figure 5.

Poland: Inflation Developments, 1993–96

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Polish Central Statistical Office.

32. However, from mid-1995 onwards, inflation resumed its downward path. An improved harvest pushed down both food prices and overall prices during the summer. This, together with a significant hardening of the exchange rate (see Chapter V), brought the year-on-year inflation rate down by some 8 percentage points in the space of four months, despite rapid expansion of the money supply. Inflation fell to 21.6 percent by the end of 1995: a considerable achievement but still well above the official inflation target of 17 percent.

33. Though inflation has continued to fall through 1996, consolidating the substantial gains of 1995, progress slowed substantially. The authorities’ December inflation target of 17 percent was again exceeded, but this time only by 1½ percentage points. While average inflation for the year fell from 27.8 percent in 1995 to 19.9 percent in 1996, in large part this was simply carryover from the sharp decline in the second half of 1995. Indeed, progress in reducing inflation in the second half of 1996 has been minimal, making it more difficult to reach next year’s target of 15.5 percent annual average inflation.

34. Exchange rate policy lies at the heart of the inflation reduction achieved since 1995. Reductions in the rate of crawl, combined with a series of small step appreciations in 1995, have put direct downward pressure on domestic inflation through lower import prices. The effect is seen vividly in the dramatic reduction in the rate of producer price inflation, which has fallen from 30 percent at the start of 1995 to only a little above 10 percent by end 1996.5 At the same time, the trend increase in consumer prices relative to producer prices has re-emerged (possibly obscured in 1995 by the undervalued exchange rate as well as falling food prices). Such a trend is consistent with rapid productivity growth in the tradables sector, but could also reflect the return of competitiveness to more normal levels (see Chapter V for a more detailed discussion of the exchange rate and competitiveness).

35. Administered prices account for almost 20 percent of the Polish CPI basket. These can be broken into two groups: goods with officially set prices (electricity, natural gas, central heating and hot water, medicines and spirit alcohol), and goods whose prices are not strictly administered, but which are influenced by excise taxes (beer and wine, tobacco, and liquid fuel and gasoline).6 In 1996, as in 1995, administered prices were increased less than originally intended, in order to contain inflation. For example, the increases in excise tax for tobacco and beer planned for the second half of 1996 were canceled, and the seven percent increase in VAT for medicines intended for July was abandoned. In addition, the government has used sales of agricultural reserves and extensions of duty free grain quotas to contain food price increases.

36. Delaying administered price increases to meet inflation targets has obvious risks: cost recovery is delayed—increasing the burden either on enterprise finances or on the budget—and even larger administered price increases are simply postponed to the future. Fuel provides a particularly telling example. During 1996, higher world oil prices made it unprofitable to import crude oil, refine it, and then sell it on the domestic market. The result was sporadic fuel shortages, offset only partly by sales of state oil reserves and duty free import quotas. In October, the government allowed slight increases in the price of fuel, lowered the excise tax on diesel, and expanded the duty free quota, in an attempt to increase the profitability of domestic refining. Even so, in practice, to overcome the shortages, fuel has been imported and sold above the official price (which applies only to domestically produced fuel). Long delayed for fears of its inflationary impact, fuel prices were finally liberalized in February 1997.

37. Why has inflation proved so resilient in Poland? Structural weaknesses offer one explanation. These include indexation, high tariff protection, monopolization, the need to raise relative prices to world levels, and the reduced effectiveness of monetary policy in an economy which still has sectors sheltered from market discipline (Chapter II of SM/95/316 (12/27/95)). A two-handed approach combining tighter financial policies with intensified structural reforms could substantially reduce the costs of disinflation, increase the effectiveness of macroeconomic policy, and thereby help lay the foundation for sustained economic growth.

38. The environment. Poland’s impressive economic performance during transition has been accompanied by a major effort to protect and clean up the environment. The adoption of the 1991 National Environmental Plan, and Poland’s commitment to harmonize its environmental standards with the EU (in line with its Association agreement) have both contributed. The share of investment expenditures in environmental protection has roughly doubled to around 1 percent of GDP; tighter regulations against the sources of environmental pollution have been introduced; higher quality fuels have been utilized; and industrial restructuring has promoted more efficient energy use and a diminished role for high-polluting heavy industry. As a result, between 1989 and 1994, total emissions of particulates fell by 42 percent, with nitrogen dioxide emissions falling by 25 percent and sulphur dioxide by one-third.

39. Unfortunately, these improvements have been made relative to a poor pretransition starting point. Total emission of air pollutants ranks among the highest in Europe; only 55 percent of the population is served by municipal sanitation services and less than 40 percent benefit from sewage treatment plants (compared to western European averages of more than 90 percent); and seasonal fluctuations and regional rainfall differences lead to periodic water shortages. Thus, Polish environmental quality still ranks well below OECD averages.

III. Recent Fiscal Developments7

A. Overview

40. After the large fiscal imbalances associated with the early and most difficult years of transition, Poland achieved a major fiscal turnaround in 1993, through a series of ambitious reforms and a rigorous budget. Since then, the general government deficit has been held consistently below 3 percent of GDP, compared with close to 7 percent in 1991–92 (see Table 1 and the tabulation below).

Table 1.

Poland: Consolidated General Government Operations, 1991-96 1/

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Sources: Data provided by the authorities, and staff calculations and estimates.

Data are on a cash basis except for state budget expenditure, which is on a domestic commitments basis.

General Government Performance, 1991–96

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Sources: Strategy for Poland, information provided by the authorities; and staff estimates.

41. Besides maintaining the deficit at 2–3 percent of GDP since 1993 and a primary surplus since 1994, Poland has cut its public debt from 147 percent of GDP to 53½ percent of GDP between 1992 and 1996, while building a substantial government bond market from scratch. It has accomplished difficult reforms of income taxation, indirect taxation, and—lately—trade taxation; and has recently begun equally key reforms of government institutions and the social security system (pensions, disability, and unemployment).

42. These achievements have not come easily. The Government that came into office in 1993, while committed to continued stabilization and reforms, saw its mandate as one of enhancing equity in a more gradually paced transition. This limited its ability to reform the large social spending blocks in the budget: health, education, and pensions; these remain the main impediments to expenditure consolidation. Moreover, the revenue ratio has resumed its decline; structural reforms have imposed at least short-run costs on the budget; and a drive to decentralization has made fiscal management more complex. There have been, on the other hand, offsetting positive factors—significant debt relief, the return to growth, and a continued broadbased consensus on the principles of stabilization and market-oriented reforms. The Strategy for Poland, the new Government’s medium-term policy framework adopted in early 1994, adopted these principles and has guided fiscal consolidation over the past three years. The time horizon of the Strategy was extended by a new initiative in 1996 (Package 2000) to underpin Poland’s goal of joining the European Union soon after the turn of the century.

B. State Budget

43. Within general government, the state budget (core central government8) is responsible for about two-thirds of revenue and gross spending; it is the almost exclusive focus of the domestic fiscal policy debate. Through the 1990s, it has run a deficit slightly larger than for overall general government, supporting small surpluses in other agencies by various types of transfers (Table 2).9

Table 2.

Poland: Components of General Government Budget, 1991-95 1/

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Sources: Data provided by the Polish authorities and staff estimates.

Data are on a cash basis except for state budget expenditure, which is on a domestic commitments basis. Beginning in 1994, the data are compiled according to GFS (except that privatization receipts are shown as revenue). Hence, 1994-95 data may not be strictly comparable with previous years’. The state budget comprises central government and regional authorities. Expenditure of the state budget includes all “unidentified expenditure”; this is mainly complementary period adjustments.

44. Having peaked at nearly 8 percent of GDP in 1992, the state budget deficit was more than halved in 1993 and has now been reduced to just over 2 percent.10 The policies underlying this consolidation were more consistent than perhaps annual deficit movements might suggest. The marked tightening in 1994 and the offsetting upward shift in the 1995 deficit are explained mainly by changes in the timing of debt service, a lengthening of maturities, and the resumption of full commercial debt service in 1995, together with first steps in dismantling trade taxes—which continued in 1996.

45. For 1997, the state budget incorporates a significant income tax reduction that, together with the continuing trade tax reform, explains the apparent 0.7 percent of GDP widening of the state budget deficit—to 2.8 percent of GDP in 1997.11 Since the budget was prepared on the earlier assumption of a 2.6 percent of GDP deficit in 1996, the sizeable overperformance last year would suggest the potential for a similar margin in 1997.

C. Revenue

46. While Poland has not been spared the characteristic transition revenue decline, the initial sharp fall of 1989–91 was braked by strong policy action from 1992 on, and the revenue ratio has since been kept high, at around 46–47 percent of GDP for general government (28 percent in the state budget). This, however, has masked a continuing underlying weakness in core revenues, which has resurfaced recently in revenue aggregates, and is likely to be maintained under the Government’s plan for medium-term tax reduction.

47. The 5½ percent of GDP revenue drop during the first phase of the transition (10 percent in the state budget) resulted from a wide spectrum of problems, including a pronounced decline in enterprise profitability, an erosion of indirect tax bases, and the virtual elimination of trade taxes. After restoring import tariffs in 1991, the authorities began several rounds of ambitious tax reform in 1992 to rebuild revenues. A new personal income tax law was introduced to capture the shift in income shares from profits to wages; the corporate tax was reformed to broaden the definition of enterprise income; VAT was implemented in mid-1993 to provide a broad-based source of consumption taxation; and a broad-coverage import surcharge was imposed to recapture incomes in the relatively healthy trade sector. Within two years, these measures raised an additional 7 percent of GDP, although half of that was offset by a further drop in enterprise tax receipts.12 During 1993—95, despite a 1994 increase in PIT rates13 and a focused initiative on broadening the tax net, the revenue ratio remained around 47½ percent of GDP, before dropping by about 2 percent of GDP in 1996; a further fall is projected for 1997 even before the income tax cuts.

48. The recent gentle revenue decline is to some extent welcomed in Poland as an indicator of diminishing government pressure on the economy. Unlike earlier losses it is orderly, in the sense that it is largely anticipated in the budget and compensated by spending restraint. It can partly be explained by the recovery, and in particular, by its unevenness. Almost inevitably, given the transition strategy, growth surfaced first in investment, exports, and services—relatively lightly taxed sectors. Traditional tax bases, concentrated in lagging sectors, have continued to shrink as a share of GDP. Other causes include the following: (1) Starting in 1995 the import surcharge was phased out and disappears from the beginning of 1997. Tariffs have been cut each year by an average 20 percent for industrial goods and about half that for agricultural goods. (2) Privatization is now reducing the base for state enterprise dividend payments to the budget (though privatization revenues have been significant during the past three years). (3) Central bank profit transfers have dropped to one-tenth the level of previous years, mainly because of the costs of sterilizing large external surpluses (see Attachment I).

49. In 1996, the revenue decline of 1½ percent of GDP was influenced also by specific factors. The personal income tax lagged because publicity about a tax-preference for family donations trebled deductions compared with budget. Also, some planned excise increases were delayed and the excise on diesel fuel was lowered—largely in an effort to contain inflation. On the other hand, VAT and trade taxes were buoyant, mainly because of higher than expected imports. Privatization receipts and related nontax revenue from sales of concessions and licenses also exceeded expectations.

50. The sharper decline in state budget revenue than for general government as a whole has been notable for several years (Table 3). It can also be explained by the recovery: earmarked monies such as social security contributions and own-revenues of extrabudgetary funds have grown relative to fungible “core” taxes on income and trade, because of rising real wages and intensifying commercialization within state agencies. Hence, the state budget’s share in revenue has dropped from 77 percent in 1990 to only 60 percent in 1996. This has been the major recent change in Poland’s revenue structure. Perhaps contrary to expectations, the direct-indirect tax split has changed little, because the strong performance of the PIT and payroll taxes has compensated for the falling enterprise tax base.

Table 3.

Poland: State Budget Revenue, 1991–96

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Sources: Data provided by the authorities, and staff estimates.

Includes turnover tax through 1995.

The stamp duty and the real estate tax were abolished in 1990.

51. For 1997, the budget envisages a further 1.8 percent of GDP drop in the revenue ratio. The income tax reform package passed by Parliament in November 1996 is seen by the Government as the first step in implementing the medium-term fiscal reforms outlined in Package 2000. It has three main sets of provisions: (1) cuts in personal income tax rates from the current 21/33/45 percent scale to 20/32/44 percent in 1997 and to 19/30/40 percent in 1998; (2) a cut in the corporate income tax rate from 40 to 38 percent; and—importantly for alleviating the cost of the package—(3) the recision or reduction of several tax exemptions, notably on investment income and family donations. To offset part of the resulting revenue loss in 1997, the authorities added Bank Handlowy, the preeminent state-owned bank, to the list of state assets to be privatized this year (Chapter VI). Besides the cost of the income tax package, the revenue side of the 1997 budget reflects the continuing trade tax reform, specifically the elimination of the import surcharge at a loss of around 0.8 percent of GDP, and further tariff cuts. Central bank transfers are projected to remain depressed, reflecting the still-large volume of outstanding open-market operations. Higher planned privatization receipts and scheduled increases of VAT rates for energy products partly offset these costs.

D. Expenditure

52. Expenditure has also gently trended down since 1992, despite many opposing pressures. The orderly containment of spending has been key for Poland’s fiscal success, given the pressures on revenue. At the general government level, outlays declined from 50½ percent of GDP in 1992–93 to less than 48 percent in 1996; state budget expenditure dropped from 33 percent to 30 percent of GDP over the period (see Tables 1 and 4).

Table 4.

Poland: State Budget Expenditure, 1991-96

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Sources: Data provided by the Polish authorities; and staff estimates.

Includes pensions for uniformed personel and family allowances, and transfers to other state budget funds.

In 1990 and 1991 arrears and residual expenditure included in current and capital expenditure.

53. The pressures that have made control of spending difficult include: (1) the perceived need to rebuild government wage rates, which had been among the hardest hit in the transition, and which, after several years of real hikes, are at around 85 percent of wages in the rest of the economy; (2) social security payments linked to a wage index which has tended to grow faster than the CPI and GDP deflators; (3) several rounds of Constitutional Tribunal rulings requiring government compensation for earlier under-indexation of wages and benefits; (4) periodic arrears bail-outs (see below); (5) growth in demand for unemployment benefits; and (6) rising demands for funding from local governments as their responsibilities increase (see below). Moreover, despite significant savings in debt service in recent years compared with budget, (7) interest payments have increased by 2½ percent of GDP since 1991, because of the recommencement of full debt service payments abroad as the quid pro quo of the 1994 debt reduction, and the growth of domestic debt carrying relatively high nominal interest rates.14

54. Spending reductions were concentrated on subsidies and in capital and net lending. The recent subsidy cuts were a less drastic continuation of the sharp cuts of the early transition years: the already much-reduced explicit support for enterprise losses was eliminated and housing subsidies curtailed (though these are intrinsically long lived and still remain important).15 Direct investment outlays have dropped by around ½ percent of GDP since 1992—from already low levels—and budget responsibility for guaranteed project borrowing has been successfully curbed, saving another ½ percent of GDP.

55. The declining trend in overall expenditure sharpened in 1996, when spending fell by more than 2 percent of GDP. Overruns in wages and unemployment benefits were offset by large savings in debt service and transfers to social security funds (FUS). Capital outlays and subsidies also came in below budget. The social security transfers were lower than budgeted not only because high wages boosted contributions but also because of an interim arrangement governing benefit indexation, which was designed to limit real growth to 2½ percent.16 A potential threat to the budget, the ruling of the Constitutional Tribunal that government must pay compensation for under-indexation of pensions in the fourth quarter of 1995, was deferred to 1997.

56. As in 1996, spending in the draft 1997 budget is largely driven by policies for wages and pensions. The budget provides for a 5 percent average real increase in government wages, with larger increases planned for workers in education and health. A new law on pension indexation, based mainly on prices, with room for additional increases depending on budgetary possibilities, is expected to generate savings in future years, given likely labor productivity growth. Despite this welcome reform, average pensions are projected to grow by up to 7 percent in real terms during 1997, because of the combined impact of a catch-up payment for lower-than-budgeted pensions in 1996, and compensation on account of the Constitutional Tribunal ruling for 1995. The latter is currently estimated to cost about Zl 2.5 billion.17 There will be some savings to the transfer bill from the impact of 1996 reforms tightening eligibility for disability and unemployment benefits. The budget provides for real growth in spending on education, health, housing, agriculture, and defense/security. The 5 percent real increase in defense outlays is mainly wage related but also incorporates Poland’s commitments to the Partnership for Peace. An estimated 1.7 percent of GDP in 1996, Poland’s defense outlays have been declining steadily throughout the transition.

57. Five years of discretionary expenditure cuts have caused the structure of general government spending to change significantly, even after the first sharp shift from subsidies to income transfers in the “big bang” of 1990. The share of transfers to households in total spending rose by more than 20 percent in 1992–96, and now amounts to 43 percent of outlays. The interest share trebled, to 9 percent of spending. For the incomplete period over which the wage bill can be measured, it has trended up and currently accounts for 17½ percent of outlays. The subsidy cuts—by a further two-thirds following their initial decline—have reduced subsidies to less than 4 percent of spending. Finally, the capital budget, always small, now amounts to less than 6 percent of spending.

58. A further apparent change in the structure of spending can be traced to the transfer of state budget responsibilities to local governments and big cities, largely in 1995–96. This decentralization—mainly in the area of education—has reduced the state budget’s wage bill and raised intergovernmental transfers. Estimates are, however, that the overall size of the public sector labor force has actually grown by around 1 percent over the period, so the smaller wage bill observed in the budget is a poor indicator of wage pressure on government finances. The responsibilities and size of extrabudgetary funds have also increased, though some have been abolished (Table 5). While all of these developments reflect government priorities, it is clear that the growth of entitlements, wages, and interest, and the policy of devolution, have by now limited the room for future discretionary expenditure adjustment.

Table 5.

Poland: Operations of Extra-Budgetary Funds, 1991-95 1/

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Source: Data provided by the authorities, and staff estimates.

Data are on a cash basis. There were 14 funds in 1991,18 in 1992,17 in 1993, 18 in 1994, and 17 in 1995. Details of the three biggest funds (the main social funds) are shown in Table 6. The other funds cover veterans’ and other health concerns, geological and environmental issues, agriculture, and culture.

59. Several of the institutional reforms currently under way are designed to give the government additional room to manoeuvre in managing expenditure. The most important are the reforms of the pension system and unemployment insurance, which aim to curb the growth in the transfer bill (see Table 6 and Chapter VI below). One goal of the decentralization strategy is to make spending on education more efficient, with closer control of costs and arrears. A debate on possible health care reform—particularly controversial—has recently been revived. There is also an on-going initiative for civil service reform (though it focuses more on the development of professional cadres than on managing the public sector wage bill). Finally, the 1997 draft budget provides for some expansion of capital spending.

Table 6.

Poland: Finances of the Main Social Insurance Funds, 1991-95 1/

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Source: Data provided by the Polish authorities; and IMF staff estimates.

On a cash basis.

E. Financing and Public Debt

60. Government’s contribution to demand pressures has been reduced somewhat more than the relatively minor movements in the deficit would suggest. For a number of reasons, domestic bank financing has declined significantly, from 7 percent of GDP in 1992 to 0.7 percent in 1996 (Table 1). First, the domestic market for government paper has expanded rapidly. In 1995–96, domestic nonbank borrowing supplied around 1½ percent of GDP in deficit financing, up from almost zero in the early 1990s.18 In 1996, too, local governments began to issue bonds for the first time. A second factor is that foreign financing, which had been negative through the 1990s, became positive in 1995. In 1997, some regression of the financing pattern is projected, because (unduly generous) tax preferences for investors in government paper are being eliminated as part of the tax reform package (see above). This is expected to dampen nonbank finance significantly (albeit with a large margin of uncertainty, since the impact of the tax preferences in creating demand for treasury bonds is not known). Also, foreign financing—always conservatively projected—is projected to reverse to marginal negative net flows. Hence, bank borrowing of nearly 2½ percent of GDP is implicit in the 1997 budget.

61. Despite the buoyant domestic demand for government paper, public debt has fallen sharply. While the primary surplus has contributed, the decline, from 147 percent of GDP in 1992 to an estimated 53 ½ percent in 1996 and 49 percent in 1997, is mainly explained by developments on the external side. The second stage of the Paris Club agreement in 1994 reduced Polish official debt by nearly US$3 billion, and a London Club agreement cut commercial debt by nearly 50 percent. The drop is also testimony to the benefits of recovery—the combination of strong real growth, favorable exchange rate movements, and falling interest rates. At end-1996, just over 60 percent of outstanding debt was external; foreigners also hold domestic paper, but their claims currently represent less than 2 percent of the debt.

F. Other Levels of Government

62. Besides the state budget, the general government includes social funds (the second-largest component), local governments, and extrabudgetary agencies at central and local levels (Table 2). Supported by transfers from the state budget, these agencies—the rest of general government—have run a small but significant surplus throughout the 1990s.

63. The financial position of the social funds before transfers has been a main policy concern, and a prime motivation for the ongoing benefits reforms (Chapter VI). It has improved significantly since 1994; the budget transfer dropped from 7.7 percent of GDP to 5.6 percent of GDP in 1995 and a preliminary 5 percent of GDP in 1996 (Tables 5 and 6). Savings were realized in part because of buoyant wage growth (and thus contribution growth), while there has also been a sizeable decline in expenditures of the main pension fund (FUS) relative to GDP, reflecting both a lower-than-expected influx of new pensioners and the effect of some recent reforms (Chapter VI).

64. As regards subnational levels of government, there have been significant changes in structure and management since 1995, mainly in the direction of decentralization. Beginning in 1996, 46 large cities became self-governing; their number is likely to increase in 1997. They, and other municipalities, took responsibility for primary schools and some vocational training. In 1997, the administration of additional educational establishments will be shifted to them. The additional tasks are currently financed by direct budget transfers over and above the regular share of personal income tax kept by local governments.19 The long-planned elimination of the road tax (a main own-revenue source) has been deferred. A working group has been established to draft a new local government law by end-1997, within a wider brief to articulate a decentralization strategy, and with a particular focus on developing modalities for moving local governments further towards self financing. Besides these measures, control of over 3,000 firms still in state hands is being handed over to provincial governors; from now on the central government will supervise only larger strategic enterprises. A proposal to reestablish intermediate levels of subnational administration (poviats), between municipalities and provinces, is also up for debate.

65. Besides the on-going shift in responsibilities between levels of government, 1996 has also witnessed a major reorganization within central government. Seven ministries are being abolished, including the Central Planning Office and the Ministry of Foreign Economic Relations, and four new ones created, including a Treasury and Ministry of Economy. The Treasury has taken over the state’s ownership function in large firms and will also be responsible for privatization. The main goals of the reorganization were to eliminate the branch structure of oversight for state enterprises and instead concentrate industrial policy issues in a new Ministry of Industry, and to decentralize governance and small-scale privatization to lower levels of government.

G. Outstanding Fiscal Issues

66. Despite Poland’s consistently sound fiscal performance, a number of shortcomings remain to be dealt with for the completion of the stabilization process. These include: the remaining agenda for tax reform; persistent government expenditure arrears; the fact that consolidation has been achieved partly by temporary measures; the need to align medium-term fiscal targets with other financial objectives; and the exceptionally high level of uncertainty in fiscal policy—partly a budget management challenge.

67. Tax reform. The tax reforms of the last five years have dealt with many of the previous important distortions in the tax system.20 Perhaps the most immediate unresolved issues are: remaining VAT exemptions that have proved politically difficult to remove; and the impending need to identify permanent revenues (or expenditure cuts) to replace privatization receipts.

68. Arrears. As in other transition countries, the state budget outcome has been affected by relatively small but recurring arrears. Now almost exclusively concentrated in education and health, they have contributed 0.1–0.4 percent of GDP to the commitments deficit in most years. The authorities have carried out several rounds of bail-outs, most recently as part of the closure of the 1995 and 1996 budgets. The latter, if fully effected as planned, could cost 0.6 percent of GDP in 1997; it is intended to be the last such exercise. To insure against recurring arrears, repayment will be authorized only to spending units with no new arrears. Previous rounds have also been associated with measures to correct not only the stock, but also the flow problem, although apparently with limited success to date. For example, the transfer of primary schools to local government was partly motivated by the desire to control their spending more closely.

69. The underlying fiscal gap. The deficit target has been achieved each year with the help of one-time revenues, such as privatization receipts and license fees, of 1 percent of GDP or more. Excluding these one-off factors would put the general government deficit at 3.6 percent of GDP in 1995, 3.1 percent in 1996, and a budgeted 4 percent in 1997. This higher underlying gap, coupled with the possible weakening of the fiscal balance if the current high growth rates were to slow, implies that more adjustment is likely to be needed for longterm stability than recent data might suggest.

70. Medium-term goals. The need to address the underlying fiscal gap is of importance particularly from a medium-term perspective, given the widely-agreed need to raise savings and investment ratios, reduce inflation, and provide for contingencies like the recent large capital inflows. However, Poland’s medium-term fiscal direction is somewhat unclear. The Government’s new medium-term program, Package 2000, was approved in mid-1996, with the aim, inter alia, of furthering convergence towards Maastricht criteria. It envisages a declining deficit path consistent with achieving 5–7 percent inflation and 5 percent growth in 2000 (see tabulation below). Specifically, the 1997 state budget deficit was to be 2.2 percent of GDP (down from a projected 2.5 percent of GDP in 1996), falling to 1.7 percent of GDP in 2000. The plan incorporated phased reductions in corporate and personal income taxes, as a key input to achieving the growth target. These were the motivation for the November 1996 tax package. However, unlike in the Package, the tax reforms came at the cost of loosening the state budget deficit to 2.8 percent of GDP (up from an estimated 1996 deficit of 2.2 percent of GDP). Whether this remains compatible with the goals of Package 2000 will depend on actual budget implementation in 1997 and success in bringing 1998 budget plans back on the envisaged medium-term track.

Medium-Term Fiscal Goals (State Budget), 1994–2000

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Source: Package 2000 (April 1996); staff estimates.

71. Uncertainty. A central characteristic of Poland’s fiscal experience in the 1990s has been substantial subannual volatility. This has made the deficit outturn difficult to forecast, complicated program management, and heightened uncertainty about financial parameters. Specifically, each year since 1992, within-year indicators and unbudgeted-for shocks have signaled potentially serious spending overruns, but factors mainly linked to the intensifying recovery eventually bailed the budget out. In recent years, declining interest rates and the strengthening of the zloty brought debt service in below target; privatization receipts have generally come in above budget; and since 1995 rising real wages have boosted social security contributions and temporarily alleviated structural pressures on the pension system. High growth has also made it possible to grant real increases in politically sensitive areas of expenditure while still compressing spending in terms of GDP. And overruns in actual inflation compared to target boosted revenues while depressing real spending. It is not clear how safe the 2½–3 percent deficit would be if growth were to slow, prices and wages to stabilize, privatization to be completed, and real exchange rate appreciation to pause.

IV. Money, Credit, and Interest Rates21

72. This chapter reviews recent monetary developments and issues: Poland’s monetary policy framework and the challenges it has faced during the transition; developments in monetary aggregates and interest rates; and the central bank’s monetary policy guidelines for 1997. Bank privatization, restructuring, and supervision are covered in Chapter VI on structural reforms. Monetary issues are also addressed in Attachments I–III, which cover, respectively, the evolution of the targets and instruments of monetary policy, estimates of money demand in Poland, and an empirical analysis of the effectiveness of sterilization.

A. Framework and Challenges

73. Throughout Poland’s transition, monetary policy has operated with the exchange rate as a key nominal anchor. In 1990–91, the turnaround from near hyperinflation to inflation below 50 percent occurred under a fixed exchange rate regime, with high interest rates, a large fiscal adjustment, and the opening of the economy to foreign competition. The more gradual disinflation since has also been achieved with a largely exchange rate based strategy. Between October 1991 and May 1995, monetary policy was conducted under a crawling peg arrangement, with periodic reductions in the rate of crawl in line with the disinflation objective and several step devaluations to preserve external balance. Since May 1995, Poland’s exchange rate regime has formally been a crawling band of ± 7 percent around the central parity, with several small step appreciations and a further reduction in the rate of crawl. However, exchange rate fluctuations within the band have so far been rather limited.

74. In practice, the exchange rate has not been the only nominal anchor. As discussed in Attachment I, the authorities have followed a multiple anchor approach to achieve moderate disinflation without jeopardizing the recovery and with a view to preserving external balance. Domestic interest rates and the rate of crawl have generally been geared to the inflation target, while the level of the exchange rate has been set with a view to securing external balance. Fiscal and incomes policies have acted as additional anchors.

75. The intermediate and operational targets of monetary policy have also been set in a flexible manner. While the National Bank of Poland (NBP) has formally used broad money as the intermediate target in its monetary framework, in practice, as noted above, interest rates have been set mainly with a fairly direct view toward the goal of moderate disinflation. Until recently, short-term interest rates were the operational target of monetary policy. This choice reflected mainly the underdeveloped nature of Poland’s financial markets. With effect from January 1996, the NBP switched to reserve money as the operational target, although the level of money market interest rates has continued to be an important target in the day-to-day conduct of monetary policy.22

76. The circumstances under which monetary policy has been operating have not been easy:

  • Early on, there was a need to establish a modern central bank, with well-functioning indirect instruments of monetary control. As described in detail in Piero Ugolini, National Bank of Poland: The Road to Indirect Instruments, IMF Occasional Paper No. 144 (October 1996), this task is largely completed. In particular, open market operations have been the primary instrument of monetary policy already since 1993.

  • Large fiscal deficits in 1991–92 (following a temporary surplus in 1990) put considerable pressure on monetary aggregates. This pressure was exacerbated by Poland’s low degree of monetization—at that time, broad money amounted to 30 percent of GDP, less than half of the money-to-GDP ratio in the Czech Republic and also much below that in Hungary.

  • Banking sector problems have at times hampered efficient transmission of monetary policy actions. While bank privatization is still incomplete and some co-operative and specialized banks are yet to turn the corner, a major restructuring of the commercial bank sector starting in 1993 has been largely successful, with bank profits and solvency improving rapidly in recent years. Moreover, prudential regulations have been established, and bank supervisory capacity has been strengthened.

  • The shocks and uncertainties of transition have likely caused structural changes in behavioral relationships, making judgements on the appropriate stance of monetary policy difficult. For example, there have been large unforeseen and in part unexplained shifts in private savings.

  • Disinflation in Poland is rather costly, reflecting a number of structural reasons, including entrenched indexation practices, protracted relative price changes, and slow restructuring of enterprises.23 Together with the need to sustain the recovery, this has at times tended to result in a somewhat accommodative monetary stance, including devaluations.

  • The increased openness of the economy has reduced the scope for independent monetary policy. While interest sensitive capital movements were relatively limited until Poland’s full normalization of relations with commercial creditors in late 1994, several factors have worked to increase capital mobility since. These factors include: increased confidence in the economy (owing to the strong recovery and improving external position); the development of Poland’s financial markets; liberalization of capital account restrictions, including permission for foreigners to participate in the Treasury bills market; and, during 1995, widespread expectations of zloty appreciation. Under the existing exchange rate system, maintaining independence of monetary policy has required heavy sterilization.

  • Although the NBP has considerable autonomy in fulfilling its central bank functions, the need for Parliamentary approval of the NBP’s monetary policy guidelines and the availability of central bank financing for the budget indicate that full independence is yet to be achieved. A new central bank law, which would significantly strengthen NBP independence, is under discussion in Parliament.

B. Recent Monetary Developments

77. In early 1995, monetary policy faced a difficult task. Inflation, which had been close to 30 percent in the previous year, was targeted to decline to 17 percent. However, net international reserves (NIR) had since mid-1994 increased at a rapid rate, with the sources of the increase somewhat unclear at the time.24 Moreover, the planned fiscal stance was at best neutral. In this situation, a harder exchange rate—through reductions in the rate of crawl and a series of small step appreciations—became the main anti-inflationary weapon. Headline interest rates were also raised early in the year, prompted by a high January inflation outcome, but as higher interest rates were found to contribute to capital inflows and with a harder exchange rate improving prospects for disinflation, interest rates were cut significantly later in the year. In the event, inflation was contained to below 22 percent during 1995, also helped by a good harvest.

78. Monetary management was little easier in 1996. Inflation was again targeted to decline to 17 percent, but the pressures turned out to be quite different than in the previous year. After continuing its rapid rise through March, NIR stabilized, in part owing to a weakening current account and reduced expectations of zloty appreciation. While the weakening of the external position made the authorities cautious about further use of the exchange rate instrument, the lagged effects of past exchange rate actions helped inflation to decline below 20 percent by June. With the inflation target within reach and the harvest proving to be normal, the NBP relaxed the stance of monetary policy from mid-year, by reducing headline interest rates, reserve requirements, and open market operations. The last mentioned action was also prompted by the NBP’s increased concern over its profits, which threatened to turn negative under the weight of sterilization. In large part because of this relaxation, but also because of banks’ increased willingness to lend following the cleaning up of their balance sheets, credit to nongovernment accelerated markedly in the second half of 1996, supporting a strong pick-up in domestic demand. The demand pressures kept inflation from declining at the targeted rate, and the year ended with inflation at 18.5 percent. With credit expansion showing no signs of deceleration, the NBP in December 1996 and early 1997 tightened the stance of monetary policy, effecting a 2–3 point rise in market interest rates and announcing increases in reserve requirements.

Money and credit

79. Following a stagnation in the money-to-GDP ratio in 1993–94, the Polish economy has since been remonetizing (Table 1 and Figure 1). Adjusted for temporary factors, in 1995 broad money increased by almost 40 percent in nominal terms and by 15 percent in real terms.25 At the time it was unclear whether this rapid expansion represented a large monetary overhang with significant inflationary implications, or a welcome build-up of real balances from depressed levels. However, recent money demand studies by both NBP and Fund staff conclude largely in favor of the latter explanation, suggesting that the rapid decline in inflation in the second half of 1995 induced a marked increase in real balances.26 Developments in 1996 are also in line with this explanation: with disinflation slowing down significantly, real broad money growth declined to 7 percent by end-year (only slightly more than real GDP growth).

Table 1.

Poland: Monetary Survey, 1992-96

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Sources: Data provided by the Polish authorities; and staff estimates.

The change in the stock of net credit to general government can be reconciled with the flow change in bank financing in the fiscal table after adjustments are made for valuation effects on the dollar-denominated debt of the government and capitalized interest on the bonds issued to recapitalize the state-owned banks.

For 1994-96, the growth rates have been adjusted to correct for an exceptional decline in the banking system’s payments float at end-1994 (by Zl 2.5 billion, because of currency redenomination) and at end-1996 (by a provisionally estimated Zl 2 billion, because of a switch to a new reporting system.).

Credit to nongovernment excluding capitalized interest and interest due but not paid, deflated by the consumer price index.

Figure 1.
Figure 1.

Selected Countries: Ratio of Broad Money to GDP, 1990–96

(In percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish Central Statistical Office; WEO, October 1996; and staff calculations.

80. The acceleration of real money growth over the past two years is entirely attributable to zloty money (Figure 2). With nominal increases (year on year) at times exceeding 50 percent, real zloty balances have risen by over one third since end-1994. By contrast, foreign currency deposits have remained almost flat in nominal zloty terms (and declined markedly in U.S. dollar and real terms, as well as relative to broad money). This reversal of currency substitution, which was strongest in 1995 and showed some signs of slowing down in late 1996, is evidence of increased confidence in the zloty, and was associated in 1995 with widespread expectations of zloty appreciation.

Figure 2.
Figure 2.

Poland: Real Broad Money and Its Composition, 1992–96 1/

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: National Bank of Poland.1/ Nominal variables deflated by the CPI and indexed so that real broad money equals 100 in January 1992.

81. The sources of money growth have varied greatly in recent years (see tabulation below).27 While the government’s recourse to bank financing accounted for half of broad money growth in 1994, credit to government has since been subdued, owing to moderate fiscal deficits and increased nonbank and foreign financing of the budget. In 1995, the massive current and capital account surpluses made net international reserves by far the largest source of money expansion. Reserves stabilized in 1996, when a rapid acceleration of credit to nongovernment became the dominant source of money growth, especially in the second half of the year.

Contributions to Broad Money Growth

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82. The surge in net international reserves from mid-1994 to early 1996 greatly complicated monetary management. To contain the impact of this surge on liquidity and interest rates, the NBP resorted to increasingly large-scale open market operations (Table 2). These operations were at first carried out through reverse repurchase agreements based on Treasury bills, but later also through outright sales of Treasury bills and auctions of NBP bills. With the help of the sterilization, reserve money growth in 1995 was held to about one third of the increase in the NBP’s net foreign assets. However, this result was achieved at increasing quasi-fiscal cost (estimated to have peaked at close to an annualized 1 percent of GDP in early 1996), as the NBP accumulated low-interest foreign reserves in exchange for high-interest domestic securities. Moreover, with capital becoming more mobile internationally, the effectiveness of open market operations was put increasingly in question.28 Starting in the second quarter of 1996, sterilization operations were scaled down, pushing down market interest rates, in part with a view to preventing a return of large capital inflows.

Table 2.

Poland: Balance Sheet of the National Bank of Poland, 1992-96

(In billions of zlotys; stocks at end of period)

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Sources: Data provided by the Polish authorities; IMF, International Financial Statistics; and staff estimates.

Broad money divided by reserve money.

In percent.

83. The recent rapid expansion of credit to nongovernment is, to an extent, a healthy development (Figure 3).29 During 1992–94 credit to nongovernment had declined by a cumulative 29 percent in real terms, as banks were undercapitalized and burdened with bad loans; in that situation, and reflecting the fragile stage of the recovery, banks considered lending to firms and households risky and preferred to invest in government securities. Against this background, the cumulative 43 percent real increase in 1995–96 can be seen as a welcome rebound, owing in part to the increased willingness of the restructured banking sector to lend to firms which now have a longer track record. The increased credit demand has also reflected a strong pick-up in investment. Nevertheless, cuts in interest rates, compounded by a mid-year reduction of reserve requirements, also bear part of the responsibility. Indeed, the NBP viewed the accelerating growth rates of credit to nongovernment during the second half of 1996—to annual nominal rates exceeding 100 percent for household credit (albeit from a very low base) and 40 percent for enterprise credit—with increasing concern, and around the end of the year tightened monetary conditions by effecting increases in market interest rates and reserve requirements.

Figure 3.
Figure 3.

Credit Developments, 1992–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; Polish Central Statistical Office; andstaff calculations.1/ Deflated by the CPI and indexed so that the total equals 100 in January 1992.

Interest rates

84. The NBP sets its headline (official) interest rates—the rediscount and Lombard rates—with a view to signaling the central bank’s broad policy intentions (Table 3).30 With excess liquidity in the banking system in recent years, the influence of these rates on the banks’ behavior has been declining. They are of direct relevance to the Government, however, as the interest rate on restructuring bonds (issued to recapitalize banks) is a six-month average of the rediscount rate, and as the Lombard rate applies to London Club bonds (issued by the Government to get NBP financing for the agreement with commercial creditors) and to the financing of central investment.31

Table 3.

Poland: Interest Rates, 1991-96 1/

(In percent)

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Source: Data provided by the Polish authorities; and staff calculations.

The NBP refinance rate and the deposit and lending rates are end-period values, while all the other rates are monthly averages.

From January 1996, the refinancing rate for central investment loans guaranteed by the State Treasury is equal to the Lombard rate (shown in the table); for other refinancing loans the rate is 1 point higher.

One-day reverse repo rate in 1994-95,14-day reverse repo rate in 1996.

Midpoint of the range of rates offered by principal commercial banks.

Warsaw interbank offered rate.

Interest rate on zloty instrument minus interest rate on equivalent U.S. dollar instrument minus annualized rate of crawl.

85. In recent years, headline rates have been kept moderately positive in real terms, and changes in them have usually been in response to developments in and prospects for inflation (Figure 4). As mentioned above, in early 1995, headline rates were raised by 2–3 points following an unexpectedly high January inflation outcome. Later in the year, in connection with step appreciations (of 5 percent in May and 1 percent in September) and with inflation starting to decline, headline rates were cut by 4 and 2 points, respectively. In January 1996, following another small step appreciation and in the wake of a favorable end-1995 inflation outcome, headline rates were cut by 2–3 points. With disinflation slowing down, headline rates have since been reduced only once, by 1 point in mid-1996.

Figure 4.
Figure 4.

Poland: Interest Rates, 1992–96

(In percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; and staff calculations.

86. Since 1994, the NBP has also had direct influence on short-term market rates (especially the Warsaw Interbank Offered Rates, or WIBOR) through its “intervention rate”, which is the rate on its open market operations (mainly reverse repurchase agreements). With the yield curve in Poland fairly rigid and flat, the intervention rate tends to guide movements in longer term market rates, such as those on Treasury bills, as well. Having been negative between mid-1994 and mid-1995, the real market rates became moderately positive by late 1995, reflecting a gradual decline in nominal rates at a time of rapid disinflation. During 1996, market rates were pushed down by more (5–6 points) than headline rates (3–4 points), and in the second half of the year market rates were only barely positive in real terms. In this situation, with credit to nongovernment rising rapidly, the NBP raised its intervention rate by 2–3 points around the turn of the year.32

87. Banks in Poland have been free to set their rates already since 1990, although market-based mechanisms in determining the cost of funds have gained prominence only slowly, with the development of money and government securities markets. Deposit rates have tended to be negative in real terms. Nevertheless, since the beginning of 1995 the interest differential compared to foreign currency deposits (adjusted for exchange rate expectations) has been large enough to induce a major dedollarization, as described above. With the interest rate spread at 7–8 percent in the past few years, real lending rates have typically been comfortably positive, even though only marginally so in late 1996. The relatively large spread reflects a combination of factors, including inefficiencies in the banking system and rather high and unremunerated reserve requirements.33

C. Monetary Policy Guidelines for 1997

88. The main targets for monetary policy are presented annually in the NBP’s monetary policy guidelines which, after discussion, are voted on by Parliament along with the budget act. These guidelines present a detailed monetary program—covering broad and reserve money growth, budget financing, expansion of credit to the nongovernment sector, and the expected change in net international reserves—based on broad macroeconomic assumptions, including the inflation target, adopted by the Government for the budget. In practice, implementation of the monetary program has been quite pragmatic, with the guidelines often having been overtaken by unexpected developments.

89. The guidelines for 1997 were designed to be consistent with the Government’s goals of GDP growth of 5½ percent and reducing inflation to 13 percent during the year. In the NBP’s plan, broad money is the intermediate target, while reserve money acts as the operational objective. Consistency of the monetary program requires that, given planned policies and prospective developments, the various sources of money supply (domestic credit to government and nongovernment, NIR expansion, and other items, net) should equal the projected increase in money demand. Among the key assumptions is that net international reserves will remain broadly unchanged in U.S. dollar terms in 1997, with capital inflows offsetting a widening current account deficit. Broad money expansion is projected at Zl 27.4–28.6 billion (20.4–21.3 percent), with growth in reserve money targeted at Zl 6.1–6.6 billion (17.8–19.3 percent).34 The rate of crawl is assumed to slow down to about 9 percent annually, or to an average of some 0.7 percent monthly.

90. In the NBP’s view, the 1997 budget will complicate monetary management. With the general government deficit target fixed at 3 percent of GDP (2.8 percent for the state government), the expansion of credit to nongovernment is targeted to decelerate sharply. Specifically, assuming bank financing of the general government deficit at Zl 8.3–10.2 billion (an increase of 17.8–21.9 percent in the stock),35 the guidelines envisage credit to the nongovernment sector increasing by Zl 17.1–19.0 billion (21.3–23.7 percent, down from 43 percent in 1996).

V. External Sector Developments

91. The transformation of Poland’s balance of payments has matched the dramatic changes occurring elsewhere in the economy. From the very start of transition, Poland has used trade liberalization to redirect the economy toward a more market-oriented system, and also to bring down inflation through increased import competition. Though goods markets were soon opened to foreign competition, capital market integration has progressed more slowly. Until recently, foreign capital was deterred by Poland’s heavy foreign debt burden, as well as by delays in normalizing relations with commercial bank creditors.

92. Poland’s balance of payments experience since transition can be divided broadly into three phases. In the first phase the problem was how best to shore up reserves. With the economy open to foreign trade, but capital inflows negligible, Poland had to build up reserves by generating current account surpluses, at a time when—instead of accumulating claims abroad—foreign savings might have been used profitably to help finance the pressing investment needs of transition. The fragile external position also forced monetary and exchange rate policy to be geared in part toward safeguarding the level of international reserves.

93. This changed in 1994. With surpluses on both current and capital accounts, international reserves became plentiful. Devaluation in late 1993 and rapid growth in productivity had provided a substantial boost to competitiveness, which lead exports to increase by almost 70 percent over the next two years. The result was a current account surplus (including unrecorded trade) averaging 2.8 percent of GDP in 1994–95. Second, and of greater permanence, successful completion of a Brady style debt and debt-service reduction (DDSR) agreement in late 1994 paved the way for the return of capital inflows. These were to account for approximately half of the spectacular US$9 billion increase in net international reserves in 1995.

94. 1996 has been a year of transition to a third phase. Instead of current account surpluses, capital inflows now explain the bulk of—substantially smaller—reserve accumulation. Reflecting some reversal of the earlier gains in competitiveness, a slowdown in the growth of foreign markets, and rapid growth of domestic demand, the current account has worsened significantly. Including unrecorded trade, the current account is expected to show a modest deficit of less than 1 percent of GDP in 1996, widening further in 1997. In contrast, the capital account has remained in sizeable surplus.

95. In itself, the recent emergence of a current account deficit is no cause for concern: Poland needs additional resources to finance the increased investment necessary to sustain rapid growth. What bears watching is the speed with which—as in many other transition countries—the current account turnaround has taken place. Present analysis suggests that the current account deficit should stabilize at sustainable levels, assuming a slowdown in the growth of domestic demand.36 To sustain rapid medium term growth, the key challenge at present is to ensure that the current account deficits—and the foreign savings they represent—are used for efficient investment, adding to—rather than replacing—domestic savings.

A. Exchange Rate Policy and Competitiveness

96. The exchange rate has played a dual role in Poland’s stabilization, at times acting as the main anchor for domestic policy, while also being responsive to developments in external competitiveness.37 For example, as part of the initial “big bang” reforms, the exchange rate was fixed in 1990 as a means of reducing inflation—a classic nominal anchor approach—but only after the external position had been safeguarded by an initial devaluation of almost 50 percent. Though inflation came down sharply, it still remained well above partner country levels, and international competitiveness worsened. Because of this, and to adjust to the shock of the CMEA collapse, in May 1991 the exchange rate was devalued by 16.8 percent and pegged to a basket of five currencies. This was followed in October 1991 by the introduction of a crawling peg exchange rate system. Since then, the initial 1.8 percent rate of crawl has been progressively lowered to the present rate of 1.0 percent per month (Table 1).

Table 1.

Poland: Exchange Rate Developments

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97. Despite the primarily exchange rate based strategy, the authorities have also been ready to adjust the exchange rate, both to preserve competitiveness and, when necessary, to restore its nominal anchor role. At first these adjustments were mainly devaluations, prompted by concerns over the weak external position. In 1995, these became appreciations, in an effort to correct for undervaluation of the zloty and to stem speculative capital inflows. A series of small step appreciations meant that the nominal effective exchange rate depreciated by only 8 percent through the year, far less than would be implied by the rate of crawl. Indeed, changes in cross rates meant the zloty depreciated by only 3 percent against the U.S. dollar. The result was a substantial appreciation of the real effective exchange rate during 1995 (Figure 1, Table 2). In addition, the real appreciation has been magnified by the substantial tariff reductions that have taken place in recent years (Chapter VI; and Tables 3 and 4).

Figure 1.
Figure 1.

Poland: Exchange Rate Developments

(January 1990 - November 1996)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish authorities; IMF, Information Notice System, and staff estimates.1/ Partner country inflation converted to zlotys at actual exchange rates.2/ Unit labor cost calculated by the Competitiveness Indicator System.
Table 2.

Poland: Effective Exchange Rates, 1990-96

(Quarterly average indices, January 1992 = 100)

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Sources: IMF Information Notice System; and staff estimates.

Based on data on unit labor costs in Poland and partner countries.

Nominal effective exchange rate index deflated by seasonally adjusted index of relative consumer prices; a decrease indicates depreciation.

Table 3.

Poland: Evolution of Customs Tariff Structure, 1989–96 1/

(Percentage rates)

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Sources: Ministry of Foreign Economic Relations; Organization for Economic Cooperation and Development; and data provided by the Polish authorities.

Based on average frequency, including suspended tariffs and tariffs on duty-free tariff quotas.

Estimates based on CN classification.

Estimates based on CN clarification, including suspended tariffs and Free Trade Agreements.

Including free trade agreements.

Table 4.

Poland: Recent Tariff Developments 1/

(Percentage rates)

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Source: Data provided by the Polish authorities.

Based on CN nomenclature excluding tariff free quotas.

Including Free Trade Agreements.

Weights based on trade structure for January-July 1996.

98. Appreciation was brought to a halt in 1996. After the rate of crawl was reduced to 1 percent in January, there were no changes to exchange rate policy during the year, save for some tentative steps toward creating greater exchange rate flexibility within the band. Concerns over competitiveness delayed the reduction in the rate of crawl that had been intended for the second half of the year. As a result, the producer price based real effective exchange rate barely changed during the year, consistent with the re-emergence of some form of purchasing power parity. Preliminary staff estimates suggest that, with the period of exchange rate undervaluation now over, the earlier link from foreign producer-price inflation to domestic producer prices is visible again (Figure 2).

Figure 2.
Figure 2.

Poland and Partner Countries: Producer Prices, 1991–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish Central Statistical Office; and staff estimates.

99. How should one assess the competitiveness of the Polish economy from the various measures of the Polish real exchange rate shown in Figure 1? One approach is to argue, based on the commodity composition of Polish exports, that Polish firms can largely be considered price takers on international markets. The stability of the PPI-based real exchange rate during 1996 is consistent with this view. With prices given, competitiveness then depends critically on developments in relative unit labor costs, which determine relative profit margins across countries. In 1993–94, rapid gains in labor productivity far exceeded real wage increases. Unit labor costs increased by less than producer prices, and profit margins increased as a result. This created a highly competitive real exchange rate. More recently, labor productivity growth has fallen a little (though still remains high), and real wage growth has been strong (particularly the real product wage—deflated by the PPI), bringing the period of undervaluation to an end. Profit margins in the production of traded goods have fallen back in line with margins elsewhere in the economy, returning competitiveness to more normal levels.

100. This interpretation is borne out by recent studies of the Polish Foreign Trade Research Institute. Their survey of over 1,500 Polish exporters, accounting for more than 60 percent of total exports, indicates a continued deterioration since 1995 in the profitability of exporters relative to producers oriented toward the domestic market. From the first quarter of 1995 to the first quarter of 1996, the overall profitability of exporters has fallen by about 1½ percentage points. In early 1996 the profitability of exporters fell below that of nonexporters for the first time. The survey indicates that coal and shipbuilding remain the least profitable export sectors, while profitability is strongest in relatively homogenous products such as chemicals, construction, and rubber.

B. Developments in the Current Account

101. Recent large swings in Poland’s current account are dominated by significant changes in the merchandise trade account, both official and unrecorded (Table 5). The official trade deficit worsened from 0.9 percent of GDP in 1994 to 1.5 percent in 1995, and is estimated to have reached almost 6 percent in 1996. The slight deterioration in 1995 was dwarfed by a surge in unrecorded trade, which raised the adjusted current account balance to a surplus of 3.3 percent of GDP, and contributed to that year’s substantial increase in net international reserves. In 1996 the adjusted current account returned to broad balance, as recorded trade moved into large deficit while the growth of unrecorded trade slowed (Figure 3).

Table 5.

Poland: Balance of Payments, 1990-95 1/

(In millions of US dollars)

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Sources: Polish authorities; and Fund estimates and projections.

Convertible currency trade on a payments basis from commercial banks.

Foreign currency purchases in the kantor market that reflect current account transactions, as described in SM/95/310 and SM/95/316.

Figure 3.
Figure 3.

Poland: External Sector Developments, 1993–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish authorities; and staff estimates.1/ Staff estimates for final quarter of 1996.2/ Trade volumes on a balance of payments basis. Excluding unrecorded trade.

102. Exports of goods and services took off in 1994 and 1995, due to improved external conditions and the competitive real exchange rate. The dollar value of merchandise exports grew 35 percent in 1995, after increasing 25 percent in 1994. In volume terms, export growth was more steady (rising by around 20 percent in both 1994 and 1995), reflecting the weakening of the U.S. dollar in 1995. In 1996, slower growth of foreign demand and the real appreciation of 1995 combined to dampen export performance.

103. According to customs data, the dollar value of overall exports increased only 7.2 percent year-on-year in the first half of 1996.38 However, behind this aggregate figure lies a wide dispersion in export performance. Exports in sectors with lower value-added—such as nonprecious metals (15 percent of total Polish exports)—fell 3.6 percent, these sectors being particularly affected by slower growth in the European Union (EU) and the fall in world commodity prices. In contrast, exports of more sophisticated products (electro-machinery, transportation equipment) and light manufactures (furniture and lighting) grew much more rapidly than average.

Recent Developments in the Composition of Polish Imports

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Sources: Central Statistical Office and staff estimates.

104. As the domestic recovery has gathered pace, the growth in imports has also accelerated (Figure 3). Intermediate inputs still predominate, accounting for two-thirds of total imports. However, this share declined slightly during the first half of 1996, with imports of investment and consumption goods growing twice as rapidly. In general, import growth has been highest in the “restructuring sectors,” such as electrical machinery and chemicals, prompted by the transformation of the Polish economy and increased foreign direct investment. However, import growth of consumer durables, such as cars, has also been strong, reflecting the recent rapid recovery in private consumption.

105. The transition to a market economy has also seen a massive geographical reorientation of Polish trade patterns. With the dissolution of the Council for Mutual Economic Assistance (CMEA) in 1991, exports weakened and trade in nonconvertible currencies virtually disappeared (Table 5–8). Because of the disintegration of established preferential trading relationships, exports stagnated from 1990 to 1992. However, imports surged, especially from EU countries. Since 1992, both exports and imports have grown strongly, helped by increased trade with the EU and, in particular, Germany. Between 1992 and 1995, Polish exports to the EU as a share of total Polish exports increased by 12 percentage points, to 70 percent. The import share increased by a similar amount, rising to 65 percent.

Table 6.

Poland: Current Account of Balance of Payments in Convertible and Nonconvertible Currencies, 1983-95 1/

(In millions of U.S. dollars)

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Source: Data provided by the Polish authorities; and staff calculations.

Represents the summation of transactions, expressed in U.S. dollars, unadjusted for unrecorded trade. Transactions in transferable rubles were converted into U.S. dollars at the cross commercial rate.

Table 7.

Poland: Balance of Payments in Transferable Rubles with Members of the CMEA, 1988-95 1/

(In millions of transferable rubles)

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Source: Data provided by the Polish authorities.

Excluding trade in convertible currencies or under bilateral agreements.

Transactions reflect execution of contracts signed before end-1990. The transferable rouble denominated trade arrangement came to an end on January 1, 1991.

Table 8.

Poland: Transactions Under Bilateral Payments Agreements, 1990-95 1/

(In millions of U.S. dollars)

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Source: Data provided by the Polish authorities.

Figures are on a cash basis.

106. Though a natural consequence of reintegration with developed market economies, this redirection toward the EU may have been somewhat exaggerated. So far, economists have relied on two methods to predict the “normal” geographical distribution of Polish trade: predictions from estimated “gravity models” of trade, and comparison of current trading patterns with pre-socialist trading patterns. Both approaches predict a substantial role for trade with the EU, confirming that trade with the EU before transition was artificially repressed. However, the findings suggest that the present proportion of trade with the EU is somewhat greater than might be expected.39 With the disappearance of such temporary factors as the breakdown of the CMEA and the initial output collapse in Poland’s partner transition economies, Polish trade outside the EU should also expand. This is borne out by the recent recovery in Poland’s trade with Central and Eastern Europe.

107. In addition to official trade, there is considerable unrecorded foreign trade in the Polish economy. Poland is home to a large number of open air bazaars and informal trading centers, attracting visitors from Germany and also from the former communist countries of Central and Eastern Europe, as well as the former Soviet Union. The bulk of these transactions are made in cash, converted generally through the currency booth or “kantor” market. By their nature these transactions are extremely difficult to measure.

108. Until 1995, the sales of foreign currency from kantors to the commercial banks were recorded in the balance of payments as part of short term capital. However, a survey by NBP branches that year concluded that 85 to 95 percent of such purchases were attributable to border trade and services rendered by Polish residents to nonresidents. Given the difficulties in preparing monthly estimates of this ratio, and the margin of error attached to such estimates, from 1996 onwards the NBP decided to include the entire amount of such foreign currency cash transactions in the current account, as a clearly identified separate category: “Unclassified transactions on current account, net”. Staff estimates broadly concur with this approach, placing 80 percent of such transactions in the current account for 1995 (a year of much short term speculative activity, based on expectations of zloty appreciation), and the entire amount in the current account for 1996, following the approach of the authorities.40 However, ideally, this item together with other foreign currency cash transactions, should be allocated explicitly across its appropriate balance of payments components.

109. Since 1994, the Central Statistical Office has conducted border trade surveys every six months, in an attempt to measure unrecorded trade activity. These surveys suggest that foreign visitors purchased just over Zl 5 billion (US$1.9 billion) in Polish goods and services in the first half of 1996, a 27 percent increase from a year earlier. This would imply that unrecorded exports make up approximately one-seventh of total Polish exports. The surveys also suggest that the ratio of unrecorded to official exports is highest for countries on the eastern border such as Ukraine, where unofficial exports are almost one half of the official figure.

Recent Developments in Cross-Border Trade

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Source: National Bank of Poland, except for * which is Central Statistical Office.

110. However, the survey evidence does not provide a complete picture of unrecorded trade activity. The surveys sample only a small fraction of those crossing the border, do not attempt to cover all modes of border crossing, and their questions are geared more toward reporting consumer spending than the activities of informal traders. If taken literally, they would imply average spending per visitor to Poland of only US$50. It is true that there is evidence that the surplus on unrecorded trade may be reaching saturation point: new supermarkets are being constructed on the German side of the border and there are increased import restrictions on Poland’s eastern border. Even so, it is clear both from official data, and from surveys, that unrecorded trade makes a significant contribution to Polish exports (Figure 4).

Figure 4.
Figure 4.

Poland: Unrecorded Trade, 1992–96 1/

(Millions of US Dollars)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: National Bank of Poland.1/ As measured by ‘Unclassified Foreign Currency Cash Transactions’ in the Balance of Payments.

111. Compared to developments in merchandise trade, the balance of trade in services has been small and relatively stable. Transportation dominates, with around 30 percent of total trade in services. However, recent years have seen a trend increase in receipts from foreign travel, license payments, financial services, and consulting, consistent with the increasing role of services in the overall economy.

112. Data on private transfers are more difficult to interpret. The National Bank of Poland measures private transfers by the inflows and outflows from residents’ foreign currency denominated bank accounts. While these flows include such transfers as workers remittances, they also reflect border trade cash transactions, and simple currency substitution (which should not appear in the balance of payments at all).41 Ideally, foreign currency cash transactions should be excluded from data on private transfers, and instead be allocated across appropriate balance of payments components, or as a second best, be added to the category “Unclassified transactions”.42

C. The Capital Account, International Reserves, and External Debt

113. Since 1994, the Polish economy has experienced a tendency toward increasing capital inflows. Together with unrecorded trade, these have more than covered the official trade deficit. As a result, there have been substantial increases in foreign exchange reserves, which rose by US$9.1 billion alone in 1995, the equivalent of 8 percent of GDP or almost one quarter of broad money. Net capital inflows moderated somewhat in 1996, but are expected to increase in 1997, easily financing the emerging current account deficit.

114. Portfolio investment was not identified as a separate item in the Polish balance of payments until 1995. In that year, foreign purchases of short-term domestic treasury bills increased significantly, raising the share of foreign holdings from almost zero in 1994 to a peak of more than 20 percent in the first quarter of 1996. Several waves of inflows during 1995 responded to favorable interest differentials and expectations of nominal exchange rate appreciation. After the December 1995 appreciation, inflows continued for a few months, partly in anticipation of reductions in the rate of crawl and in interest rates. Short-term portfolio inflows have subsided since then, following several rounds of interest rate reductions and the progressive widening of the official trade deficit which dampened exchange rate expectations. As a result, the foreign share in treasury bills dropped back to below 8 percent by end-1996.

115. The Polish government has also re-entered international capital markets with a successful US$250 million Eurobond issue, which was awarded an investment grade by the credit agency Moody’s. A similarly successful DM 250 million issue followed in 1996, and the government plans to raise up to US$500 million on international capital markets in 1997. Poland has since acquired an investment grade rating from all three major credit rating agencies. However, its bonds typically trade at much lower yields than paper of similar grade.

116. These initial bond issues have not been prompted by budgetary needs, but by the desire to re-establish Poland’s presence in international capital markets, and to create a benchmark against which investors might judge Polish corporate or municipal bond issues. The state-owned Bank Handlowy itself issued a US$100 million Eurobond in 1996, and private placements by Polish companies and banks have started to increase.

117. Foreign direct investment (FDI) has increased steadily from a little over US$500 million in 1994 to an estimated US$2.2 billion in 1996. But even this is likely an underestimate. These official figures are measured on a payments basis, and only record investment transactions conducted through the banking system. Thus, they omit investment in kind and reinvested earnings, among other things. Estimates from the State Foreign Investment Agency (PAIZ) show a much greater role of foreign participation, suggesting that the stock of FDI had passed US$10 billion by June 1996, with commitments to future investment of US$8 billion.

Foreign Investment in Poland

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Source: Polish Agency for Foreign Investment (PAIZ)

118. Even these figures may be on the low side. PAIZ data are based on the voluntary reports of companies that have declared investments exceeding US$1 million: this covers only about 400 out of the total 25,000 foreign registered companies. Thus, the figures omit undeclared investment, and also investments by small foreign companies.

119. Until now, most of the foreign investment has come from the United States, and has been concentrated in industry, particularly food processing (Table 15). However, East Asian and particularly Korean firms have demonstrated great investment interest, with one large investor alone announcing plans to invest US$2 billion in cars, electronics, banking, and office construction.

Table 9.

Poland: External Trade, 1990-95 1/

(Percentage change)

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Source: Data provided by the Polish authorities; and staff estimates.

Customs basis: merchandise exports, excluding unrecorded trade.

Provisional estimates.

Price indices for years 1990–91 were calculated as quotient of the turnover value index in foreign currency prices and turnover volume index; since 1992 indices are obtained as results of foreign currency price surveys.

Table 10.

Poland: Direction of Trade by Commodity Group, 1995

(Share, in percent; SITC classification)

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Source: Data provided by the Polish authorities.
Table 11.

Poland: Commodity Composition of Trade, 1990-95

(At current prices, in millions of U.S. dollars; SITC classification)

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Source: Data provided by the Polish authorities.

Only public sector.

Table 12.

Poland: Commodity Composition of Trade with Nonsocialist Developed Countries, 1990-95

(At current prices, in millions of U.S. dollars; SITC classification)

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Source: Data provided by the Polish authorities.

Only public sector.

Table 13.

Poland: Commodity Composition of Trade with Nonsocialist Developing Countries, 1990-95

(At current prices, in millions of U.S. dollars; SITC classification)

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Source: Data provided by the Polish authorities.

Only public sector.

Table 14.

Poland: Commodity Composition of Trade with Former CMEA and other Former Socialist Countries, 1990-95 1/

(At current prices, in millions of U.S. dollars; SITC classification)

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Source: Data provided by the Polish authorities.

Data for trade settled in transferable rubles (TRs) were converted into U.S. dollars using cross rates derived from the commercial rates of the zloty vis-à-vis the TR and the dollar.

Includes only the public sector.

Table 15.

Poland: Foreign Investment in Poland by Sector through July 1996

(In millions of U.S. dollars)

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Source: Polish State Foreign Investment Agency.

Including equity and loans.

120. Despite these recent developments, international capital market activity remains modest compared with that in other emerging market economies: at US$250, Polish FDI per capita is approximately one fifth of that in Hungary, and a third of that in the Czech Republic. Thus, even after the recent strong growth in foreign investment, there remains considerable scope for further increases. True, using PAIZ data, the total stock of FDI is now highest in Poland, but this is only by virtue of its larger population.

121. What factors explain this lack, until recently, of interest from international investors? First, the initial conditions—near-hyperinflation, a huge external debt, and low levels of international reserves—were hardly attractive to foreign investors. Poland’s foreign debt problem was only finally resolved in October 1994, which in effect limited international capital market access to only the last two years. Second, financial officers of domestic firms have been reluctant to tap into foreign markets, either out of lack of technical sophistication, or because of perceived risks associated with exchange rate policy. Third, privatization has been relatively slow and, until very recently, has provided few opportunities for foreign investors. As a consequence, out of Poland’s external debt of more than US$40 billion, at most US$6 billion has resulted from foreign borrowing post-1990, and one third of this is owed to the World Bank. However, with strong economic fundamentals in place and substantial investment needs, international borrowing activity is now poised to take off.

122. While recent capital inflows have been driven by Poland’s growing investment needs, they have also been facilitated by Poland’s accession to the OECD. Membership has entailed some liberalization of the rules governing foreign ownership of land, and substantial relaxation of capital account restrictions (full current account convertibility was already achieved in 1995: see Chapter VI and Appendix II on Poland’s exchange and trade system). The overall result has been an improvement of the climate for foreign investment in Poland.

123. Developments in Poland’s official reserves have reflected the underlying current and capital account behavior described above (Table 16). The most notable feature is the transformation from a country chronically short of foreign exchange to one with a comfortable international reserve position. From 1993 to 1996, gross official reserves increased more than fourfold, and now cover more than six months of imports of goods and services. While solidifying Poland’s external position, the resulting increase in net international reserves has posed complications for Poland’s monetary management, as described in Section IV of this paper, and in Attachment I.

Table 16.

Poland: External Reserves and Other Foreign Assets, 1989–95

(In millions of U.S. dollars)

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Source: Data provided by the Polish authorities.

Gold is valued at US$400 per ounce.

Includes pre-paid letters of credit.

124. At the end of 1995, Poland’s gross external debt stood at US$44 billion or 37 percent of GDP, down from more than 55 percent of GDP at the end of 1993. The net debt is much lower, taking into account Poland’s substantial foreign currency reserves. A little under two thirds of the debt is owed to the Paris Club of official creditors, and around one sixth is owed to the London Club. Other main creditors include Russia and the World Bank, though agreement with the former on a mutual debt write-off is now being implemented. Interest and amortization payments are expected to peak at US$4.0–5.7 billion in 2004–8. This should be a manageable burden, particularly if Poland’s recent record of output growth, increasing exports, and trend real exchange rate appreciation is sustained.

Table 17.

Poland: Scheduled Debt Service by Creditor, 1990–94

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Source: Data provided by the Polish authorities.
Table 18.

Poland: Servicing of Medium- and Long-Term Debt in Convertible Currencies, 1989-95

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Source: IMF staff compilation from data provided by the Polish authorities.
Table 19.

Poland: Summary of Nontariff Trade Restrictions, 1996

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Source: Data provided by the Polish authorities.
Table 20.

Poland: Protectionist Measures Introduced by the European Union, March 1992–December 1996.

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Source: Data provided by the Polish authorities.

VI. Structural Reforms43

A. Overview

125. The structure of Poland’s economy has changed dramatically over the past seven years, toward an open, market-oriented system with a steadily growing private sector, generally improved performance of public enterprises, the reorientation of external trade, and improvements in other relevant indicators (Table 1). The depth of this structural change and the resulting strength and resilience of the supply response in recent years testify to the broad success of the economic strategy pursued in Poland since 1990. The remarkable continuity of commitment to the principles of market-orientation and financial stability, irrespective of the composition of the seven governments that have been in power since 1990, has been a major engine of structural change throughout the period under review.

Table 1.

Poland: Structural Change, 1989-96

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Sources: Central Statistical Office, Ministry of Finance, CUP, and National Bank of Poland’s own estimates.

Since 1992, share of private sector in gross value added.

Annual average employment; including agriculture.

January-September 1996.

Industrial output sold; since 1993 excluding VAT.

Profitability defined as gross profit to total income (in 1992, gross profit to total cost).

Share of exports to country groups in total exports; custom statistics (shipment basis).

January-June 1996.

Estimates based on balance of payments statistics; 1989-1995 shares recalculated at 1996 real effective exchange rate.

Including free trade agreements.

Prices directly controlled by the government; end-year weights.

Including uniformed personnel and farmers’ pensions.

126. Notwithstanding this overall success, the implementation of structural reforms has not been without problems and setbacks, particularly in areas where active government involvement beyond freeing up and stabilization was involved. Several factors have acted as a brake on decisive reforms across the board. First, almost from the start, issues such as privatization and pension reform have been among the politically most controversial in Poland, resulting in rather slow and fitful progress in these areas. Second, as in many other transition economies, the strong impetus for change at the initial stage of reforms subsequently lost some momentum under increasing pressures for a more gradual and equitable transformation. Third, and partly reflecting those pressures, adjustment in certain core industries has faced powerful social and political resistance, and despite the evident progress in many state enterprises, serious problems remain, for example, in the coal and defense industries. As a result, the economy today continues to wrestle with many institutional and structural weaknesses inherited from the past, and sustained rapid growth into the next decade will require a “second wave” of reforms directed at those problems.

127. The mixed record on structural reforms is exemplified by the experience with the Strategy for Poland which was adopted by the Government in June 1994. Conceived as a blueprint for economic policies to be implemented by the new left-wing coalition that came to power in late 1993,44 it was to signal a renewed commitment to an ambitious agenda of reforms in the context of an explicit medium-term framework. On the structural side, while continuing with the basic market-orientation of policies, the Strategy placed somewhat greater emphasis on the search for social consensus and equity in reforms, and on strengthening the administration of the state sector, both in its own right and as a preliminary to privatization. The list of policies covered by this program was very comprehensive, including, inter alia, continued privatization, demonopolization and improved management of public enterprises; major social security reform; financial sector development; and a reorganization of the central economic administration.

128. Progress in implementing this agenda has been uneven, with several reform initiatives falling behind schedule and some of them watered down in the process. In part, these difficulties were of a political nature, reflecting differences within the governing coalition about the desirable pace and direction of change (particularly in the area of ownership reforms) as well as the sensitivity of reforms affecting a major part of the electorate (such as pension reform). Occasionally, an ambivalent attitude to large-scale foreign investment has also tended to hamper more rapid progress (for example, in bank privatization), and the search for ways to help out weak state firms or other interests has at times lead to nonmarket solutions (such as the creation of holdings). Nevertheless, significant progress has been made in several important areas, as for example in a fairly steady—if relatively slow—pace of privatization, some essential first steps toward comprehensive social security reform, further external liberalization, and a major reform of the central administration in charge of economic and financial affairs. The desire to integrate fully and rapidly with Western European and other advanced market economies, broadly shared among a wide spectrum of the electorate and the political elite, has been a powerful incentive to advance reforms even in the face of strong domestic opposition. This incentive has been most directly felt in the exchange and trade system, where the Association Agreement with the European Union (EU) signed in 1991 and the process leading to Poland’s accession to the OECD in 1996 have established the framework for progressive liberalization of trade in goods, services, and capital. Increasingly, the prospect of EU accession is becoming the prism through which economic performance and policies in general, and structural reforms in particular, are being formulated and assessed. In this vein, the scope of the Strategy for Poland was widened in 1995 to include several topics central to this objective,45 and the Government has recently launched a new effort to reinvigorate reforms across the board.46

B. Ownership Transformation

129. Although measured progress with privatization differs according to the specific indicator chosen, the overall record is one of fairly steady but slow progress over the past five years. While the number of firms privatized has declined from nearly 400 annually during 1992–94 to 230 in 1995 and 260 in the first nine months of 1996, the average size of firms privatized has increased over the same period as evidenced by the rise in revenues from privatization from about ½ percent of GDP in 1992 to 1 percent in 1995–96 (Table 2). Of the about 8,500 public enterprises at the start of the transition, about 500 have disappeared through mergers and acquisitions; and in about half of the remainder, the privatization process had started by September 1996. Only in about half of those enterprises, however, has the process been completed. As a result, there are still some 4,000 industrial enterprises that are owned by the state, apart from the over 500 firms included in the Mass Privatization Program and the 1640 state farms taken over by the Agricultural Privatization Agency (APA).47 Within the privatization that has occurred over the past five years, a relatively large portion involved the transfer of small and medium-sized firms to employees; as a result, the involvement of “outside” capital (domestic or foreign) has been rather limited.

Table 2.

Poland: Privatization 1990-96

(Number of Firms)

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Sources: Central Statistical Office (GUS), Ministry of Treasury (formerly Ministry of Privatization), and Ministry of Finance.

Central Statistical Office (GUS).

130. After an initial wave of privatization involving mainly small retail and service-oriented businesses, progress proved much more difficult with the larger, industrial enterprises. This reflected in part the authorities’ strategic decisions (a) to involve insiders (managers and workers councils) by granting them an effective veto over the privatization process, and (b) not to opt for a single, overall method of privatization based on a voucher system but to allow a multitrack approach without predetermined assignation of ownership rights. As a result, state-owned enterprises (SOE) could choose to temporize by not following any of the routes to privatization then offered, and wait for the possibility of a more favorable privatization plan or government support later on. Recognizing these difficulties, the authorities in 1992-93 made a two-pronged attempt to advance the privatization of medium-and large-scale industrial enterprises: first, through a Mass Privatization Program (MPP) for up to about 600 firms, and second, by engaging the social partners in tripartite negotiations that resulted in the so-called “Pact on State Enterprises” (five draft laws, establishing inter alia guidelines for privatization of most SOEs). Both initiatives, however, faced serious practical and political obstacles: as explained more fully below, the MPP started only in mid-1995 and will not be completed before 1997; and the Pact’s privatization law was not implemented mainly because of strong political and trade union objections to a deadline that would have forced SOEs to choose a privatization path within six months. The 1994 Strategy for Poland envisaged a reorientation of the program of ownership transformation from the emphasis on rapid, large-scale privatization in the Pact on Enterprises toward mass commercialization, as a step prior to privatization. Again, however, this initiative proved more difficult to implement than expected, and a new privatization law embodying this reorientation as well as several other important clarifications of the privatization rules came into effect only in October 1996.48

131. Privatization has followed three main avenues. The most frequently used one has been the so-called “liquidation” of small and medium-sized enterprises, involving both leasing to insiders (Article 37 of the 1990 Privatization Law) and sale of assets of liquidated enterprises (under Article 19 of the 1981 Law on SOEs). As shown in Table 2, leasing to insiders has been the fastest way of privatizing, with nearly 1,300 firms transferred to date, usually within a short period after starting the process. Although the new Government that came into office in 1993 intended to give greater emphasis to this path, its use has declined markedly in recent years reflecting a dwindling pool of easily leasable firms as well as the delays in passing the new privatization law. The sale of assets of liquidated enterprises has also proved an efficient way of recycling productive capacity—especially movable assets—to the private sector, involving over 1,400 former SOEs. Completion of this path, however, has lagged far behind, typically reflecting difficulties with selling social and immobile assets.

132. The second path, “capital privatization”, has involved the sale of larger enterprises, usually with a substantial share going to an outside strategic investor. Notwithstanding the small and declining number of enterprises sold on this path (less than 200 so far), its scope and the size of individual deals has grown in recent years (including, for example, five tobacco firms in 1995–96). It has also been the main source of budgetary revenues, and has generally been associated with strong improvements in enterprise performance, especially when foreign investors were involved, as has been the case increasingly in recent years.

133. The “Mass Privatization Program” (MPP) is a voucher-based scheme through which ownership in 512 enterprises (representing around one tenth of industrial enterprises)49 is being distributed to all adult citizens, through the conduit of 15 National Investment Funds (NIFs). The NIFs, created by the state in mid-1995, are managed by outside firms with Polish and foreign participation, under the control of Government-appointed Supervisory Boards. Each NIF holds a strategic stake of 33 percent in about 30–35 companies, and a small share (1.9 percent) in each of the remaining firms included in the MPP.50 All Polish adult citizens were entitled to receive, for a nominal fee of Zl 20, one “share certificate” which will be exchanged for actual NIF shares (on present plans, one share in each NIF upon their listing on the Warsaw Stock Exchange in early 1997).51 During the one-year distribution period that ended in November 1996, over 27 million people (close to the entire eligible population) took up their certificates. With certificates being freely transferable, an active secondary market has developed in which the price fluctuated at Zl 155–160 in late January 1997, reportedly underpinned by significant demand from institutional investors; it is estimated that about half of the original holders have sold their certificates since the start of distribution.

134. The significant delays with implementing this program reflected mainly the administrative complexity resulting from the authorities’ desire to provide a mechanism for improving corporate governance (rather than simply distributing ownership) and to insure against all possible risks of failure, as well as some initial reluctance of the Government that took office in 1993 to move ahead with the program. Partly as a result of this delay, the original intention of including only well-performing enterprises was not fulfilled, as nearly one third of the MPP firms recorded losses in 1994. This, in turn, complicated the task of many Fund managers who often were not prepared to act as “turn-around” agents, and has been the source of some disagreements between them and the Supervisory Boards who tended to emphasize the rescue- and restructuring objective of the MPP. Overall, however, the experience with the program to date—even if relatively short—has been positive: Fund managers have already had a salutary effect on corporate governance in many enterprises, and will increasingly do so as they become more involved themselves and/or catalyze involvement by other investors. The conversion of certificates into shares of listed NIFs, together with trading of shares in individual firms, should also boost the development of the Polish capital market.

135. The new privatization law that came into effect recently provides, inter alia, for the commercialization, at the initiative of the founding body, of large enterprises designated for privatization as well as of certain enterprises not expected to be privatized (mainly state holding companies). It also introduces a new track for privatization through domestic debt-equity conversions, and stipulates the free distribution to employees, upon privatization, of 15 percent of the enterprise shares. The long-delayed passage of this law, in finally clarifying the “rules of the game,” should remove a major incentive for insiders to delay privatization. Since commercialization entails the abolition of the workers’ council, it also effectively removes the ability of insiders to block privatization and should facilitate corporate governance in SOEs. On the other hand, commercialization without a clear mandate for rapid privatization could prolong state involvement through management and supervisory boards.

C. Public Enterprises

136. Given the relatively slow pace of privatization, the state has retained a major role in the enterprise sector, and a pervasive one among larger industrial firms: although the public sector accounted for less than a third of total GDP in 1995, its share in the enterprise sector was about half; and nearly three fourths of the 100 largest Polish enterprises were directly controlled by the state, many of them in and around heavy industry.

137. Public enterprise performance during the transition has been mixed. On the one hand, many firms have adjusted to the new rigors of budget constraints and market prices, mainly through downsizing, reducing costs, and more efficient use of inputs. These efficiency gains have been reflected in the public enterprise sector’s return to overall profitability (from the trough that followed the inflationary windfall profits of 1990), and doubtless contributed to the recovery of output that started in 1992. On the other hand, a number of public enterprises continue to generate losses, and many others are in need of deep restructuring hitherto avoided, in part, thanks to import protection, monopoly power, or other forms of explicit or implicit state support (such as arrears on taxes and social security contributions—see Chapter III). Overall, the experience has been that public enterprises, even if able to adjust so as to avoid losses, tended to have difficulties in moving from such “defensive” adjustment to deep restructuring and profit maximization.

138. During the first 2–3 years of the transition, enterprises faced a progressively hardening budget constraint as a result of the virtual elimination of budgetary subsidies, the leveling-off of interfirm arrears, and reduced access to bank loans. At the same time, managers began to play a larger role, emphasizing cost control, profits and marketing over production targets, and wages were kept in check, partly under the influence of the excessive wage tax (see Chapter II) and increasing scope of bargaining at the enterprise level. While this resulted, as noted above, in significant improvements in aggregate profitability, results varied greatly among sectors and subsectors, and even within subsectors (such as shipbuilding) there have been examples of enterprises with similar starting conditions yet wholly different adjustment paths. In many cases, those differences reflected the ability or inability of managers to embark, with support from a majority of employees, on a comprehensive strategy of deep restructuring including shedding of labor and redundant assets, financial restructuring, and eventual full or partial privatization.

139. The slow pace of adjustment in many public enterprises, and the ensuing losses, were accommodated in part by the banking system, resulting in a large portfolio of bad loans (see below).52 A Law on Enterprise and Bank Restructuring, adopted in early 1993, intended to rehabilitate the banks and deal with enterprises with bad debts (Table 4). Inter alia, it required the banks—as a condition for recapitalization by the Government—to create workout units and complete the restructuring of their bad loan portfolios by March 1994 (later extended by one month) through one of several ways stipulated in the law (repayment, conciliation, bankruptcy, liquidation, or sale of debt). A recent study by Gray and Holle (1996) examined the question of how effective this law has been in fostering the restructuring or closure of problem firms, by surveying a sample of 139 of the 787 firms put through the program. It found a positive impact on balance, but far less than expected initially. The program was clearly a catalyst that forced banks and enterprises to confront their problems; helped the banks clean up their balance sheets and build institutional capacity in their workout units (though not necessarily in their credit units); furthered the process of separating viable from unviable firms; and allowed loan forgiveness without much of the usual moral hazard problems. However, the program seems to have had limited power to force major restructuring in problem debtors; had little success in privatizing them; and in about one eighth of the cases surveyed even failed to halt new bank lending to firms with bad loans. Overall, it was only the first step in a long process of building strong banks that can impose effective corporate governance on enterprises in times of financial distress. Also, the focus on the temporary and exceptional conciliation procedure may have stalled the development of traditional exit processes (formal and informal workouts and bankruptcy), which continue to be poorly designed for the needs of a market economy.

Table 3.

Poland: Indicators of Banks’ Health and Performance, 1993-96 1/

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Source: Polish authorities.

Excluding cooperative banks and banks in liquidation or bankruptcy.

Table 4.

Poland: Law on Financial Restructuring of Enterprises and Banks 1/

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Source: Ministry of Finance

Status as of May 31, 1996.

140. The new Government that took office in late 1993 established better management of state assets as one of its priorities, mirroring its more cautious approach to privatization. In pursuit of this goal, the Strategy for Poland envisaged the “mass commercialization” of all public enterprises not yet converted into joint-stock companies and the creation of a new Treasury Ministry to exercise the state’s ownership rights. As noted above, this initiative has taken nearly three years to get underway, owing to the delays in the new privatization law and the need to coordinate the creation of the Treasury within the wider context of the Reform of the Central Administration. With the new law that came into effect recently, the authority over smaller enterprises has been transferred to local authorities, while the state’s ownership rights over larger enterprises have been centralized in the hands of the new Treasury established in October 1996. Regarding “mass commercialization”, the tention is not to commercialize most enterprises at once, but to proceed on a case-by-case basis according to the procedures established under the Commercial Code. Another way of restructuring state-controlled firms that has gained currency in recent years is through the creation of holdings (such as in the sugar, coal, and oil industries), in part with the objective of fortifying enter-prises against increasing foreign competition. While the experience with these arrangements is still short, the results in the coal and sugar sectors are not encouraging, where they tended to become vehicles for cross-subsidization (coal mines) and/or to weaken competition among domestic producers (sugar).

141. Many of the most distressed public enterprises are concentrated in several “problem sectors” such as defense, hard coal mining, steel, chemicals, and shipbuilding. While the difficulties facing those sectors reflect in some measure the structural weaknesses inherited from the past, they are also the result of missed opportunities at the enterprise as well as policy levels. For example, the reconsolidation of coal mines in 1993 was followed by major wage increases, postponement or delays of necessary mine closures, rising output in the face of shrinking domestic demand, and consequent massive losses. In early 1996, the Government adopted a new medium-term restructuring program involving reduction of employment and closure of several mines, but also large new state subsidies. By contrast, shipbuilding has been a sector with minimal government involvement since the start of the transition and where one shipyard (Szczecin) engaged in successful deep restructuring and privatization, while another (Gdansk) failed to adjust and went bankrupt in 1996.

142. As in many other transition economies, sectoral problems in Poland are closely intertwined with regional imbalances such as, the concentration of hard coal mining and heavy industries in the South-West. Counteracting such imbalances has become an increasing concern for the Government. Since 1991, “Distressed Areas”—identified mainly on the basis of the level of unemployment—have been granted special benefits including extended unemployment benefits and tax deductions for employment-creating investment. In 1994, a program of “Special Economic Zones” started offering to larger investors total relief from income tax for the first ten years (50 percent for the following ten years), exemption from the real estate tax, and accelerated depreciation. By end-1996, three such zones had been established, and several others were under consideration.

D. Social Security

143. The main elements of Poland’s system of social protection are unemployment benefits, pensions, family and housing allowances, sickness benefits, social assistance, and health care. Reforming this system has been high on the agenda for several years, including in the Strategy for Poland which envisaged, as one of its top priorities, the creation of a largely self-financed and insurance-based social security system, supplemented with well-targeted social assistance. While a decisive breakthrough in this area remains to be secured, there has been tangible progress in recent years in rationalizing some of the existing arrangements and in furthering the national debate on the need for deep reforms. There have, however, been setbacks as well (such as several Constitutional Tribunal rulings invalidating earlier adjustment measures, and some steps that increased costs rather than reducing them), and with every year of delay comprehensive reform is becoming more difficult given the underlying demographic pressures and the long lead-time of reforms. The recent appointment of a Government Plenipotentiary for Social Security Reform is designed to concentrate the Government’s reform efforts in this area.

144. Unemployment benefits, introduced in 1989 with rather generous provisions, underwent several reforms in the early 1990s that tightened eligibility rules, limited the duration to 12 months (18 months in distressed areas), and established a flat-rate benefit of 36 percent of the average wage. As a result, the share of registered unemployed covered by benefits dropped from about three quarters in 1991 to half in 1994. After that, the share increased again, to about 60 percent by end-1995, reflecting both the reduced incidence of long-term unemployment and apparently rising “entitlement” effects.53 In 1996, the Government introduced several changes as part of a medium-term overhaul of the system, designed to contain abuse, remove outdated early-transition benefits, and separate insurable risks from social assistance-type benefits. In particular, the minimum employment period was lengthened from 6 in the previous 12 months to 12 in the previous 18 months; a third tier of duration was introduced for low unemployment regions (6 months); the value of benefits was differentiated according to the individual’s work history; the entitlement of school leavers was eliminated; and early retirement because of plant closures will be replaced by social assistance at a lower level. The link between the level of benefits and the average wage was also replaced in 1996 with CPI indexation. For the future, the reform agenda is to move from the present structure of financing (two thirds from the budget, and one third from employers’ contributions) to a fully self-financed, insurance-based system with shared financing from employers’ and employees’ contributions and linkage of benefits to the individuals’ work and contribution history.

145. During the first few years of the transition, expenditures on pensions almost doubled relative to GDP, reflecting mainly large-scale early retirement and use of disability pensions to absorb labor market pressures, as well as relatively generous pension adjustments. By 1992, the share of pension expenditures in GDP had risen to 15 percent, and the required subsidy from the budget had jumped to over 6 percent of GDP. After that, the authorities managed to prevent a further escalation of costs, although this was achieved mainly through short-term measures that left most of the system’s fundamental problems unaddressed. In a nutshell, these problems included generous eligibility criteria for disability pensions and early retirement; a high replacement rate; indexation following the average wage in the economy; inclusion of noninsurable risks; and weak administration and contribution discipline. With Poland’s population still relatively young, an unchanged structure of entitlements would risk not only continued pressure on the finances of the system over the coming years, but a serious crisis after 2005 when large cohorts would reach retirement age. Aware of these dangers, the Government has accorded pension reform a high priority and recently implemented several changes that will have a beneficial long-term effect; nonetheless, the prospects for comprehensive reform remain uncertain at this stage.

146. Following an across-the-board cut in the pension base from 100 percent to 91 percent in January 199354, the newly elected Government in 1994—as part of its agenda of softening the social costs of the transition—increased the minimum pension from 35 percent of the average wage to 39 percent and legislated a gradual return of the pension base to 100 percent (with the first step, to 93 percent, implemented in 1994). The Strategy for Poland in early 1994 adopted a two-pronged approach to pension reform, with a number of immediate cost-saving measures, including the crucial change from wage to price indexation, to be followed by comprehensive systemic reforms over several years. While the Strategy’s original timetable has been roiled by political controversy, some progress has been made on both prongs. Regarding indexation, the change was first postponed by one year, then implemented for 1996 in a temporary solution that was later partly invalidated by the Constitutional Tribunal (see Chapter III), and only recently adopted as a permanent new law.55 Other improvements included the introduction of means testing for family allowances and their separation from the main pension fund; equalization of the responsibility for sickness benefits for private employers with those of state-owned enterprises, with a concurrent reduction in the level of benefits; and a major reform of the system of disability pensions (basing eligibility criteria on inability to work rather than on damage to health).56

147. Regarding long-term reforms, there have been several proposals ranging from an initial Government draft that would have mainly fine-tuned the current pay-as-you-go system, to more radical proposals for systemic change toward a funded and privately managed system. The first Government proposal, presented in mid-1995, envisaged a three-tier system with a basic state pension for all citizens, a compulsory earnings-related contribution system, and voluntary contributions to private pension funds. After extensive consultations, a revised program was presented to Parliament in December 1995 which dropped the idea of a basic state pension for all. Instead, the new system—after a phasing-in period of 15–20 years—would consist of a first pillar of general, compulsory insurance (pay-as-you-go, contributing about 70 percent of retirement incomes); a second, voluntary “funded” pillar with private pension funds (20 percent); and a third pillar in the form of individual savings (10 percent). The proposal also included a partial switch to price indexation, a tightening of the rules on early retirement and cumulation of a pension with income from work, as well as gradually higher contributions for farmers.

148. An alternative, put forth by the Ministry of Finance in early 1996, proposed a predominantly funded system based on mandatory contributions to privately managed pension funds. A small first pillar would guarantee a minimum payment to all (equivalent to about 20 percent of the average wage), while a large portion of retirement income would come from the second pillar, reflecting the individuals’ contribution history and the performance of pension funds. Additional reform proposals were presented by various other parties during the course of the year. Although Parliament in April 1996 adopted an outline of the Government’s revised proposal, it did so with the informal understanding that further work toward a final reform program should incorporate appropriate elements of all existing proposals. The Office of the Plenipotentiary has been given the task of devising a compromise program, to be presented in spring 1997. While the outcome cannot be known at this stage, a consensus appears to be forming around a three-tier system with a reformed pay-as-you go system as the first pillar; a second pillar with mandatory contributions to privately managed pension funds; and a third pillar based on voluntary private savings.

E. Banking Sector

149. Over the past five years, the Polish banking system has made major progress on several fronts. By end-1996, private banks controlled some 30 percent of total assets in the banking system, and 40 percent of capital. The state banks have largely dealt with the old bad loans, and contained new ones, and overall bank profitability has improved steadily in an environment of increasing competition and financial deepening. Notwithstanding this progress, there have been problems as well: after solid progress initially, commercial bank privatization entered a more difficult phase in 1994, and only recently a new revised program has been adopted; in contrast to strong profitability growth in commercial banks, the picture is mixed in cooperative and some specialized banks; and overall there remains a long distance toward a modern system that would be able to compete successfully under full international integration.

150. According to a program adopted by the Government in 1991, the nine regional commercial banks carved out of the NBP in 1989 were to be restructured and recapitalized as necessary to allow their rapid privatization by end-1996. While recapitalization proceeded as scheduled, to date only four of these banks have actually been privatized. The first three were sold according to the initial plan, on an individual basis and with involvement of strategic investors, but by 1995 it became clear that the original timetable could not be kept. In part, the slippage reflected the authorities’ difficulties in finding suitable investors—compounded by low domestic demand for bank stock and a more hesitant attitude to foreign majority control of domestic banks—as well as their view that some of the remaining banks were too weak on their own to be privatized without prior consolidation. Accordingly, while continuing with the ongoing privatization of the fourth regional bank (completed at end-1995)57, the Government began to search for a revised strategy for the remaining state-owned banks that would meet those concerns while allowing continued use of the funds in the Polish Bank Privatization Fund (PBPF).58 A first proposal, presented in the fall of 1995, envisaged the creation of holdings around two large specialized banks (Bank Handlowy and PKO-SA) that would have included three of the remaining state-owned regional banks but also one of the already privatized banks as well as the Polish Development Bank. While the proposal included privatization of the holdings as an ultimate objective, a large part of the shares were to be used by the State as contributions to newly-created pension funds as well as to satisfy outstanding compensation claims against the budget.

151. After intense debate and several modifications,59 the Government’s revised bank privatization strategy finally settled in late 1996. According to the latest version, following the consolidation of three state-owned regional banks around PKO-SA (already under way), another regional bank would be privatized in 1997 (with some 65 percent slated for institutional investors, domestic or foreign). Bank Handlowy would also be privatized individually in 1997, with sale of about 30 percent to institutional investors, a public offer of over 20 percent, some 30 percent held in reserve for future distribution to pension funds, and the rest going to employees and the Government’s reprivatization reserve. This would be followed by privatization of the Polish Development Bank and the last of the nine regional commercial banks, as well as the PKO-SA group, the Bank for Food Economy (BGZ, by 1999) and the large State Savings Bank (PKO-BP, by 2000).

152. While privatization has fallen short of expectations, the past few years have witnessed the largely successful financial restructuring of state-owned commercial banks. As shown in Table 3, the share of nonperforming loans in bank portfolios has declined from over 30 percent in 1993 to 14 percent in September 1996, and since 1994 bad loan provisions have been at or above the supervisory standards. The decline in the burden of bad loans resulted both from the 1993 Law on Enterprise and Bank Restructuring described above, and from the steady increase in the volume of new loans, first mainly to the government and later also to households and enterprises. The approach to bank rehabilitation adopted in Poland differed from the experience in many other transition countries in at least three important aspects: First, it had the banks confront their problems in a decentralized fashion (through their workout units). Second, it established an appropriate incentive structure for the banks as a strict deadline was imposed for initiating action on the bad loans; the volume of such loans for which recapitalization was in prospect was fixed ex ante (at the level of end-1991); and eventual recapitalization was conditioned on the creation of work-out units and implementation of a restructuring program. And third, banks operated under the commercial code, with ownership functions exercised by the Ministry of Finance through Supervisory Boards, and with the clear prospect of future privatization. In that way, the Government intended to deal simultaneously with the stock and flow aspects of the bad loan problem.

153. Although, as noted above, the program can only be assessed from a longer-term perspective, it appears to have been successful in removing the burden of the old bad loans while avoiding a flood of new ones. Banks chose conciliation procedures (a streamlined version of a Chapter 11 proceeding under U.S. bankruptcy law) for about one third of their bad loan portfolio; liquidation or bankruptcy was the second most often chosen path (29 percent); and most of the remaining debts were either sold in the secondary market or debt service was resumed (Table 4). In return, the Government provided to the banks involved about Zl 4 billion worth of recapitalization bonds, raising their capital-to-asset ratio to the target level of 12 percent. Regarding new lending, the authorities estimate—on the basis of extensive on-site inspections—that currently only a small portion (around 2 percent or less) of new credits require additional provisioning. Even so, the jury on some of the loans extended in recent years is still out, as evidenced by the continuation of some lending—albeit on a relatively small scale—to distressed enterprises.

154. Progress has been a lot more uneven with reforming the large specialized banks, in particular the food economy bank (BGZ) and the state savings bank (PKO-BP). In the BGZ, while some progress has been made since the bank’s conversion into a joint-stock company in improving loan recovery and narrowing the large operational deficits of past years, it continues to be saddled with a huge bad loan portfolio, a negative capital-to-asset ratio, and antiquated procedures and technology. Although much of the bad loan portfolio reflects the deeper problems in Polish agriculture and dates from before 1994, political lending decisions have also played a role and some 10 percent of bad credits stem from the past two years. Meanwhile, the bank has already absorbed massive capital infusions totaling Zl 2.5 billion. A recovery plan was adopted in mid-1996 that envisages a gradual retreat from retail operations (where the BGZ competes with cooperative and regional banks), with the bank focusing on wholesale banking and its “Apex” role for cooperative banks. PKO-BP remains burdened with a large share of nonperforming housing loans made before 1990; although it is refunded by the budget for the resulting losses, privatization of this bank will require a solution to this problem in its balance sheet.

155. The situation in private banks, many of which were under severe strains in 1992–93, has improved in recent years under the influence of economic recovery and removal of the weakest banks. There have been 21 mergers and acquisitions (14 of them with NBP assistance) and 3 bankruptcies. NBP intervention took the form of direct capital injections (typically involving also a write-down of owners’ capital), the purchase of long-term obligations issued by the troubled banks at below-market interest rates, and provision of rediscount credit. While the NBP was reluctant initially to let any bank go bankrupt for fear of shaking confidence, it has felt less pressured to intervene actively since the establishment in early 1995 of the Bank Guarantee Fund which provides deposit insurance60 and may support ailing banks. The adoption in 1992 of a more restrictive licensing policy also helped as it essentially stopped the proliferation of new banks, and several foreign banks have followed the NBP’s encouragement to take over ailing small Polish banks.

156. While the strains in the private banking sector have been largely overcome, progress has been mixed in rural cooperative banks. The number of such banks has declined by 220 since mid 1992 (about half through bankruptcies and half through mergers and acquisitions), to slightly over 1,400, with the number expected to shrink further over the next few years. Though overall profitability has improved markedly, and the average capital-to-asset ratio has risen to 9.5 percent, still about one third of all cooperative banks are undergoing recovery programs, a number of them with highly uncertain prospects. The Government is currently reorganizing the sector into three groups, with the largest one consolidating some 1,200 local banks around nine regional banks and the BGZ as “Apex” bank, and the remaining 200 local banks grouped around two other regional banks.

157. Poland has made significant progress in recent years in improving bank supervision and prudential standards. In the initial years of transition, the lack of adequate prudential regulations and supervisory capacity contributed to the problems faced by the banking sector. However, in 1992–95 the supervising agency (the General Inspectorate of Bank Supervision, or GIBS), which is located in the NBP, introduced a comprehensive set of prudential regulations and supervisory practices. In particular, regulations governing commercial banks’ classification of nonperforming loans and provisioning requirements were established in November 1992, foreign exchange exposure limits were set in April 1993, deposit insurance for private banks was introduced in February 1995, and in 1995 a new accounting plan for banks was announced (Table 5). Intensive training has been provided for the supervisory personnel, and both off-site analysis and on-site inspections by GIBS are being performed. However, while improving, bank supervision in Poland is still very much in a building phase, as most supervisory staff have had only a relatively short period of training and on-the-job experience;61 weaknesses remain in particular in the area of risk management.

Table 5.

Poland: Key Banking Prudential Regulations

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F. Trade and Payments

158. After the virtual elimination of trade protection in 1990, Poland in 1991–92 partially reinstated higher tariffs as well as nontariff barriers out of both balance of payments and budgetary concerns. Since then, trade liberalization has made fairly steady progress—albeit not without setbacks—mainly under the umbrella of Poland’s agreements with the EU, EFT A, and CEFTA, and in the context of the Uruguay Round and accession to the WTO. Likewise, the exchange system has been progressively liberalized with most payments restrictions on current transactions abolished in 1990, formal current account convertibility established in 1995, and a number of capital account restrictions eased in 1995–96 in the context of Poland’s accession to the OECD.

159. Under the Europe Agreement, following the elimination in 1992 of duties on about one fourth of industrial imports, Poland since 1995 has been cutting duties on most remaining industrial goods by one fifth each year, leading to zero duties by 1999. Imports from CEFTA countries have also been subject to progressive tariff reductions, with customs duties on most industrial imports to be abolished by 1997. As a consequence, the average effective tariff rate on industrial goods has dropped from almost 20 percent in 1994 to just over 6 percent in 1996, with a further decline in prospect for 1997 (Chapter V). The average tariff on agricultural products has been fluctuating around 20 percent in recent years, with a slight increase in 1995 reflecting mainly the conversion of nontariff barriers into tariffs upon Poland’s accession to the WTO.62 At that time also, Poland bound 96 percent of its industrial tariffs, and all agricultural tariffs, with the bound ceilings to be reduced by 38 percent over six years (36 percent for agricultural products). Actual tariff reductions, however, may be substantially less as most tariffs are already far below the bound ceilings. While the 6 percent import surcharge introduced in December 1992 was originally scheduled to be phased out within two years, balance of payments and budgetary pressures stretched this timetable to four years.63

160. Pressures to delay or even reverse import liberalization have come mainly from agriculture and unreformed state industries. In mid-1994, variable import levies were introduced on a number of food and agricultural products; while these levies were abolished in mid-1995 upon Poland’s WTO accession, the Government in early 1996 approved possible additional duties on certain food products to guard against import surges. Regarding industrial imports, the authorities—citing the need for extended protection of certain industries—have on several occasions invoked the restructuring clause in the Europe Agreement to either raise tariffs or postpone scheduled tariff reductions (such as for petrochemicals and steel). Also, a new system of mandatory safety and product standards was introduced in 1996, which—although not discriminatory—appears to act as a barrier to imports. Notwithstanding these setbacks, however, the overall trend has been one of continued liberalization even in the face of at times strong domestic opposition. A recent agreement between Poland and the EU partly allows for extended protection of certain industries, in return for specific undertakings on restructuring and liberalization. It also envisages adaptation of Poland’s system of product standards to that of the EU by end-1997.

161. On the export side, Poland has benefitted from the asymmetric concessions under the agreements with the EU and EFT A, and from symmetric tariff reductions by other CEFTA members. As a result, since 1995 Polish industrial goods have had duty-free access to the EU and EFTA markets, with the exception of steel and textiles which were freed in 1996 and 1997, respectively. Under the accelerated timetable of CEFTA, over 95 percent of mutual trade in industrial goods is free of tariff protection as of 1997. Remaining barriers to industrial exports include anti-dumping provisions, export licensing requirements and voluntary export restraints, and Poland’s agricultural trade with the EU, EFT A, and CEFTA markets is only partly liberalized, mainly on the basis of symmetric concessions.

162. A new foreign exchange law that came into force on January 1, 1995, together with subsequent implementing regulations, eliminated the remaining restrictions on the making of payments for current international transactions. On this basis, effective June 1, 1995, Poland accepted the obligations under Article VIII, Sections 2, 3, and 4 of the Articles of Agreement. Since then, the authorities have taken a number of measures liberalizing capital flows, mainly in connection with the OECD accession process. On the entry side, the purchase of land by foreigners was eased somewhat in early 1996, although with tight limitations for agricultural lands and a new (and retroactive) permit requirement for land ownership acquired though investment in a Polish firm. A number of authorization requirements for foreign direct investments were abolished around the same time, and the restrictions on financial credits and loans were eased significantly. Moreover, outward direct investments as well as long-term portfolio investments in recognized OECD markets were liberalized for both enterprises and individuals. The authorities have announced Poland’s intention to continue with the progressive liberalization of the exchange system, with a view to removing a large majority of the remaining restrictions by the year 2000. Appendix II contains a detailed description of Poland’s exchange system as of December 31, 1996.

APPENDIX I Summary of the Tax System in 1996 1

A. Personal Income Tax (PIT)

1. Base. Poland has a global personal income tax, with some income sources (dividends and interest, sale of property, royalties, income from unidentified sources) taxed under separate schedules. Incomes from agriculture, forestry, and inheritance and donations are also taxed under separate laws—except for income from intensive branches of agriculture which is covered by the PIT. Residents are taxed on their world-wide income, and nonresidents on income realized in Poland. Residents receive credit for taxes paid abroad, not exceeding an amount proportional to the share of foreign income in total income unless specified differently in bilateral tax treaties. Exempt income from abroad is added to domestic income to calculate the average rate which is then applied to nonexempt income. Exchange rate gains are taxed. Spouses can file jointly, with their incomes averaged. Single parents pay double tax on half their income. Income of children is added to parents’ income, unless the parents do not have access to the children’s income. Pensions and unemployment benefits are taxed.

2. Exemptions. Most allowances (family, nursing, child care, childbirth, orphan, death and funeral allowances), scholarships, veterans’ benefits, and insurance compensation are not taxed. Interest on bank deposits (except for deposits related to nonagricultural business), state treasury securities, municipal bonds and income from the sale of share certificates convertible into national investment fund shares are exempt. Capital gains on publicly traded shares are exempt. Treasury bonds purchased by individuals on the primary market may be deducted from income up to a limit.

3. Allowable costs. PIT is paid on total income minus related costs, except for costs related to exempt income and for losses on property sales. Employees (but not pensioners) can deduct 0.25 percent of the income ceiling for the first bracket (Zl 40.95 monthly, for one employment contract) as the cost of earning income. Depreciation and revaluation of fixed assets are specified by the Law on Enterprise Income Tax. Costs of inventions, patents, trade marks, books and similar works covered by intellectual property rights are defined as 50 percent of revenue, and for royalties as 20 percent, unless documentation of higher actual costs is provided. Losses can be carried over and prorated during the next three years.

4. Deductions. Donations for certain purposes are deductible up to 15 percent of income. Expenses on investment in housing, land for housing, or housing improvements and renovation are deductible up to life-time ceilings. The limit on land purchase is specified annually as equivalent to 350 square meters valued at an average price, and for purchase, construction, or reconstruction of apartments and houses at 70 square meters of average-price housing. The limit for repairs is one fifth of the limit for purchase. The above deductions can also be taken for investments in rental housing. If deductions are not used in the year when expenses are incurred, they can be carried over. If financed by a bank loan, the expenses are reduced by the amount of the loan, but repayments and interest are deductible. Expenses for education in nonpublic schools are deductible for each child up to one fifth of the average annual wage in the economy. Expenses for personal education (training or purchase of books and certain educational equipment, including computers and software) are also deductible to a specified limit. Housing and educational deductions have to be substantiated by VAT invoices.

5. Rates. In 1996, tax rates were as follows:

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The law provides for brackets for the subsequent year to be adjusted on the basis of average wage growth in January–September, compared to the same period of the preceding year.

6. Dividends and income from profit-sharing of legal persons and interest income from loans (unless granted for business purposes), and interest and discounts on securities are taxed under a separate schedule at a 20 percent rate. Proceeds from the sale of real estate are considered income if the sale takes place less than five years after the purchase (six months for other property, ten years if the taxpayer used an income tax deduction for investment in housing). Proceeds from the sale of farm real estate are taxed, if by the transaction the land loses its agricultural character. Proceeds from the sale of property are not taxed if reinvested in housing within two years. All proceeds from the sale of property are taxed under a separate schedule at a 10 percent rate. Income from royalties and intellectual services to nonresidents is taxed at 20 percent. Income from undisclosed sources is taxed under a separate schedule at a 75 percent rate.

7. Allocation. PIT revenue is split between the central government (85 percent) and local governments (gminas) (15 percent).

8. Presumptive Tax. Self-employed persons and partnerships with revenue in the previous fiscal year below a threshold (Zl 208,000 in 1995) can pay a presumptive tax equal to 9.5 percent of revenue from services, 6 percent from manufacturing, construction and cargo transport and 3.3 percent on revenue from trade and catering.

9. Administration. Annual filing and settlement are required by April 30 of the following year. Where applicable, tax is withheld monthly by employers.

10. Pending changes. A number of changes in the PIT were passed in late 1996, effective from 1997. These include reduced rates (20, 32, and 44 percent), the elimination of some deductions for inter-family donations, and the elimination of the deduction for Treasury bonds purchased by individuals. Also in 1997, the allocation of PIT revenues to local governments will rise to 16 percent.

B. Social Security Taxes

11. Base. Social security taxes are paid only by employers. The taxes are paid on all wages, except for short term contracts up to two weeks and for temporarily employed pensioners. Salaries of military and police officers are not subject to a contribution, but their pensions are paid by the budget. Contributions to the farmers’ pension fund are negligible.

12. Rates. The rate is 45 percent for the main social security fund (ZUS), 3 percent for the Labor Fund, and 0.5 percent to a fund that pays the wages of workers whose corporations are in the process of liquidation.

C. Enterprise Income Tax

13. Base. This tax applies to all legal entities. Income of partnerships is allocated to their members for tax purposes. Income from agriculture, except for intensive branches and forestry, is taxed under separate laws. Special provisions apply to taxation of holdings. Resident companies are taxed on their world-wide income, non resident companies only on income realized in Poland. Income from abroad is taxed on the same principles as for individuals. Interest is taxed or deducted on a cash, not accrual, basis. For residents, it is deductible, except for interest on penalties, and delayed tax payments. Interest to foreign residents is subject to a 20 percent tax, which may be reduced by tax treaties. Exchange rate gains and losses are included in income. The loss can be offset from the income during the next three years in equal amounts.

14. Exemptions and deductions. Income from current and capital subsidies (including grants for recapitalization) is exempt. Income of national investment funds is exempt. Donations for specific purposes can be deducted up to 15 percent of income. Income invested in rental housing up to a limited amount per housing unit is deductible. For 1996, the investment allowance is granted to all taxpayers (also individuals) with a profit rate in the previous fiscal year of at least 8 percent (4 percent for some activities) and with no tax arrears. These taxpayers can expense investments up to 25 percent of pre-tax profits immediately, or 50 percent if they predominantly export their output. The Ministry of Finance may grant investment allowances and allowances for environmental protection.

15. Accounting rules. Accounting rules are determined by separate legislation. A taxpayer can use either standard cost, average costs, FIFO, or LIFO method, but the method for business purposes and tax reporting should be the same. Inventory is valued at lower than cost or realizable value. The depreciation method is straight-line, except for some equipment for which accelerated depreciation is allowed. More favorable provisions for accelerated depreciation are granted for firms in regions with structural unemployment. Asset valuation adjustment is determined by the ordinance of the Council of Ministers.

16. Tax rates. The general rate on profits is 40 percent (38 percent beginning in 1997). The withholding tax on dividends is 20 percent. A company receiving dividends is granted a credit for the tax paid on dividends. The credit is not refundable, but can be carried forward. Income of nonresidents from royalties and intellectual services is taxed at 20 percent, unless tax treaties define otherwise. Branches of foreign companies are taxed on the basis of presumed income, which is estimated as 5 percent of sales in foreign trade, 10 percent in construction, and 60 percent from commissions. Branches can choose to be taxed on the basis of income statements, but then some minimum taxes based on turnover apply.

17. Allocation. The central government receives 95 percent of revenue from enterprise tax, and gminas get 5 percent.

D. Value-Added Tax

18. Poland has a standard value-added tax, implemented in July 1993 as a successor to the turnover tax.

19. Rates. The general rate is 22 percent. A lower rate of 7 percent applies to coal, gas, electricity, heating, food industry products, toys, clothing for children, cosmetic products for children, furniture for children, newspapers, books, musical instruments, telecommunications services, passenger transportation, tourism and recreation (except for 4 and 5 star hotels), construction materials and services. Exports and pharmaceutical products are zero-rated, as are machines, agricultural equipment and tools, farm trailers and tractors, fertilizers, pesticides, industrial feed, orthopaedic equipment, hearing aids, plastic and rubber medical and sanitary articles, and veterinarian supplies.2, 3

20. Exemptions. Exempt are meat products, eggs and poultry products, fish and related products, dairy raw materials, milk processed industrially, farm products, including wheat, breeding, forestry, services in agriculture, postal services, water supply, municipal services except for heat, gas and electricity supply, household services, services in education science, culture, art, government services, financial and insurance services, except for currency exchange. Entities with sales in the previous fiscal year lower than Zl 80,000 (c.US$ 28,000) are exempt but may choose to pay VAT. Entities paying income tax in the form of the lump sum tax are also exempt.

21. Administration. Some VAT payers dealing in trade and catering are required to use officially designated cash registers to record transactions.

E. Excises

22. The following goods are subject to excise taxation, at the listed rates:

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F. Import Duties

23. Import duty rates range from 0 to 45 percent, in increments of 5 percent. Preferential rates apply to countries with most-favored nation status, and imports from some developing countries are exempt. The average effective rate in 1996 was 11 percent, with further cuts specified effective in 1997.6 A temporary import tax of 3 percent on CIF plus duty value was charged on all imports, but was abolished as of January 1, 1997. Equipment investment by foreign participants in a joint venture is not subject to customs duty, as long as it remains with the joint venture for three years.

G. Other Taxes

24. The central government taxes gambling. Local governments collect tax on agricultural property and forests, inheritance and gift tax, real estate tax, and vehicle (“road”) tax.

H. Tax Identification Numbers

25. TINs were introduced as of January 1, 1996 for all taxpayers, and a National Taxpayers’ Registry was established.

APPENDIX II The Exchange and Trade System1

(Position as of December 31, 1996)

A. Exchange Arrangement

1. The currency of Poland is the zloty (100 groszy = 1 zloty), the external value (central rate) of which is pegged to a basket of five currencies.2 The central rate is adjusted under a crawling peg policy at a preannounced rate. Since May 16, 1995, the National Bank of Poland has allowed the exchange rate of the zloty at the interbank market to fluctuate within margins of ± 7 percent around the central rate. Once a day the National Bank quotes fixing rates (i.e., official market rates) for the U.S. dollar and the deutsche mark, with fixing rates for other convertible currencies determined on the basis of cross exchange rates on international markets; fixing rates fluctuate within the ± 7 percent margins around the central parity. The National Bank quotes exchange rates daily for 20 convertible currencies,3 the European currency unit (ECU), and the SDR. Outside the interbank market, banks are permitted to set freely their buying and selling rates in transactions with their clients.

2. The exchange rate on the foreign exchange bureau market (kantors), in which natural persons are allowed to transact freely, provided that the transaction is not a commercial one, is determined by market forces.4

3. On December 31, 1996, the official central rate for the U.S. dollar was Zl 2.9587 per US$1, and the fixing rate was Zl 2.8755 per US$1. There are no formal forward exchange market arrangements. However, large commercial banks provide forward contracts if requested.

4. Poland accepted the obligations of Article VIII, sections 2, 3, and 4 of the Fund’s Articles of Agreement on June 1, 1995.

B. Administration of Control

5. The authority to make basic changes in the Foreign Exchange Law rests with Parliament.5 Regulations are promulgated by the Minister of Finance, in cooperation with the President of the National Bank, in the form of general foreign exchange permits, or by the President of the National Bank in the form of individual permits. General permits are issued for all residents and nonresidents, and for specified groups. The procedures for issuing individual permits are established by the President of the National Bank in cooperation with the Minister of Finance. Decisions concerning individual foreign exchange permits are subject to appeal to the Supreme Administrative Court (NSA). The authority to enforce exchange regulations rests with the Minister of Finance, who exercises related functions mainly through the President of the National Bank.

6. Foreign exchange control is exercised by the Ministry of Finance, the National Bank, the foreign exchange banks, border guards, and post offices.

7. In accordance with the Fund’s Executive Board Decision No. 144–(52/51), adopted on August 14, 1952, Poland has notified the IMF that in compliance with UN Security Council Resolutions it has imposed and maintained a ban on trade with Iraq and on exports of certain products to Libya; and that licences are required for trade (and transit through Poland) with Bosnia and Herzegovina.

C. Prescription of Currency

8. Outstanding balances under the (inoperative) bilateral payments agreements with Bangladesh, Brazil, China, Egypt, India, Iraq, Russia, Syria, Tunisia, and Turkey are being settled in accordance with the terms of the agreements. Balances outstanding under the arrangements of the International Bank for Economic Cooperation are still being settled in transferable rubles. Settlements with all other countries may be made in any convertible currency.

D. Resident and Nonresident Accounts

9. Resident accounts: Residents, both natural and juridical persons, may hold foreign exchange in the form of currency and securities. Residents who are natural persons may maintain currency accounts (“A” accounts), and these accounts may be freely credited with convertible currency brought in or transferred from abroad and/or deposited without declaring the sources of funds. Balances in these accounts can be sold in foreign exchange bureau markets; withdrawals in zlotys, converted at the prevailing exchange rate, are freely permitted. Accounts maintained in deutsche mark, French francs, pounds sterling, Swiss francs, and U.S. dollars in demand deposits earn interest at an annual rate of 1.5–3.0 percent; accounts maintained in these currencies in one- two- and three-year term deposits earn interest at an annual rate of 3.3–6.15 percent. Funds in “A” accounts cannot be used for business activities. When leaving the country permanently, individuals are allowed, under the general foreign exchange permit, to transfer all funds from this account.

10. Until December 9, 1995, foreign exchange receipts from exports were required to be surrendered. Amendments to the Foreign Exchange Law, which came in effect on December 10,1995, abolished the surrender requirement and allowed domestic companies to maintain foreign currency accounts. Transfers abroad to cover transaction costs related to international trade are freely permitted.

11. Residents (individuals and enterprises) carrying out service and investment activity abroad may hold foreign exchange accounts abroad to cover costs of such activity; the National Bank must be notified about opening accounts abroad, and quarterly balances in these accounts must be reported to the National Bank.

12. Nonresident accounts: Nonresidents, natural and juridical persons, are free to maintain bank accounts in zlotys and in convertible currencies. There are two types of convertible currency accounts for nonresidents: (1) unrestricted accounts (rachunek wolny), and (2) “C” accounts.

13. Unrestricted accounts6 may be opened in any licensed foreign exchange bank; they may or may not pay interest, depending on an agreement with the bank. Unrestricted accounts may be credited only with funds which are freely transferable abroad. These accounts may also be credited with domestic currency which could be converted into foreign currencies and transferred abroad. The following sources of funds allow later transfer abroad: (i) transfers from abroad or foreign currencies declared at the border, (ii) claims on residents resulting from foreign transactions in goods, services, or intellectual property, (iii) inheritances and bequests for foreign persons, (iv) remuneration for legal work for residents, (v) documented income from securities legally acquired in Poland, (vi) reimbursements for overpaid taxes, and (vii) receivables resulting from court, administrative, or arbitrage rulings.

14. “C” accounts may be maintained only in convertible currencies; they may or may not pay interest depending on an agreement with the bank. There is no control on sources of funds deposited at “C” accounts. However, there are limitations on transfers abroad from “C” accounts, and the limitations are the same as for unrestricted accounts.

E. Imports and Exports

15. Licenses are not required for imports from the convertible currency area, with the exception of imports of radioactive materials and military equipment; alcoholic beverages other than beer; tobacco products; crude oil and oils obtained from bituminous minerals; gasoline and light oils; natural gas and other gaseous hydrocarbons; goods for industrial assembly of motor vehicles. The importation of petroleum oils and oils obtained from bituminous minerals is subject to quantitative quotas.

16. The importation of the following products is prohibited: passenger cars and other passenger vehicles older than ten years; trucks, vans, other utility cars, passenger vehicles for transportation of more than ten persons, older than three years; cars with two-cycle engines; and combine harvesters.

17. Exports of raw hides and skins of bovine or equine animals, pickled or otherwise preserved, raw skins of sheep and lambs, leather of bovine or equine animals, other animals without hair on, ferrous waste and scrap, remelting scrap ingots of iron and steel, waste and scrap of copper, nickel, aluminum, lead, zinc, and tin are subject to quota restrictions.7 Export licenses are required for the following goods: coal, petroleum oils and oils obtained from bituminous minerals, crude petroleum gases and other gaseous hydrocarbons, radioactive materials, and military equipment; export licenses are required for (1) goods subject to export quotas, (2) exports carried out within the framework of international agreements that stipulate bilateral settlements, and (3) temporary exports of capital goods and transport equipment for leasing.

18. Exports of the following products are prohibited: (i) live poultry, that is fowls of species Gallus Domesticus, ducks, geese, turkeys and guinea fowls, (ii) geese’s eggs in shell fresh, preserved, or cooked, (iii) trade with Iraq, (iv) trade with Libya with respect to chemical catalyzers, pipes and tubes, steel chains, hydraulic and gas pumps, chemical installations, laboratory equipment, and automation equipment.

19. All commercial imports, regardless of country of origin or provenance, are subject to an ad valorem import tariff. As of January 1, 1996, new import tariffs based on the Harmonized System (HS 1996) and the Combined Nomenclature of the European Community (CN 1996) were introduced, with six basic rates: zero on equipment for the disabled, mineral resources, textiles, and cattle hides; zero to 3.6 percent on other raw materials; 7.4 percent to 11 percent on basic parts of semifinished and finished goods; 14.6 percent to 27.4 percent for industrial goods; 26.6 percent to 40 percent on agriculture and textile products; and 30 percent for luxury goods. Imports from developing countries are granted preferential treatment under the General System of Preferences. Also, imports from 42 developing countries, tropical products from Chapters 6 to 24 of the HS, and many goods from chapters 32 and 94 of the HS that are of interest to developing countries enter Poland duty free. For the remaining goods imported from non-European developing countries whose per capita GDP is lower than Poland’s, duties are reduced by 20–30 percent of the most-favored-nation (MFN) rate.

20. Imports are subject to an import surcharge of 3 percent;8 duties and taxes on imports for export production are refunded. Exports are subject to zero percent VAT rate.

21. Until recently, exporters were required to declare all foreign currency receipts from exports, to repatriate them within two months of receipt, and to surrender them to the Polish foreign exchange banks within 14 days of receiving notice that foreign exchange had been deposited in their accounts in Poland. Effective December 10, 1995, the surrender requirement was abolished.

F. Payment for and Proceeds from Invisibles

22. Payments for invisibles arising from merchandise transactions, including insurance and transportation costs, are permitted freely if related to trade transactions. Other invisible transactions are carried out under either a general or individual permit. Foreign exchange for such payments is made available automatically if the transaction is authorized.

23. Under the general foreign exchange permit, Polish nationals may take abroad up to ECU 5,000 or its equivalent in foreign currencies, checks, and travelers’ checks. Documentary proof of origin is necessary for amounts exceeding this limit. Residents must repatriate foreign exchange within two months of returning to Poland. For official and business travel, allowances are based on separate regulations on business travel and on collective wage agreements.

24. Nonresidents entering Poland are permitted to have up to ECU 2,000 or its equivalent in convertible currencies; higher amounts must be declared at the border. Nonresidents are free to take out of Poland up to ECU 2,000 or its equivalent; higher amounts are allowed up to the amount declared on the border.

25. There are no limitations, both on residents and nonresidents, to take out of Poland or bring into Poland domestic banknotes and coins.

26. Domestic residents are allowed to transfer foreign currencies abroad to: (1) cover liabilities resulting from court, arbitrage, or administrative proceedings, (2) pay for participation in seminars, conferences, and training abroad, (3) pay contributions in international organizations, (4) pay costs of protecting intellectual property, (5) pay taxes, custom duties, and administrative fees abroad if required by law, and (6) support family members up to ECU 10,000 per year for each family member.

27. Transfers abroad by nonresident workers in Poland, other than in the context of employment in joint ventures, are determined on the basis of an agreement between domestic and foreign institutions or enterprises and through individual foreign exchange permits. Nonresident employees of joint ventures may transfer abroad up to 100 percent of their income. Residents may remit pensions and annuities in convertible foreign exchange at the official exchange rate to nonresidents who are entitled to such payments on the basis of a ruling from the social security administration.

28. Profits on direct investments by nonresidents may be transferred abroad without restriction. On liquidation, the investor may transfer abroad the proceeds from the sale of the remaining assets sold in foreign currency.

G. Capital

29. Parliament annually sets an upper limit on the public sector external indebtedness. Within this limit, foreign borrowing takes place on the basis of intergovernmental agreements, placing of securities on international markets, and in various forms of bank credit. Under the provisions of the banking law, the National Bank, and licensed foreign exchange banks are empowered to borrow abroad, short or long term, and to extend foreign credits.

30. Foreign direct investments are regulated by the Law on Companies with Foreign Participation dated June 14, 1991,9 with later amendments. Under this law, new businesses need to register only with local courts, except for mergers with state owned companies if state assets are to be utilized for more than six months or if state assets will become part of the capital.10 Imports of capital goods for new joint ventures are exempt from customs duties. The transfer of profits from joint ventures and from investment in shares of Polish companies is not restricted, and invested capital may be repatriated once outstanding obligations to creditors are discharged. The transfer of profits or repatriation of capital from bonds is not restricted. Although the law does not stipulate a minimum amount of capital that foreign nationals must invest in Poland, the minimum capital requirement set forth in the Polish commercial code for a limited liability or equity company is in effect and is applied to foreign investment.

31. In OECD countries and countries having agreements on investment protection with Poland, residents are permitted to: (1) establish subsidiaries or affiliates, (2) purchase real estate if it is related to their economic activity, (3) acquire stakes in foreign companies if the stake gives at least 10 percent of votes, and (4) purchase securities issued with maturity not less than 1 year up to the amount of ECU 1,000,000 or its equivalent. Natural persons are permitted to purchase real estate abroad if the purchase price does not exceed ECU 50,000 or its equivalent in convertible currencies. Residents are permitted to open accounts abroad to serve the above purposes; notification to the National Bank about opening accounts abroad and quarterly reports on balances in foreign accounts are required.11

32. Negotiable export documents may be discounted by foreign banks; foreign credits for transactions related to trade, services and intellectual property are freely permitted.

33. Residents are permitted to take credits for domestic investments from EBRD, EBRD, EBB, and Nordic Investment Bank if the credits are guaranteed by the Government or the National Bank. Economic units are permitted to borrow and lend abroad if the maturity of the loan is one year or longer; the National Bank must be notified about such loans within 20 days from signing the agreement.

34. Residents are permitted to issue securities with maturity of one year and longer on foreign markets. Residents are also permitted to buy securities with maturity of one year and longer issued in Poland by nonresidents; these securities must be approved by the Security and Exchange Commission, and the overall limit on purchase of such securities is set at ECU 200 million per year. Residents issuing securities abroad or buying securities issued domestically by nonresidents must notify the National Bank within 20 days from the transaction.

35. Until recently, nonresidents could acquire real estate or other immovable property in Poland only with permission from the Ministry of the Interior, except in the form of an inheritance.12 The amended Law on Acquisition of Real Estate by Foreigners, which came into effect on May 4, 1996, maintained this general rule, but introduced several important exemptions. Foreigners may acquire real estate without permit if: (1) it is a separate apartment; (2) they have lived in Poland for at least five years after getting a permanent residence visa; (3) they are married to a Polish citizen for at least two years (purchased real estate must form a part of matrimonial community of property); or (4) real estate is purchased by nonresident legal persons for statutory purposes and the area of real estate does not exceed 4,000 square meters in urban areas. The Council of Ministers may issue a regulation defining other cases where a permit is not required, providing that the area of acquired real estate does not exceed 4,000 square meters in urban and 10,000 square meters in rural areas. The Council of Ministers may also extend the area to be acquired without permit to 12,000 square meters in urban and 30,000 square meters in rural areas.

H. Gold

36. Resident individuals may hold gold in any form. Trading in gold, other than jewelry, is subject to permission from the foreign exchange authorities. Polish and foreign nationals may take abroad gold coins that bear value in foreign exchange. They may also bring into Poland coins made from precious metals that are legal tender in Poland.

I. Changes During 1996

Administration of Control

37. February 1. New general foreign exchange permit came into force.

38. April 1. Amendments to the general foreign exchange permit came into force removing some restrictions on trade credits, portfolio, and capital investments.

Capital

39. March 26. Amendments to the Law on Companies with foreign participation removing some permit requirements.

40. May 4. Amendments of the 1920 Law on Acquisition of Real Estate by Foreigners, introducing exemptions to the general rule of permit requirements for nonresidents to acquire real estate in Poland.

Imports and Exports

41. January 1. New, lower, import tariffs came into force.

42. January 1. The rate of import surcharge was lowered from 5 percent to 3 percent.

APPENDIX III Poverty in Poland1

1. This Appendix summarizes the findings of recent research by the Fund and the World Bank into the behavior of poverty in Poland.2

2. Prior to transition, Poland’s income distribution can be characterized by the following stylized facts (Milanovic (1992)). Compared with typical market economies, income inequality was less pronounced; income from property was insignificant; benefits in kind were large relative to wages; income from self employment was relatively high (because of a large agricultural sector); cash transfers made up a similar proportion of GDP as in market economies (around 20 percent) but tended to be distributed in a less targeted manner; and direct taxes played almost no role in income redistribution. Social protection came directly from the labor market: labor force participation was virtually obligatory, but this was rewarded with job guarantees and extensive social benefits.

3. As might be expected, transition to a market economy created profound changes in the distribution of wages. Unlike the pretransition situation, the median wage of a white-collar worker now exceeds the median blue-collar wage. Wage dispersion has increased, particularly among white-collar workers, and there have been particularly pronounced increases in the relative wages of the top decile of white-collar workers. This has been mirrored in a rising premium on education, with the university-to-primary education wage ratio increasing from 1.34 in 1987 to around 1.8 in 1993. Reflecting these changes, the degree of wage inequality has increased.

4. The transition to a more market based economy also meant substantial changes to the established system of social protection. The old system of job guarantees, controlled prices, indiscriminate subsidies, and generous enterprise-provided benefits was reformed. In their place, a new social safety net was formed, with increased reliance on cash transfers, including unemployment benefits, pensions, social assistance, family allowance, maternity benefits and sick pay, while free access to health care and education was maintained.

5. Despite the introduction of this cash-based system, measured poverty increased significantly with the change in economic system, in essence because of the sharp contraction of output and the emergence of large-scale unemployment as the economy started to restructure. Following the practice of the Polish authorities in defining the poverty line as equal to the level of the minimum pension (US$71 per month in June 1993, equivalent to around US$140 measured in terms of purchasing power parity), the poverty rate doubled from an average of around 7 percent of the population in the late 1980s to 14.4 percent in 1993, or 5.5 million people. Even so, it is unclear how much of this worsening in poverty is due to Poland’s transition to a market economy: given the instability of the economy at the end of the 1980s, it is arguable that, without economic reform, the deterioration in poverty might have been even greater. In addition, the high inflation conditions of the pre- and early transition period are likely to have created substantial measurement problems.

6. In 1993, poverty in Poland had the following structure:

  • - the poverty rate tended to decline with age, and with education

  • - in more than one-third of cases, unemployment was the proximate cause of poverty

  • - unemployed households had a poverty rate of 28 percent, twice the Polish average

  • - 60 percent of Poland’s poor lived in villages

  • - 40 percent of the poor belonged to nonnuclear families

  • - 20 percent of children lived in poverty.

7. The economic prospects for women have been mixed under transition. The movement away from traditionally male-centered heavy industry has tended to create greater employment opportunities for women, and the gender gap in wages has fallen with transition. In addition, improved supply of consumer products, and replacement of rationing by the price mechanism, has substantially reduced the time wasted in queuing. Against this, the availability of child care has decreased somewhat as enterprises have shed their responsibility for providing social benefits.

8. To reduce poverty, the World Bank has argued that economic growth alone is insufficient, and that social transfers and reformed macroeconomic and structural policies will also be needed.

9. On the positive side, poverty in Poland tends to be relatively shallow: the incomes of the poor are bunched fairly closely together, with there being no evidence of the emergence of a separate underclass of extremely impoverished people. This compressed income distribution means that economic growth should pull significant numbers of people above the poverty line, and thus be particularly effective in reducing the incidence of poverty. The World Bank estimates that each percentage point increase in income (keeping income distribution constant) should reduce the poverty rate by 0.5–0.7 percentage points. Thus, Poland’s recent record of rapid economic growth should already have made a significant contribution to poverty reduction.

10. Significant resources have been devoted to the various social insurance and social assistance systems noted above, which should have helped further to alleviate poverty. In 1993, these accounted for 19 percent of GDP, a much higher proportion than in market economies at similar or higher income levels.3 These transfers reduced the poverty deficit from approximately 8.6 percent of GDP (before transfers) to 0.8 percent of GDP (after transfers).4 Thus, the main problem is not the amount of resources devoted to transfers, but their insufficient targeting. For example, roughly half of all Polish households receive pensions and family allowances, and 68 percent of the population live in households that receive at least one social transfer other than a pension.

11. At present, social transfers are dominated by pensions which have accounted for approximately 15 percent of GDP since 1993. These payments ensure that the elderly do not fall into poverty, but they are not targeted specifically to the poor. Indeed, because pensions are linked to past wages, they are less effective at creating a more progressive income distribution. More nonpoor than poor people receive pensions, and the pensions received by poor people are 40 percent lower than those of the nonpoor.

12. To summarize, measured rates of poverty increased with the initial transition to a market economy, though actual poverty probably increased by a smaller amount. Since then, preliminary evidence suggests that poverty rates may have stabilized and, given the shallowness of Polish poverty, has perhaps even been reduced. Polish expenditures on social transfers as a proportion of GDP are high compared to countries with similar income levels. There is substantial scope for further reductions in poverty through improved targeting of social transfers, in addition to the powerful effect of sustained rapid economic growth.

References

  • Ebrill, Liam and others, 1994, Poland: The Path to a Market Economy, IMF Occasional Paper No. 113 (Washington: International Monetary Fund).

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  • Milanovic, Branko, 1992, “Income Distribution in Late Socialism: Poland, Hungary, Czechoslovakia, Yugoslavia, and Bulgaria Compared,” Research Paper Series No. 1 (Washington: Socialist Economies Reform Unit, Country Economics Department, World Bank, March).

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  • World Bank, 1995, Understanding Poverty in Poland (Washington).

ATTACHMENT I Targets and Instruments of Monetary Policy1

A. Introduction

1. There has been much debate about Poland’s monetary policy in recent years. Although most would agree that the Polish economy has staged a remarkably successful performance, the contribution of monetary policy to this outcome has been more controversial, especially over the past two-three years when views have differed, at times sharply, over the appropriate stance of policies. To some extent, this controversy has reflected the considerable tensions that monetary policy has had to cope with, and which would have strained even the most sophisticated policy framework. At the same time, there has also been some disagreement about the regime’s basic rationale and operating principles. For example, while some have emphasized the fundamental anchor role of the exchange rate, others would focus on the need to control the money supply; and in practice, it seems that neither of those “anchors” was given priority in actual policy implementation.

2. This paper examines monetary-cum-exchange rate policy in Poland over the past few years. After this introduction, Section B briefly reviews monetary and exchange rate developments since the start of the transition. Section C then looks at the conduct of policies with a view to identifying the main objectives and operating principles of the National Bank of Poland (NBP). In reviewing actual policy implementation from the perspective of the overall framework of targets and instruments, the focus is on the key policy choices faced by the NBP in recent years, and how the inevitable tensions and tradeoffs have been resolved. Section D concludes the paper.

B. Monetary and Exchange Rate Developments Since 1990

3. Over the past six years, inflation and monetary growth have generally been declining, albeit not without setbacks, as shown in Figure 1. After dropping from over 600 percent in 1989 to near 30 percent by late 1993, annual inflation remained around that level for the next 1½ years, before declining to around 20 percent by spring 1996. Over the same period, the economy first contracted sharply in 1990–91, followed by an accelerating recovery that peaked in 1995 (Figure 2). The external position witnessed a similar turnaround from fundamental weakness during the early years of transition (with intermittent periods of strength in the aftermath of devaluations) to a major export boom and rising capital inflows in 1994–95 (Figure 3). While the budget deficit (after an initial surplus attributable largely to temporary factors) was a key force driving monetary expansion in the early years, its contribution has diminished at the expense of, first, accelerating net international reserves (NIR) growth (1994–95) and later, credit expansion to enterprises and households (1996; Figure 4).

Figure 1.
Figure 1.

Poland: Money and Inflation

(Year-on-year percentage change)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; Central Statistical Office (GUS); and staff estimates.1/ The PPI for 1994 and 1996 was reconstructed using month-to-month changes.
Figure 2.
Figure 2.

Poland: Real GDP and Industrial Production

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Central Statistical Office (GUS); and staff estimates.
Figure 3.
Figure 3.

Poland: External Sector Performance

(In billions of US$)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; and staff estimates.1/ Excluding valuation changes.2/ Including estimates of unrecorded trade.3/ On a cash basis.
Figure 4.
Figure 4.

Poland: Sources of Broad Money Growth

(In percent of previous year’s broad money stock)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; and staff estimates.1/ Nongovernment credit.2/ NIR recalculated at exchange rate as of end of previous year.

4. Looking in particular at the progress made with disinflation and monetary stabilization, one can distinguish roughly four phases.

1990–91: Stabilization from near-hyperinflation under a fixed exchange rate regime

5. Although the initial inflationary impact of price liberalization and devaluation was larger than expected, subsequently inflation came down rapidly under the influence of the swing in the budget from a large deficit into a surplus, high real interest rates, and the opening of the economy to foreign competition under a fixed exchange rate. At the same time, however, output also fell sharply. During 1991, domestic financial policies weakened, partly under the influence of continued recession (prolonged by the CMEA collapse), with the fiscal position returning to a large deficit and real interest rates becoming negative. With wages also rising rapidly, competitiveness was eroding fast, and the exchange rate peg came under increasing pressure—leading, first, to a devaluation in May and then to a switch to a crawling peg in October (Table 1). Thus, while disinflation continued during 1991, its pace decelerated in reflection of the softening stance of financial and exchange rate policies.

Table 1.

Poland: Exchange Rate Developments

article image
1992–93: Slow disinflation with crawling peg and periodic step devaluations

6. This period witnessed a further slowdown in disinflation, especially in 1992 when another devaluation (February), combined with a large budget deficit, put pressure on monetary aggregates. Inflation returned to a declining path in late 1992, and kept falling until the next devaluation in August 1993. This “ratcheting down” of inflation between periodic step devaluations reflected primarily the downward tension on prices imparted by the crawling peg,2 supported by the large fiscal adjustment implemented in 1993 and continued “slack” in output (the economy had just bottomed out from recession). Interest rates, however, were barely positive in real terms. In fact, a large reduction of interest rates in early 1993 (in response to declining inflation) probably contributed to the loss of reserves which eventually triggered the August 1993 devaluation.3

1994 to mid–1995: Inflation “stuck” in the 30 percent range with increasing undervaluation of the zloty

7. This period was characterized by accelerating export-led growth while domestic demand remained subdued; widening current account and overall balance of payments surpluses; and rapid monetary expansion fueled mainly by rising NIR. Not surprisingly, inflation did not come down much further in this environment. In hindsight, rapid transition-related productivity growth combined with the August 1993 devaluation had made the zloty progressively undervalued. Once western markets recovered from the 1993 recession, this undervaluation induced a growing external surplus that proved difficult to sterilize. The authorities initially were reluctant to appreciate the zloty to contain these pressures, for fear of overvaluation and, on the part of the NBP, a desire to increase NIR. Instead, the NBP relied mainly on sterilization through open market operations, and exchange rate action was limited to slowing down the rate of crawl. However, a series of three cuts in the monthly rate of crawl between September 1994 and February 1995 (to 1.2 percent) failed to stem the flood of NIR, and it took increasingly aggressive (and costly) open market operations to hold up interest rates during this period (Figures 5 and 6).

Figure 5.
Figure 5.

Poland; Interest Differentials

(In percent; annual basis)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; and staff estimates.1/ Annualized yield on six-month Zloty deposits minus yield on 6-month dollar deposits.2/ Annualized yield on 3-month and 6-month Treasury bills minus respective 3-month LIBOR rate for basket currencies, minus rate of crawl.
Figure 6.
Figure 6.

Poland: Cost of Sterilization

(In millions of zloty)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; and staff estimates.1/ Interest on OMOs.2/ Interest on OMOs minus interest on NIR.3/ Three-month centered moving average.
1995 to 1996: Renewed disinflation and external adjustment following currency appreciation in a new exchange rate regime

8. From mid-1995, progress with disinflation resumed. This reflected mainly a significant hardening of the exchange rate, including three small step appreciations between May and December 1995 (totaling 8½ percent) and a further reduction of the rate of crawl to 1 percent a month (in the context of a new “crawling band” regime). Aided also by a good harvest, inflation declined dramatically during the second half of 1995 (from over 30 percent in the first half to 21.5 percent in December), followed by a more moderate decline in 1996 (to 18.5 percent by the end of the year). After the near-boom of 1995, growth paused somewhat during the first half of 1996 and its composition shifted toward domestic demand, with the current account moving into broad balance under the combined effect of relative price (currency appreciation) and demand changes (weakening in Western Europe, accelerating domestic demand). While the rise in NIR and rapid monetary expansion continued through early 1996 because of increasing capital inflows, an apparent increase in the demand for money absorbed much of this expansion, permitting the reduction of inflation. To contain capital inflows and the associated sterilization costs, starting in late 1995, the NBP moved to lower interest rates, encouraged also by the decline in inflation. Portfolio capital inflows indeed subsided during the second quarter of 1996 as exchange rate expectations waned and the lower domestic interest rates reduced the incentive for arbitrage. At the same time, however, credit expansion and domestic demand accelerated throughout 1996, which became a growing concern for the NBP.

C. Targets and Instruments

Monetary policy guidelines

9. Formally, the main targets for monetary policy have traditionally been laid down in the annual “Monetary Policy Guidelines” approved by Parliament together with the annual State Budget. These Guidelines would usually present the outline of a monetary program, based on broad macroeconomic assumptions formulated by the Government as the basis for the State budget, including an inflation target for the following year.4 The Guidelines would specify broad money (M2) growth as the principal monetary target, and present other targets such as the expected change in NIR, budget financing, and growth of credit to the nongovernment sector. Reflecting the recent change in the NBP’s official operational target (discussed more fully below), the Guidelines for 1996 also set a nominal target for reserve money, in addition to the broad money target. Authority over exchange rate policy has formally been divided between the NBP and the Government, with “fundamentals” (such as the currency basket, the central parity, and the rate of crawl) to be decided at the initiative of the NBP in consultation with the Ministers of Finance and Foreign Economic Cooperation,5 the width of the band to be agreed between the NBP and the Ministry of Finance,6 and the actual rate to be “set, calculated, and published” by the NBP.7

10. In practice, the Monetary Policy Guidelines and the NBP’s detailed monetary program based on those guidelines have often been overtaken by actual developments during the year (Figure 7). This should not be surprising, given the nature of the transition which included a series of unexpected developments and shocks, both real and monetary. In this environment, rigorous adherence to the monetary program drawn up at the start of the year would have been neither possible nor advisable. Instead, the NBP often had to choose between the various targets and objectives prescribed in the Guidelines. Regarding the exchange rate, the practice has been that all but minimal changes were to be agreed between the NBP and the Government, including significant fluctuations within the current exchange rate band.

Figure 7.
Figure 7.

Poland: Monetary Aggregates: Program and Actual

(Changes during the year)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; and staff estimates.
Targets8
Multiple anchors

11. From October 1991 to May 1995, monetary policy in Poland was conducted against the background of a crawling peg exchange rate arrangement. With a preannounced and relatively steady rate of crawl, this regime can be viewed as analytically equivalent to a fixed exchange rate regime and was to serve as the nominal anchor in the system. In choosing between the options of an “active” and a “passive” crawl,9 the continued need to reduce inflation argued for the adoption of an “active” crawl that imparted downward tension on prices; at the same time, the authorities opted for moderate disinflation targets reflecting the inherently weak fiscal position and structural rigidities (as the exchange rate path and/or domestic interest rates consistent with an overly ambitious target might not be sustainable).10

12. In this framework, the chief constraint on monetary policy would be the need to maintain credibility of the crawling peg. While slowing monetary expansion would be necessary for lower inflation, the NBP in the fixed exchange rate system would not have direct control over the foreign reserve component of the money supply. Thus, monetary policy was to be geared toward controlling net domestic assets, taking into account the likely behavior of the demand for money and the expected or desired balance of payments outcome. The chief monetary target under Fund-supported programs was therefore a limit on net domestic assets of the banking system, with an additional target (floor) for net international reserves (NIR) to safeguard against the contingency of weaker-than-programmed demand for money.

13. While the authorities adopted the crawling peg as a key element of their framework, they did not view it as the sole anchor of policy. According to Article 5.1 of the Law on the NBP, the activity of the NBP is “aimed particularly at strengthening the Polish currency”. On this basis, the NBP has considered the reduction of inflation as a priority task for monetary policy, while securing external balance was considered an important goal of exchange rate policy. Restrictive fiscal and incomes policies11 were to act as additional “anchors” in support of disinflation and external adjustment.

14. The NBP’s monetary framework would typically define broad money12 as the key intermediate target, specified in nominal terms as a percentage increase during the year. This approach was initially chosen during the first stage of the transition when the fiscal deficit was seen as the dominant force pushing monetary expansion, with the broad money target embodying best the required compromise between the desirable (disinflation) and the feasible (the budget deficit). Later, the NBP would also argue that statistical studies showed that broader monetary aggregates explained inflation better than net domestic assets, making broad money the preferred target variable. Like net domestic assets, the balance of payments (as a proxy for the sustainability of the crawl) was not the main focus of monetary policy, although developments in gross and net international reserves were closely monitored in view of their influence on the total money supply.

15. While one might say that formally the exchange rate regime has become gradually more flexible, from a fixed peg to a relatively wide crawling band, in practice change has been limited since the move in October 1991 to a crawling peg. The rate of daily devaluations would typically be set and preannounced consistent with the authorities’ inflation target, with the level of the exchange rate corrected further by relatively infrequent steps. There were three devaluations during 1991–93 and a revaluation (in three steps) in 1995, with the rate of crawl gradually halved from 24 percent to 12 percent.13 The introduction of a crawling exchange rate band in May 1995 reflected the authorities’ desire to introduce some flexibility, as maintaining a tight crawling peg became increasingly difficult. In principle, the new system would maintain partially an anchor role for the nominal exchange rate while at the same time providing scope to deal with the uncertain nature of shocks and growing capital mobility. In practice, as explained more fully below, the move to a band was also a compromise between the NBP who argued for a step-revaluation to correct fundamental under-valuation of the zloty, and the Government which preferred the appreciation to take place in the context of a band with unchanged central parity.

Operational target

16. Starting in early 1993 when open market operations became the primary instrument of monetary policy, the NBP used short-term interest rates as the “operational” target of monetary policy. This choice reflected mainly the underdeveloped nature of financial markets with, for example, very volatile conditions in the interbank money market (dominance of “monetary shocks”). In practice, the NBP would attempt to stabilize the T/N WIBOR rate (“tomorrow-next Warsaw Interbank Offered Rate”) around a desired level, mainly through the interest rates it quoted on T/N Open Market Operations (OMOs).

17. In December 1995, the NBP officially adopted reserve money as its chief “operational target”, instead of the short-term money market interest rate used previously. This change was motivated partly by the perception that reserve money was more closely linked to broad money than short-term interest rates, reflecting an increasingly stable money multiplier. The NBP also explained that a quantitative operational target had become more appropriate as the initial volatility of money market interest rates had stabilized. Moreover, it was felt that official adoption of a reserve money target would indicate more readily to the public the two basic options to contain NIR-fueled monetary growth: aggressive open market operations or currency appreciation.

Policy implementation

18. Actual policy implementation has evolved in an “eclectic” manner, adjusting pragmatically—even if slowly—to new situations without adhering to a rigorous framework. In a nutshell, interest rate policy has tended to act quite directly on what the NBP considered its central objective, namely continued gradual disinflation. Its relatively strong statutory independence permitted it to accommodate the relatively large deviations of key monetary variables from their targeted path (see Figure 7), and even significant deviations from the Government’s official inflation target were accommodated as long as inflation was kept broadly on a gradual downward path (Figure 8). To secure this goal, interest rates were set mainly in light of the NBP’s judgement of recent inflationary trends. Exchange rate policy would follow the preannounced crawl as long as external balance was not in serious jeopardy.

Figure 8.
Figure 8.

Poland: CPI Inflation: Program and Actual

(12-month rate, in percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Polish authorities.1/ Target for December-on-December CPI, as laid down in the annual state budget assumptions.

19. During the first years of the transition, the usable data series were obviously too short and unreliable to allow estimation of a demand for money function. Reflecting these uncertainties, the NBP at the start of each year would set annual broad money targets on the basis of a simple assumption of either unchanged or slightly declining velocity. In practice, demand for money often deviated significantly from the assumed path, and as noted above the NBP tended to accommodate these deviations. A particular difficulty in recent years surrounded the end-1994 redenomination of the zloty, which was associated with significant swings in currency demand, the money multiplier, and the bank float.14 While it is possible ex post to adjust for these effects, they were hard to foresee at the time. More generally, the increase of confidence in Poland’s economy that has occurred in recent years was bound to have implications for the demand for money that were difficult to predict. For example, the second half of 1995 witnessed an unexpected drop in velocity which under rigorous adherence to the annual monetary target would likely have induced large currency appreciation.15

20. A closer inspection of interest rates over the period under review shows a close link between the 12-month rate of inflation and changes in the refinance rate, a key reference rate indicating the stance of monetary policy particularly in the earlier stages of the transition. Bank deposit and lending rates would typically follow closely the official (“headline”) interest rates quoted by the NBP, as would—until recently—the interest rate used by the NBP in its open market operations (Figures 9 and 10). This direct link between interest rate policy and inflation has also been evident in numerous NBP policy statements that would condition changes in interest rates first and foremost on inflation performance. In real terms, the NBP would keep the refinance rate generally negative during the recession, albeit with a narrowing margin; around zero during the initial phase of the recovery; and significantly positive once growth was firmly established (see Figure 11).

Figure 9.
Figure 9.

Poland: Nominal Interest Rates

(In percent; annual basis)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: National Bank of Poland.
Figure 10.
Figure 10.

Poland: NBP Refinance Rate, NBP Intervention Rate, and Inflation

(In percent; annual basis)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Polish authorities.1/ Interest rate quoted by NBP on its short term OMOs (1-day reverse repo in 1994 and 1995, and 14-day reverse repo in 1996).
Figure 11.
Figure 11.

Poland: Real Interest Rates 1/

(In percent; annual basis)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: National Bank of Poland.1/ Based on a three-month centered moving average of consumer durables prices; prime lending rate based on a three-month centered moving average of PPI inflation.

21. In contrast, interest rate policy typically would not react to deviations from the external or broad money targets (unless moderate disinflation was also in jeopardy; Figure 12). For example, interest rates were lowered significantly in early 1993, in response to declining inflation, and kept low throughout 1993 notwithstanding a sharp deterioration in the external accounts (leading to the August 1993 devaluation). Likewise, interest rates were raised in early 1995 (in response to an up-tick in inflation) and kept at a relatively high level through mid-1995 despite rapidly rising NIR; and were then reduced gradually after inflation had started to fall, notwithstanding continued rapid broad money expansion.

Figure 12.
Figure 12.

Poland: Monetary Program and Interest Rates

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: National Bank of Poland.1/ NBP intervention rate (1-day reverse repo) in 1994 and 1995; 14-day reverse repo in 1996.

22. As indicated above, the authorities have viewed external balance as the chief assignment of exchange rate policy, with the domestic anchor function as a secondary role. Starting in the second half of 1994, the NBP was struggling with a growing dilemma as persistent inflation seemed to require high interest rates, while growing NIR increases made a case for interest rate reduction. In hindsight, it is clear that the root of the dilemma lay elsewhere, namely in the progressive undervaluation of the currency, with the resulting balance of payments surplus proving difficult for monetary policy to sterilize. The exchange rate anchor lost its “bite”, permitting substantially higher than targeted inflation, and interest rate policy was increasingly hard-pressed by the growing disequilibrium. When this became apparent, the initial reaction was to reduce the rate of crawl so as to permit a gradual return of the exchange rate to its equilibrium, along with lower inflation than otherwise. As this failed to stem the rising external surplus, partly because of growing capital inflows, the authorities began to consider nominal appreciation of the zloty. This shift reflected growing recognition both of the increasing constraints imposed by the rate of crawl on domestic interest rates (slowing the crawl further would have required lowering interest rates as well) and the role of the crawl as the main anchor of a gradual, forward-looking disinflation strategy (a sharp reduction in the rate of crawl might have to be reversed, at least partially, later on).

23. The question of whether to revalue the zloty or not was thus at the forefront of the policy debate in early 1995, with the NBP arguing for a step-revaluation and greater flexibility of the exchange rate while the Government hesitated out of concerns about competitiveness and growth. The resulting compromise was to introduce—after several months of debate—a band of plus-minus 7 percent around an unchanged central parity, and to allow a “market-driven” appreciation within the band, up to an “inner” limit of 5 percent. After the zloty appreciated quickly to that limit, there was little further use of the band as the exchange rate remained under virtually continuous pressure to appreciate further. Faced with continued rapid NIR increases, the NBP in September allowed an additional appreciation of 1 percent, followed by another 2 percent in December at which time the central parity was also moved (by 6 percent).16 In hindsight, this approach—while eventually restoring exchange rate equilibrium—not only precluded effective use of the band, but probably also fueled exchange rate expectations and speculative capital inflows.17

24. Since the start of 1996 the zloty has again been kept within a very narrow “inner band”. Occasionally, the rate was allowed to fluctuate by 2–3 percent, but the authorities have expressed their intention to prevent any further real appreciation of the zloty. As a result, the zloty has effectively returned to a relatively tight crawling peg at about 1–3 percent below the central parity (Figure 13), although stated policy is “not to resist” a market-driven depreciation within the band up to about 2 percent above the parity. In real effective terms, most of the gains in competitiveness made in 1993–94 have now been reversed, with relative unit labor costs back at about their 1992 level (Figure 14).

Figure 13.
Figure 13.

Poland: Zloty Value of the Basket, 1991-96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: National Bank of Poland.1/ Average NBP rate before May 16, 1995, and fixing rate thereafter.2/ As of March 6, 1995, NBP increased the spread in its transactions with banks from +/-0.5 percent to +1-2 percent around the central rate.
Figure 14.
Figure 14.

Poland: Real Effective Exchange Rates

(1993 = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Staff calculations.1/ Adjusted for working days.

25. During 1995, in addition to the large current account surplus, capital inflows accelerated and residents switched increasingly from foreign to domestic assets. In order to limit currency appreciation while keeping interest rates high to combat inflation, the NBP resorted to large-scale sterilized intervention. Initially using reverse repos, the NBP later also sold virtually its entire usable stock of Treasury bills as well as a large amount of its own NBP bills, with the total stock of OMOs reaching nearly Zl 20 billion in April 1996 (equivalent to about two thirds of reserve money). This policy has had mixed success. While the NBP was successful in keeping domestic interest rates relatively high through early 1996, broad money growth exceeded program targets by a wide margin, permitting also substantially higher inflation. In fact, the excess of broad money over the target in 1995 was broadly equivalent to the sum of program deviations in NIR and credit to government, suggesting limited overall scope for sterilization. Staff estimates of the so-called “offset coefficient”, presented in Attachment III, suggest that the NBP in 1995–96, in order to sterilize US$100 million of inflows, had to issue about 2½ times (US$250 million) worth of domestic securities. In other words, sterilization, although still possible, had become a very expensive option for the NBP.

26. Interest rate differentials thus appear to have played an important—albeit not the only—role in attracting capital inflows and currency resubstitution. The premium on zloty-denominated assets, after adjusting for the preannounced rate of crawl, increased significantly in early 1995 and remained at some 3–5 percent until early 1996 (Figure 5). While this premium certainly acted as an incentive to invest in zloty assets, exchange rate expectations also seemed an at times powerful motive. Although they are difficult to measure, casual evidence suggests that the three major “waves” of inflows during 1995 (April-May, September, and December-January) were related to widespread market rumors about imminent appreciation.18 As a result, the share of foreign holdings of Treasury bills rose from close to zero to about 22 percent over the 12 months to February 1996, with total measured portfolio inflows reaching about US$2 billion. Over the same period, the share of foreign currency deposits (FCD) in broad money declined from 30 percent to 20 percent, with FCD dropping by over US$1 billion in absolute terms (Figure 15). As noted above, capital inflows have subsided since early 1996 following several rounds of interest rate reductions and a change in market sentiment reflecting the weakening in the official trade balance.

Figure 15.
Figure 15.

Poland: Foreign Currency Deposits.

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: National Bank of Poland.

27. Not surprisingly, the escalating cost of sterilization became a major policy concern in 1996. NBP operating profits, initially forecast at Z1 1.8 billion for the entire year (½ percent of GDP, down from 1 percent in 1995), dwindled rapidly under the weight of ever rising OMOs, and by early 1996 there were fears that the NBP would soon start incurring losses (Figure 6). By April 1996, the interest on outstanding OMOs, adjusted for the return on an equivalent amount of NIR holdings, had reached the equivalent of about 1 percent of GDP. Containing portfolio inflows and preventing central bank losses hence became an almost overwhelming concern for the NBP. Several rounds of interest rate reductions since end-1995 (mainly affecting market rates) reflected this concern. While this policy shift doubtless contributed to the weakening of external pressures, the turnaround in the external accounts was also attributable, as noted above, to the 1995 appreciation and the cyclical downturn in major trading partners. In addition to helping arrest portfolio inflows, however, the easing of monetary policy has also fueled a strong acceleration of domestic credit expansion, at a time when banks were generally becoming more prepared to lend as a result of successful restructuring and recapitalization.

28. Reserve money control, officially introduced in January 1996, has played a minor role so far in shaping the conduct of monetary policy. Typically, a target corridor for reserve money would be established at the start of each month,19 based on the outcome of the previous month and with a view to attaining the annual target. The NBP so far would not adjust its annual reserve money target in response to deviations in basic targets or assumptions,20 and the main decisions on interest rates apparently have not been connected to reserve money developments. The day-to-day variance of market interest rates has, however, increased measurably since the start of 1996.

29. In summary, during most of the period under review, the NBP’s interest rate policy was conditioned mainly by the pursuit of a moderate disinflation objective, with the level of real rates gradually raised as the economy moved from recession to rapid growth. Exchange rate policy has followed a rather tight crawling peg in the short run, with four realignments over the past six years (“crawling, adjustable peg”). While over the past two years the institutional framework has been created for a more flexible exchange rate policy, the band has not been used much in practice so far, except for step appreciation to correct undervaluation of the zloty. In contrast, interest rates were lowered in 1996 mainly with a view to containing capital inflows.

D. Conclusions

30. This paper has examined the main objectives and operating principles of monetary policy in Poland, and how they relate to the country’s generally successful stabilization experience.

31. Over the past six years, Poland has been able to bring down annual inflation from the high triple digits to below 20 percent while at the same time experiencing the best growth performance of all former centrally planned economies. The overall macroeconomic strategy that has brought about this success can be described as a “multiple-anchor, multiple-indicator” approach with the exchange rate, interest rates, incomes policy, fiscal adjustment, and bank and enterprise restructuring playing major roles. Monetary policy, formally based on an exchange rate anchor that became increasingly flexible over time, in practice has followed an eclectic approach that tried to compromise between moderate disinflation targets and external balance. Domestic interest rates would generally be geared to the objective of keeping inflation on a downward path, while the exchange rate’s prime assignment would be external balance.

32. Weary of the potential costs of rapid disinflation, the Government would typically set moderate annual disinflation targets, which would in turn be the basis for the preannounced exchange rate crawl and annual monetary programs with broad money as the main target. In its day-to-day conduct of policy, the NBP would accommodate deviations in all major targets, including inflation, as long as the core objectives of a continued (even if only modestly inclined) downward path of inflation and a sustainable external position were secured. Were these core targets in jeopardy, exchange rate adjustment would typically be used to defend the balance of payments, and interest rates to secure continued disinflation. In case of conflict between the money supply, interest rates, and the exchange rate, the NBP would typically give up most easily on the money supply, while holding on to both interest rates and the exchange rate as long as possible. When a conflict between the latter two became unsustainable, in the face of reserve loss or, more recently, overwhelming NIR increases, the exchange rate would usually give first. In 1996, however, preventing further appreciation and avoiding central bank losses became major policy concerns for the NBP, leading to several rounds of interest rate reductions. Despite the introduction of a relatively wide exchange rate band, its use has been limited so far other than for the 1995 revaluation.

33. While the NBP’s eclectic approach has worked reasonably well, the experience has not been without strains, and recent developments offer some lessons. First, there has been a striking gap between, on one hand, formal arrangements and the conceptual framework for monetary policy, and on the other, the actual practice of day-to-day policy implementation. While this is always true to some extent, a more transparent framework might have been useful in resolving the tensions and in making the trade-offs better understood by the political process and the public at large. Second, the experience in 1994–95 showed that for the exchange rate to work well as an anchor, it should be at or near its equilibrium level, and once there is clear evidence of disequilibrium, it should be corrected quickly and preferably through step appreciation. In particular, the piecemeal approach to appreciation in 1995 bears some responsibility for the surge in NIR, and the consequent costs of sterilization. Third, Poland’s balance of payments has obviously become too open for a tight exchange rate target and an independent monetary policy to be able to co-exist for anything but the very short term. And fourth, the increasing concerns over domestic credit growth in 1996 are a reminder that, while sterilized intervention may not be a sustainable defense against capital inflows, reducing interest rates risks stoking domestic demand, typically calling for offsetting fiscal adjustment.

ATTACHMENT II Money Demand in Poland1

1. Although the importance of a well-behaved money demand relationship for the conduct of monetary policy is well recognized, doubts are often expressed about the feasibility of finding such equations for transition economies: transition involves large shocks that make for instability, and in most cases the available data series are rather short. However, Poland (as the first country to embark on transition) has long been past the initial stabilization phase, and reliable monetary data, with consistent definitions, are available at least since the beginning of 1992. Against this background, this attachment provides a brief overview of developments in Poland’s money demand so far in the 1990s and presents a quarterly equation that tracks past movements in broad money reasonably well. The properties of the equation, as well as the projections generated by it, are broadly similar to those of the equations that the National Bank of Poland uses in preparing its monetary plans.

A. Stylized Facts to Be Explained

2. The salient facts are as follows:

  • Real money growth has picked up only recently (Figure 1). After a sharp decline during the near-hyperinflation in 1989–90, real money balances recovered very slowly, growing by only a cumulative 15 percent in the four years between early 1991 and early 1995. However, since mid-1995, real balances have risen rapidly, by over 18 percent through September 1996.

  • The money-to-GDP ratio has also picked up, but there is ample scope for further monetary deepening. At 33 percent, Poland’s ratio remains low compared with both its average of 40 percent in 1985–88 and the much higher levels prevailing in some of the other countries that are relatively advanced in transition, especially the Czech Republic.

  • The recent acceleration in real money growth is entirely attributable to zloty money (Figure 2). With nominal increases (year on year) at times exceeding 50 percent (Figure 3), real zloty balances have risen by over one third since end-1994. By contrast, foreign currency deposits have remained broadly flat in nominal zloty terms (and declined markedly in U.S. dollar and real terms).

  • Narrow money and its components have moved very closely in line with broad money developments (Figures 4–6). Specifically, there have been rapid increases in real balances only over the past 18 months, and entirely owing to the zloty component. Also, the movements of currency in circulation have been very similar to those of zloty deposits (except for the unusual developments in the banking system float at end-1994, discussed in Chapter IV on developments in money and credit).

Figure 1.
Figure 1.

Poland: Broad Money, 1990–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities; and staff estimates.
Figure 2.
Figure 2.

Poland: Components of Broad Money, 1992–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities; and staff estimates.
Figure 3.
Figure 3.

Poland: Broad Money and Components, 1992–96

(Annual growth rate in percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities.
Figure 4.
Figure 4.

Poland: Narrow Money, 1990–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities; and staff estimates.
Figure 5.
Figure 5.

Poland: Components of Narrow Money, 1992–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities; and staff estimates.
Figure 6.
Figure 6.

Poland: Narrow Money and Components, 1993–96

(Annual growth rate in percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities.

B. Toward an Explanation

3. Before discussing the estimation results, it is instructive to look at graphs relating developments in money to movements in the potential explanatory variables. Besides economic activity, whose strength clearly contributed to the rapid real money growth in 1995–96, the key factors include inflation, interest rates, and the exchange rate. Among the interesting observations are the following:

  • The decline in the income velocity of money has been closely associated with the gradual drop in inflation (Figure 7).

  • The sharp decline in the share of foreign currency deposits since early 1995 has been strongly correlated with the hardening of the exchange rate.

  • There is some evidence of the expected positive relationship between velocity and interest rates, but the relationship appears to be rather loose (Figures 8–10).

  • Interest differentials seem to be a poor predictor of the share of foreign currency deposits in total money. This may simply reflect the difficulty of measuring exchange rate expectations and the risk premium.

Figure 7.
Figure 7.

Poland: Velocity, Inflation, and Exchange Rate, 1990–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities.
Figure 8.
Figure 8.

Poland: Broad Money and Interest Rates, 1992–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities.1/ Rate on zloty deposits minus rate on dollar deposits minus 3-month annualized, forward-looking rate of depreciation.
Figure 9.
Figure 9.

Poland: Zloty Money and Interest Rates, 1992–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities.1/ Rate on zloty deposits minus rate on dollar deposit^ minus 3-month annualized, forward-looking rate of depreciation.
Figure 10.
Figure 10.

Poland: Foreign Currency Deposits and Interest Rates, 1992–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities.1/ Rate on zloty deposits minus rate on dollar deposit? minus 3-month annualized, forward-looking rate of depreciation.

C. Econometric Estimates

4. The preferred estimated equation was for total broad money, using quarterly data for 1992ql–96q3. The stylized facts suggest few, if any, gains from estimating separate equations for currency, demand deposits, and time deposits. Differentiating between zloty money and foreign currency deposits would seem useful, but attempts to model the latter proved unsuccessful—not surprising given the above-mentioned measurement problems. The starting period was largely determined by data availability and reliability—beginning in December 1991, monetary data have been based on a new system of accounts and an improved reporting system. Equations were also estimated using monthly data, but the advantages of having a larger number of observations seemed to be more than offset by increased noise in the data and the need for more seasonal dummies.

5. In accordance with the error-correction methodology, a static (long-run) equation was estimated first, and lagged residuals from that equation (the error-correction term) were included in the final dynamic equation. In the long-run equation, real broad money (m–p) was regressed on two measures of economic activity (industrial production, ip, and real retail sales, rs) and CPI inflation (Dp); no significant effects were found for interest rates and the exchange rate2:

m - p = - 4.12 ( 9.3 ) + .044   ( 8.3 ) ip  +   0 .21 rs ( 2.6 )  -   0 .29 Dp ( 0.9 ) ( 1 ) R 2 = 0.92 DW=1 .59, SE=0 .023

Although the inflation variable is not statistically significant, its inclusion yields the desirable property that the long-run money-to-GDP ratio is not constant, but rises with declining inflation.3 Specifically, the equation predicts that every 3 percentage point drop in inflation will eventually raise the money-to-GDP ratio by 1 percent.

6. The dynamic equation included the error correction term (ec) the nominal effective exchange rate (neer, with an increase implying zloty appreciation), and seasonal dummies as additional explanatory variables:4

D M = - 0.02 ( 1.4 )  +  0.68 ( 4.6 ) D P  +  0.21 ( 2.5 )   D n e e r  +  0.25 ( 2.3 )   D M - 1 - 0.19 ( 2.3 )   e c - 1  +  0.037 ( 5.3 )   s e a s o n 2  +  0.059 ( 7.5 )   s e a s o n 3  +  0.061 ( 11.0 )   s e a s o n 4 ( 2 )
R 2 = 0.95 , D W = 1.69 , S E = 0.0067

7. Several features of the estimated equation are noteworthy:

  • The equation tracks changes in money balances very well (upper panel of Figure 11).

  • When estimated only through end-1994, the equation is able to predict the outcome in 1995–96 reasonably well (lower panel of Figure 11). This is reassuring. In the second half of 1995, when nominal money balances continued to rise rapidly despite a rather sharp drop in inflation, there was great uncertainty about the reasons for the increase; the possibilities included a shift in the money demand relationship and/or a build-up of a monetary overhang that would derail the disinflation efforts. In the end, the surge in real money balances was sustained, and the equation suggests why: there appears to have been no shift in money demand, and the pick-up in real money growth seems to have been attributable to increased confidence in the zloty (created by disinflation and a harder exchange rate) and a strengthening of activity (especially retail trade).

  • Polish households and firms are apparently able to adjust their portfolios quickly to the desired levels. The equation implies very rapid adjustment of money balances toward the long-run equilibrium—the mean lag in response to a change in the price level is just over one month.5 The lag in adjustment is consistent with the results obtained by Timothy Lane (“Household Demand for Money in Poland,” Staff Papers, Vol. 39, No. 4, International Monetary Fund, December 1992) using data from the 1980s, but it is shorter than in many studies for other economies.

Figure 11.
Figure 11.

Poland: Performance of Money Demand Equation, 1992–96

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Data provided by the authorities; and staff calculations.

ATTACHMENT III The Offset to Monetary Sterilization in Poland1

1. Over the past two years, the National Bank of Poland has intervened heavily in the domestic interbank market in an attempt to prevent the often massive external reserve increases from undermining control over money supply. It is well understood that these sterilization operations have been costly. It is less clear, however, whether open market operations have been effective in mopping up excess liquidity. This attachment presents estimates of the “offset coefficient” to shed light on this issue.

2. The standard procedure for calculating the offset coefficient is to estimate the following equation:

Δ N F A   =   α  +  β Δ N D A  +  γ Δ r *  +  σ Δ Y  +  ε , ( 1 )

where Δ is the first difference operator, NFA is the central bank’s net foreign assets, NDA is its net domestic assets, r* is the foreign interest rate, Y is nominal income, and ϵ is the usual error term. Pioneered by Kouri and Porter (“International Capital Flows and Portfolio Equilibrium” Journal of Political Economy, Vol. 82, May/June 1974), this equation is derived as a reduced form from a simple monetary model that includes a money demand function and a money supply process with NDA as the policy variable. If capital is mobile, a decrease in NDA (resulting, for example, from open market operations) will lead to an increase in NFA, as the widened interest differential will attract inflows. In the limit, β, the “offset coefficient,” is –1. In that case, sterilization is completely ineffective (as any attempts to mop up liquidity will be fully offset by capital inflows), and monetary policy has lost its independence.

3. Even a summary look at the data suggests that sterilization has not been fully effective in Poland (Figure 1). Over the past few years, attempts to sterilize (that is, to contain the NBP’s net domestic assets) seem to have been associated with movements in the NBP’s net foreign assets in the opposite direction.

Figure 1.
Figure 1.

Poland: The NBP’s Net Foreign and Domestic Assets, 1994–96 1/

(Monthly changes in billions of zlotys)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Staff calculations.1/ NFA is expressed at constant end-1993 exchange rates.

4. Equation (1) was estimated for Poland using ten-day data (for the 10th, 20th, and 30th days of each month) for the June 1994-July 1996 period. Actual data were used for the monetary variables, whereas the (seasonally adjusted and polynomially smoothed) value of industrial production was used as a proxy for nominal income. To remove spurious correlation caused by valuation effects, NFA was calculated at constant end-1993 exchange rates; NDA was then obtained as reserve money minus the constant-exchange-rate NFA. A dummy variable, DUM94, was added to account for the effect on NDA of the unusual behavior of the banking system float at end-1994. After some experimentation with the lag structure, OLS estimation yielded the following equation (t-values of coefficients are in parentheses):

Δ N F A   =   0.31 ( 4.7 )   -   0.24 Δ N F A - 1 ( 2.3 )   -   0.41 Δ N D A ( 7.7 )   -   0.27 Δ N D A - 1 ( 4.0 )   -   0.09 Δ N D A - 2 ( 1.7 ) - 17.0 Δ r * ( 3.1 )  +  2.13 Δ Y ( 1.6 )   -   1.76 D U M 94 ( 3.4 ) ( 2 ) R 2   =   0.48 , D W   =   2.20

5. The results imply that the offset has been significant, but not complete, leaving some scope for independent monetary policy. Summing over the coefficients for NDA (and taking into account the lagged dependent variable), the estimated offset coefficient is –0.62 (statistically significantly different from –1). Hence, sterilization is feasible, but rather costly—mopping up a given external inflow requires open market operations of roughly 2.5 times as much. For example, in order to sterilize an NFA increase of US$1 billion (Zl 2.1 billion at end-1993 exchange rates), the National Bank of Poland would have to raise the outstanding balances held under open market operations by over Zl 5 billion, equivalent to some 15 percent of the base money stock.

6. The result for Poland is broadly in line with those obtained for other countries that have faced rapid increases in international reserves. In Recent Experiences with Surges in Capital Inflows (IMF Occasional Paper No. 108, December 1993), Susan Schadler et al. used quarterly data over periods through 1991 for six countries (Chile, Colombia, Egypt, Mexico, Spain, and Thailand) and found offset coefficients, ranging between –0.7 and –0.1. For the Czech Republic, a background study for the 1995 Article IV consultation with the Czech Republic (Section IV.4 of SM/95/171) used fortnightly data over September 1994-May 1995 and estimated the offset coefficient at between –0.4 and –0.6, very close to the estimate for Poland reported above. For Hungary, a 1996 background study (Chapter VI of SM/96/207) used monthly data to estimate an offset coefficient of about –0.5 for the period up to March 1995 (when the crawling peg exchange regime was adopted) and close to –1 for the period since.

7. In concluding, some qualifying remarks are in order. First, OLS estimates of the offset coefficient can be subject to a simultaneity problem (see Maurice Obstfeld, ∜Can We Sterilize? Theory and Evidence,∝ American Economic Review, Papers and Proceedings, Vol.72, May 1982.) Specifically, if the central bank routinely reacts to reserve increases by sterilizing, the causation may run from NFA to NDA rather than the other way round; if so, OLS yields biased coefficients. In order to assess the extent of this bias, equation (1) was reestimated employing two-stage least squares. Reassuringly, the offset coefficient was –0.57, suggesting that the bias, if any, is small.

8. Second, the high frequency of the data enables one to investigate whether the offset coefficient has changed over time. Many observers would probably expect to find that capital mobility in Poland has increased in recent years, especially following the conclusion of the debt and debt service reduction agreement with commercial creditors in November 1994. However, estimation results for subperiods provided no support to this hypothesis.

ATTACHMENT IV Understanding Polish Trade Performance1

1. The recent deterioration in Poland’s current account requires careful assessment. What is of concern is not the present level of the current account deficit (less than 1 percent of GDP, including unrecorded trade). Rather it is the size of the swing (a deterioration of more than 4 percent of GDP from 1995 to 1996) and the speed with which it took place that bears watching. At issue is whether this trend will continue toward a possibly unsustainable position, or whether it instead stabilizes at a moderate level that can be easily sustained and which, in fact, can help finance the substantial investment needs of transition. To help answer this question, this attachment examines the factors accounting for recent developments in the official trade balance and their implications for Poland’s medium term trade outlook.

2. It is noteworthy that the recent worsening of the trade balance is not confined to Poland, but is shared among many transition economies. Among the Visegrad countries, only Hungary’s trade balance has not deteriorated since 1994 (Figure 1). There are numerous possible explanations of this weakening in trade performance common to many transition economies. Growth in western Europe, the major export market for these economies, has slowed in recent years, reducing the demand for their exports. The effects on export demand of this slower growth may also have been exacerbated by the commodity composition of exports of typical transition economies. Under central planning, economic structures tended to be dominated by industry, and also to be artificially specialized. The intention was to take advantage of economies of scale in production, and then to trade based on some centrally imposed notion of comparative advantage. However, with exports now driven not by plans but by markets, this legacy of over-specialization in production may have increased the vulnerability of exports to cyclical changes in foreign demand. In addition, though the commodity composition of trade has changed markedly with the transition to a market economy, many of the new types of exports—semifinished goods, and lightly processed manufactures used as inputs to production elsewhere—may also be particularly sensitive to the business cycle, as compared to a more diversified export base. Finally, current account deterioration may be the natural corollary of an investment boom induced by transition or, more generally, of a wave of capital inflows stimulating domestic demand and currency appreciation.

Figure 1.
Figure 1.

Visegrad Countries: Trade Balance, 1994–96

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish Central Statistical Office; WEO, October 1996; and staff calculations.1/ Excluding unrecorded trade.

3. This study cannot attempt to resolve between these various explanations, but it can point to some of the factors that lie behind recent changes in trade performance, at least for Poland. The next section does this by documenting recent developments in the pattern of Polish trade. The concluding section formalizes the analysis, presenting estimates of a model of Polish trade performance that is used to assess the medium-term prospects for Polish trade.

A. Recent Developments in the Pattern of Polish Trade

4. Since transition, there have been considerable changes in the composition of Polish trade, both in terms of commodities and in terms of market geography. This can be seen by comparing current trade patterns with those under central planning. In 1987, the CMEA (Council for Mutual Economic Assistance) and other former socialist countries dominated Polish trade, making up half of the total, while trade with Western developed countries accounted for only 40 percent. By 1993, this pattern had been completely overturned. Western countries accounted for three-quarters of Polish trade, with barely one-seventh now directed to the CMEA countries. During 1993–95 this new pattern changed little, with only the share of CMEA countries increasing slightly (Table 1 and Figure 2).

Table 1.

Poland: Commodity Composition of Trade, 1987 and 1995.

article image
Source: Data provided by the Polish authorities.
Figure 2.
Figure 2.

Geographical Composition of Trade, 1987–95

(In percent)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish authorities and staff calculations.

5. The commodity composition of Polish trade has also changed markedly since the late 1980s. Consider the aggregate data. For exports, the share of manufactures classified by material (this includes relatively lightly processed items such as wood, rubber, paper, leather, textiles, minerals, iron and steel) increased by almost ten percentage points, whereas exports of machinery and transport equipment (more technical manufactured products) fell by a roughly similar amount. On the import side, imports of fuels and crude materials have fallen, whereas manufactures classified by material again increased by a significant amount.

6. Disaggregating the commodity pattern by region shows even more dramatic changes. Concerning trade with developed countries, the importance of all types of manufactured goods has increased significantly. Conversely, the role of raw materials (products such as unprocessed food and live animals, crude materials and mineral fuels) has fallen dramatically, both for exports and imports. Although exports of raw materials have not fallen in dollar terms, they have increased far less than the roughly five-fold increase in exports of manufactures during this eight-year period. This development is consistent with the view that Poland’s trade with the West was distorted under communism, and that trade in raw materials then played too great a role. With the transition to a market economy, trade with the West has flourished and, for the most part, the expansion in Polish exports has been concentrated in manufacturing, suggestive of where Poland’s comparative advantage may lie.2

7. Exports to the CMEA and former socialist countries show similarly marked changes. In 1987, the distribution of exports to these countries was highly skewed, with one category—heavy machinery and transport equipment—making up more than half of the total. By 1995, this proportion had fallen to barely one-seventh. Instead, exports of manufactures in general have increased, reflecting the same shift toward lighter manufactures shown in exports to developed countries. Unlike trade with the West, food and live animals have taken an increasing share of exports to the former CMEA countries, perhaps reflecting fewer trade restrictions.

8. What do these changing trade patterns tell us about the nature of Poland’s comparative advantage? In a recent cross-country study, Sheets and Boata (1996) have advanced three alternative hypotheses concerning the development of trade during transition. The first hypothesis is that the CMEA distorted both the commodity composition of trade between CMEA members, and reduced the level—though not necessarily the composition—of trade with the West. According to this hypothesis, we might expect the commodity composition of Polish trade with the CMEA and with the West to converge during transition, perhaps toward the pre-existing pattern of trade with the West. The second hypothesis asserts that the collapse of the CMEA, and the concomitant fall in aggregate demand in that region, led Polish exporters to redirect exports once headed to the CMEA to the West instead: simple substitution that might necessitate price-cutting to be effective. This would imply that commodities showing declining sales to the CMEA would be offset by increased exports to the West: a negative correlation at the commodity level. The third hypothesis says simply that the CMEA was one part of an entire system which, by relying on controls rather than relative prices to allocate resources, distorted trade in numerous and unpredictable ways. This hypothesis suggests that the move to a market economy will force Polish exports to follow the principle of comparative advantage. As a result, the structure of exports might change dramatically and in an unpredictable way, but the commodity composition of exports to the former CMEA countries and to the West should move more closely into line.

9. It is difficult to adjudicate between these hypotheses from the above fairly aggregated data. Even so, the data does seem to offer some support to the first and third hypotheses. For example, the share of light manufactures in total exports has increased, both to developed countries and to the CMEA countries. The commodity composition of exports to the CMEA has become less skewed and more balanced and—save for agriculture—seems to more closely resemble the pattern of trade with the West (Figure 3).

Figure 3.
Figure 3.

Poland: The Changing Commodity Composition of Polish Trade, 1987 to 1995

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

10. This interpretation is borne out by comparing simple correlations of the trade shares. Back in 1987, the correlation coefficient between the composition of exports to the CMEA and to developed countries was only 0.39, suggesting relatively little similarity. By 1995, this simple correlation had increased to 0.71, implying considerable convergence in trade patterns. As might have been expected, it was trade with the CMEA that converged more toward trade with market economies, and not the other way round. Comparing the pattern of exports to the CMEA in 1987 and in 1995, the correlation was only 0.35, whereas the correlation between exports to developed countries in 1987 and 1995 was 0.69.3

B. A Model of Polish Trade Performance

11. The changes in the pattern of Polish trade, and the immense structural changes in the Polish economy, make it difficult to quantify standard economic relationships. For example, the assumption of stable economic relationships is questionable, particularly if we mix data from the pre- and post- transition years. Nonetheless, an attempt is made here to use the available data—even if at some sacrifice of economic rigor—to reach a quantitative indication of the nature of Polish trade behavior, and to use this to draw some conclusions for its medium-term outlook.

12. Numerous data issues complicate the task of modeling Polish trade performance. In most cases, consistent data series go back only a few years, making it hard to recover long-term economic relationships. Inconsistencies between customs data (collected by the Central Statistical Office (GUS)) and payments-based data (collected by the National Bank of Poland (NBP)) also make it difficult to determine the correct measure of Poland’s trade position.

13. On the surface, there are few problems with data on merchandise exports. The small differences between the customs and payments based data can be explained by differences in timing between when goods actually cross the border (customs data), and when payment is made (payments data). However, this disregards the substantial problem of unrecorded crossborder exports, which are estimated at around one-seventh of the value of officially recorded exports (Chapter V). The factors determining this trade (conditions in neighboring border regions, cross border price differentials) are unlikely to coincide with the determinants of aggregate Polish exports. Because of the imprecision attached to these data, as well as the lack of price deflators, this study excludes unrecorded exports from the econometric model.4

14. There are also problems with import data. Imports measured on a customs basis are around 20 percent higher than imports measured on a payments basis (Figure 4). Part of this discrepancy simply reflects differences in definition. The customs-based figures are measured c.i.f, that is, they include the costs of carriage and insurance, while the NBP reports data f.o.b.: it adjusts reported import payments downward, allocating the costs of carriage and insurance under nonfactor services in the balance of payments. In addition, customs data imports may include imports paid for “in kind” and not involving cash payment. These might include foreign direct investment in the form of cross-border transfers of machinery and equipment.

Figure 4.
Figure 4.

Customs and BoP Based Trade, 1992–96

(In millions of US dollars)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Polish authorities.

15. Finding appropriate export and import price deflators is also problematic. In the past, there have been problems with GUS measures of export and import unit values. Instead, the staff have used a six-country weighted average of foreign PPIs measured in dollars as a proxy for Polish export prices. Polish import prices were calculated as the Polish export price divided by any change in the Polish terms of trade, as estimated by the WEO on the basis of the commodity composition of Poland’s trade. However, preliminary examination suggests that the GUS measures are now broadly similar to these artificially constructed measures of export and import prices, at least for the most recent years (Figure 5). Certainly, when calculating volumes, any differences in price deflators are dwarfed by the huge increase in the dollar value of exports and imports.

Figure 5.
Figure 5.

Poland: Export and Import Prices, 1992–96

(Index; 1992 Q1 = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish authorities and staff calculations.

16. Growth in Polish trade volumes has been correlated with growth in demand, both on the export and import side. Polish export volumes have grown far more rapidly than foreign demand, as measured by the growth in partner country non-oil merchandise imports (as calculated by the WEO) (Figure 6). By the same token, import volume growth has far exceeded Polish GDP growth.5 This would suggest that Polish trade volumes are highly sensitive to the state of the business cycle. Indeed, the ability of the Polish economy to continue to grow rapidly, at a time when growth in much of Western Europe has slowed, may be one cause of the recent deterioration of Poland’s trade position. As described earlier, on the export side, the strong cyclicaliy of Polish exports may reflect their commodity composition. “Manufactures classified by material” is the main category of Polish exports, making up a little under one-third of the total. Consisting of relatively lightly processed items such as wood, rubber, paper, leather, textiles, minerals, iron and steel, these items might be particularly vulnerable to the effects of a slowdown in production in the more developed economies of Western Europe.

Figure 6.
Figure 6.

Poland: Export and Import Volumes, 1992–96

(Index; 1992 Q1 = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: Polish authorities; WEO, October 1996; and staff calculations.1/ Weighted average of partner country non-oil merchandise imports.

17. This cyclical sensitivity can be illustrated indirectly by relating Polish export volumes to conditions in Germany, which is now Poland’s major export market. Data from the Direction of Trade Statistics (DOTS) show that exports to Germany—Poland’s main trading partner—have been more volatile than total exports (Figure 7). In particular, there was a marked reduction in exports to Germany in the first quarter of 1996. To assess the cyclical sensitivity of Polish export volumes, Figure 8 plots total Polish export volumes relative to cycle against German domestic demand relative to cycle.6 The close correlation is quite striking, indicating strong cyclical sensitivity.

Figure 7.
Figure 7.

Poland: Export Volumes to Germany and the World, 1992–96

(Index; 1992 Q1 = 100)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: IMF, Direction of Trade Statistics; Polish authorities; and staff calculations.
Figure 8.
Figure 8.

Poland: Cyclical Variation in Polish Export Volumes and German Domestic Demand, 1992–96

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: WEO, October 1996; and staff estimates.1/ Calculated as deviation from trend.

18. So far, there have been few attempts at empirical modeling of Polish trade behavior. Czyżewski (1996) presents a careful analysis and forecast of Polish trade performance in 1995. He relates import volumes to Poland’s real exchange rate and to Polish import prices (measured in dollars). Though this seems reasonable, it omits any role for domestic demand variables, and so cannot take account of sensitivity of imports to the Polish cycle. The performance of export equations was less satisfactory, leaving export volumes to be explained by seasonal dummies superimposed on an exponential trend, with economic factors ignored.

19. The National Bank of Poland has also prepared empirical models of Polish imports and exports. In its economic model, exports are assumed to depend on lagged exports, German imports, and the lagged real exchange rate; imports depend on lagged imports and the lagged real exchange rate. However, forecasts from this model have, so far, proved unreliable. In practice, simple time series models have been preferred instead. These explain exports and imports using an autoregressive equation with moving average terms. Such equations tend to perform admirably in a statistical sense and, by picking out the recent trend, are excellent for making month to month projections. However, by omitting the ultimate economic determinants of trade behavior—such as competitiveness, and domestic and foreign demand variables—their medium term forecasts are less reliable, and the equations themselves are unable to simulate the effects of policy changes, or of changes to the economic environment.

20. This paper uses an alternative econometric approach, based on the technique known as “cointegration”. Following this procedure, the first step is to uncover a long-run, or “cointegrating” relationship. In early attempts at estimation, world producer prices were used to derive Polish export and import prices. Essentially, this assumes that Poland is a price taker for traded goods, which would mean assuming an infinite price elasticity of foreign demand for Polish exports—something that one might want to estimate instead. Trade volumes were related to movements in the unit labor cost based real effective exchange rate, and demand variables, with plausible elasticity assumptions imposed. Taking prices as given, this approach amounts to assuming export and import supply functions.

21. Following this approach, but using econometric estimates instead of imposing elasticities, yields:7

exports   =   - 5.60 ( - 3.7 )   -   0.36 ( - 1.5 )   r e e r  +  2.33 ( 13.8 )   f o r e i g n ( 1 ) R 2 = 0.94 , D W = 2.20 , S a m p l e   p e r i o d :   1992 q 1   t o   1996 q 2

where exports refers to Polish export volumes, reer is the unit labor cost based real effective exchange rate and foreign is the volume of partner country non-oil merchandize imports, and gives the following import equation:

i m p o r t s   =   - 12.19 ( - 6.0 )   -   0.24 ( - 0.9 )  reer (adjusted for tariff changes)   +   3 .73 ( 12.2 )   gdp ( 2 ) R 2   =   0.92 , D W   =   1.46 , Sample period:   1992q1   to   1996q

where imports refers to Polish import volumes, and gdp is Polish real gdp.

22. The export volume equation seems plausible: the elasticity of exports with respect to growth in foreign imports is around 2, high compared to most industrial countries but reasonable given Poland’s scope for increasing its foreign market share. Moreover, it is consistent with the view that Polish exports are particularly sensitive to the state of the economic cycle. The real exchange rate elasticity is around –0.4, a little on the low side. However, the import volume equation is problematic: the estimated elasticity of 3.7 with respect to GDP is very high, though not surprising given the observed dramatic increase in import volumes; the real exchange rate (corrected for tariff changes) has the wrong sign.

23. These problems suggest using more conventional relative price measures as explanatory variables, in place of relative unit labor costs.8 This will produce equation estimates that can be interpreted more like conventional demand curves. In addition, instead of using an artificially interpolated quarterly GDP series,9 actual data on industrial production and real retail sales were used to measure Polish domestic demand.

24. The following export demand equation was estimated:

exports =   -5 .96 ( 10.8 )   -   1 .09 ( - 2.3 ) ( p x / p c p i f )  +  2.03 ( 17.5 )  foreign ( 3 ) R 2 = 0.95 ,  DW=2 .53, Sample period: 1992q1 to 1996q3

where px/pcpif represents the price of Polish exports relative to consumer prices in foreign partner countries.

25. In the above equation, export volume is assumed to depend on the price of Polish exports relative to foreign consumer prices, both expressed in dollars, and a world demand variable (constructed as the weighted average of non-oil merchandise import volumes in Poland’s foreign partner countries). The elasticity of exports with respect to foreign demand is again around 2, while the elasticity with respect to Polish export prices relative to the foreign weighted CPI is –1.1, close to the range of estimates reported in Goldstein and Khan (1985, p. 1076).

26. For import volumes, the following equation was estimated:

imports = - 1.23 ( - 0.7 ) - 1.24 ( - 3.9 ) ( pm/pcpi )  +  0.64 ( 3.0 )  retail +   0 .45 ( 1.1 )   ind ( 4 ) R 2 = 0.98 ,  DW=2 .94, Sample period: 1993q4 to 1996q3

where pm/pcpi represents the price of imports relative to Polish consumer prices, retail the level of real retail sales, and ind the level of industrial production.

27. Poland’s demand for imports is assumed to depend on the price of imports relative to the price of domestically consumed goods (as measured by the CPI), with a correction for the declining rate of import protection.10 Estimating this equation over the full sample period yields problematic results, mainly because the published measure of real retail sales only starts to increase from end-1993 onwards. But re-estimating the import equation from the last quarter of 1993 onwards yielded more plausible results. The price elasticity falls within a –1 to –1.5 range, and real retail sales become significant, with a plausible elasticity. Including both real retail sales and industrial production gives an activity elasticity greater than one which, given that they are both growing faster than GDP, is consistent with the rising import share observed in Poland.

28. The second step is to assume that the above two equations represent “cointegrating relationships”, and to incorporate these into short-run dynamic relationships for exports and imports.11 The quarterly growth in export volume was related to the change in relative export prices, the growth in world demand, and a lagged error-correction term: the difference between actual export volumes and the value predicted from the cointegrating equation. Similarly, import volume growth was related to the change in the relative price of imports, the growth of real retail sales and of industrial production, and a lagged error correction term. In both cases, the error-correction term was statistically significant, and had the expected negative sign, indicating adjustment towards equilibrium. The fit within sample was also very good, suggesting that the equations explained well the recent sizeable movements in export and import volumes (Figure 9).

Figure 9.
Figure 9.

Poland: Exports and Imports, 1992–96 Actual and Predicted

(In millions of US dollars)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Source: Staff calculations.

29. What are the implications for the sustainability of Poland’s external trade position, given the recent significant changes in export and import volumes? These equations, combined with projections of the future values of the determinants of Polish trade, can be used to address this question.

30. Foreign demand, foreign consumer prices, dollar export prices and dollar import prices were all projected using the assumptions underlying the World Economic Outlook. Official budget assumptions and projections were used to forecast consumer prices and the future path of the exchange rate and the degree of import protection. The growth of real retail sales and industrial production were both projected at 7 percent for 1997, and then assumed to move in line with projections for the growth of private consumption and gross domestic product.

31. The results are presented in Figure 10. The official trade balance soon levels off, and stabilizes at around 7 percent of GDP. Including unrecorded cross-border trade (conservatively projected to increase at only 5 percent annually in dollar terms), the trade deficit stabilizes at a little over 3 percent of GDP which, given the scope for potential profitable investment in Poland, should be easy to finance and sustain.

Figure 10.
Figure 10.

Poland: Developments in Merchandise Trade, 1990–2000

(In percent of GDP)

Citation: IMF Staff Country Reports 1997, 033; 10.5089/9781451831795.002.A001

Sources: National Bank of Poland; and staff calculations.

32. The main risks to the projections come from changing the assumptions. For example, the recovery in Western Europe may take longer than anticipated, or insufficiently tight policies may slow progress in reducing Polish inflation, and so worsen competitiveness. Thus, the forecasts are highly contingent on developments in the external environment, and on domestic policy action. Even so, the equations do provide a framework for assessing developments in Polish foreign trade. By comparing actual developments with the model predictions, and by changing the assumptions to match actual outcomes, this framework can be used to more closely monitor future developments in Polish trade.

References

  • Corker, Robert, 1989, “External Adjustment and the Strong Yen, Recent Japanese Experience,” Staff Papers, International Monetary Fund, Vol 36 (June), pp. 464–493.

    • Search Google Scholar
    • Export Citation

  • Czyżewski, Adam, 1996, “Foreign Trade Performance in 1995: Analysis and Forecast,” mimeo.

  • Goldstein, Morris, Mohsin. S. Khan, 1985, “Income and Price Effects in Foreign Trade,” in Handbook of International Economics, Volume 2, Ronald W. Jones Peter B. Kenen.

    • Search Google Scholar
    • Export Citation

  • Sheets, Nathan, Simona Boata, 1996, “Eastern European Export Performance During the Transition,” International Finance Discussion Paper No. 562 Washington: Board of Governors of the Federal Reserve System.

    • Search Google Scholar
    • Export Citation
1

Economic developments through 1993 were described in detail in “Poland: The Path to a Market Economy” IMF Occasional Paper No. 113 (1994).

2

Prepared by Mark Griffiths.

3

External sector developments are described more fully in Chapter V.

4

See Chapter II of SM/95/316 (12/27/95) for a more detailed explanation and empirical evidence.

5

Though part of the decline in 1996 comes from the exclusion of excise tax in the official statistics.

6

For liquid fuels and gasoline, moreover, approval of price changes had to be requested from the Ministry of Finance (tax chamber), which can delay approval by up to three months. However, this requirement was abolished in February 1997.

7

Prepared by Adrienne Cheasty.

8

That is, excluding the social funds and a number of extrabudgetary funds.

9

The deficit numbers are also influenced by arrears (see below), and timing issues. Carry-over of budget transactions from one year to the next (complementary period items) explain most if not all of the “unidentified expenditures” in the state budget.

10

Provisional national statistics for 1996 show a state budget deficit in the order of 2.5 percent of GDP, because they include arrears repayment which remains to be made in 1997.

11

Following the authorities’ usual conservative practice of forecasting a deficit in the rest of general government, this would entail a general government deficit of 3 percent of GDP in 1997.

12

The excess wage tax began to be dismantled in 1992; this also offset the gains from other reforms. The reforms are described in detail in Chapter II of “Poland: The Path to a Market Economy”; IMF Occasional Paper No. 113 (1994). It may be noted that since subsidies to enterprises were cut sharply, the net contribution of enterprises to the budget has declined by less than the drop in enterprise tax revenue.

13

As part of the new Government’s strategy to increase somewhat the tax burden on the better-off to finance higher transfers to the poor.

14

Foreign interest payments are projected to peak (in dollar terms) in 2004–08.

15

Enterprise support has recently reemerged in the context of restructuring programs—mainly for the coal sector and for toxic waste containment. Hence, measured subsidies are projected to rise in the 1997 budget. Implicit subsidies in the form of tax and social security arrears have also not been completely eliminated.

16

The arrangement was intended as a temporary solution in 1996, before comprehensive change from wage-based to price-based indexation (see Chapter VI). Preliminary indications also point to a lower than expected influx of new pensioners, and some improvement in contribution compliance.

17

Government debts due to Constitutional Tribunal rulings on compensation for earlier years also remain outstanding. As of 1996, these are estimated to amount to Zl 6.8 billion (1.9 percent of 1996 GDP).

18

Measurement of nonbank financing is complicated by difficulties in splitting secondary-market transactions between banks and nonbanks. However, the now-complete phased dematerialization of paper has improved accounting capacity. It should also be noted that nonbank financing includes bonds bought by foreigners on the domestic market. These latter amounts are small, but volatile.

19

In 1997, this share was raised from 15 percent to 16 percent (to compensate for the effect of lower tax rates). The share going to big cities is higher, to finance their wider responsibilities; in 1996, they received 21 percent.

20

The current tax system is summarized in Appendix I.

21

Prepared by Juha Kähkönen.

22

The adoption of reserve money as the official operational target reflected a number of considerations, including increased sophistication of financial markets, perceived greater stability of the money multiplier, and the desire for more transparency in the NBP’s use of instruments.

23

See Chapter II on real sector developments, and Mark Griffiths and Thierry Pujol, “Moderate Inflation in Poland: A Real Story,” IMF Working Paper WP/96/67 (June 1996).

24

The difficulties in identifying the sources of the NIR increase are discussed in Chapter V on external sector developments. With hindsight, while in 1994 the NIR increase resulted mainly from a large current account surplus (including unrecorded cross-border trade), in 1995 the continued large current account surplus was accompanied by increasingly large-scale capital inflows.

25

The special factor at end-1994 was an exceptional decline in the banking system’s payments float at the time of currency redenomination—with effect from January 1, 1995, 10,000 old zlotys became one new zloty. A similar decline occurred at end-1996 in the context of a move to a new reporting system for commercial banks.

26

Fund staff estimates of Poland’s demand for money are described in Attachment II.

27

In the tabulation, broad money growth has been adjusted for the unusual behavior of the payments float at end-1994 and end-1996. Credit to nongovernment has been calculated excluding capitalized interest and interest due but not paid, and the valuation effects of exchange rate changes have been excluded from the contribution of net international reserves.

28

The estimates of the “offset coefficient” reported in Attachment III suggest that the scope of sterilization has become rather limited. The estimated coefficient of-0.6 implies that eliminating the liquidity impact of a Zl 100 million reserve inflow requires sterilization operations worth Zl 250 million.

29

The nongovernment sector comprises households and both private and public enterprises.

30

Rediscount credit refers to the NBP’s acceptance of bills of exchange for rediscounting, whereas Lombard credit offers banks an opportunity to obtain credit from the NBP (for up to 12 months) against the collateral of government or NBP securities.

31

Until January 1996, there was a third headline rate, namely the refinancing rate. Although it was abolished at that time, refinancing credit continues to be available (at the Lombard rate for central investment loans guaranteed by the State Treasury, and at the Lombard rate plus 1 point for other refinancing loans).

32

Treasury bill rates did not rise commensurately, however, as the Ministry of Finance placed over Zl 2 billion with the NBP at end-December, limiting the need for Treasury bill sales through auctions. To contain the expansion in’ liquidity, the NBP announced an increase in reserve requirements, effective at end-February.

33

At end-1996, reserve requirements were 17 percent on zloty demand deposits, 9 percent on zloty time deposits, and 2 percent on foreign currency deposits. In early 1997, the NBP announced increases in reserve requirements (by 3 points on zloty demand deposits and by 2 points on foreign currency deposits) with effect from end-February.

34

In contrast to previous years’ plans, the monetary program embodied in the guidelines for 1997 is expressed in the form of ranges for the key aggregates.

35

Chapter III on fiscal developments elaborates on budget financing for 1997.

36

Attachment IV analyses recent developments in Polish trade, as well as their possible future implications.

37

Attachment I presents a more detailed description of exchange rate and monetary policy.

38

The volume increase was a little larger, because of a decline in dollar export prices.

39

These findings are summarized in Nathan Sheets and Simona Boata, 1996, “Eastern European Export Performance During The Transition,” International Finance Discussion Paper No. 562 (Washington: Board of Governors of the Federal Reserve System).

40

See Chapter I of SM/95/316 (12/27/95) for more details.

41

See Chapter 1 of SM/95/316 (12/27/95) for more details.

42

A recent STA Technical Assistance mission has made detailed suggestions in this respect.

43

Prepared by Markus Rodlauer.

44

The Strategy for Poland initially covered the period 1994–97, and was later extended until 1998. A new medium-term program (Package 2000), covering the period through the year 2000 and focusing on macroeconomic and fiscal targets, was adopted in 1996.

45

The new topics included, inter alia, regional policy, environmental protection, and accession to the European Union.

46

Specifically, a high-level Task Force for Structural Reforms has been created to develop a comprehensive policy blueprint for structural reforms toward EU membership. The Task Force includes representatives of the Central Government, local and regional administrations, social partners and business associations, and the European Commission and other foreign partners.

47

By mid-1996, the APA had sold less than 10 percent of the land belonging to the state farms, but over 70 percent had been leased (typically for ten years, with first right of purchase by the lessee upon expiration of the lease).

48

Part of the new law came into effect in January 1997.

49

According to 1994 book values (excludes banks and insurance companies as well as enterprises with five or less employees). Tentative estimates indicate that MPP enterprises accounted for about 11 percent of industrial sales in 1995.

50

In each individual company, 60 percent of shares go to the NIFs (33 percent to the lead shareholder, and 1.9 percent to the 14 other NIFs), 15 percent to employees, and the rest remains with the Treasury (mostly 25 percent, except in companies where 15 percent goes to farmers and fishermen closely associated with the enterprise). Several NIFs have recently consolidated their minority share holdings among each other.

51

At the level of NIFs, 85 percent of equity will be exchanged for share certificates, with the remaining 15 percent providing for part of the remuneration of Fund managers (1 percent annually for ten years, plus five percent for those managers who stay with the same NIF for ten years).

52

The financial position of many state enterprises deteriorated in 1991 as the temporary factors (such as the large devaluation and high inflation) that had inflated enterprise profits in the previous year subsided. Thus, while the high inflation in 1989–90 had cleansed bank balance sheets of most of the old bad loans, by 1993 the share of nonperforming loans had risen again to nearly one third (Table 3).

53

Such as growing frequency of half-year employment (the minimum period entitling one to unemployment benefits) and a rising tendency to accept new employment only just before the maximum benefit period expires.

54

Motivated by budgetary pressures, the pension base defined by the pension formula was lowered from 100 percent to 91 percent of the calculated base pension, effectively cutting pensions by 10 percent from the level they would have reached without this measure.

55

The new system envisages, as a minimum, indexation following a “pensioners’ CPI”, with possibly higher increases (up to projected real wage growth) decided annually based on negotiations between the social partners and taking into account budgetary possibilities. For 1997, since there was no time left for negotiations, the law stipulates 1.5 percent real pensions growth. Actual pensions growth, however, is expected to be significantly higher (up to about 7 percent), reflecting ex-post adjustment for lower-than programmed real pensions growth in 1996 as well as compensation for the absence of pensions indexation in early 1996, in accordance with the relevant Constitutional Tribunal ruling. After-tax pensions will benefit further from the cut in personal income taxes (by one percentage point for the lowest bracket).

56

The new system also introduces a comprehensive system of rehabilitation for the handicapped, as well as support for their employment. Although approved in June 1996, the new law will come into effect only as of September 1997, to allow for the necessary institutional arrangements.

57

While no commercial bank was privatized in 1996, the Government further reduced its stake by selling part of its shares in some of the banks already privatized.

58

The PBPF was established in 1992 with the unused funds from the Polish Stabilization Fund, to help service the recapitalization bonds issued to seven of the nine regional banks. Access to this Fund in support of a particular bank’s bonds required that the bank was privatized before the end of 1996.

59

An important modification was imposed by Parliament which, in April 1996, passed a new bank consolidation law that restricted the scope of the scheme to banks wholly owned by the state, and hence excluding the already privatized bank.

60

The Fund provides full coverage for deposits up to ECU 1,000, and 90 percent up to ECU 3,000. A draft law currently before Parliament would extend 90 percent coverage up to ECU 4,000 from July 1, 1997, and up to ECU 5,000 from January 1, 1998.

61

This problem was exacerbated by the departure in the early 1990s of a number of well-qualified staff, mainly to newly established commercial banks.

62

With the Uruguay Agreements allowing for tariffication of nontariff barriers on sensitive goods at the level of the base period (1986–88), i.e., a period when protection in Poland was very high, there was room for some increase of overall protection on the occasion of Poland’s joining the WTO.

63

After reductions to 5 percent in 1995 and 3 percent in 1996, the surcharge was eliminated in 1997.

1

Prepared by Adrienne Cheasty.

2

Pharmaceuticals are to be taxed at 7 percent in 2000.

3

The Ministry of Finance zero-rated these goods on the basis of Article 50 of the law that provided the corresponding authorization, which is supposed to be used for a period not longer than six years. Otherwise, the goods would be subject to a 7 percent rate.

4

Revenue stamps are used for tobacco, spirits, and wine.

5

Above a threshold of US$350 for video players, US$600 for video cameras, and US$750 for color TV sets.

6

Including import surcharge.

1

Prepared by Robert Sierhej, Economist, Resident Representative Office.

2

The basket consists of the U.S. dollar (weight 45 percent), the deutsche mark (35 percent), the pound sterling (10 percent), the French franc (5 percent), and the Swiss franc (5 percent). On January 1, 1995 new currency notes and coins began to circulate, replacing old currency at a conversion rate of 1 to 10,000. Old currency remained in circulation until the end of 1996; it can still be exchanged in banks till 2010.

3

Australian dollars, Austrian schillings, Belgian francs, Canadian dollars, Danish kroner, deutsche mark, Finnish markkaa, French francs, Italian lire, Irish pounds, Japanese yen, Luxembourg francs, Netherlands guilders, Norwegian kroner, Portuguese escudos, pounds sterling, Spanish pesetas, Swedish kronor, Swiss francs, and U.S. dollars.

4

Foreign exchange bureaus (kantors) must obtain licenses to operate. They are permitted to purchase foreign exchange from licensed foreign exchange banks without restriction.

5

A new foreign exchange law came into effect on December 31, 1994; the law was further amended, and amendments came into effect on December 10, 1995.

6

Unrestricted accounts were introduced on December 31, 1994.

7

Quotas for exports of nonferrous metals waste and scrap were established in December 1996; before that date, exports of these products were banned.

8

The surcharge was abolished as of January 1, 1997.

9

It replaced the Law on Economic Activity with Participation of Foreign Parties, which had governed all new foreign direct investments since December 23, 1988.

10

A permit is not required if the state company is liquidated under Article 37 of the privatization law.

11

The National Bank must be notified within one month from opening the account.

12

Acquisition of real estate by foreigners was regulated by the Law on Acquisition of Real Estate by Foreigners dated 1920.

1

Prepared by Mark Griffiths.

2

In particular, the note is based on Chapter VII of Ebrill et al. (1994) and World Bank (1995).

3

For example, Portugal and Spain, with per capita incomes more than double that of Poland, spend around 12 percent of GDP on cash social transfers.

4

The poverty deficit is defined as the amount of additional money needed, assuming perfect targeting of transfers, to raise everybody’s income up to the poverty line.

1

Prepared by Markus Rodlauer.

2

From October 1991 to August 1993, the rate of crawl was 1.8 percent per month (24 percent annually), with inflation decelerating from around 50 percent to near 30 percent over the same period.

3

Together with other factors such as the recession in western markets, a boom in consumer imports in the months preceding the July 1993 introduction of VAT, and a large reduction of deposit interest rates by the State Savings Bank (PKO-BP) partly linked to its restructuring efforts.

4

While the NBP would be consulted in the design of this macro-framework, the Government’s objectives would usually prevail even in the face of disagreement with the NBP.

5

Council of Ministers Resolution of May 1991.

6

Foreign Exchange Law (last amended in 1995).

7

Law on the NBP (1990). There has not been a clear legal definition of the dividing lines between those areas of authority.

8

While some basic elements of the monetary policy regime have been in place since 1990, it was not until the creation of an interbank money market in 1992 that indirect monetary policy instruments could be effectively employed. Therefore, in examining monetary-cum-exchange-rate management, the following sections focus on the period since 1993 when direct credit ceilings were no longer applied.

9

This distinction, first introduced by McKinnon (1981), refers to the role of the exchange rate in reducing inflation. One option is for the monetary authorities to preannounce a rate of crawl below the projected inflation differential with trading partners, with the rate of crawl to be reduced progressively until a fixed exchange rate can be established or until conditions are conducive for floating the exchange rate. The other option would be to set the rate of crawl solely with a view to preventing domestic inflation from compromising international competitiveness, in effect targeting a real exchange rate and thereby abandoning the nominal anchor function of the peg.

10

An implication of using the exchange rate to support the reduction of inflation is that some of the costs of disinflation are borne by the traded goods sectors and international competitiveness. The risk of output loss from exchange rate-based disinflation is higher if there is significant structural inflation inertia, as appears to be the case in Poland (see Griffiths and Pujol, 1995).

11

Initially, in the form of an excessive wage tax, which was softened progressively and finally replaced in 1995 by a new incomes policy based on collective bargaining between social partners.

12

Currency outside banks plus deposits denominated in domestic and foreign currencies.

13

Not surprisingly, inflation also has been about halved over the same period (from about 40 percent in 1992 to 20 percent in 1996).

14

In particular, there was a sharp decline in late 1994 in currency demand (reversed in early 1995), and at end-1994 broad money jumped by over 3 percent reflecting a one-time clearing operation that reduced the bank float to almost zero.

15

While monetary policy simply had to reckon with these uncertainties, the data series have now lengthened to an extent that allows estimation of a reasonably stable and well-fitting demand for money function (Attachment II).

16

Cumulatively, there was thus a step appreciation of 9 percent, with an adjustment of the central parity by 6 percent. As a result, the zloty in early 1996 stood at 2 percent below the central parity (i.e., 2 percent appreciated), within a band of plus/minus 7 percent.

17

The authorities’ choice to introduce a band without prior step-appreciation could be rationalized with the view that the strength of the external accounts might only be temporary and easily reversed in the future. A particular problem in this context has been the interpretation of the large “unrecorded trade” flows and resulting difficulties in assessing the underlying external position. The weight of available evidence, however, pointed to a strong transition-related improvement in competitiveness, a “permanent” shock notwithstanding its likely erosion over time even without nominal appreciation. The point was that policy should pre-empt such erosion through wage and price inflation by eliminating in time the disequilibrium in the exchange rate.

18

Of course, exchange rate expectations are not unrelated to interest rate differentials. More generally, one could say it was the market perception of an unsustainable interest rate differential that attracted inflows (under the combined incentive of the yield differential and the expected capital gains from exchange rate appreciation and/or interest rate reduction).

19

The target corridor has a width of Zl 700 million (about 2 percent of the reserve money stock) and is set in terms of average reserve money during the month.

20

The 1996 Guidelines set annual targets for broad money and reserve money without establishing a hierarchy between them. Although the reserve money target was derived using the target for broad money and an assumption for the broad money multiplier, the Guidelines would not indicate which target should be abandoned in case of a change in the multiplier. In fact, during much of the year broad money threatened to overshoot the annual target by a large margin, while the reserve money target was kept unchanged.

1

Prepared by Juha Kähkönen.

2

All variables are in logarithms, and D denotes the first difference operator. The figures in parentheses are t-values of the coefficients.

3

This statement holds strictly only if the elasticity of money with respect to GDP is one. This indeed seems to be the case: tests using a quarterly GDP series derived by interpolation could not reject the hypothesis that the elasticity equals one. The choice of industrial production and retail sales, rather than GDP, as the scale variables was based on operational considerations: these variables are available with minimal lags and do not require artificial interpolation. (Incidentally, although in many cases including two scale variables can be expected to cause problems with multicollinearity, this is not the case here. In Poland, retail sales were subdued until 1995, by which time industrial production had been booming for years.)

4

In addition to the basic statistics reported here, the equation passed the usual battery of tests, such as AR, ARCH, normality, and RESET.

5

In the presence of both a lagged dependent variable and an error-correction term, the mean lag is (1 – α – β)/γ where α is the coefficient on the price level in the dynamic equation, β is the coefficient on the lagged dependent variable, and γ is the error-correction coefficient.

1

Prepared by Juha Kähkönen.

1

Prepared by Mark Griffiths.

2

Even so, Polish agricultural exports might be expected to be much higher under a more liberal agriculture trade regime in developed countries, and in the European Union in particular.

3

Sheets and Boata (1996) reach similar conclusions, using a more sophisticated and more comprehensive approach.

4

However, unrecorded exports are used to measure Poland’s overall trade position, and, for purposes of medium term projections, are forecast to increase by a modest amount.

5

Both Polish GDP and foreign demand have been interpolated by setting the quarterly growth rate equal to the fourth root of the annual growth rate. The resulting series are therefore much smoother than the “true” quarterly series, particularly for Polish GDP.

6

The trend was estimated by using the HP filter. Using Polish exports to Germany, as measured by DOTS, gave a less convincing picture, because the fall in exports to Germany in 1992q4 precedes the fall in German demand of 1993ql.

7

In this and subsequent equations, series have been converted into natural logarithms, and t-statistics are reported in parentheses.

8

The motivation for such specifications is described in Goldstein and Khan (1985), and also in Corker’s (1989) study of Japanese trade performance.

9

Official Polish quarterly GDP data have been issued only very recently, and go back no further than 1994.

10

Chapter VI describes the recent reductions in customs duties and the abolition of the import surcharge.

11

On purely statistical grounds, the assumption of cointegration is questionable: the high values of the Durbin-Watson test statistic indicate substantial correlation in the residuals, casting doubt whether a true long run relationship has been discovered. But—given the short sample size—it is unrealistic to believe that a “statistically pure” cointegrating relationship can be found from the Polish data. Moreover, the estimates seem plausible, and the coefficients suggested by the data are reasonable. At any rate, the equations should be seen as work in progress: as more data becomes available, the equations can be re-estimated so that a more satisfactory relationship may be discovered.

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Cover IMF Staff Country Reports
Poland: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1997: Issue 033
Publisher:
International Monetary Fund
ISBN:
9781451831795
ISSN:
1934-7685
Pages:
214
DOI:
https://doi.org/10.5089/9781451831795.002
  • Figure 1.
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    Figure 1.

    Poland: Selected Economic Indicators, 1990–96

  • Figure 1.
    View in gallery
    Figure 1.

    Visegrad Countries: Gross Domestic Product and Inflation, 1988–96

    (GDP Peak = 100)

  • Figure 2.
    View in gallery
    Figure 2.

    Poland: Selected Consumption Indicators, 1993–96

    (Index; 1993 = 100)

  • Figure 3.
    View in gallery
    Figure 3.

    Poland: Selected Production Indicators, 1990–96

  • Figure 4.
    View in gallery
    Figure 4.

    Poland: Unemployment Rates, 1992–96

    (In percent)

  • Figure 5.
    View in gallery
    Figure 5.

    Poland: Inflation Developments, 1993–96

    (Annual percent change)

  • Figure 1.
    View in gallery
    Figure 1.

    Selected Countries: Ratio of Broad Money to GDP, 1990–96

    (In percent)

  • Figure 2.
    View in gallery
    Figure 2.

    Poland: Real Broad Money and Its Composition, 1992–96 1/

  • Figure 3.
    View in gallery
    Figure 3.

    Credit Developments, 1992–96

  • Figure 4.
    View in gallery
    Figure 4.

    Poland: Interest Rates, 1992–96

    (In percent)

  • Figure 1.
    View in gallery
    Figure 1.

    Poland: Exchange Rate Developments

    (January 1990 - November 1996)

  • Figure 2.
    View in gallery
    Figure 2.

    Poland and Partner Countries: Producer Prices, 1991–96

  • Figure 3.
    View in gallery
    Figure 3.

    Poland: External Sector Developments, 1993–96

  • Figure 4.
    View in gallery
    Figure 4.

    Poland: Unrecorded Trade, 1992–96 1/

    (Millions of US Dollars)

  • Figure 1.
    View in gallery
    Figure 1.

    Poland: Money and Inflation

    (Year-on-year percentage change)

  • Figure 2.
    View in gallery
    Figure 2.

    Poland: Real GDP and Industrial Production

  • Figure 3.
    View in gallery
    Figure 3.

    Poland: External Sector Performance

    (In billions of US$)

  • Figure 4.
    View in gallery
    Figure 4.

    Poland: Sources of Broad Money Growth

    (In percent of previous year’s broad money stock)

  • Figure 5.
    View in gallery
    Figure 5.

    Poland; Interest Differentials

    (In percent; annual basis)

  • Figure 6.
    View in gallery
    Figure 6.

    Poland: Cost of Sterilization

    (In millions of zloty)

  • Figure 7.
    View in gallery
    Figure 7.

    Poland: Monetary Aggregates: Program and Actual

    (Changes during the year)

  • Figure 8.
    View in gallery
    Figure 8.

    Poland: CPI Inflation: Program and Actual

    (12-month rate, in percent)

  • Figure 9.
    View in gallery
    Figure 9.

    Poland: Nominal Interest Rates

    (In percent; annual basis)

  • Figure 10.
    View in gallery
    Figure 10.

    Poland: NBP Refinance Rate, NBP Intervention Rate, and Inflation

    (In percent; annual basis)

  • Figure 11.
    View in gallery
    Figure 11.

    Poland: Real Interest Rates 1/

    (In percent; annual basis)

  • Figure 12.
    View in gallery
    Figure 12.

    Poland: Monetary Program and Interest Rates

  • Figure 13.
    View in gallery
    Figure 13.

    Poland: Zloty Value of the Basket, 1991-96

  • Figure 14.
    View in gallery
    Figure 14.

    Poland: Real Effective Exchange Rates

    (1993 = 100)

  • Figure 15.
    View in gallery
    Figure 15.

    Poland: Foreign Currency Deposits.

  • Figure 1.
    View in gallery
    Figure 1.

    Poland: Broad Money, 1990–96

  • Figure 2.
    View in gallery
    Figure 2.

    Poland: Components of Broad Money, 1992–96

  • Figure 3.
    View in gallery
    Figure 3.

    Poland: Broad Money and Components, 1992–96

    (Annual growth rate in percent)

  • Figure 4.
    View in gallery
    Figure 4.

    Poland: Narrow Money, 1990–96

  • Figure 5.
    View in gallery
    Figure 5.

    Poland: Components of Narrow Money, 1992–96

  • Figure 6.
    View in gallery
    Figure 6.

    Poland: Narrow Money and Components, 1993–96

    (Annual growth rate in percent)

  • Figure 7.
    View in gallery
    Figure 7.

    Poland: Velocity, Inflation, and Exchange Rate, 1990–96

  • Figure 8.
    View in gallery
    Figure 8.

    Poland: Broad Money and Interest Rates, 1992–96

  • Figure 9.
    View in gallery
    Figure 9.

    Poland: Zloty Money and Interest Rates, 1992–96

  • Figure 10.
    View in gallery
    Figure 10.

    Poland: Foreign Currency Deposits and Interest Rates, 1992–96

  • Figure 11.
    View in gallery
    Figure 11.

    Poland: Performance of Money Demand Equation, 1992–96

    (Annual percent change)

  • Figure 1.
    View in gallery
    Figure 1.

    Poland: The NBP’s Net Foreign and Domestic Assets, 1994–96 1/

    (Monthly changes in billions of zlotys)

  • Figure 1.
    View in gallery
    Figure 1.

    Visegrad Countries: Trade Balance, 1994–96

    (In percent of GDP)

  • Figure 2.
    View in gallery
    Figure 2.

    Geographical Composition of Trade, 1987–95

    (In percent)

  • Figure 3.
    View in gallery
    Figure 3.

    Poland: The Changing Commodity Composition of Polish Trade, 1987 to 1995

  • Figure 4.
    View in gallery
    Figure 4.

    Customs and BoP Based Trade, 1992–96

    (In millions of US dollars)

  • Figure 5.
    View in gallery
    Figure 5.

    Poland: Export and Import Prices, 1992–96

    (Index; 1992 Q1 = 100)

  • Figure 6.
    View in gallery
    Figure 6.

    Poland: Export and Import Volumes, 1992–96

    (Index; 1992 Q1 = 100)

  • Figure 7.
    View in gallery
    Figure 7.

    Poland: Export Volumes to Germany and the World, 1992–96

    (Index; 1992 Q1 = 100)

  • Figure 8.
    View in gallery
    Figure 8.

    Poland: Cyclical Variation in Polish Export Volumes and German Domestic Demand, 1992–96

  • Figure 9.
    View in gallery
    Figure 9.

    Poland: Exports and Imports, 1992–96 Actual and Predicted

    (In millions of US dollars)

  • Figure 10.
    View in gallery
    Figure 10.

    Poland: Developments in Merchandise Trade, 1990–2000

    (In percent of GDP)

Figure 1.

Poland: Selected Economic Indicators, 1990–96
Figure 1.

Visegrad Countries: Gross Domestic Product and Inflation, 1988–96

(GDP Peak = 100)
Figure 2.

Poland: Selected Consumption Indicators, 1993–96

(Index; 1993 = 100)
Figure 3.

Poland: Selected Production Indicators, 1990–96
Figure 4.

Poland: Unemployment Rates, 1992–96

(In percent)
Figure 5.

Poland: Inflation Developments, 1993–96

(Annual percent change)
Figure 1.

Selected Countries: Ratio of Broad Money to GDP, 1990–96

(In percent)
Figure 2.

Poland: Real Broad Money and Its Composition, 1992–96 1/
Figure 3.

Credit Developments, 1992–96
Figure 4.

Poland: Interest Rates, 1992–96

(In percent)
Figure 1.

Poland: Exchange Rate Developments

(January 1990 - November 1996)
Figure 2.

Poland and Partner Countries: Producer Prices, 1991–96
Figure 3.

Poland: External Sector Developments, 1993–96
Figure 4.

Poland: Unrecorded Trade, 1992–96 1/

(Millions of US Dollars)
Figure 1.

Poland: Money and Inflation

(Year-on-year percentage change)
Figure 2.

Poland: Real GDP and Industrial Production
Figure 3.

Poland: External Sector Performance

(In billions of US$)
Figure 4.

Poland: Sources of Broad Money Growth

(In percent of previous year’s broad money stock)
Figure 5.

Poland; Interest Differentials

(In percent; annual basis)
Figure 6.

Poland: Cost of Sterilization

(In millions of zloty)
Figure 7.

Poland: Monetary Aggregates: Program and Actual

(Changes during the year)
Figure 8.

Poland: CPI Inflation: Program and Actual

(12-month rate, in percent)
Figure 9.

Poland: Nominal Interest Rates

(In percent; annual basis)
Figure 10.

Poland: NBP Refinance Rate, NBP Intervention Rate, and Inflation

(In percent; annual basis)
Figure 11.

Poland: Real Interest Rates 1/

(In percent; annual basis)
Figure 12.

Poland: Monetary Program and Interest Rates
Figure 13.

Poland: Zloty Value of the Basket, 1991-96
Figure 14.

Poland: Real Effective Exchange Rates

(1993 = 100)
Figure 15.

Poland: Foreign Currency Deposits.
Figure 1.

Poland: Broad Money, 1990–96
Figure 2.

Poland: Components of Broad Money, 1992–96
Figure 3.

Poland: Broad Money and Components, 1992–96

(Annual growth rate in percent)
Figure 4.

Poland: Narrow Money, 1990–96
Figure 5.

Poland: Components of Narrow Money, 1992–96
Figure 6.

Poland: Narrow Money and Components, 1993–96

(Annual growth rate in percent)
Figure 7.

Poland: Velocity, Inflation, and Exchange Rate, 1990–96
Figure 8.

Poland: Broad Money and Interest Rates, 1992–96
Figure 9.

Poland: Zloty Money and Interest Rates, 1992–96
Figure 10.

Poland: Foreign Currency Deposits and Interest Rates, 1992–96
Figure 11.

Poland: Performance of Money Demand Equation, 1992–96

(Annual percent change)
Figure 1.

Poland: The NBP’s Net Foreign and Domestic Assets, 1994–96 1/

(Monthly changes in billions of zlotys)
Figure 1.

Visegrad Countries: Trade Balance, 1994–96

(In percent of GDP)
Figure 2.

Geographical Composition of Trade, 1987–95

(In percent)
Figure 3.

Poland: The Changing Commodity Composition of Polish Trade, 1987 to 1995
Figure 4.

Customs and BoP Based Trade, 1992–96

(In millions of US dollars)
Figure 5.

Poland: Export and Import Prices, 1992–96

(Index; 1992 Q1 = 100)
Figure 6.

Poland: Export and Import Volumes, 1992–96

(Index; 1992 Q1 = 100)
Figure 7.

Poland: Export Volumes to Germany and the World, 1992–96

(Index; 1992 Q1 = 100)
Figure 8.

Poland: Cyclical Variation in Polish Export Volumes and German Domestic Demand, 1992–96
Figure 9.

Poland: Exports and Imports, 1992–96 Actual and Predicted

(In millions of US dollars)
Figure 10.

Poland: Developments in Merchandise Trade, 1990–2000

(In percent of GDP)