June 7, 2002

1. This statement reviews developments in Poland since the preparation of the staff report for the 2002 Article IV consultation (SM/02/152, 5/17/02). The additional information does not change the thrust of the staff appraisal. Nonetheless, in light of the deterioration in the problematic relationship between the government and the National Bank of Poland (NBP) and further threats to the autonomy of the Bank, staff again urges the authorities to prevent differences on policy for the short-run from giving rise to changes in institutional structures that are likely to have long-term damaging consequences.

2. Economic Developments

• Evidence of a strong economic recovery remain few and far between. Exports, imports and tax revenues picked-up considerably in April. But the up-tick in industrial production was more muted (0.5 percent in seasonally adjusted terms). Credit growth also remained anemic (4 percent, year-on-year). Further, confidence surveys, which had improved sharply in the first quarter, have more recently leveled off. These data points are not inconsistent with the staff s projections of 1.4 percent output growth for 2002, which assumed a weak first-half. ¹

• Unemployment appears to have peaked. According to the broadest measure, the quarterly labor force survey, seasonally-adjusted unemployment fell from 19 in the last quarter of 2001 to 18.7 percent in the first quarter of this year. Registered unemployment, however, continues to rise, to 17.5 percent in April in seasonally adjusted terms, although its rate of increase has moderated in recent months.

• Headline inflation fell to 3 percent in April—a new post transition low. Moreover, virtually all of the core inflation measures are now below the end-2003 target. These developments are consistent with the staff’s inflation projections for 2002 of an average rate of 3.2 percent and an end-year rate of 3.6 percent—below the end-year target of 5 percent with a ±1 percentage point band.

• The 2001 fiscal deficit has been revised down marginally (0.2 percent of GDP). Reflecting the availability of final numbers for local governments’ deficit, which were 0.3 percent of GDP lower than projected, and central government expenditure arrears, which amounted to 0.1 percent of GDP, the 2001 general government economic deficit is now estimated by the staff at 4.6 percent of GDP.²

• The zloty has strengthened in recent weeks: appreciating from around Zl 4.15–4.20 to the U.S. dollar earlier in the year to around Zl 4.05 to the U.S. dollar in recent days. Coupled with the lack of firm evidence of a robust economic recovery, this has prompted the government to seek changes to the exchange rate regime. To date markets have been unperturbed by these and other developments (see below).

3. Policy Developments

• The Monetary Policy Council (MPC) cut interest rates further in April. Reflecting the fall in inflation and subdued demand conditions, the key policy rate was cut by another 50 basis points in April, to 9 percent. This brings the cumulative cut in rates since the start of the easing cycle in February 2001 to 1000 basis points. Real policy interest rates remain of the order of 6 percent.

• Troubled by frailty of the economy, the government has been pressing for deeper interest rate cuts and changes to the exchange rate regime. A Cabinet Council, a joint meeting between the Council of Ministers and the President convened for matters of importance, is expected to meet in the coming days to discuss monetary policy issues. In parliament, parallel to government proposed revisions to the National Bank Law to make it consistent with EU requirements, a group of parliamentarians have submitted a number of amendments—including, a provision for adding six new members to the MPC and expanding the mandate of the NBP to include economic growth and employment objectives—that would change institutional arrangements in a way that would most likely lead to an easing of monetary policy. Both drafts have been sent to a parliamentary committee for further consideration. After the report of the committee, further votes in the lower house, upper house and ratification by the President would be required for the amendments to be adopted. The President has generally indicated that he would not sign such legislation and/or refer it the constitutional court—although a veto could be overridden by a 60 percent majority in parliament.