Abstract
This 2004 Article IV Consultation for Poland highlights that with strong exports and robust consumption, its GDP growth picked up gradually, reaching 6.9 percent (year over year) in the first quarter of 2004. Nevertheless, investment growth remains moderate. Financial markets have been unsettled. Despite low inflation, long-term interest rates have risen since mid-2003, initially in response to the announcement of an expansionary 2004 budget and more recently to unsettled politics. The weak responses of investment and employment raise concern about fundamental impediments to the recovery.
1. This supplement reviews developments in Poland since the preparation of the staff report for the 2004 Article IV consultations and provides a staff comment.
I. Recent Economic and Political Developments
2. The recovery continues to be strong, while inflation has risen faster than expected. Real GDP growth reached 6.9 percent year-on-year (2.8 percent quarter-on-quarter seasonally adjusted) in the first quarter of 2004, substantially faster than the 4.7 percent year-on-year (1.2 percent quarter-on-quarter) growth in Q4 2003. Most of the pick-up in growth was attributable to a rapid inventory accumulation, though fixed investment growth also rose. The current account deficit rose in the first quarter of 2004, but, owing to a strong pick-up in service exports, was less than staff expected. CPI inflation increased in May to 3.4 percent (year-on-year) mainly due to food and oil price increases. Nevertheless, inflation expectations are steady at about 2½ percent (year-on-year) and nominal wage growth fell to 4.4 percent (year-on-year) in May. Retail sales, export, import and industrial sales remained robust through May. Employment growth, however, is still weak.
3. Prime Minister Belka’s government was approved by Parliament in a second round confidence vote in June. The economic team, including Deputy Prime Minister Hausner, of the previous government remains in place. To secure the support of the new social democratic party (SDPL), the ruling coalition had to agree to a no-confidence vote in October which could lead to early elections in late 2004 or early 2005. Mainstream opposition parties strengthened their positions and the support for populist parties diminished in the European elections.
II. Economic Outlook
4. Recent data releases support the projections in the staff report of a reasonably strong recovery with a modest current account deficit; inflation in the near term, however, is likely to be higher than projected.
Staff have revised GDP growth projections for 2004 slightly upward, from 5 to 5.3 percent, reflecting expectations of somewhat stronger investment growth and a smaller negative contribution from net exports than in the staff report.
The relatively small upward revision, despite a far stronger than expected outcome in the first quarter, reflects the staff’s assumption that some pick-up in final domestic demand over the balance of the year will be largely met by drawing down the large inventory accumulation in the first quarter.
In spite of the stronger-than-expected current account outcome in the first quarter, the staff’s projection for the year remains unchanged because higher oil and commodity price projections suggest a smaller terms of trade gain than previously expected.
Reflecting a stronger-than-expected pick-up in food prices, staff has increased its projection for the average inflation rate in 2004 from 2.9 to 3.5 percent.
III. Fiscal Policy
5. The fiscal outlook for 2004 has improved somewhat. With stronger growth and higher tax revenue so far this year than previously expected, staff projects the general government deficit at 7 percent of GDP, down from 7.2 percent indicated in the staff report. Assuming the appreciation of the zloty since mid-May holds, public debt should remain below 55 percent of GDP by year-end.
6. The new government has committed itself to the implementation of the key elements of the Hausner plan. Although a number of social benefit reform measures in the Hausner plan have been abandoned, staff estimates of annual savings in 2005–07 fall by only 0.1 percent of GDP.
IV. Monetary Policy
7. The MPC increased the policy rate by 50 basis points on June 30 and maintained a restrictive bias. As analysts expected a 25 basis point-increase, the MPC’s decision surprised the market. In its statement, the MPC pointed to strengthening domestic demand and the increase in inflation expectations that had taken place already before the high CPI inflation for May was released as the main inflation risk factors.
V. Staff Appraisal
8. The resolution, at least for now, of recent political uncertainties and the new government’s commitment to renew the effort to implement the Hausner plan are welcome. The government should seize this opportunity to press the fiscal reform agenda vigorously. Early statements provide some hope that the government will attempt to do so. While part of the Hausner plan appears to have been abandoned, what remains is still a critical mass that should be implemented in time for the 2005 budget. This will be a critical test of the government’s will to arrest the damaging fiscal deterioration of the past few years and reposition the government’s role in the economy.
9. The increase in the policy rate in June signaled concerns about the impact of rising prices on inflation expectations and future wage demands. The recent jump in inflation—due to one-off factors, which now seem to be stronger than previously expected by staff and market participants—combined with an expansionary budget and a strong rebound in economic activity made a case for a policy response. Going forward, it will be important to ensure that the policy response to supply side influences remains measured. In its future decisions, therefore, the MPC should take into account that—as long as inflation expectations continue to be contained and nominal wage demands do not accelerate—inflation should revert toward the middle of the target range when temporary shocks dissipate in 2005. While the output gap seems to be closing faster than staff previously expected, the modest nominal wage increase so far suggests that high unemployment continues to impose wage discipline. Nonetheless, nominal wage developments and changes in inflationary expectations will have to be closely monitored in the coming period. Setting, early on, a nominal wage growth target in the budget that is in line with longer-term inflation trends would help with anchoring expectations at this stage.
Poland: Selected Economic Indicators, 1999-2004 1/
(In percent, except where indicated)
GDP series for 2000-2002 are based on the authorities’ new methodology introduced in late 2002. GDP series prior to 2000 are staff estimates of the new methodology, using growth rates from the old methodology. This applies to all tables and figures of the staff report.
Derived as a difference between total savings and current account.
Including the full amount of transfers to social security fund.
With second pillar pension funds part of general government.
With second pillar pension funds outside general government.
Public debt after consolidation excluding risk weighted stock of outstanding guarantees based on Polish methodology.
Including risk weighted stock of outstanding guarantees.
Poland: Selected Economic Indicators, 1999-2004 1/
(In percent, except where indicated)
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | |||
|---|---|---|---|---|---|---|---|---|
| Proj. | ||||||||
| Activity and prices (growth rates) | ||||||||
| GDP | 4.1 | 4.0 | 1.0 | 1.4 | 3.8 | 5.3 | ||
| Domestic demand | 4.8 | 2.8 | -1.6 | 0.8 | 2.4 | 5.5 | ||
| Private consumption growth | 5.2 | 2.8 | 2.1 | 3.3 | 3.1 | 5.1 | ||
| Public consumption growth | 2.1 | 1.6 | 0.6 | 0.6 | 0.4 | 3.5 | ||
| Domestic fixed investment growth | 6.8 | 2.7 | -8.8 | -5.8 | -0.9 | 7.7 | ||
| Net external demand (contribution to growth) | -0.9 | 0.6 | 2.6 | 0.5 | 1.3 | -0.4 | ||
| CPI inflation | ||||||||
| Average | 7.3 | 10.1 | 5.5 | 1.9 | 0.8 | 3.5 | ||
| End of period | 9.8 | 8.5 | 3.6 | 0.8 | 1.7 | 4.5 | ||
| Unemployment Rate (registered, end year) | 13.1 | 15.1 | 19.4 | 20.0 | 20.0 | 19.4 | ||
| Gross Domestic Saving (ratio to GDP) 2/ | 17.3 | 18.7 | 17.9 | 16.2 | 16.8 | 17.1 | ||
| Gross Domestic Investment (ratio to GDP) | 24.9 | 24.7 | 20.7 | 18.9 | 18.7 | 19.4 | ||
| Public Finances (percent of GDP) | ||||||||
| State Government Revenues | 19.3 | 18.8 | 18.4 | 18.4 | 18.7 | … | ||
| State Government Expenditures 3/ | 21.2 | 20.9 | 22.7 | 23.4 | 23.2 | … | ||
| State Government Balance 3/ | -1.9 | -2.1 | -4.3 | -5.0 | -4.5 | … | ||
| General Government Revenues | 38.9 | 37.5 | 38.2 | 38.3 | 39.6 | 39.3 | ||
| General Government Expenditures | 42.0 | 40.4 | 43.6 | 44.6 | 45.3 | 46.4 | ||
| General Government Balance | -3.0 | -3.0 | -5.3 | -6.3 | -5.8 | -7.0 | ||
| General Government Net Borrowing (ESA95) 4/ | -1.5 | -1.8 | -3.5 | -4.0 | -3.9 | -4.9 | ||
| General Government Net Borrowing (ESA95) 5/ | -2.0 | -3.3 | -5.0 | -5.9 | -5.5 | -6.4 | ||
| General Government Debt 6/ | 41.9 | 38.7 | 39.7 | 45.1 | 50.1 | 53.0 | ||
| Public debt 7/ | 43.2 | 40.0 | 41.0 | 46.7 | 51.6 | 54.2 | ||
| Money and credit | ||||||||
| Private Credit (12-month change) | 29.1 | 17.3 | 9.2 | 5.0 | 7.9 | … | ||
| Broad Money (12-month change) | 20.1 | 11.9 | 9.2 | -2.0 | 5.6 | … | ||
| Money market rate (eop) | 17.9 | 19.2 | 11.7 | 6.7 | 5.5 | … | ||
| 13-week t-bill rate (eop) | 16.4 | 16.8 | 11.2 | 6.1 | 5.3 | … | ||
| Balance of Payments | ||||||||
| Current account balance (transactions, in mill.$US) | -12,487 | -9,998 | -5,357 | -5,007 | -4,085 | -5,226 | ||
| percent of GDP | -7.6 | -6.0 | -2.9 | -2.6 | -1.9 | -2.3 | ||
| C/A balance plus FDI, percent of GDP | -3.2 | -0.4 | 0.2 | -0.5 | -0.1 | -0.4 | ||
| Exports (millions U.S. dollars) | 30,060 | 35,902 | 41,664 | 46,742 | 61,007 | 73,710 | ||
| Export volume growth | 2.0 | 25.3 | 11.8 | 8.3 | 14.1 | 10.0 | ||
| Imports (millions U.S. dollars) | 45,132 | 48,210 | 49,324 | 53,991 | 66,732 | 80,902 | ||
| Import volume growth | 4.4 | 10.8 | 3.2 | 7.3 | 4.9 | 10.7 | ||
| Terms of trade (index 1995=100) | 90.5 | 88.1 | 97.4 | 100.1 | 103.5 | 103.8 | ||
| Official reserves (millions U.S. dollars) | 27,314 | 27,466 | 26,564 | 29,794 | 33,975 | 34,463 | ||
| months of imports | 7.3 | 6.8 | 6.5 | 6.6 | 6.1 | 5.1 | ||
| Total external debt (percent of GDP) | 39.7 | 41.7 | 38.7 | 44.3 | 49.6 | 48.6 | ||
| Ratio of short term debt to gross reserves | 41.1 | 34.8 | 41.7 | 46.7 | 55.6 | 55.2 | ||
| Fund Relations (January 31, 2004) | ||||||||
| Fund holding of currency (in percent of quota) | 60.7 | |||||||
| Holding of SDRs (in percent of allocation) | n/a | |||||||
| Quota (SDR million) | 1369 | |||||||
| Exchange rate | ||||||||
| Exchange rate regime | Floating | |||||||
| Present exchange rate (March 4, 2004) | zl 4.0 = US$1 | |||||||
| Zloty per US$, period average | 4.0 | 4.3 | 4.1 | 4.1 | 3.9 | … | ||
| Zloty per Euro, period average | 4.2 | 4.0 | 3.7 | 3.9 | 4.4 | … | ||
| Real effective exchange rate (INS, CPI based) | 112.0 | 121.2 | 137.7 | 133.3 | 120.0 | … | ||
| percent change | -4.1 | 8.2 | 13.7 | -3.2 | -10.0 | … | ||
GDP series for 2000-2002 are based on the authorities’ new methodology introduced in late 2002. GDP series prior to 2000 are staff estimates of the new methodology, using growth rates from the old methodology. This applies to all tables and figures of the staff report.
Derived as a difference between total savings and current account.
Including the full amount of transfers to social security fund.
With second pillar pension funds part of general government.
With second pillar pension funds outside general government.
Public debt after consolidation excluding risk weighted stock of outstanding guarantees based on Polish methodology.
Including risk weighted stock of outstanding guarantees.
Poland: Selected Economic Indicators, 1999-2004 1/
(In percent, except where indicated)
| 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | |||
|---|---|---|---|---|---|---|---|---|
| Proj. | ||||||||
| Activity and prices (growth rates) | ||||||||
| GDP | 4.1 | 4.0 | 1.0 | 1.4 | 3.8 | 5.3 | ||
| Domestic demand | 4.8 | 2.8 | -1.6 | 0.8 | 2.4 | 5.5 | ||
| Private consumption growth | 5.2 | 2.8 | 2.1 | 3.3 | 3.1 | 5.1 | ||
| Public consumption growth | 2.1 | 1.6 | 0.6 | 0.6 | 0.4 | 3.5 | ||
| Domestic fixed investment growth | 6.8 | 2.7 | -8.8 | -5.8 | -0.9 | 7.7 | ||
| Net external demand (contribution to growth) | -0.9 | 0.6 | 2.6 | 0.5 | 1.3 | -0.4 | ||
| CPI inflation | ||||||||
| Average | 7.3 | 10.1 | 5.5 | 1.9 | 0.8 | 3.5 | ||
| End of period | 9.8 | 8.5 | 3.6 | 0.8 | 1.7 | 4.5 | ||
| Unemployment Rate (registered, end year) | 13.1 | 15.1 | 19.4 | 20.0 | 20.0 | 19.4 | ||
| Gross Domestic Saving (ratio to GDP) 2/ | 17.3 | 18.7 | 17.9 | 16.2 | 16.8 | 17.1 | ||
| Gross Domestic Investment (ratio to GDP) | 24.9 | 24.7 | 20.7 | 18.9 | 18.7 | 19.4 | ||
| Public Finances (percent of GDP) | ||||||||
| State Government Revenues | 19.3 | 18.8 | 18.4 | 18.4 | 18.7 | … | ||
| State Government Expenditures 3/ | 21.2 | 20.9 | 22.7 | 23.4 | 23.2 | … | ||
| State Government Balance 3/ | -1.9 | -2.1 | -4.3 | -5.0 | -4.5 | … | ||
| General Government Revenues | 38.9 | 37.5 | 38.2 | 38.3 | 39.6 | 39.3 | ||
| General Government Expenditures | 42.0 | 40.4 | 43.6 | 44.6 | 45.3 | 46.4 | ||
| General Government Balance | -3.0 | -3.0 | -5.3 | -6.3 | -5.8 | -7.0 | ||
| General Government Net Borrowing (ESA95) 4/ | -1.5 | -1.8 | -3.5 | -4.0 | -3.9 | -4.9 | ||
| General Government Net Borrowing (ESA95) 5/ | -2.0 | -3.3 | -5.0 | -5.9 | -5.5 | -6.4 | ||
| General Government Debt 6/ | 41.9 | 38.7 | 39.7 | 45.1 | 50.1 | 53.0 | ||
| Public debt 7/ | 43.2 | 40.0 | 41.0 | 46.7 | 51.6 | 54.2 | ||
| Money and credit | ||||||||
| Private Credit (12-month change) | 29.1 | 17.3 | 9.2 | 5.0 | 7.9 | … | ||
| Broad Money (12-month change) | 20.1 | 11.9 | 9.2 | -2.0 | 5.6 | … | ||
| Money market rate (eop) | 17.9 | 19.2 | 11.7 | 6.7 | 5.5 | … | ||
| 13-week t-bill rate (eop) | 16.4 | 16.8 | 11.2 | 6.1 | 5.3 | … | ||
| Balance of Payments | ||||||||
| Current account balance (transactions, in mill.$US) | -12,487 | -9,998 | -5,357 | -5,007 | -4,085 | -5,226 | ||
| percent of GDP | -7.6 | -6.0 | -2.9 | -2.6 | -1.9 | -2.3 | ||
| C/A balance plus FDI, percent of GDP | -3.2 | -0.4 | 0.2 | -0.5 | -0.1 | -0.4 | ||
| Exports (millions U.S. dollars) | 30,060 | 35,902 | 41,664 | 46,742 | 61,007 | 73,710 | ||
| Export volume growth | 2.0 | 25.3 | 11.8 | 8.3 | 14.1 | 10.0 | ||
| Imports (millions U.S. dollars) | 45,132 | 48,210 | 49,324 | 53,991 | 66,732 | 80,902 | ||
| Import volume growth | 4.4 | 10.8 | 3.2 | 7.3 | 4.9 | 10.7 | ||
| Terms of trade (index 1995=100) | 90.5 | 88.1 | 97.4 | 100.1 | 103.5 | 103.8 | ||
| Official reserves (millions U.S. dollars) | 27,314 | 27,466 | 26,564 | 29,794 | 33,975 | 34,463 | ||
| months of imports | 7.3 | 6.8 | 6.5 | 6.6 | 6.1 | 5.1 | ||
| Total external debt (percent of GDP) | 39.7 | 41.7 | 38.7 | 44.3 | 49.6 | 48.6 | ||
| Ratio of short term debt to gross reserves | 41.1 | 34.8 | 41.7 | 46.7 | 55.6 | 55.2 | ||
| Fund Relations (January 31, 2004) | ||||||||
| Fund holding of currency (in percent of quota) | 60.7 | |||||||
| Holding of SDRs (in percent of allocation) | n/a | |||||||
| Quota (SDR million) | 1369 | |||||||
| Exchange rate | ||||||||
| Exchange rate regime | Floating | |||||||
| Present exchange rate (March 4, 2004) | zl 4.0 = US$1 | |||||||
| Zloty per US$, period average | 4.0 | 4.3 | 4.1 | 4.1 | 3.9 | … | ||
| Zloty per Euro, period average | 4.2 | 4.0 | 3.7 | 3.9 | 4.4 | … | ||
| Real effective exchange rate (INS, CPI based) | 112.0 | 121.2 | 137.7 | 133.3 | 120.0 | … | ||
| percent change | -4.1 | 8.2 | 13.7 | -3.2 | -10.0 | … | ||
GDP series for 2000-2002 are based on the authorities’ new methodology introduced in late 2002. GDP series prior to 2000 are staff estimates of the new methodology, using growth rates from the old methodology. This applies to all tables and figures of the staff report.
Derived as a difference between total savings and current account.
Including the full amount of transfers to social security fund.
With second pillar pension funds part of general government.
With second pillar pension funds outside general government.
Public debt after consolidation excluding risk weighted stock of outstanding guarantees based on Polish methodology.
Including risk weighted stock of outstanding guarantees.