Republic of Poland—Assessment of the Impact of the Proposed Flexible Credit Line Arrangement on the Fund’s Finances and Liquidity Position

This paper focuses on an arrangement under the Flexible Credit Line (FCL) for the Republic of Poland. Poland’s macroeconomic performance has been very strong. The authorities believe that access under an FCL arrangement in the amount of SDR 13.69 billion could help maintain market access and safeguard against downside risks during the current period of high volatility and retrenchment in international capital markets. IMF staff concurs and believes that, given Poland’s regional importance, the FCL may provide insurance not only to Poland, but also to the region more broadly.

Abstract

This paper focuses on an arrangement under the Flexible Credit Line (FCL) for the Republic of Poland. Poland’s macroeconomic performance has been very strong. The authorities believe that access under an FCL arrangement in the amount of SDR 13.69 billion could help maintain market access and safeguard against downside risks during the current period of high volatility and retrenchment in international capital markets. IMF staff concurs and believes that, given Poland’s regional importance, the FCL may provide insurance not only to Poland, but also to the region more broadly.

1. This note assesses the impact of the proposed Flexible Credit Line (FCL) arrangement for Poland on the Fund’s finances and liquidity position, in accordance with the policy on the FCL.6 The proposed arrangement would cover a 12-month period, and be in an amount of SDR 13.7 billion (1,000 percent of quota). The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.7 The authorities intend to treat the arrangement as precautionary.

Background

2. Poland had several Fund arrangements in the 1990s until it extinguished its remaining outstanding credit in 1995 (Table 1). In order to facilitate its transition, Poland had three Stand-By Arrangements (SBAs) and one arrangement using a blend of the Extended Fund Facility (EFF) and Compensatory Financing Facility (CFF) from 1990 to 1994. Access under the latter arrangement approved in 1991 was the largest at SDR 1.2 billion. The two subsequent SBAs brought Fund exposure to its peak in 1994 of just below SDR 1 billion (Figure 1), reflecting the fact that Poland had not drawn the full amounts available under any of its Fund arrangements. Poland extinguished all outstanding obligations to the Fund through two advance repurchases in 1995.

Table 1.

Poland: IMF Financial Arrangements, 1990–1995

(In millions of SDR)

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Source: Finance Department.

As of end-December.

Includes a purchase of SDR 162.6 million under the Compensatory Financing Facility.

Figure 1.
Figure 1.

Poland: IMF Credit Outstanding, 1990–1995

(In millions of SDRs)

Citation: IMF Staff Country Reports 2009, 138; 10.5089/9781451832051.002.A002

Source: Finance Department.

3. Total external debt is significant but sustainable (Table 2).8 External debt has been stable around 50 percent of GDP in recent years, and is projected to rise to about 60 percent of GDP in 2009 owing mainly to the depreciation of the zloty. Short-term debt on a residual maturity basis accounts for over one-quarter of this total. Public external debt is projected to increase to about 17 percent of GDP in 2009. Gross public debt has stabilized at about 45 percent of GDP in recent years, and while some increase is projected in the near-term, sustainability analysis shows debt remaining manageable under a range of scenarios, with no significant contingent liabilities incurred thus far during the crisis.

Table 2.

Poland: Total External Debt, 2005–2009

(In millions of SDR)

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Source: Polish authorities and IMF staff estimates.

Projected.

Impact on the Fund’s Finances and Liquidity Position

4. The substantial access under the proposed arrangement could add significantly to the Fund’s credit exposure. In terms of SDRs, the proposed FCL arrangement would be more than ten times Poland’s largest arrangement to date. If the full amount available under the FCL arrangement—which the authorities intend to treat as precautionary—were drawn, Poland’s outstanding use of GRA resources would reach SDR 13.7 billion, an individual country exposure which has previously been exceeded in only four cases, including augmentations.

5. If the full amount available under the proposed FCL arrangement were purchased in 2009:

  • Poland’s external debt position would increase somewhat, with Fund credit representing a modest part of this debt: total external debt would rise to about 65 percent of GDP initially, and public external debt would rise to about 22 percent of GDP, with Fund credit at about 5 percent of GDP (Table 3). At its peak in 2009, Poland’s outstanding use of GRA resources would account for less than one-tenth of total external debt, about one-quarter of public external debt, and also about one-quarter of reserves.

  • External debt service would increase over the medium-term, but would remain manageable. Poland’s projected debt service to the Fund would peak in 2013 at about SDR 7 billion, or 2.2 percent of GDP.9 In terms of exports of goods and services, debt service to the Fund would peak at about 4.4 percent, accounting for about 70 percent of total public external debt service.

Table 3.

Poland: Capacity to Repay Indicators 1/

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Sources: Polish authorities, Finance Department, World Economic Outlook, and IMF staff estimates.

Assumes full drawings under the FCL upon approval. The Polish authorities have expressed their intention to treat the arrangement as precautionary, as balance of payments pressures have not materialized.

Based on the rate of charge as of April 22, 2009. Includes surcharges under the system currently in force and service charges.

Staff projections for external debt, GDP, gross international reserves, and exports of goods and services, as used in the staff report that requests the proposed FCL, adjusted for the impact of the assumed FCL drawing.

6. Reflecting the high access under the arrangement, the impact on the Fund’s liquidity, and on its potential credit risk exposure, would be substantial:

  • The proposed arrangement would reduce Fund liquidity by the full amount of available access (Table 4). Approval of the proposed arrangement would reduce the one-year forward commitment capacity (FCC) by SDR 13.7 billion. In addition to quota resources included in the FCC, the Fund also has supplementary resources under the borrowing agreement with Japan.

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Poland as a share of total GRA credit would be about 40 percent. As a result, the concentration of Fund credit among the top five users of Fund resources would increase to about 90 percent.

  • Potential GRA exposure to Poland would be large in relation to the current level of the Fund’s precautionary balances. If the resources available under the arrangement were fully drawn, Fund credit to Poland would be equivalent to almost twice the Fund’s current precautionary balances.

Table 4.

FCL Arrangement for Poland—Impact on GRA Finances

(In SDR millions, unless otherwise indicated)

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Sources: Finance Department.

The FCC measures the Fund’s capacity to make new credit commitments over the next 12 months.

Based on current Fund credit outstanding plus full drawings under the proposed FCL.

Assessment

7. The proposed arrangement would have a large but manageable impact on Fund liquidity. Nonetheless, the Fund’s liquidity has declined rapidly in recent weeks, and is likely to continue decline as the Board considers requests for arrangements that have already been announced or are in the pipeline. This underscores the need for continued close monitoring of liquidity, and to expedite the efforts to bring new borrowing agreements into effect to supplement the Fund’s resources.

8. Poland intends to treat the FCL arrangement as precautionary, but if it did prove necessary to draw, the Fund’s credit exposure to Poland would be large. Poland’s overall external and public debt dynamics are expected to remain sustainable including should adverse shocks materialize such that a drawing became necessary. Poland’s very strong policy record, and the very strong legislative and institution policy framework, provide assurances about the future course of policies, such that Poland’s capacity to repay is projected to remain strong. Nonetheless, the scale of the Fund’s potential exposure to Poland—in conjunction with the recent commitments to other members and the prospects for further credit expansion in the pipeline—underscores the need to strengthen the Fund’s precautionary balances.

6

See GRA Lending Toolkit and Conditionality—Reform Proposals (3/13/09), and GRA Lending Toolkit and Conditionality—Reform Proposals (3/24/09).

7

If the full amount is not drawn in the first six months of the arrangement, subsequent purchases are subject to a review of Poland’s continued qualification for the FCL arrangement.

8

A more detailed description and analysis of external and public debt is provided in the staff report.

9

The figures on debt service used in this report are calculated assuming that full amount available under the arrangement is purchased upon approval of the arrangement, and that all repurchases are made as scheduled.

Republic of Poland: Arrangement Under the Flexible Credit Line: Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Poland
Author: International Monetary Fund