Republic of Poland
Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement—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
Search for other papers by International Monetary Fund in
Current site
Google Scholar Close
Publication Date:
21 Jan 2011
eISBN:
9781455213795
Language:
English
Keywords:
ISCR; CR; FCL arrangement; deficit; Poland; debt; fcl; short-term debt; current account; banking system; central bank; GDP deflator; Government debt management; Current account deficits; Inflation; Global
Download PDF (1.4 MB)

Poland’s macroeconomic performance was strong during the global crisis, supported by sound economic policies. The previous Flexible Credit Line (FCL) arrangements served the Polish economy well and provided adequate insurance against negative spillover risks. Executive Directors emphasized the need to implement economic policies that preserve macroeconomic stability. Against this background, Directors approved the request for a new two-year arrangement under the FCL, which would provide an essential buffer against a possible increase in risk aversion. The authorities intend to treat the new FCL arrangement as a precautionary instrument.

Abstract

Poland’s macroeconomic performance was strong during the global crisis, supported by sound economic policies. The previous Flexible Credit Line (FCL) arrangements served the Polish economy well and provided adequate insurance against negative spillover risks. Executive Directors emphasized the need to implement economic policies that preserve macroeconomic stability. Against this background, Directors approved the request for a new two-year arrangement under the FCL, which would provide an essential buffer against a possible increase in risk aversion. The authorities intend to treat the new FCL arrangement as a precautionary instrument.

I. Context

A. Weathering the Global Crisis

1. Poland’s very strong economic policies in the decade prior to the global crisis contributed to very strong economic fundamentals. At the outset of the global crisis, Poland had limited macroeconomic imbalances: credit and domestic demand growth had remained relatively moderate, inflation was contained, current account and fiscal deficits had been restrained, and as a result public and external debt were at comfortable levels. This performance owed much to a track record of sound policies. Poland’s commitment to the EU Stability and Growth Pact helped to lower the fiscal deficit and limit government debt. Comprehensive pension reforms helped to address the long-term challenges of an aging population. A determined anti-inflationary focus—in the context of an effective inflation targeting regime and a floating exchange rate policy—built confidence in monetary institutions and anchored inflation expectations. Finally, a strong financial supervisory framework fostered a well-capitalized banking system.

2. Notwithstanding Poland’s favorable fundamentals, the economy was severely affected by the global crisis through both real and financial channels. With Poland’s key trading partners in recession, exports contracted by over 30 percent year-on-year in the first half of 2009. The freeze in global funding markets was transmitted to domestic financial markets, which experienced sharp price declines. The stock market index fell by half between June 2008 and March 2009; the exchange rate against the euro depreciated by about 30 percent from peak to trough; and interbank transactions came to a virtual standstill. The associated fall in confidence caused an abrupt decline in investment. As a result, GDP growth slowed sharply from 5.1 percent in 2008 to 0.9 percent y/y in the first half of 2009.

3. The authorities’ timely and comprehensive policy response to the global crisis helped to avoid an outright recession. Poland was the only EU country with positive GDP growth (1¾ percent) in 2009. This enviable performance can been attributed, in part, to counter cyclical policies, which were facilitated by the room for maneuver afforded by Poland’s limited imbalances and buttressed by the insurance provided by the FCL arrangement approved on May 6, 2009. In particular, fiscal policy provided appropriate stimulus through a combination of tax cuts (enacted earlier but coming into effect in 2008-09) and the government’s decision in mid-2009 to allow automatic stabilizers to work on the revenue side. Monetary policy was also accommodative, with aggressive cuts in the policy interest rate through the first half of 2009, complemented by facilities for exceptional liquidity support. Measures were also taken to safeguard financial stability, including the recommendation that banks retain 2008 profits, which was key to restoring capital-adequacy ratios to pre-crisis levels.

4. Coming into 2010, macroeconomic policies were geared toward supporting the incipient economic upturn. On the fiscal front, the authorities aimed to balance short-term cyclical and medium-term sustainability concerns by allowing automatic stabilizers to work in 2010 while strengthening the medium-term fiscal framework, including by specifying additional corrective actions triggered by the debt thresholds under the Public Finance Act (including a nominal freeze in budgetary wages and limiting indexation of pensions to CPI inflation). 1 With inflation close to the central bank’s target, monetary policy rates were kept on hold. As financial conditions normalized, exceptional liquidity facilities were gradually withdrawn. The authorities continued their efforts to enhance the resilience of the financial system, including by introducing Recommendation T, which strengthened lending standards for households. A successor FCL arrangement was approved on July 2, 2010, following the expiration of the original arrangement on May 5.

B. Recent Developments

5. Economic growth gained momentum in 2010 more quickly than originally expected. The increase in real GDP growth was led by inventory rebuilding, private consumption, and EU-funded public investment, while the contribution of net exports was dampened by the earlier exchange rate appreciation. Recent high frequency indicators suggest that the momentum remains strong in 2010Q4 (Figure 1). As a result, staff has revised up its GDP growth projection for 2010 to 4 percent.

Figure 1.
Figure 1.

Poland: Recent Economic Developments, 2008-10

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: European Commission; and Polish Statistical Office.

6. CPI inflation remains close to the central bank’s 2½ percent target. After falling to a low of 2.0 percent in July and August, headline inflation increased to 2.7 percent in November, driven mainly by food prices (reflecting in part a weak harvest) and higher energy prices (reflecting global developments). Core inflation has remained stable at Sources: Polish Statistical Office. 1.2 percent in recent months. Staff estimates that headline inflation reached 3 percent at end-2010.

uA01fig01

Poland: Contributions to GDP Growth

(Year-on-year percent change)

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

uA01fig02

Inflation

(Y-o-y percent change, end-of-period)

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: Polish Statistical Office.

7. The current account deficit has widened in line with strengthening domestic demand. The deficit increased from 2.2 percent of GDP in 2009 to 2.9 percent of GDP in thefour quarters to 2010Q3, as imports accelerated more quickly than exports. The deficit is more than financed by net FDI inflows and capital transfers from the EU. The financial account has posted a large surplus so far this year, mainly reflecting large purchases of government securities by nonresidents. Strong capital inflows have put upward pressure on the exchange rate, but external financial turbulence has led to depreciations in May and November. The real exchange rate is assessed to be broadly in line with fundamentals.

8. The fiscal deficit widened in 2010, reflecting lagged effects of the 2009 economic slowdown. Corporate and personal income tax revenues in the first three quarters of 2010 fell relative to last year, as firms and the self-employed continued to deduct earlier losses. Consequently, the state budget deficit (net of EU funds, cash basis) increased in the first eleven months of 2010 relative to the previous year, though it remained below the 2010 budget plan, mainly due to an unbudgeted transfer of central bank profits. Local governments were also affected by the weaker-than-expected tax collections, which, together with rising capital spending, implied only a small cumulative cash surplus through the third quarter, significantly less than a year ago. The balance of social security funds net of subsidies also deteriorated year-on-year due to a fall in contributions in the third quarter coupled with higher pension payments. As a result, the general government deficit (ESA95) is estimated to rise from 7.2 percent of GDP in 2009 to 7.9 percent of GDP in 2010.

9. The financial system remains stable. Banks’ profits have increased further this year, leading to a rise in capital adequacy ratios to about 14 percent. While non-performing loans have crept up—at 12.2 percent and 7.2 percent for loans to corporates and households, respectively, at end-September—their growth rate has slowed. Underpinned by improving domestic liquidity, credit growth is showing signs of revival, especially in mortgage lending. For consumer loans, banks are tightening standards following the introduction of Recommendation T. Growth in corporate loans also remains subdued, due to both weak demand and still relatively tight lending standards (Figure 2).

Figure 2.
Figure 2.

Poland: Banking Sector Indicators, 2007-10

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: Polish authorities; and IMF staff estimates.

C. Outlook and Near-Term Policies

10. Economic growth is projected to moderate slightly in 2011 and then stabilize at close to 4 percent in 2012-13. Growth is expected to remain largely driven by domestic demand, as EU-funded public investment increases, and a pick-up in credit growth and improved corporate profitability boost private fixed investment. Private consumption grow this set to ease a little, as VAT rate hikes take effect and employment growth moderates. Public consumption is also expected to slow, given more contained growth in current government spending, including a prospective freeze on the government wage bill. Given moderating growth in key trading partners, the contribution of net exports to growth is projected to fall, and the current account deficit is projected to widen gradually to about 3½ percent of GDP. With the output gap expected to turn positive and labor market conditions improving, CPI inflation is projected to rise to a level near the upper bound of the central bank’s tolerance range. Over the medium run, the economy is expected to grow at close to 4 percent.

Poland: Real GDP Growth Projections, 2010-13

(Percent)

article image
Sources: Polish authorities; and IMF staff estimates.

11. Downside risks to the outlook have increased, mainly reflecting heightened uncertainty in external financing conditions. Sovereign financing concerns in other countries could intensify funding pressures and increase financing costs for Poland. Indeed, the November 2010 financial market turbulence in Europe drove Poland’s CDS spreads and government bond yields to about the levels seen in May 2010 (Figure 3). The level of nonresident portfolio exposures—with holdings of government debt at historic highs—combined with the liquidity of Polish debt markets expose the country to a sharp turn around in risk appetite, which could further exacerbate financial strains, should risks materialize. In addition, Poland is closely integrated into Europe’s banking system—which holds about 80 percent of total external claims on Poland—making it vulnerable to contagion from renewed financial strains, given its exposure to banks in Europe’s core.

Figure 3.
Figure 3.

Poland: Linkages and Spillovers

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: IMF, Direction of Trade Statistics; BIS; CMA; Bloomberg; and IMF staff estimates.

12. Against this background, the authorities are tightening macroeconomic policies gradually. In particular:

  • Fiscal consolidation is starting in 2011. This year’s budget contains consolidation measures amounting to about 1 percent of GDP, roughly evenly distributed between expenditure and revenue, including a limit on discretionary expenditure growth to nomore than 1 percent above inflation (CPI+1)—which encompasses a freeze in the central government wage bill—and a 1 percentage point hike in VAT rates.

  • The central bank stands ready to respond to inflationary pressures. Marketexpectations suggest that a tightening cycle will start in 2011. Given the still-largeuncertainty surrounding the inflation outlook, the authorities are carefully watchingdevelopments in inflationary expectations, core inflation, potential output, and theexchange rate.

  • Financial sector policies are geared toward limiting risks, as credit is set to startexpanding again. The authorities continue to monitor closely financialdevelopments. They have undertaken both top-down and bottom-up stress-tests, which continue to confirm the robustness of the financial system. Looking forward, they are considering various options to mitigate the risk of an acceleration of foreigncurrency lending by banks to unhedged borrowers.

Consolidation Measures Included in the 2011 Budget

article image

Parliament also passed legislation maintaining the CPI+1 discretionary spending ceiling as long as Poland is in the EU’s Excessive Deficit Procedure. More recently, the government announced its intention to lower contributions to the private pension system from 7.3 to 2.3 percent of wages starting in April 2011, with the differencebeing retained by the state pension system and recorded in notional individual accounts; as a result, the general government deficit (ESA 95) will be reduced byabout 1 percent of GDP over the medium term, though it will be higher in the long run. Reflecting the consolidation measures and the pension change, as well as one-offfactors and some tax buoyancy, staff projects the general government deficit to fall to 5.8 and 4.6 percent of GDP in 2011 and 2012, respectively. Notwithstanding theupcoming parliamentary elections scheduled for October 2011, the authorities are determined to lower the fiscal deficit further and put government debt on a downward path, in line with their EU commitments, which call for reaching the Maastricht limit(3 percent of GDP) by 2012. The authorities consider that this will require additional measures (beyond those announced to date). Moreover, Parliament approved a plan toimprove liquidity management which, together with stepped-up privatization efforts and the above-mentioned measures, will help to stabilize general government debt (ESA95 definition) at about 56 percent of GDP by 2016 under staff’s scenario based on announced policies. In the event that the 55 percent-of-GDP debt threshold is breached (the authorities expect debt under the national definition to remain below the threshold under their baseline scenario), additional measures will be triggered, including an automatic hike in VAT rates by a further 1 percentage point.

II. The Role of the Flexible Credit Line

13. The authorities believe that precautionary access to the FCL since May 2009 has served their economy well. They note that the two successive FCL arrangements helped to allow for a more flexible policy response to the global crisis while preserving favorable access to markets, even as volatility remained elevated (Figure 4). The first FCL arrangement provided useful insurance in the aftermath of the 2008–09 global crisis, being credited, in part, for the return of foreign investors to the domestic bond market especially after April 2009 and the successful bond placements on international markets starting in the second half of 2009. The second FCL arrangement has supported the continuation of these positive trends in 2010, cushioning the impact of turbulence in European markets.

Figure 4.
Figure 4.

Poland: The FCL’s Impact on Financial Markets, 2009-11

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: Bloomberg; Polish Ministry of Finance; Dealogic; and IMF staff estimates.

14. Looking forward, the authorities see a need for enhanced insurance under the FCL arrangement in response to increased downside risks and heightened external uncertainty. Poland’s economy remains exposed to possible external shocks that are beyond the authorities’ control. As noted above, uncertainty has intensified and downside risks have increased since July 2010, especially related to the fragile economic and financial environment in Europe, which represents Poland’s major trade and financial partner. Moreover, Poland’s relatively deep and liquid financial markets give investors the opportunity to express views on the region, which makes Poland vulnerable to global or regional shocks. At the same time, the policy space to respond to such shocks is now more limited. In this context, access to the FCL on a prolonged and augmented (though still precautionary) basis would help to strengthen Poland’s resilience to external shocks.

15. The authorities view the recent reform of Fund facilities as providing a timely opportunity to expand insurance against external risks by cancelling the current FCL arrangement approved in July 2, 2010 and requesting a two-year FCL arrangement with the proposed access of 1,400 percent of quota (SDR 19.166 billion or about $29.5 billion). 2 The new FCL instrument provides more flexibility both on access and length. The authorities would like to take advantage of these features, which were not available at the time the current arrangement was approved, and which they see as more appropriate given the risks that Poland is now facing. Indeed, a new higher-access, longer-tenor FCLarrangement would provide adequate insurance against risks that have persisted for longer than anticipated at the time of the approval of past FCL arrangements. They view that such a larger and longer insurance policy would allow more time for shocks to dissipate, while preserving investor confidence and supporting macroeconomic policies going forward.

A. Access

16. Access under the successor arrangement is predicated on potential drains undera plausible adverse scenario. With increased downside risks since the approval of the current FCL arrangement in July 2010, and notwithstanding a broadly adequate level of international reserves relative to standard metrics and peers (although Poland is below median on coverage of short-term debt), higher access is required to provide credible assurances of sufficient liquidity under a stress scenario. Such an adverse scenarioen compasses plausible—albeit somewhat more severe—assumptions compared to those underlining the level of access in the current FCL arrangement, which aim to capture thehigher and more persistent risks that Poland is now facing (Box 1). The shocks used in this scenario are in line with Poland’s experience during the 2008–09 crisis and are comparable to other FCL cases. They imply potential financing gaps of $28.8 billion and $30.0 billion in 2011 and 2012, respectively.

17. Staff believes that intensified risks to the balance of payments justify access inthe requested amount. Notwithstanding Poland’s very strong fundamentals and sustained track record of implementing very strong policies, the uncertain financial market environment, particularly within Europe, justifies the need for a sufficiently large and prolonged buffer against tail risks. The proposed access equivalent to $29.5 billion for aperiod of two years would cover potential drains under an adverse scenario, while continuing to signal policy credibility and maintain investor confidence. It would also help to expand Poland’s international reserves to around $126 billion, which would bring it closer to the international median ratio of international reserves to short-term debt.

Adverse Scenario

This adverse scenario takes as a starting point staff’s latest baseline forecast, which incorporates substantial FDI inflows and ample short-term and long-term external financing for both government and private sector. Baseline rollover rates are projected at over 200 percent for the public sector and around 115 percent for the private sector. As a result, reserve accumulation is projected to be around $11 billion in 2011 and $9 billion in 2012.

The scenario assumes concurrent shocks to various components of Poland’s balance of payments, meant to capture a tail risk scenario. Given heightened external risks since July 2010, the current assumptions are somewhat more severe than those underlying the current FCL arrangement and, in some cases, more in line with Poland’s experience during the 2008–09 crisis, while comparable to other FCL cases.

The main assumptions underlying the adverse scenario are as follows:

  • A fall in FDI inflows of 25 percent relative to the baseline. This is in line with the observed decline in FDI in 2009 with respect to 2008. The current FCL arrangement assumed a 15 percent decline relative to baseline.

  • Equity portfolio outflows of around 10 percent of total non-resident equity holdings. This decline is in line with the outflows observed during the most intense period of the crisis between the third quarter of 2008 and the first quarter of 2009. The assumption under the current FCL arrangement is of equity outflows of around 5 percent.

  • A decline in rollover rates of around 20–25 percentage points relative to the baseline assumptions. Rollover rates were assumed to be 10–20 percentage points lower under the current FCL arrangement.

  • Other investment outflows, mostly from non-resident deposits, of $4 billion, compared to a change in other investment net flows of $12 billion from 2008Q1 to 2009Q2 (the current FCL arrangement assumes outflows of $2 billion).

  • As reserve coverage of short-term debt is below the international median, somereserve accumulation is important to maintain investor confidence. The buildup in reserves is thus reduced by half relative to the baseline (same assumption as under the current FCL).

18. The access being requested under the FCL arrangement is consistent with other recent high-access cases. The table below compares the access level being requested by Poland under the FCL to other high-access cases using a wide array of metrics. The various measures confirm that access for Poland at the 1,400 percent level is at or below the median of all recent high access cases, including as a share of GDP (6 percent), trade (<15 percent of exports or imports), and external debt (10 percent).

Poland: External Financing Requirements and Sources, 2008-12

(In million of U.S. dollars)

article image
Sources: National authorities and staff estimates and projections.

Poland: Proposed Access Relative to Other High-Access Cases

article image
Sources: Executive Board documents; MONA database; and Fund staff estimates.

High access cases include available data at approval and on augmentation for all the requests to the Board since 1997 which involved the use of the exceptional circumstances clause or SRF resources. Exceptional access augmentations are counted as separate observations. For the purpose of measuring access as a ratio of different metrics, access includes augmentations and

The data used to calculate ratios is the actual value for the year prior to approval for public, external, and short-term debt, and theprojection at the time of program approval for the year in which the program was approved for all other variables

Refers to residual maturity.

B. Qualification Criteria

19. Staff believes that Poland fully meets the qualification criteria identified in ¶2 ofthe FCL decision (Figure 5). Poland’s very strong economic fundamentals and institutional policy framework, together with its sustained track record of implementing very strong policies, have allowed the authorities to adjust economic policies in a timely and effective manner during and immediately after the global crisis. Furthermore, the authorities remain committed to maintaining very strong policies as the economic recovery gains strength. Indeed, Poland’s achievements and policies have been recognized by the Executive Board, most recently in the 2010 Article IV Consultation concluded on May 7, 2010 (SM10/88 and SUR/10/40). As to the relevant criteria for the purpose of assessing qualification for a successor FCL arrangement identified in ¶2 of the FCL decision, staff’s assessment is as follows:

Figure 5.
Figure 5.

Poland: Qualification Criteria

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: Bloomberg; Poland authorities; and IMF staff estimates.1/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

  • A sustainable external position: The current account deficit is projected to remain ata moderate level that is consistent with its equilibrium norm over the medium term. External debt is projected to peak at around 70 percent of GDP in 2011 and to gradually decline thereafter. Moreover, the sustainability of the external debt position is generally robust to a range of standard stress scenarios.

  • A capital account position dominated by private flows: The bulk of external debtflows in Poland’s financial accounts are from private creditors, with official creditors accounting for less than 10 percent of these flows by mid-2010.

  • A track record of steady sovereign access to international capital markets atfavorable terms: Poland has continued to enjoy one of the highest credit ratings among emerging markets, which it has maintained despite the crisis and prolonged financial uncertainty in the region. In 2010, the government successfully issued about €7 billions overeign debt in international capital markets—a record among peers—and yields and spreads are now below than those of Italy, and much lower than Spain and Portugal (though they have recently risen, in line with regional trends, given the turbulence in European markets).

  • A reserve position that is relatively comfortable when the FCL is requested on aprecautionary basis: International reserves remain broadly adequate when compared to peers (Figure 6). Poland is above the median on two out of three standard metrics, though coverage of short-term external debt at remaining maturity plus the current account deficit isestimated at somewhat below the median at around 74 percent in 2010, but is expected to increase to over 90 percent in 2011.

  • Sound public finances, including a sustainable public debt position: Fiscal policy has provided appropriate counter-cyclical support to the economy during the downturn by using the fiscal space afforded by a track record of sound policies leading up to the crisis. The recently-proposed change to the pension system will lower the fiscal deficit and reducethe accumulation of government debt over the medium run, though it leads to higher implicit pension liabilities in the long run. Looking forward, the authorities are committed to a sustained consolidation effort, as demonstrated by the measures included in the 2011 budget and their commitment to reduce the deficit to the Maastricht limit of 3 percent of GDP by 2012, detailed in their latest Convergence Programme. Stepped-up privatization effortsand planned improvements in liquidity management, together with a strengthening of debt-safety thresholds, are expected to further help to maintain debt sustainability. On staff’s scenario based on announced measures, general government debt (ESA95) is projected to stabilize at about 56 percent of GDP by 2016. Nonetheless, the debt path over the medium term is sensitive to a further growth shock and slippages in the consolidation momentum.

uA01fig03
Notes: The baseline includes identified measures announced to date.Sources: Eurostat; and IMF staff estimates.

  • Low and stable inflation, in the context of a sound monetary and exchange ratepolicy framework: The authorities remain committed to preserving their inflation targeting framework. In this context, they stand ready to respond to inflationary pressures as economics lack diminishes.

  • The absence of bank solvency problems that pose an immediate threat of a systemic banking crisis: Poland’s banking system has remained liquid, well capitalized, and profitable. There are no bank-solvency problems that pose an immediate systemic threat. Direct exposure to banks in Europe’s periphery is very limited, though Poland is highly exposed to banks in Europe’s core, which could be a potential source of risk. Finally, top-down and bottom-up tress tests undertaken by the NBP and the KNF continue to showthat overall the system remains resilient to adverse macroeconomic shocks. 3

  • Effective financial sector supervision: Poland’s supervisory framework remains strong, as shown by the KNF’s effective response during the crisis and its proactive stance in limiting risks related to consumer and FX-mortgage lending.

  • Data transparency and integrity: The overall quality of Poland’s macroeconomic data is good, as acknowledged by the 2003 data ROSC. Poland subscribed to the SDDS in 1996, and the authorities provide all relevant data to the public on a timely basis. The NBP has introduced a new BOP compilation system, which has reduced the size of errors and omissions. Additional ongoing work is expected to deliver a further reduction in errors and omissions in early 2011. 4

Figure 6.
Figure 6.

Poland: Reserve Coverage in International Perspective 1/

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: IMF, World Economic Outlook; and IMF staff estimates.1/ Estimates for 2010.2/ GIR at the end of 2010 in percent of ST debt at remaining maturity and current account deficit in 2010. The current account is set to zero if it is in surplus.

20. The authorities’ letter (Attachment) highlights their continued commitment to implementing sound economic policies. The government is strongly committed to preserving a sustainable growth rate and maintaining macroeconomic stability. The authorities remain determined to reduce the general government deficit and place public debt on a downward path, in line with their European commitments. To this end, they stand ready to take additional fiscal measures, as needed. Monetary and exchange rate policies will remain underpinned by the inflation targeting framework and the floating exchange rate regime. The authorities will continue to closely monitor the financial system, including through regular stress tests and enhanced surveillance of banks. They intend to treat the new FCL as precautionary.

III. Impact on Fund Finances, Risks, and Safeguards

21. The Fund’s liquidity position is expected to remain adequate after approval ofan FCL arrangement for Poland. The impact of the proposed FCL arrangement in the amount of 1,400 percent of quota (SDR 19.166 billion) on the Fund’s finances and liquidity position would be large but manageable (see Supplement I).

22. Poland’s capacity to repay the Fund is strong. The authorities have indicated that they intend to continue to treat the arrangement as precautionary. Nevertheless, even if a full drawing under the FCL arrangement were made, Poland’s capacity to fulfill its financial obligations to the Fund would not be an issue. Poland has an excellent track record of meeting its obligations to the Fund, the government has a deep commitment to macroeconomic stability and prudent fiscal policies, and the economy’s medium-term growth prospects remain strong. Moreover, even if the adverse scenario were to materialize, Poland’s external debt would stay on a sustainable medium-term path, with debt service remaining manageable.

uA01fig04

External Debt Service Assuming Full Draw of FCL

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Poland: Indicators of Fund Credit, 2011-16

article image
Sources: IMF Finance Department; Polish authorities; and IMF staff estimates.

End of Period. Assumes full drawing under the FCL upon approval. The Polish authorities have expressed their intention to treat the arrangement as precautionary.

Excludes IMF purchases.

Based on the rate of charge as of mid-December 2010. Includes surcharges under the system currently in force and service charges.

23. Staff completed the safeguard assessment procedures required for an FCL arrangement before July 2010, when the current arrangement was approved. Safeguards procedures applicable to FCL arrangements require Fund staff to review the most recently completed external audit of the member’s central bank. An authorization for staff to communicate directly with the NBP’s external auditor, PricewaterhouseCoopers (PwC)Warsaw, has been provided by the authorities. Staff has reviewed the audited information provided by PwC for 2009 and discussed the results of the audit with the audit partner on June 21, 2010. No significant safeguards issues emerged from the conduct of these procedures. PwC issued an unqualified audit opinion on the NBP’s 2009 financial statements on March 29, 2010.

IV. Staff Appraisal

24. Staff assesses that Poland continues to meet the qualification criteria for access to FCL resources. As at the time of the last FCL approval in July 2010, staff believes that the authorities’ track record of very strong economic policies before and during the economic crisis contributed to overall strong economic fundamentals. Since then, the fiscal deficit widened somewhat in 2010, due to lagged effects of the economic downturn. While therecently-proposed change to the pension system will lower the fiscal deficit over the medium term, it increases implicit pension liabilities over the long term. The authorities’ commitment to continue to pursue policies that preserve macroeconomic stability—exemplified by the consolidation measures in the 2011 budget and the policy plans detailed in their letter—provides strong reassurance that economic policies will remain sound. Therefore, staff’sassessment is that Poland continues to meet the qualification criteria for use of GRA resources under the FCL.

25. In light of increased external risks, staff recommends approval of a two-year FCL arrangement for SDR 19.166 billion (1,400 percent of quota). Although Poland’sunderlying fundamentals and medium-term prospects remain sound, renewed financial strains in Europe present increased downside risks to the near-term outlook, given Poland’sdeep and open financial markets. Against this background, replacing the current one-year FCL arrangement for 1,000 percent of quota with a new two-year arrangement for 1,400 percent of quota, which the authorities intend to treat as precautionary, would provide Poland with more adequate insurance against such heightened risks, while helping to maintain confidence in the authorities’ capacity to withstand such shocks without jeopardizing macroeconomic stability. Risks to the Fund resulting from a new FCL arrangement for Poland are contained by the strong policy setting, the authorities’ intent to treat the arrangement as precautionary, and their very strong debt-servicing record and manageable external debt-service profile.

Table 1.

Poland: Selected Economic Indicators, 2009-13

article image
Sources: Polish authorities; and IMF staff estimates.

Real GDP is calculated at constant 2000 prices.

According to ESA95 (inc. pension reform costs). Including the authorities’ recent fiscal consolidation package.

Excluding debts of the National Road Fund.

NBP Reference Rate (eop). For 2010, latest.

For 2010, exchange rate as of December 28.

Annual average (2000=100); for 2010, January-October average.

Table 2.

Poland: Balance of Payments on Transaction Basis, 2007-16

(In millions of US$)

article image
Sources: National Bank of Poland; and IMF staff estimates.

Reserve level at end of previous year over short-term debt by remaining maturity.

Exports of goods and services.

Excluding repurchase of debt and including deposits.

Table 3.

Poland: External Financing Requirements and Sources, 2008-13

(In million of U.S. dollars)

article image
Sources: National authorities and staff estimates and projections.
Table 4.

Poland: Financial Soundness Indicators, 2005-10

(In percent)

article image
Sources: National Bank of Poland; and KNF.

Regulatory capital.

Data for domestic banking sector.

Operating costs to net income from banking activity.

Table 5.

Poland: General Government Revenues and Expenditures, 2008-16

(In percent of GDP, ESA95 basis)

article image
Sources: Eurostat; and IMF staff estimates. Notes: The projections include measures announced to date.
Table 6.

Poland: Monetary Accounts, 2004-10 (eop)

article image
Sources: IFS and staff estimates and projections.
Table 7.

Poland: External Debt Sustainability Framework, 2005-16

(In percent of GDP, unless otherwise indicated)

article image

Derived as [r - g - ρ(1+g) + εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock, with r = nominal effective interest rate on external debt; ρ = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate,ε = nominal appreciation (increase in dollar value of domestic currency), and α = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as[-ρ(1+g)+ εα(1+r)]/(1+g+ρ+gρ) times previous period debt stock. ρ increases with an appreciating domestic currency (ε > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levelsof the last projection year.

Table 8.

Poland: Public Sector Debt Sustainability Framework, 2005-16

(In percent of GDP, unless otherwise indicated)

article image

General government gross debt, ESA95 definition.

Derived as [(r - π(1+g) - g + αε(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; α = share of foreign-currencydenominated debt; and ε = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r -π(1 +g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as αε(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

Derived as nominal interest expenditure divided by previous period debt stock.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Figure 7.
Figure 7.

Poland: External Debt Sustainability: Bound Tests, 2005-16 1/

(External debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: International Monetary Fund, Country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanentone-half standard deviationshocks. Figures in the boxes represent average projections forthe respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current accountbalance.3/ One-time real depreciation of 30 percent occurs in 2010.
Figure 8.
Figure 8.

Poland: Public Debt Sustainability: Bound Tests, 2005-16 1/

(Public debt in percent of GDP)

Citation: IMF Staff Country Reports 2011, 024; 10.5089/9781455213795.002.A001

Sources: International Monetary Fund, country desk data, and staff estimates.1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.2/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and primary balance.3/ One-time real depreciation of 30 percent and 10 percent of GDP shock to contingent liabilities occur in 2010, with real depreciation defined as nominal depreciation (measured by percentage fall in dollar value of local currency)minus domestic inflation (based on GDP deflator).

Authorities’ Letter

Mr. Dominique Strauss - Kahn

Managing Director

International Monetary Fund

700 19th Street, N.W.

Washington, D.C. 20431, USA

Warsaw, January 3rd, 2011

Dear Mr. Strauss - Kahn,

The first Flexible Credit Line (FCL) arrangement as well as its successor have turned out to bevaluable assets for Poland’s economy. During the last two years Poland has successfully metexternal challenges to its economic performance. While global recovery has recently resumed, progress towards global financial stability has remained vulnerable, exposed to downside risksand associated with increasing volatilities in investors’ sentiment. In particular, sovereign debtproblems In several euro-area countries and the related market pressures on them have been apotential source of risk for the economies of Central and Eastern Europe.

In these circumstances, Poland has maintained strong macroeconomic fundamentals, underpinned by sound policies, assisted by FCL arrangements. These efforts have beensuccessful, and Poland has been able to maintain access to international markets at satisfactoryspreads.

In 2009 Poland was the only EU country to avoid recession nnd in 2010 the economy has gainedfurther momentum. We are strongly cornmltted to remain on this upward track while preservingthe macroeconomic stability necessary to ensure sustainability.

The Polish government is determined to reduce the general government deficit as well as puttingpublic debt on a downward path, in line with our European commitments. Measures to curtailpublic expenditures such as the abolition of early retirement for 4 million employees, the freezingof public sector wages, immediate tax measures to increase revenues, and automatic conditional VAT increases if the debt level were to exceed the 55% debt/GDP threshold, as well as stepsdesigned to improve management of public funds, have already been Introduced. The recentlyannounced pension reform is expected to additionally decrease the general government deficitby approximately 1% of GDP on an annualized basis, 0.7 of which will take place in 2011. Restrictions on local government expenditures currently planned will reduce the generalgovernment deficit by 0.6% of GDP in 2012 and a further 0.6% of GDP in 2013. Additional fiscaldisciplinary measures will be implemented, if necessary.

The Inflation-targeting framework has served Poland well and will be maintained. ThisFrramework, combined with the free-floating exchange rate regime, will keep inflation low and stable over the next 24 months.

Poland’s banking system was able to withstand the cirsis well and currently shows no solvency problems. The surveillance of banks has been enhanced, In line with FSAP recommendations. Financial institutions are closely monitored by the authorities, including the use of stress-tests, which show polish institutions’ resilience to adverse shocks. In order to strengthen analyses, supervision and coordination between the state agencies responsible for the financial sector. Financial Stability Committee comprising representatives from the MoF, NBP, KNF (Financial Supervisory Authority) was established in 2008.

We see the redesigned FCL as a key instrument for the Fund to address the current situation on global markets. We believe that Poland is currently well qualified to apply for an exrtended and increased FCL arrangement. Being amongest the strongest performers in Europe Poland is clearly eligible for hte enhanced FCL. The cordinated internaltional support program has reduced, but not eliminated sovereign debt stress inside the euro area and the associated risks for other economies. Furthermore, the recent crisis has demonstrated the increasing financial interconnectedness of countries and, therefore, also expanding spillovers and contagion. In our view the amount of the FCL requested by Poland adequately reflects the potential financing needs of the economy in the face of increased extrernal risks. As in 2009, when Poland (among others things thanks to its access to the FCL) proved to be a pillar of stability in emerging Europe, we believe that other economies in the region will also benefit from the changes we are requesting to the FCL for Poland.

Therefore, we request the approal of a Flexible Credit Line arrangement for Poland in the amount of SDR 19.166 billion (1400 percent of quota) covering a period of 24 months. Should hte arrangement be approved, it is Poland’s intention that the FCL remain a precautionary facility.

Fiscal forecasting and built-in contingency reserves.

article image
1

Poland’s Public Finance Act establishes two debt thresholds that apply to the national definition of debt (excluding debts of the National Road Fund) at 50 and 55 percent of GDP. Breaching of the first threshold triggers mild policy changes, serving mainly as a signal to policymakers. Breaching of the second threshold requires more stringent measures that need to be implemented in the budget for the second year after the breach, aimed at curbing the increase in debt. A Constitutional debt limit is set at 60 percent of GDP.

2

See The Fund’s Mandate—”Future Financing Role: Reform Proposals”, and The Fund’s Mandate–“The Future Financing Role–Revised Reform Proposals and Revised Proposed Decisions.”

3

See the NBPs’ December 2010 Financial Stability Report, http://www.nbp.pl/homen.aspx?f=/en/systemfinansowy/stabilnosc.html

4

The recent improvements to the BOP compilation system, which targeted the nonfinancial private sector, have not reduced the size of errors and omissions to an acceptable level. Consequently, the authorities are now taking a closer look at the reporting of banks’ off-balance-sheet operations. At the same time, the authorities are re-assessing the reporting of various current account items (trade in goods, transportation, and private transfers), though these are not thought to contribute much to errors and omissions. The authorities plan to develop and implement adjustments to BOP reporting in early 2011.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Republic of Poland: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement—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
Volume/Issue:
Volume 2011: Issue 024
Publisher:
International Monetary Fund
ISBN:
9781455213795
ISSN:
1934-7685
Pages:
44
DOI:
https://doi.org/10.5089/9781455213795.002
Figure 1.

Poland: Recent Economic Developments, 2008-10

Poland: Contributions to GDP Growth

(Year-on-year percent change)

Inflation

(Y-o-y percent change, end-of-period)
Figure 2.

Poland: Banking Sector Indicators, 2007-10
Figure 3.

Poland: Linkages and Spillovers
Figure 4.

Poland: The FCL’s Impact on Financial Markets, 2009-11
Figure 5.

Poland: Qualification Criteria
Figure 6.

Poland: Reserve Coverage in International Perspective 1/

External Debt Service Assuming Full Draw of FCL
Figure 7.

Poland: External Debt Sustainability: Bound Tests, 2005-16 1/

(External debt in percent of GDP)
Figure 8.

Poland: Public Debt Sustainability: Bound Tests, 2005-16 1/

(Public debt in percent of GDP)