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

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.

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. 1 The proposed arrangement would cover a 24-month periodwith access of SDR 19.166 billion (1,400 percent of quota). It would succeed the current FCL arrangement, which would be cancelled prior to approval of the proposed arrangement. The full amount of the proposed access would be available throughout the arrangement period, in one or multiple purchases. 2 The authorities intend to treat the arrangement as precautionary.

I. Background

2. Against the backdrop of a global economic and financial crisis, a one-year FCL arrangement with access equivalent to SDR 13.69 billion was approved on May 6, 2009 and treated as precautionary by the authorities. This arrangement was succeeded by another FCL arrangement on identical terms which was approved on July 2, 2010. The authorities’ timely and effective policy responses to the impact of the global crisis on Poland have been successful in maintaining stability, with Poland being the only EU country with positive GDP growth (1¾ percent) in 2009. As a consequence, no drawings were made under either the previous or the existing FCL arrangement. Poland has a history of strong performance under Fund arrangements and an exemplary record of meeting its obligations to the Fund. 3

3. Total external and public debt levels are significant but sustainable. External debt, which was in the 44–55 percent of GDP range in the years preceding the recent crisis, is projected to peak at about 70 percent of GDP in 2011-12, and gradually decline over the medium term. Short-term debt on a residual maturity basis is estimated at about a third of total external debt in 2010, and this share is projected to decline to about one-quarter over the medium term. Public external debt, in turn, is estimated at 23 percent of GDP in 2010, and is projected to decline gradually over the medium term. Gross public debt (ESA95 definition), which stayed below 50 percent of GDP in 2005-2008, is estimated at around 56 percent of GDP in 2010, as a result of the countercyclical fiscal policy followed by the authorities in response to the global crisis. The debt ratio is projected to stabilize at around 56-58 percent of GDP in the coming years. Sustainability analyses suggest that both external and public debt are generally robust to, and remain manageable under, a range of scenarios. 4

4. The substantial access under the proposed arrangement could add significantly to the Fund’s credit exposure. If the full amount available under the FCL arrangement—which the authorities intend to treat as precautionary—were drawn, Poland’s out standing use of GRA resources would reach SDR 19.166 billion, among the highest of individual country exposures. 5

5. If the full amount available under the proposed FCL arrangement is purchased in 2011:

  • Fund credit would represent a modest part of Poland’s external debt. Total external debt would rise to 77 percent of GDP initially, and public external debt toabout 30 percent of GDP, with Fund credit representing over 6 percent of GDP (Table 1). At its peak, Poland’s outstanding use of GRA resources would account for about 8 percent of total external debt, and about 21 percent of both public external debt and gross international reserves.

  • External debt service would increase over the medium term, but would remain manageable under staff’s medium-term macroeconomic projections. Poland’s projected debt service to the Fund would peak in 2015 at SDR 9.8 billion, or close to 2½ percent of GDP. 6 In terms of exports of goods and services, external debt service to the Fund would peak at about to 5½ percent, and would then account for about half of total public external debt service.

Table 1.

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 December 9, 2010. Includes surcharges 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. The impact of the proposed arrangement on the Fund’s liquidity, and on its potential exposure to credit risk, would be substantial:

  • The net effect of the cancelation of the current FCL arrangement and the approval of the proposed arrangement would be to reduce the Fund’s one-year forward commitment capacity (FCC) by about 4 percent from its current level. The net liquidity impact would be to reduce the FCC by SDR 5.5 billion to about SDR 111 billion, assuming the approval of the proposed FCL arrangement for Mexico. This level of liquidity remains relatively comfortable by historical standards. However, the liquidity position could change quickly, particularly given the currentpotential for other large requests for Fund support owing to stresses in some sovereign debt markets and the potential for spillovers, underscoring the need for the continued close monitoring of the Fund’s liquidity position.

  • If the resources available under the FCL arrangement were fully drawn, GRA credit to Poland would represent about a quarter of total GRA credit outstanding. However, the concentration of Fund credit among the top five users of Fund resources would remain stable at close to its current level of about 74 percent.

  • Potential GRA exposure to Poland would be almost three times the Fund’s current precautionary balances.

Table 2.

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. It includes the liquidity effects of resources made available under borrowing and note purchase agreements.

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

Precautionary balances exclude amounts in Special Reserves attributable to profits on gold sales in FY2010.

Excluding Poland’s existing FCL and including the new proposed FCL for Mexico.

II. Assessment

7. The proposed arrangement would have a large, but manageable impact on the Fund’s liquidity. The current liquidity position is sufficiently strong to accommodate the net liquidity impact of the proposed arrangement. However, close monitoring of the Fund’s liquidity position is warranted in light of the significant uncertainty surrounding the recovery from the global crisis and the potential for substantial demand for Fund resources. In this regard, the continued availability of supplementary resources under the bilateral borrowing and note purchase agreements, as well as early effectiveness of the expanded NAB, are key for maintaining the adequacy of the Fund’s resources. 7

8. Poland intends to treat the FCL arrangement as precautionary, but if it did prove necessary to draw, this would feature prominently among the Fund’s single credit exposures. Poland’s overall external debt and debt service ratios are expected to remain manageable including should adverse shocks materialize such that a purchase became necessary. In addition, Poland’s capacity to repay is expected to remain strong given its sustained track record of implementing strong policies, including during the global financial crisis, and sound institutional policy framework, which provide assurances about the future course of policies. Nonetheless, the scale of the Fund’s potential exposure to Poland—in conjunction with the recent increase in commitments to other members and the possibility of further credit expansion under already existing or new Fund arrangements–underscores the need to strengthen the Fund’s precautionary balances.

1

See GRA Lending Toolkit and Conditionality—Reform Proposals (www.imf.org), GRA Lending Toolkit and Conditionality—Reform Proposals (www.imf.org), Flexible Credit Line (FCL) Arrangements, Decision No.14283-(www.imf.org), adopted March 24, 2009, The Funds Mandate—The Future Financing Role—Revised ReformProposals and Revised Proposed Decisions (www.imf.org), and The Fund’s Mandate—Flexible Credit Line (FCL)Arrangements, Decision No.14714-(www.imf.org), adopted August 30, 2010.

2

If the full amount is not drawn in the first year of the arrangement, a review of Poland’s continuedqualification under the FCL must be completed before purchases may be made after the first year of thearrangement.

3

See Republic of Poland—Assessment of the Impact of the Proposed Flexible Credit Line Arrangement on the Fund’s Finances and Liquidity Position (IMF Country Report 09/138, Sup. 1, 04/28/2009).

4

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

5

The largest GRA credit exposure was SDR 23.359 billion to Brazil in 2003. Currently, the largest GRAexposure is to Romania in the amount of SDR 9.8 billion.

6

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.

7

For an update on the Fund’s liquidity position see The Fund’s Liquidity Position—Review and Outlook:Update (IMF Policy Paper, www.imf.org).

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