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

Poland’s economy has recovered well in 2010–11, reflecting strong economic fundamentals and decisive countercyclical policies. Poland’s strong trade and financial links to Europe continue to make it vulnerable to potential shocks from the region. Despite the difficult external environment, the authorities have continued to rebuild policy space to counter adverse shocks. Measures are also being taken to strengthen medium- and long-term fiscal sustainability. The economy is expected to moderate further in 2013. Financial sector policies have helped improve the resilience of the banking system.

Abstract

Poland’s economy has recovered well in 2010–11, reflecting strong economic fundamentals and decisive countercyclical policies. Poland’s strong trade and financial links to Europe continue to make it vulnerable to potential shocks from the region. Despite the difficult external environment, the authorities have continued to rebuild policy space to counter adverse shocks. Measures are also being taken to strengthen medium- and long-term fiscal sustainability. The economy is expected to moderate further in 2013. Financial sector policies have helped improve the resilience of the banking system.

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 FCL arrangements.2 The proposed arrangement would cover a 24-month period and access would be in an amount of SDR 22.0 billion (1,303 percent of quota). It would succeed the existing FCL arrangement, which would be cancelled prior to approval of the proposed arrangement. The full amount of access proposed would be available throughout the arrangement period, in one or multiple purchases.3 The authorities intend to treat the arrangement as precautionary.

I. Background

2. Against the backdrop of the global economic and financial crisis, a one-year FCL arrangement equivalent to SDR 13.69 billion (1,000 percent of quota) was approved on May 6, 2009 which the authorities treated as precautionary. This arrangement was succeeded by another FCL arrangement on identical terms which was approved on July 2, 2010 and a two-year FCL arrangement in the amount of SDR 19.166 billion (1,400 percent of quota) approved on January 21, 2011.4 Poland’s economy recovered well in 2010–11, reflecting very strong economic fundamentals and decisive counter-cyclical policies. Limited macroeconomic imbalances prior to the crisis and counter-cyclical policies during the crisis aided the strong recovery. As a consequence, no drawings were made under any of the previous or the existing FCL arrangement. Poland has a history of strong performance under Fund arrangements and exemplary record of meeting its obligations to the Fund.

3. Total external and public debt levels are projected to decline broadly and remain sustainable.5 External debt, which was in the 44-55 percent of GDP range in the years preceding the recent crisis, is projected to peak at almost 70 percent of GDP in 2012-13, and gradually decline over the medium term. Short term debt on a residual maturity basis is estimated at about 30 percent of total external debt in 2012, and this share is projected to decline to below one-quarter over the medium term. Public external debt, in turn, is estimated at 28 percent of GDP in 2012, and is projected to rise to almost 33 percent by 2014 and decline thereafter. Gross public debt (ESA95 definition), which stayed below 50 percent of GDP in 2005-2008, is estimated at around 55 percent of GDP in 2012, still as a result of the countercyclical fiscal policy followed by authorities in response to the global crisis. Net external debt is projected to stabilize at around 50 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.6

4. If the full amount available under the proposed FCL arrangement were disbursed in 2013:

  • Fund credit would represent a modest part of Poland’s external debt (Table 1). Total external debt would rise to 76 percent of GDP initially, and public external debt to about 38 percent of GDP, with Fund credit r epresenting about 7 percent of GDP. At its peak, Poland’s outstanding use of GRA resources would account for about 9 percent of total external debt, almost 18 percent of public external debt, and about 22 percent and gross international reserves.

  • External debt service would increase in the medium-term, but remain manageable under staff’s medium-term macro projections. Poland’s projected debt service to the Fund would peak in 2017 at about SDR 11.2 billion, or about 3 percent of GDP. In terms of exports of goods and services, debt service to the Fund would peak at 5½ percent in 2017. This would account for 47 percent of total public external debt service, which would increase to almost 12 percent of exports of goods and services.

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 21, 2012. 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.

5. The immediate net impact of the proposed arrangement would be to lower the Fund’s forward commitment capacity (FCC) by SDR 12.417 billion (5 percent). This is because:

  • The current arrangement was approved before the first activation of the NAB and, under existing policies, any drawings would be financed equally by quota and bilateral resources. In the absence of a new arrangement, the cancellation of the existing arrangement would free up the quota resources (and thereby raise the FCC by SDR 9.583 billion).

  • However, the freed up bilateral resources cannot be used to finance new commitments, and therefore do not lead to a corresponding increase in the FCC. While this will reduce the need to set aside NAB resources to allow for the folding in of bilateral claims, these resources cannot be used to finance new commitments unless NAB participants and the Executive Board were to approve an increase in the maximum resources available during the current activation period. Such an increase is not being proposed at this time.

  • Approval of the proposed new FCL arrangement will reduce the FCC by the full amount of the arrangement. Thus, the net liquidity impact would be to reduce the FCC by SDR 12.417 billion to about SDR 219.2 billion (Table 2).

Table 2.

FCL 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.

Excluding Poland’s existing FCL.

Includes the PLL for Morocco and the SBAs for El Salvador, Georgia, Romania, and Serbia.

6. If the resources available under the proposed FCL arrangement were fully drawn, the Fund’s exposure to Poland would represent almost one fifth of total GRA credit outstanding.

  • Poland’s outstanding use of GRA resources, at SDR 22.0 billion, would be one of the highest of individual country exposures to date.

  • The concentration of Fund credit among the top five users of Fund resources would decrease slightly to 75 percent from 77 percent currently.

  • Potential credit exposure to Poland would be about 2.3 times the Fund’s current precautionary balances.

II. Assessment

7. The proposed FCL arrangement would have a significant but manageable impact on the Fund’s liquidity position. The Fund’s liquidity position is measured by the Forward Commitment Capacity (FCC) which comprises all the resources available for new financial commitments and reflects the full amount of all commitments under existing IMF arrangements, including precautionary arrangements. At close to SDR 232 billion, the FCC appears sufficiently strong to accommodate the proposed arrangement, especially since the cancellation of Poland’ existing FCL arrangement would partially offset the liquidity effect from the proposed new FCL arrangement. In addition, the need to set aside NAB resources to allow for the folding in of bilateral claims would be reduced, though, as noted above, these would not be available to finance new commitments without an increase in the maximum resources that can be drawn under the NAB. In addition, the 2012 bilateral borrowing and note purchase agreements (which are not included in the FCC) will provide a second line of defense to the Fund’s lending capacity as they become effective.7

8. Poland intends to treat the FCL arrangement as precautionary, but if drawn, this would feature prominently among the Fund’s largest single credit exposures. Poland’s overall external debt and debt service ratios are expected to remain manageable even with a drawing under the arrangement. 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 lending to other members and the prospects for further credit expansion under already existing or possible new Fund arrangements—underscores the need to strengthen the Fund’s precautionary balances.

2

See Flexible Credit Line (FCL) Arrangements, Decision No.14283-(09/29), adopted March 24, 2009, as amended. Also see GRA Lending Toolkit and Conditionality—Reform Proposals (3/13/09), the Fund’s Mandate – the Future Financing Role: Reform Proposals (6/29/2010), and the IMF’s Mandate – the Future Financing Role: Revised Reform Proposals and Revised Proposed Decisions (Supp. 2, 8/25/2010).

3

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

4

Soon after the approval of the FCL arrangement, the 2008 Quota and Voice Reform became effective and increased Poland’s quota from SDR 1,369.0 million to SDR 1,688.4 million. This implied that the access under the FCL was reduced to 1,135 percent of quota.

5

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

6

Note that the debt sustainability analysis does not assume drawings under the FCL arrangement.

7

If the activation threshold for triggering access to bilateral borrowing were reached (modified FCC of SDR 100 billion), these resources could be drawn in accordance with the borrowing modalities approved by the Board on June 15, 2012.

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
Author: International Monetary Fund. European Dept.