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.
Our Polish authorities believe that despite the strong fundamentals of the Polish economy, external risks remain high, and the Flexible Credit Line will continue to be instrumental in reducing the effects of those risks in case of a tail event. The previous FCL arrangements have proven to serve Poland’s economy very well.
Amid negative spillovers from financial and economic turbulence in the external environment, Poland’s macroeconomic fundamentals have remained strong, underpinned by sound and prudent macroeconomic policies. Over the past four years Poland has enjoyed the highest economic growth among OECD countries. We note that (i) job creation has been positive; (ii) the fiscal deficit has been reduced from 7.9 percent of GDP in 2010 to 5.0 percent in 2011 as a result of our authorities’ sound policy mix aimed at striking the right balance between the needed fiscal consolidation and support for the economic growth. Moreover, in 2012 the fiscal tightening, while allowing the automatic stabilizers to operate, brought the deficit down by an additional 1.5 percentage points. The authorities will continue, in line with the 2013 budget, to implement measures to further reduce the fiscal imbalance and put public debt firmly on a downward path; (iii) the international reserve buffer has gradually been rebuilt to a broadly adequate level of over USD 100 billion (iv) inflation has been kept in check; (v) a flexible exchange rate regime has served the economy well, providing the necessary cushion against external shocks; and (vi) the authorities continue to implement structural reforms to further strengthen macroeconomic fundamentals and enhance potential growth. As a result of our authorities’ active implementation of these policies and the resulting creation of needed buffers, our authorities will be enabled to take considerable steps towards exiting the FCL, when external conditions allow.
Additionally, financial institutions have continued to be closely monitored by the supervisory authorities and the macro-prudential framework has been further enhanced. The banking sector has remained robust, highly capitalized and very conservative. But given the high share of foreign ownership in the Polish banking sector and the level of parent funding and intercompany loans, the risks of capital outflows are heightened.
Poland has enjoyed access to international markets at very attractive rates. Foreign portfolio inflows have been very strong, specifically resulting in an increase in the share of non-residents in domestic treasury securities, from 14 percent at the beginning of 2009 to above 36 percent, which is roughly equal to USD 60 billion. The high inflow of foreign capital, on the one hand, is a sign of the strength of the Polish economy; on the other hand, it increases vulnerability of the Polish economy to rapid changes in investors’ behavior.
As a fully open economy that is strongly integrated in the global markets, Poland is highly exposed to potential external shocks. International conditions remain volatile and a sustainable path to global recovery has yet to be established. Despite sound domestic policies, if the external risks—underlined in the Fund’s flagship reports—materialize, Poland could be adversely affected by a significant slowdown and suffer from a substantial and destabilizing outflow of foreign capital.
Furthermore, our authorities strongly believe that the renewed FCL for Poland would play a stabilizing role not only for the country, but also for the Central and East European region as a whole, thus complementing the policy response developed in the euro area. We lastly note that Poland is not only a beneficiary of the Fund’s arrangement but also a contributor—strengthening the firepower of the Fund by participating in the New Arrangements to Borrow and by providing a bilateral loan to the Fund.
In light of the above, the authorities request the approval of a successor 24-month FCL arrangement in the amount of SDR 22 billion, equal to 1303 percent of quota. The requested amount represents a reduction of an access in terms of quota and constitutes a clear signal from the authorities to exit from the FCL when the external conditions allow. The authorities are committed to further strengthening macroeconomic buffers, specifically by fiscal consolidation and accumulation of reserves. They reaffirm their intention to treat this instrument as precautionary.