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

KEY ISSUESBackground: Poland’s strong fundamentals and sound policies helped it to successfullywithstand several bouts of market turbulence and paved the way for economicrecovery. While Poland has benefited from its continued transformation into a moreopen and dynamic economy, its substantial trade and financial linkages with globalmarkets, combined with still-large financing needs, also make it vulnerable to externalshocks.Outlook and risks: With only modest growth in its trading partners, economic activityin Poland is expected to remain moderate in the near term. Risks remain tilted to thedownside amid concerns about a protracted slowdown in the euro area, continuedgeopolitical tensions in the region, and uncertainty surrounding normalization ofmonetary policy in the United States. Domestically, the risk of continued disinflationremains high.Flexible Credit Line (FCL): Against this background, the authorities are requesting anew two-year precautionary FCL arrangement with proposed lower access in theamount of SDR 15.5 billion (918 percent of quota) and cancellation of the currentarrangement, approved on January 18, 2013. Poland’s improved economicfundamentals and increased policy buffers have reduced financing needs. However,external risks remain elevated. In this context, the authorities consider that a new FCL inthe requested amount would provide an important insurance against external risks, helpsustain market confidence, and support their economic strategy. At the same time, theauthorities consider that the substantial reduction in access sends a clear signal of theirintention to fully exit from the FCL once external risks recede. In staff’s view, Polandcontinues to meet the qualification criteria for access under the FCL arrangement.Fund liquidity: The impact of the proposed commitment of SDR 15.5 billion on Fundliquidity would be manageable.Process: An informal meeting to consult with the Executive Board on a possible FCLarrangement for Poland was held on December 19, 2014.

Abstract

KEY ISSUESBackground: Poland’s strong fundamentals and sound policies helped it to successfullywithstand several bouts of market turbulence and paved the way for economicrecovery. While Poland has benefited from its continued transformation into a moreopen and dynamic economy, its substantial trade and financial linkages with globalmarkets, combined with still-large financing needs, also make it vulnerable to externalshocks.Outlook and risks: With only modest growth in its trading partners, economic activityin Poland is expected to remain moderate in the near term. Risks remain tilted to thedownside amid concerns about a protracted slowdown in the euro area, continuedgeopolitical tensions in the region, and uncertainty surrounding normalization ofmonetary policy in the United States. Domestically, the risk of continued disinflationremains high.Flexible Credit Line (FCL): Against this background, the authorities are requesting anew two-year precautionary FCL arrangement with proposed lower access in theamount of SDR 15.5 billion (918 percent of quota) and cancellation of the currentarrangement, approved on January 18, 2013. Poland’s improved economicfundamentals and increased policy buffers have reduced financing needs. However,external risks remain elevated. In this context, the authorities consider that a new FCL inthe requested amount would provide an important insurance against external risks, helpsustain market confidence, and support their economic strategy. At the same time, theauthorities consider that the substantial reduction in access sends a clear signal of theirintention to fully exit from the FCL once external risks recede. In staff’s view, Polandcontinues to meet the qualification criteria for access under the FCL arrangement.Fund liquidity: The impact of the proposed commitment of SDR 15.5 billion on Fundliquidity would be manageable.Process: An informal meeting to consult with the Executive Board on a possible FCLarrangement for Poland was held on December 19, 2014.

Introduction

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.1 The proposed arrangement would cover a 24-month period and access would be in an amount of SDR 15.5 billion (918 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.2 The authorities intend to treat the arrangement as precautionary.

Background

2. Since the onset of the global economic and financial crisis, Poland has entered into successive FCL arrangements with the Fund under which no drawings have been made. 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, 2011.3 On Jan 18, 2013 a successor FCL in the amount of SDR 22.0 billion (1,303 percent of quota) was approved. 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. More recently, sustained efforts to build buffers and further strengthen the policy framework further improved the already very strong economic fundamentals and reduced financing needs. As a consequence, no drawings have been made under any of 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. Total external and public debt levels are projected to decline broadly and remain sustainable. External debt, which was in the 44-55 percent of GDP range in the years preceding the recent crisis, peaked at almost 73 percent of GDP in 2012-13, and is projected to decline gradually over the medium term. Short term debt on a residual maturity basis is estimated at about 30 percent of total external debt in 2014, 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 2014, and is projected to decline below 25 percent of GDP by 2018. Gross public debt (ESA95 definition), which rose to around 55 percent of GDP in 2013, is projected to fall below 50 percent in 2014 (pre-2008 levels). Net external debt is projected to fall below 45 percent of GDP in 2018. Sustainability analyses suggest that both external and public debt are generally robust to, and remain manageable under, a range of scenarios.4

4. The proposed FCL arrangement—despite its reduced access—would continue to be a substantial Fund commitment. The proposed reduction in access sends a clear signal of the authorities’ intention to exit from the FCL as external risks recede. However if the full amount available under the FCL arrangement were drawn, Poland would be one of the highest Fund exposure to date.

5. If the full amount available under the proposed FCL arrangement were disbursed in 2015, Fund exposure to Poland would be manageable.

  • Fund credit would represent a modest part of Poland’s external debt (Table 2). Total external debt would rise to 74 percent of GDP initially, and public external debt to about 33 percent of GDP, with Fund credit representing about 4 percent of GDP. At its peak, Poland’s outstanding use of GRA resources would account for about 6 percent of total external debt, 13 percent of public external debt and 19 percent of 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 2019 at about SDR 7.9 billion, or about 1.8 percent of GDP. In terms of exports of goods and services, debt service to the Fund would peak at 3.6 percent in 2019. This would account for 54 percent of total public external debt service, which would increase to about 7 percent of exports of goods and services.

Table 1.

Republic of Poland: External Debt and Debt Service, 2010–14 1/

article image
Source: Polish authorities and IMF staff estimates.

End of period, unless otherwise indicated.

Table 2.

Republic of Poland—Capacity to Repay Indicators, 2013–19 1/

article image
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 15, 2014. 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 immediate net impact of the proposed arrangement would be to lower the Fund’s forward commitment capacity (FCC) by about SDR 10 billion (4.2 percent). As the existing FCL arrangement was approved after the 2011 first activation of the expanded and amended New Arrangements to Borrow (NAB), the ratio of 3:1 of NAB-to-quota resources would apply for financing of purchases under the arrangement based on prevailing guidelines. 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 5.5 billion). Approval of the proposed new FCL arrangement will reduce the FCC by the full amount of the arrangement (SDR 15.5 billion).5 Thus, the net liquidity impact would be to reduce the FCC by about SDR 10 billion to about SDR 228.6 billion (Table 3).6

Table 3.

Republic of Poland—Impact on GRA Finances

(millions of SDR unless otherwise noted)

article image
Sources: Finance Department and IMF staff estimates.

The FCC is defined as the Fund’s stock of usable resources less undrawn balances under existing arrangements, plus projected repurchases during the coming 12 months, less repayments of borrowing due one year forward, less a prudential balance. The FCC does not include about US$461 billion in bilateral pledges from members to boost IMF resources. These resources will only be counted towards the FCC once: (i) individual bilateral agreements are effective and (ii) the associated resources are available for use by the IMF, in accordance with the borrowing guidelines and the terms of these agreements.

Current FCC minus new access plus access under the expiring program adjusted for the NAB financed portion of the expiring commitment (about SDR 16.5 billion) which was considered as already committed at the time of the most recent NAB activation and is therefore not available to finance new commitments under the current activation. This amount could be included in possible future NAB activations.

As of December 01, 2014

Burden-sharing capacity is calculated based on the floor for remuneration at 85 percent of the SDR interest rate. Residual burden-sharing capacity is equal to the total burden-sharing capacity minus the portion being utilized to offset deferred charges and takes into account the loss in capacity due to nonpayment of burden sharing adjustments by members in arrears.

7. 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.

  • The level of access relative to quota would fall from 1,303 percent of quota to 918 percent with the new FCL, or from SDR 22 billion to 15.5 billion. It would still be sizable and exceed the median of the peak levels of exceptional access cases while still remaining significantly below the levels of several recent exceptional access cases with drawing such as Greece (EFF, 2012), Ireland (EFF, 2010), Portugal (EFF, 2011) and precautionary arrangement of Mexico (FCL, 2014).

  • Poland’s outstanding use of GRA resources, at SDR 15.5 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 88.9 percent from 89.1 percent currently.

  • Potential credit exposure to Poland would be about 1.2 times the Fund’s current precautionary balances.

Assessment

8. The proposed FCL arrangement would have a significant but manageable impact on the Fund’s liquidity position. At close to SDR 239 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 with a lower access. In addition, the 2012 Borrowing 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

9. 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.

Annex I. Poland: History of IMF Arrangements

Prior to the FCL arrangements approved in May 2009, July 2010, January 2011, and in January 2013, Poland has several Fund arrangements in the 1980s and the 1990s. It fully repaid its remaining outstanding credit in 1995 (Table I.1). Poland has an exemplary track record of meeting its obligations to the Fund.

Annex Table I.1.

Poland: IMF Financial Arrangements, 1990–2015

(In SDR millions)

article image
Source: Finance Department.

As of November 11th, 2014

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

From 1990 to 1995, Poland had three Stand-By Arrangements (SBAs) and one arrangement under the Extended Fund Facility (EFF).

Since the global financial crisis, Poland has had several FCL arrangements under which no drawings have been made. 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. On Jan 18, 2013 a successor FCL in the amount of SDR 22.0 billion (1,303 percent of quota) was approved.

Annex Figure I.1.
Annex Figure I.1.

Poland: IMF Credit Outstanding, 1990-1995

(In millions of SDRs)

Citation: IMF Staff Country Reports 2015, 016; 10.5089/9781498305419.002.A002

Source: Finance Department.
1

See GRA Lending Toolkit and Conditionality – Reform Proposals (3/13/09) and Flexible Credit Line (FCL) Arrangements, Decision No.14283-(09/29), adopted March 24, 2009, as amended by Decision No. 14714-(10/83), adopted August 30, 2010; the Fund’s Mandate – the Future Financing Role: Reform Proposals (http://www.imf.org/external/np/pp/eng/2010/062910.pdf, 6/29/2010), and the IMF’s Mandate – the Future Financing Role: Revised Reform Proposals and Revised Proposed Decisions (http://www.imf.org/external/np/pp/eng/2010/082510.pdf, 8/25/2010); Review of the Flexible Credit Line, the Precautionary and Liquidity Line, and the Rapid Financing Instrument – Specific Proposals. (http://www.imf.org/external/np/pp/eng/2014/043014.pdf, 5/1/2014 and Decision No. 15593 – (14/46)).

2

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.

3

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.

4

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

5

The freed up NAB 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. However, the resources would be available to finance new commitments if the NAB is activated in the future NAB activation period.

6

If Poland were to draw upon the proposed arrangement, there would be an additional impact on the FCC as Poland would no longer participate in the Financial Transactions Plan and the NAB Resource Mobilization Plan.

7

As of [December 4, 2014], 35 agreements have been approved by the Board for a total of SDR [287] billion, of which 33 agreements have become effective for a total of SDR [276] billion.

Republic of Poland: Arrangement Under the Flexible Credit Line and Cancellation of the Current Arrangement-Staff Report; Press Release; and Statement by the Executive Director for the Republic of Poland
Author: International Monetary Fund. European Dept.