During a prolonged period of heightened external risks dating back to the global financial crisis, the consecutive arrangements under the IMF’s Flexible Credit Line (FCL) have served the Polish economy very well. Alongside solid fundamentals and prudent policies, the FCL provided additional insurance against adverse external shocks. It helped foster Poland’s macroeconomic performance and financial stability, and supported market confidence. The Polish economy successfully withstood several bouts of global financial volatility.

Meanwhile, Poland has been further building up its buffers. This has been accompanied by an evolution of risks in the external environment of the Polish economy. These risks continue to remain elevated. Our Polish authorities believe that continued additional insurance provided by the FCL remains important to support their economic policies and help sustain market confidence. The authorities wish to request a renewal of the FCL arrangement for another two years, with a reduced level of access. They continue to believe that exit from a precautionary arrangement should be state- rather than time-dependent. Thus, decisions regarding exit should be based on the assessment of the probability of tail risks, given the existing buffers. These considerations are reflected in their current request.

Buffers

Poland has made important progress in rebuilding its policy space. Macroeconomic imbalances have been substantially reduced and fundamentals further strengthened. Access to the FCL provided a temporary “breathing space” and helped support policy adjustment.

• Economic growth has picked up pace. After a significant slowdown in 2012–13, the Polish economy returned to higher growth pace last year. Strong investments and rebound in private consumption led to an acceleration in domestic demand. The authorities expect the official forecast of 3.3 percent GDP growth in 2014 to materialize.

• Fiscal policy space has been gradually regained. Both, fiscal deficit and public debt have been substantially reduced. The fiscal deficit was reduced from 7.6 percent of GDP in 2010 to 4.0 percent in 2013 (ESA2010) and is currently well on track to allow for the exit from the EU’s Excessive Deficit Procedure as scheduled. Public debt at the end of 2014 is expected to have fallen to roughly 50 percent of GDP. A permanent expenditure rule has been introduced to enhance long-term fiscal sustainability.

• External imbalances have narrowed. The current account (CA) balance substantially improved, from -6.5 in 2008 to around -1.3 percent of GDP in 2013 (BMP6), reaching its lowest level in over a decade. While exports to non-EU partners had generally been steadily increasing in recent years, a significant decline in trade has been registered in the context of the recent Russia-Ukraine tensions. Nevertheless, for 2014, the authorities expect the CA to narrow further. In addition, the capital account continues to register a surplus, primarily due to the strong inflow of the EU structural funds.

• International reserves have increased. Reserves continue to be broadly adequate according to standard metrics. They increased from around USD 80 billion at end-2009 to around USD 100 billion at end-2014.

• Monetary policy has continued to support economic stability. In late-2012 and 2013 the Monetary Policy Council (MPC) cut main policy interest rate by a cumulative 225 basis points (bps) and further by 50 bps in October 2014 to a new historic low of 2 percent. In the opinion of the MPC, this adjustment and stable economic growth limit the risk of inflation remaining below the target in the medium term. However, given the uncertainty regarding the economic conditions in the external environment of the Polish economy, the MPC does not rule out further adjustments.

• Efforts have continued to maintain a strong financial sector. The banking sector remains well-capitalized, liquid, and profitable. It continues to be supported by a strong regulatory and supervisory framework. The reliance on parent bank funding has declined alongside the reduction in FX loans outstanding.

• Steady progress on the structural front has continued. Various measures have been implemented over the last years. In the latest World Bank’s Doing Business 2015 report, Poland was ranked 32^nd—the highest in history.

Looking forward, the Polish authorities are determined to maintain very strong institutional policy frameworks and prudent policies. The government favours a balanced approach to macroeconomic management, effectively combining conservative fiscal policies with economic growth considerations.

Risks

As an open economy, Poland has benefited from integration with global markets, but at the same time remains highly exposed to potential external shocks. Its open capital account and relatively high financing needs make it susceptible to potential sudden shifts in investor sentiment.

In the authorities’ view, while some of the external risks have receded since the last FCL request, new concerns have emerged. On balance, risks continue to remain elevated.

• The authorities recognize the growing risks stemming from geopolitical tensions surrounding Russia and Ukraine.

• They are also of the view that a potential surge in financial market volatility, linked to uncertainties related to the eventual normalization of U.S. monetary policy, may pose a risk of a general abrupt shift in market sentiment toward emerging market assets. This would affect Poland, especially given the Polish zloty’s role as a proxy for the Central and Eastern European region.

• Finally, protracted slow growth in Poland’s main trading partners could affect its economy through trade linkages and the confidence channel.

In light of these concerns, the authorities believe that a successor precautionary FCL would continue to be instrumental in mitigating external risks in case of a tail event. They are of the view that additional insurance provided by the FCL remains important to help sustain market confidence and support their economic policies aimed at further strengthening the buffers.

With all these aspects considered, a successor two-year FCL arrangement at a lower level of access would provide sufficient insurance against adverse external shocks, while sending a strong signal of Poland’s commitment to exit the facility as soon as external conditions allow. At the same time, while the strengthened buffers allow for a reduction in the level of access, a full exit from the facility would be premature at this stage.

Exit

Poland’s intention to gradually reduce its reliance on the facility has been signaled on previous occasions. To ensure a smooth and orderly process, the authorities have proactively initiated extensive communication undertakings on their exit strategy, through direct outreach to investors and the general public, including press interviews by top Ministry of Finance officials. The outreach has been favorably received by investors and other stakeholders, as a proof of strength of the economy reinforcing the trust that Poland is well prepared to begin gradual exit from the arrangement.

Conclusion

Given the strengthened buffers and considering the balance of risks, our Polish authorities are requesting the approval of a successor 24-month FCL arrangement in a reduced amount equivalent to SDR 15.5 billion (918 percent of quota). Simultaneously, they wish to cancel the current arrangement approved on January 18, 2013, effective upon the approval of the new FCL.

The authorities are committed to continue strengthening policy buffers and make further progress towards exit from the facility, taking into account the evolution of the external conditions. They reiterate their intention to treat the arrangement as precautionary.