The Polish economy has remained resilient amid increased global financial volatility, supported by very strong fundamentals and prudent macroeconomic management. The Flexible Credit Line (FCL) arrangement with the Fund has been instrumental in sending a reassuring signal to markets on the strength of Poland's institutions and policies and has provided additional insurance against external shocks. The economy has returned to strong and robust growth rates while macroeconomic imbalances have narrowed further.

The external risks to the Polish economy have somewhat receded, but remain elevated. While some of the previously identified risks have diminished, new concerns have emerged. Considering the current balance of risks and further gradual improvement in fundamentals, the Polish authorities continue to see the need to maintain the access to the FCL under the current arrangement, but they are of the view that a moderately reduced level of access would provide sufficient insurance against tail risks. The authorities remain committed to their exit strategy and perceive the current midterm review as an opportunity for taking the next step to that effect. This reflects their state–contingent approach for assessing exit strategy considerations. The authorities are requesting the completion of the review of the current FCL along with a reduction in the level of access for the second year of the arrangement.

Buffers

Poland has continued to strengthen its policy buffers. Access to the FCL has helped support the policy adjustment.

• The economy has returned to solid growth rates while the labor market has strengthened. Following the 2012–13 slowdown, the real GDP growth rebounded to 3.3 percent in 2014 and is expected to reach 3.6 percent in 2015 and 3.8 in 2016. Growth is driven mainly by domestic demand with strong private consumption. Simultaneously, the unemployment rate has continued its downward trend, reaching 7.2 percent in November 2015—the lowest level since late–2008/early–2009.

• The current account (CA) balance has further improved. In 2015, the CA deficit is projected to narrow to 0.6 percent from 2 percent of GDP in 2014, on the back of lower cost of energy imports and a rebound of demand from the euro area. The moderate negative impact on Polish exports from geopolitical tensions surrounding Russia and Ukraine has been largely counterbalanced by a redirection towards more dynamic markets and gains in price competitiveness. The capital account continues to register a surplus, primarily due to the strong inflow of EU funds. The zloty exchange rate remains relatively stable and broadly consistent with fundamentals.

• International reserves remain broadly adequate against standard metrics. They increased from around EUR 83 billion (USD 100 billion) at end-2014 to around EUR 87 billion (USD 95 billion) at end-2015.

• Fiscal consolidation allowed for an early exit from the EU EDP procedure and is set to continue. In June 2015, the EU Council closed the excessive deficit procedure (EDP) for Poland, one year ahead of schedule. Looking forward, the new government committed itself to conduct the fiscal policy in accordance with domestic and European rules, in particular to keep the general government deficit below 3 percent of GDP (2.8 percent of GDP is planned for 2016) and to increase spending only in case of additional revenues. Fiscal consolidation will be supported by growth–friendly revenue and expenditure measures. A detailed medium–term fiscal plan, including a more significant tightening after 2017, will be formulated as a part of the convergence program update due in April 2016.

• Accommodative monetary policy has helped lift inflation. Negative price growth – which has persisted since mid–2014 and is mainly due to the sharp fall of energy prices in the global markets – has bottomed out after reaching its peak of 1.5 percent in the first quarter of 2015. In December 2015, the Monetary Policy Council (MPC) kept the policy rate unchanged at the all–time low of 1.5 percent. The MPC expects the price growth to slowly increase in the coming quarters, supported by the gradual closing of the output gap and good labor market situation.

• The financial sector framework has been strengthened. In particular, a macroprudential framework to allow for early detection and prevention of systemic risk has been finalized. The financial sector remains liquid and well–capitalized, however, profitability somewhat weakened mainly due to the low interest rate environment.

• Progress on the structural front has continued. This was evidenced in international rankings, with a historical jump to the 25th position in the latest World Bank’s Doing Business 2016 report.

Looking forward, the Polish authorities are determined to maintain very strong institutional policy frameworks and prudent policies. The new government's priorities are focused on advancing inclusive growth while maintaining fiscal discipline and financial stability.

Risks

As an open economy, Poland has benefited from integration with global markets, but at the same time this has created exposure to potential external shocks. In the authorities’ view, while some of the external risks have receded since the last FCL request, new concerns have emerged. The European Central Bank's quantitative easing somewhat helped diminish risks related to structurally low growth in the euro area. At the same time, new downside risks have emerged, including from a potential significant slowdown in China and other large emerging market economies. In addition, further uncertainties remain about the US Federal Reserve's future policy path, following the recent hike, as well as those related to the Russia/Ukraine geopolitical tensions. On balance, although somewhat lower, risks continue to remain elevated.

Against this backdrop, the authorities believe that access to the FCL is warranted, as it continues to provide valuable additional insurance against potential adverse external shocks. Nonetheless, in light of the further improvement in Poland's economic fundamentals and policy buffers, the authorities consider that a moderately reduced level of access would provide a sufficient protection against tail–risks for the second year of the current arrangement.

Exit strategy

Poland reiterates the commitment to gradually reduce its reliance on the FCL as external conditions allow. The authorities have continued to communicate their intention to market participants and the general public. Accordingly, market reaction has been muted, reinforcing the trust that Poland is well prepared to continue its gradual exit from the arrangement.

Conclusion

Considering the current balance of risks and continued improvement in economic fundamentals, the Polish authorities are requesting the completion of the review of the current FCL along with a reduction in its level of access to SDR 13 billion (770 percent of quota). This constitutes a decrease of around 16 percent.

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