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

Poland's economic growth remains robust, despite some weakening this year, and deflation has dissipated. The external buffers have increased, and the current account is close to balance. However, external risks remain elevated, with the key risks including a faster-than-expected pace of monetary policy normalization in the U.S., possible dislocations in emerging markets leading to bouts of financial market volatility, as well as a possible banking sector stress and growth slowdown in the euro area. The upcoming Brexit negotiations and Europe's heavy election calendar add to uncertainties.

Abstract

Poland's economic growth remains robust, despite some weakening this year, and deflation has dissipated. The external buffers have increased, and the current account is close to balance. However, external risks remain elevated, with the key risks including a faster-than-expected pace of monetary policy normalization in the U.S., possible dislocations in emerging markets leading to bouts of financial market volatility, as well as a possible banking sector stress and growth slowdown in the euro area. The upcoming Brexit negotiations and Europe's heavy election calendar add to uncertainties.

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 6.50 billion (159 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 five successive FCL arrangements with the Fund. Access under the FCL peaked at SDR 22.0 billion (1,303 percent of quota) during the fourth arrangement, approved on January 18, 2013; access under the successor arrangement, approved on January 14, 2015, was reduced to SDR 15.5 billion (918 percent of quota), and this was subsequently lowered to SDR 13.0 billion (770 percent of quota) on January 13, 2016.34 Limited macroeconomic imbalances prior to the crisis, effective pursuit of counter-cyclical policies during the crisis, and sustained efforts to build buffers and further strengthen the policy framework all served to limit Poland’s external financing needs during and after the crisis. 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 external debt levels are both projected to decline in 2017, even taking into account the impact of the new proposed FCL arrangement (Table 1) External debt, which was in the 44-55 percent of GDP range in the years preceding the global crisis, peaked at almost 74 percent of GDP in 2012 before declining to 65 percent in 2014. External debt has since risen to an estimated 70.7 percent of GDP in 2016, but is projected to decline to 68.1 percent of GDP in 2017. Short term debt on a residual maturity basis is estimated at 30 percent of total external debt in 2016 and is projected to decline to 28.7 percent in 2017. Public external debt is estimated at 31.1 percent of GDP in 2016, but is projected to decline to below 29½ percent of GDP in 2017. Gross public debt (ESA95 definition), is projected to rise slightly from 53 percent of GDP in 2016 to 54 percent in 2018 before declining gradually to 52 percent of GDP in 2021. Net external debt is projected to fall below 47 percent of GDP in 2017. Sustainability analyses suggest that both external and public debt are generally robust to, and remain manageable under, a range of scenarios.5

Table 1.

Poland: External Debt and Debt Service, 2012-17 1/

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Source: Polish authorities and IMF staff estimates.

End of period, unless otherwise indicated.

4. Even if the resources available under the proposed FCL arrangement were fully drawn, the Fund’s exposure to Poland would be moderate and represent just over 13 percent of total GRA credit outstanding.

  • Poland would become the Fund’s fourth largest individual exposure, after Portugal, Greece, and Ukraine.

  • Potential credit exposure to Poland would be about 43 percent of the Fund’s current precautionary balances.

  • However, Fund credit would only represent a modest part of Poland’s external debt (Table 2). Fund GRA credit to Poland would add around 1.3 percent of GDP to the country’s total external debt, and represent around 4.6 percent of Poland’s public external debt, in 2017. Poland’s outstanding use of GRA resources would account for 5.6 percent of gross international reserves in 2017, falling to around 5.3 percent of the total in 2019.

  • External debt service would increase in the medium-term, but remain manageable. Poland’s projected debt service to the Fund would rise to about SDR 3.3 billion in 2021, or about 0.5 percent of GDP. Peak debt service to the Fund would be less than 1 percent of exports of goods and services in 2021, and amount to only 3.3 percent of projected total external debt service.

Table 2.

Poland—Capacity to Repay Indicators (2015-22) 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 2, 2016. Includes 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. Taking into account the cancellation of the current FCL, the proposed new FCL arrangement would have no net impact on Fund liquidity. Half of the current FCL arrangement (with a total access of SDR 13.0 billion) is financed by the New Arrangements to Borrow (NAB) and the other half is financed by quota resources.6 Therefore, the positive impact of cancelling the current FCL arrangement on the Fund’s Forward Commitment Capacity (FCC) would be only SDR 6.5 billion. As the proposed access level under a successor FCL arrangement (which will be financed solely using quota resources) is also SDR 6.5 billion, the net impact of replacing the current FCL arrangement with a successor would leave the Fund’s net liquidity position unchanged (Table 3). If Poland were to draw upon the proposed FCL arrangement, however, there would be an additional impact on the FCC as Poland would no longer participate in the Financial Transactions Plan.

Table 3.

Poland—Impact on GRA Finances (in SDR billions unless otherwise noted)

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Sources: Finance Department and IMF staff calculations.

The FCC is defined as the Fund's stock of usable resources less undrawn balances under existing arrangements, plus

The cancellation of the current FCL (SDR 13 bn) will add SDR 6.5 bn to uncommitted quota resources and raise the FCC by

As of December 6, 2016.

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.

Assessment

6. The proposed FCL arrangement would have no net impact on the Fund’s liquidity position. The impact of the proposed new FCL arrangement on the FCC will be exactly offset by the impact of the cancellation of Poland’s existing FCL arrangement. At close to SDR 210 billion, the FCC appears sufficiently strong to accommodate the proposed arrangement.

7. Poland intends to treat the FCL arrangement as precautionary, but if it is drawn in full, Poland would be one of the Fund’s largest borrowers. Poland would become the fourth largest user of the Fund’s GRA resources after Portugal, Greece, and Ukraine. However, 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.

Annex I. Poland: History of IMF Arrangements

Prior to the FCL arrangements approved in May 2009, July 2010, January 2011, January 2013, and in January 2015, 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.

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

Annex Table I.1

Poland: IMF Financial Arrangements, 1990-2016

(In SDR millions)

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Source: Finance Department.

As of December 6th, 2016

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

The initial access amount was SDR 15,500 million (378 percent of quota), but the access amount was reduced to SDR 13,000 million (317 percent of quota) on January 13, 2016. See EBS/15/157.

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. Most recently, on January 14, 2015, another two-year FCL arrangement in the amount of SDR 15.5 billion (378 percent of quota) was approved, but the access amount was reduced to SDR 13.0 billion (317 percent of quota) a year later.

A02ufig1

Annex Figure I.1. Poland: IMF Credit Outstanding, 1990-2016

(In SDR millions)

Citation: IMF Staff Country Reports 2017, 018; 10.5089/9781475567236.002.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

See Republic of Poland—Review Under the Flexible Credlit Line Arrangement.

4

Following the 14th Review quota increases, which became effective on February 2, 2016, Poland’s quota increased from SDR 1,688.4 million to SDR 4,095.4 million. As a result access under the FCL fell to 378 percent, and then to 317 percent, of the new quota.

5

Note that the debt sustainability analysis does not assume any drawings under the FCL arrangement, consistent with the approach applied in other cases.

6

The current arrangement was approved when the NAB was activated, and therefore is financed by both NAB and quota resources.

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