Statement by the Staff Representative on the Republic of Poland January 18, 2019

2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Alternate Executive Director for the Republic of Poland


2018 Article IV Consultation-Press Release; Staff Report; and Statement by the Alternate Executive Director for the Republic of Poland

This statement provides information that has become available since the issuance of the staff report. The information does not alter the thrust of the staff appraisal.

On December 28, 2018, parliament approved a law freezing electricity prices in 2019 for end-users in all sectors at levels prevailing in mid-2018. The law does not specify what will happen to prices beyond 2019. With electricity generating costs projected to rise by PLN9 billion (0.4 percent of GDP) in 2019—reflecting higher prices for coal and CO2 emissions allowances—these additional costs will be borne by the government. The European Commission is planning to assess compatibility of the law with EU state aid rules.

Based on staffs current understanding of the law, relative to the counterfactual where electricity prices for all end-users increase to fully compensate for the higher generating costs, the price freeze will have the following effects in 2019 (measured as a share of GDP):

  • End-users will benefit from: (i) lower excises on electricity (0.1); (ii) reduced “transitional fees” on electricity (0.1); and (iii) lower electricity tariffs (0.2), yielding a net gain of 0.4 percent of GDP;

  • Electricity Companies will receive less revenue owing to lower electricity tariffs (0.2) and be fully compensated by a general government transfer (0.2); and

  • General Government (including extrabudgetary units) will collect lower revenue from excises (0.1) and transitional fees (0.1), and transfer the proceeds from selling unused CO2 emissions allowances to electricity companies (0.2), yielding an increase in the fiscal deficit of 0.4 percent of GDP.

The staff report factors in a price freeze only for households and SMEs, and while the report notes the risk that the freeze could be expanded to other sectors, this risk is not included in the baseline scenario. Therefore, broadening the scope of the price freeze will affect staffs macroeconomic forecasts in the following way:

  • Higher fiscal costs. The fiscal deficit will increase relative to that in the staff report by around 0.2 percent of GDP in each year that the scheme remains in place;

  • Lower inflation. Owing to unchanged electricity prices for non-SME companies, the second-round effect on consumer price inflation assumed in the staff report (about 0.1 percentage point in 2020 and 0.2 percentage point in 2021) will not materialize, lowering the inflation path by these amounts. Given time lags inherent in price pass through, no impact on 2019 inflation is expected; and

  • GDP growth. Broadening the price freeze will increase growth only slightly. This is because, with already-sizable profits, non-SME companies’ marginal propensity to spend out of additional profits is likely to be small, especially if the price freeze is temporary.