Abstract
On behalf of the Polish authorities, we thank the mission team led by Mr. Alfredo Cuevas for constructive dialogue, which resulted in the well-balanced Article IV report. The mission was conducted virtually due to a sudden increase in infection rates. The authorities appreciate the staff’s insightful report and thorough analyses of macroeconomic developments, as well as a judicious choice of selected issues focusing on the relevant topics. The authorities broadly agree with the thrust of the staff’s appraisal and appreciate their recommendations, which they intend to thoroughly assess.
On behalf of the Polish authorities, we thank the mission team led by Mr. Alfredo Cuevas for constructive dialogue, which resulted in the well-balanced Article IV report. The mission was conducted virtually due to a sudden increase in infection rates. The authorities appreciate the staff’s insightful report and thorough analyses of macroeconomic developments, as well as a judicious choice of selected issues focusing on the relevant topics. The authorities broadly agree with the thrust of the staff’s appraisal and appreciate their recommendations, which they intend to thoroughly assess.
Recent developments, outlook, and risks
In recent years, the economy successfully withstood several periods of market turbulence on the back of the country’s strong fundamentals and timely macroeconomic policies. Poland’s economy expanded by 43 percent in the decade leading up to 2019, almost three times faster than the euro area economy. While 2019 marked the 28th consecutive year of Poland’s GDP expansion, t he COVID-19 outbreak significantly affected the dynamics of economic activity, leading to a 2.5 percent contraction of the GDP in 2020.
The economy rebounded in 2021, exceeding the authorities and market projections. According to the authorities’ initial projections, the GDP was expected to grow by 4.9 percent in 2021, followed by 4.6 percent in 2022. However, the newest data indicate that GDP grew by 5.7 percent in 2021, thus, was notably higher than projected. Going forward, in 2022 the growth is projected to be driven by private consumption, which should remain strong thanks to a better situation in the labor market, and a decline in the household savings rate. A tax wedge reduction will further support consumer spending. Absent major headwinds, investment demand is projected to increase, while an increase in foreign demand for goods and services could also contribute to growth in exports. As imports should grow at a higher pace than exports, the net export is expected to weigh negatively on GDP growth in 2022.
The main sources of uncertainty and risk regarding the outlook continue to be the evolution of the pandemic and possible new variants of the CO VID-19 virus. The authorities continue with a vaccination campaign focusing their efforts on the unvaccinated part of the population. Although, the share of the fully vaccinated population is lower than the EU average, the economy adapted well during the successive waves of the pandemic.
Fiscal policy
The authorities are committed to gradually consolidating public finances and rebuilding fiscal buffers. Although the public debt-to-GDP ratio rose sharply due to pandemic-related expenditures and contraction of the economy, peaking at 57.4 percent of GDP in 2020, the authorities expect its gradual decline over the medium-term. The stronger performance of the state budget in 2021, suggests that debt is expected to drop slightly to 57 percent in 2021 and fall further to 56.6 percent of GDP in 2022, while continuing its downward trajectory go in g forward.
The authorities are attentive to the need to maintain debt sustainability. In October 2021, the revision of the 2021 budget was approved, which adjusts the forecast for state budget revenues upward an d accounts for an increase in expenditures. Given the overperformance of tax revenues, the authorities decided to reduce the state budget deficit from 3.2 to 1.6 percent of GDP in 2021, while ensuring resources necessary for the recovery.
More recently, the Parliament approved the Polish Deal package aimed at making the tax and social security system more progressive by alleviating the fiscal burdens on the lowest-earning households. The main objectives of this new package include: 1) changes in tax administration, 2) bolstering public spending on medical services by making most of the taxpayers’ health insurance contributions proportional to their incomes, and 3) reforms to the Personal Income Tax (PIT), Corporate Income Tax (CIT), and Value Added Tax (VAT). The key elements of the PIT reform include an increase in the personal allowance and a tax threshold as well as changes in health insurance contributions, making it non-deductible. The PIT reform has an additional tax relief for middle-class taxpayers. Moreover, there are several proposals aimed at tax support for Research and Development activity, tax relief for taxpayers resettling in Poland, as well as for taxpayers abstaining from retirement after reaching the required age, among a number of other tax reliefs. The authorities have also envisaged measures that would mitigate any potential negative impact of the proposed changes on public finances.
Major efforts have been made to soften the negative impact of rising prices on households. The Parliament approved the “Anti-inflation shield” which is worth in total about 0.7 percent of GDP. Key elements of this new government program include: 1) a temporary reduction in taxes, including VAT, excise, and other taxes on energy sources (natural gas, electricity, heating, fuels) as well as 0 percent VAT rate for basic food and fertilizers); 2) a direct one-off subsidy from the budget to lower-income households; and 3) compensation payments to gas distributors to freeze tariffs for households and certain public entities.
The authorities are strongly committed to sound, effective, and efficient supervision of the Public Financial Management (PFM). In this regard, the authorities thank staff for conducting the recent PIMA mission in the second half of 2021. They intend to strengthen the public investment management system and supervision in line with staff’s recommendations.
Monetary policy
In September 2021, the Monetary Policy Council (MPC), which constitutes one of the bodies of the National Bank of Poland (NBP) responsible for designing monetary policy, published the Monetary Policy Guidelines to outline key elements in Poland’s monetary policy strategy for 2022 against the backdrop of current and expected macroeconomic conditions. The authorities’ strategy is based on a medium-term inflation target of 2.5 percent with a symmetrical band for deviations of ± 1 percentage point. The scope, manner, and scale of monetary policy instruments used by the NBP will be considered flexibly, in line with developments in the economy.
As in previous years, the MPC has emphasized the flexibility of the inflation targeting regime. The authorities are prepared in the case that inflation may temporarily deviate from the target due to macroeconomic and financial shocks. While setting the appropriate pace of bringing inflation back to the target, the MPC will be guided by the nature of the economic shock and the persistence of its consequences. When deciding on the changes to monetary policy parameters, the MPC will take into consideration the following: 1) the need to accommodate price adjustments related to the post-pandemic rebound of the economy, 2) the process of Poland’s real convergence, and 3) the consequences of the structural changes taking place in the economy, including the energy transition.
Inflation reached 5.1 percent on average in 2021, which is a two-decade high, and thus is running above the NBP’s target. In December 2021, inflation increased to 8.6 percent in annual terms. Significant contributors to the increase in inflation in 2021 were the rise in global commodity prices, a record-high increase in prices of CO2 emission allowances, rising prices of goods constrained by broken supply chains, as well as increases in electricity and natural gas prices on local and global levels. The ongoing economic recovery, including an increase in demand driven by rising household income, has also added to an increase in inflation. These factors, together with a rise in regulated tariffs on electricity, natural gas, and thermal energy, will also contribute to inflation in 2022.
On February 8, 2022, the MPC raised the NBP’s interest rates for the fifth month in a row. The NBP reference rate rose to 2.75 percent. Since October 2021, the reference rate has risen by 2.65 percentage points in total. The MPC decided to increase interest rates to reduce the risk of inflation running above the NBP’s inflation target in the monetary policy transmission horizon. This risk stems from further economic recovery and the expected continuation of favorable labor market conditions, as well as the likelihood of longer-lasting impact of external shocks on price dynamics. The MPC remains committed to conducting data-driven assessments regarding the scale of monetary tightening necessary for achieving medium-term price stability and supporting sustainable economic growth. According to the MPC, zloty appreciation would be consistent with the direction of monetary policy conducted by the NBP.
Financial sector
The banking sector proved to be resilient throughout the COVID-19 pandemic, with sound asset quality and sufficient capital buffers. Recent increases in interest rates will improve the banking sector’s income and profitability. Demand for credit will positively contribute to financial sector’s earnings. Consolidation of cooperative banks is projected to continue, with an aim of widening their client base, reducing operation costs, and adapting to the digital needs of the clients. The authorities do not intend to implement changes to the bank asset tax.
Foreign currency de nominated mortgages remain the ma in source of risk for banks, but significant progress has been made to address this challenge. The Polish Financial Supervision Authority (PFSA) has prepared a framework for banks to launch a voluntary conversion of FX mortgages to zloty. So far, three banks are offering settlements based on the PFSA’s framework. Some other banks have offered their clients conversion proposals on their own terms with borrower interest in such settlements. Banks’ strong capital buffers should be sufficient to absorb provisions as the number of litigations could increase, depending on the final ruling of the Supreme Court.
The authorities are committed to improving the AML/CFT framework. In 2021, in accordance with the Fifth Anti-Money Laundering Directive, the Polish authorities revised the AML/CFT framework to include the establishment of registers of virtual asset service providers and trust and company service providers. The authorities are planning to further strengthen the framework in line with international best practices.
Structural reforms
The Polish Deal package aims to address the recovery beyond the short-term consequences of the pandemic. The five main objectives for the coming years include: 1) creating a more progressive tax and social security system through the reduction of the tax wedge for people with low incomes; 2) increasing spending on health care up to 7 percent of GDP in 6 years; 3) boosting investments with the objective of job creation; 4) supporting the housing market with a range of new instruments, such as state guarantees for some mortgage loans; 5) supporting old age pensioners by changing the tax system.
Directing the country’s resources, to the most vulnerable, is central to the Polish Deal package. Through the newly created strategic investment program under the Polish Deal package, local governments in underdeveloped regions are allowed to apply for up to 95 percent of non-returnable co-financing for investment projects, including utilities infrastructure, green transition to zero emissions, and waste management. The program is also expected to boost local entrepreneurship and the job market.
Poland is committed to reducing its carbon emissions and transforming the energy sector to be greener and more sustainable. The Polish energy strategy will incorporate the EUs “FIT for 55” package. To address the country’s energy transformation needs, the Ministry of Climate and Environment released for the public’s consultation the draft of an Act, which envisages establishing a new Energy Transformation Fund (ETF) responsible for supporting the transformation of the energy sector with the aim of reducing greenhouse emissions and achieving the climate policy objectives.
The Polish National Recovery Plan aims to strengthen the po st-pandemic economic recovery and improve its resilience to future unexpected shocks. The program will be supported by funds from the Recovery and Resilience Facility (RRF), a vehicle established by the European Commission in the form of grants and loans. The authorities have applied for European grants in five areas that are in line with the EU’s priorities: 1) building the resilience and competitiveness of the economy; 2) the green transformation of the energy sector; 3) digital transformation; 4) health care system improvements; and 5) green and smart mobility. So far, the program awaits the European Commission’s final approval.