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International Monetary Fund on May, 16th 2012. « Poland has performed even better than expected in the face of a challenging external environment. This has reflected very strong fundamentals, robust domestic demand, and sound macroeconomic management, which helped bolster confidence and sustain access to external financing. » – these are the opening sentences of the Concluding Statement of the 2012 Article IV Mission. « The mission is grateful for the warm welcome and excellent cooperation from the authorities and all other groups that it met during this visit. »
A few words of explanation..
Statements published by the IMF describe the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF’s Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.
Before reading the statement itself (see below), please have a quick look at the two extracts of the Agreement of the International Monetary Fund (adopted at the United Nations Monetary and Financial Conference, Bretton Woods, New Hampshire, July 22, 1944) required for a full understanding of the context:
Article I: The purposes of the International Monetary Fund are:
- To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.
- To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.
- To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.
- To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.
- To give confidence to members by making the general resources of the Fund temporarily available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.
- In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
The Fund shall be guided in all its policies and decisions by the purposes set forth in this Article.
Article IV: Obligations Regarding Exchange Arrangements
Section 1. General obligations of members
Recognizing that the essential purpose of the international monetary system is to provide a framework that facilitates the exchange of goods, services, and capital among countries, and that sustains sound economic growth, and that a principal objective is the continuing development of the orderly underlying conditions that are necessary for financial and economic stability, each member undertakes to collaborate with the Fund and other members to assure orderly exchange arrangements and to promote a stable system of exchange rates. In particular, each member shall:
- endeavor to direct its economic and financial policies toward the objective of fostering orderly economic growth with reasonable price stability, with due regard to its circumstances;
- seek to promote stability by fostering orderly underlying economic and financial conditions and a monetary system that does not tend to produce erratic disruptions;
- avoid manipulating exchange rates or the international monetary system in order to prevent effective balance of payments adjustment or to gain an unfair competitive advantage over other members; and
- follow exchange policies compatible with the undertakings under this Section
Section 3. Surveillance over exchange arrangements
- The Fund shall oversee the international monetary system in order to ensure its effective operation, and shall oversee the compliance of each member with its obligations under Section 1 of this Article.
- In order to fulfill its functions under (1) above, the Fund shall exercise firm surveillance over the exchange rate policies of members, and shall adopt specific principles for the guidance of all members with respect to those policies. Each member shall provide the Fund with the information necessary for such surveillance, and, when requested by the Fund, shall consult with it on the member’s exchange rate policies. The principles adopted by the Fund shall be consistent with cooperative arrangements by which members maintain the value of their currencies in relation to the value of the currency or currencies of other members, as well as with other exchange arrangements of a member’s choice consistent with the purposes of the Fund and Section 1 of this Article. These principles shall respect the domestic social and political policies of members, and in applying these principles the Fund shall pay due regard to the circumstances of members.
Republic of Poland
Concluding Statement of the 2012 Article IV Mission
May 16, 2012
Poland has performed even better than expected in the face of a challenging external environment. This has reflected very strong fundamentals, robust domestic demand, and sound macroeconomic management, which helped bolster confidence and sustain access to external financing. The flexible exchange rate cushioned the economy during episodes of turbulence in global financial markets, and broadly adequate international reserves limited volatility. Poland’s precautionary Flexible Credit Line arrangement with the IMF has helped maintain confidence in the country’s policies. But space to respond to adverse shocks is now more limited, and there remain some vulnerabilities.
The economic expansion is expected to slow. We project real GDP growth to moderate to 2½ percent in 2012, as both external and domestic demand are set to weaken. Lower growth in key trading partners will dampen exports, and uncertainty stemming from the euro area crisis has affected confidence. The muted outlook for domestic demand also reflects the planned scaling back of EU-funded public investment, weaker private consumption (largely due to persistent unemployment, modest wage growth, and tighter credit conditions), and slower private investment growth. The pace of job creation is expected to remain insufficient to reduce unemployment significantly in the near future. CPI inflation is projected to fall gradually to the 2½ percent target by mid-2013 on the back of the slowing economy and moderate wage pressures.
Risks to the outlook are on the downside, emanating mainly from external sources. While Poland may be less affected than some other countries, a deeper-than-expected recession or intensification of the crisis in the euro area would have an impact through confidence effects and substantial trade and FDI linkages with core euro area countries, as well as the exposure of the banking system to deleveraging by European parent institutions. The large share of nonresident holdings of government debt increases vulnerability to a reversal of investor risk appetite. Mortgage portfolios denominated in foreign currency also continue to pose risks to bank and household balance sheets.
Near-term policy challenges
The fiscal deficit was reduced substantially last year, and is set to decline further this year. In 2011, the overall fiscal deficit fell to just over 5 percent of GDP and public debt (ESA95 definition) reached about 56 percent of GDP. On current policies, staff projects a further reduction of the overall deficit to 3.1 percent of GDP in 2012, which would start putting public debt firmly on a downward path. If the growth outlook were to deteriorate significantly, automatic stabilizers should be allowed to operate to support the economy.
Over the medium term, public debt should be further reduced. A much lower public debt ratio would give policymakers flexibility and markets comfort. We support the authorities’ medium-term objective (MTO) of achieving a structural fiscal deficit of 1 percent of GDP by 2015, which will allow for sustained reductions in public debt. We estimate that meeting the MTO will require additional permanent fiscal measures of about ¾-1 percent of GDP. A broad expenditure review would identify areas where public expenditure could be reduced and help ensure that priority spending is safeguarded. In addition, there is room to simplify and eliminate inefficiencies in the tax system and to reduce tax preferences. This will help avoid excessive cuts in public investment, which is crucial to meeting Poland’s still-significant infrastructure needs.
Monetary policy should remain accommodative to support the weakening economy. Given the economic slowdown, the projected drop in inflation, and muted wage pressures, hikes in policy interest rates do not appear warranted. If the economy were to slow significantly and the outlook for inflation to weaken, rates should be cut. In the event of an external shock that gives rise to liquidity strains, the NBP should provide emergency liquidity support in both zloty and foreign currency, as was the case during past episodes of financial turbulence.
International reserves have grown substantially in recent years, and we support the decision to increase them further. While they exceed most measures of reserve adequacy, they are less than short-term external debt at remaining maturity plus the current account deficit.
The banking system has continued to perform well, and recent supervisory measures are welcome. The banking system has remained highly profitable, well capitalized, and liquid. Nonetheless, mortgage portfolios denominated in foreign currency and non-performing loans (NPLs) continue to pose risks. The steps taken so far—notably increased capital and liquidity buffers—help mitigate these risks, and we support the KNF’s requirement for banks to apply higher risk weights to foreign currency mortgages. Regulatory tightening and increased supervisory oversight should lead to a deceleration of new foreign currency mortgage lending (which still accounted for about a quarter of all new mortgages in the first quarter of 2012). We favor a more proactive approach to addressing NPLs, which could include increased voluntary out-of-court debt restructuring by banks under strict prudential rules and supervisory scrutiny.
We support the authorities’ intention to improve the fiscal framework. The proposed permanent expenditure rule, anchored on the MTO, should help strengthen public finances while still providing flexibility to deal with unexpected shocks. We also welcome the proposed fiscal rules for the local governments.
The recent pension reform will contribute to long-term fiscal sustainability. The gradual increase and equalization of retirement ages will improve public finances and support higher pensions in the long term, while also contributing to increase labor participation rates. We welcome the authorities’ initiatives to reform the special pension regimes. In the longer run, the latter could be aligned with the main pension system.
Recent and proposed improvements in Poland’s supervisory framework are welcome. The KNF stepped up the intensity of its supervisory processes in line with the recommendations of the 2011 Report on Observance of Standards and Codes. More frequent on-site examinations, targeted and timely supervisory actions, and a close dialogue with home supervisors are necessary for monitoring and containing risks in the banking sector. Additional supervisory resources may be needed to ensure that the KNF can effectively increase the scope and intensity of supervision, including of the credit union sector (SKOK). The authorities’ efforts to develop a more comprehensive framework for long-term bond issuance are an important step toward improving banks’ funding profiles in line with regulatory requirements outlined in the Basel III framework.
A specific bank resolution regime is needed to enable the authorities to resolve financial institutions promptly and in an orderly manner should the need arise. Work on such a framework, led by the Bank Guarantee Fund and with the engagement of the World Bank, should provide a diversified toolkit and a clearly identified resolution authority, taking into consideration the Financial Stability Board’s Key Attributes for Effective Resolution Regimes and evolving European legislation. Conclusion of this work and passage of relevant legislation are priorities.
We support the authorities’ intention to establish a macroprudential framework under the aegis of a multi-agency Systemic Risk Board. In line with the recommendations of the European Systemic Risk Board, the framework should aim to identify, monitor, and contain systemic risks and to become fully operational by end-June 2013. We look forward to the results of the work of IMF technical assistance in this area.
Boosting potential growth
Long-term economic prospects will crucially depend on structural reforms. Continued reforms would further unleash growth potential, and are especially important given Poland’s adverse demographic trends. The functioning of the labor market can be improved by better targeting job-matching services to the needs of the local population. The authorities’ efforts to reduce skill mismatches through better training and education are welcome. On the business climate, plans to ease access to regulated professions and streamline decisions on construction permits and land use are steps in the right direction. Finally, privatization should continue, guided by the authorities’ objective of reducing the share of the public sector in the economy.
The mission is grateful for the warm welcome and excellent cooperation from the authorities and all other groups that it met during this visit.