16 May 2013

IMF: Republic of Poland—Concluding statement of the 2013 Article IV Mission

The consolidation measures contained in the 2013 budget remain appropriate and automatic stabilisers should be allowed to operate. Over the medium term, key priorities include additional fiscal consolidation to reduce the public debt ratio, and structural reforms to boost potential growth.

After weathering the global financial crisis well and staging an impressive recovery in 2010-11, the Polish economy slowed markedly in 2012. The slowdown appears to be cyclical, as weakness in euro area growth spread to Poland’s main trading partners, with knock-on effects on Polish consumer and business confidence. As a result, external demand was subdued and private investment and consumption weakened. This, alongside a sharp decline in public investment, pushed growth below 2 per cent in 2012. The labour market worsened and credit growth decelerated.

Poland’s impressive fiscal consolidation continued in 2012, but the economic slowdown poses challenges going forward. The consolidation has resulted in a decline in the deficit from 7.9 per cent of GDP in 2010 to 3.9 per cent of GDP in 2012, and the first fall in the public debt ratio since 2007. Nonetheless, fiscal space remains very limited given the proximity of public debt (national definition) to the 55 per cent of GDP legal threshold and the need to further reduce the fiscal deficit over time.

Despite limited fiscal space, there is scope for fiscal policy to balance structural consolidation with support for the economy in 2013. This implies that Poland should maintain the measures contained in the 2013 budget, while allowing automatic stabilisers to operate. Under these assumptions, the IMF expects the general government deficit to reach 4 per cent of GDP in 2013, largely as a result of the impact of the growth slowdown on fiscal revenues. The strong credibility of fiscal policy has contributed to favourable financing conditions, and the authorities should continue to pre-fund public sector financing needs.

As the economy recovers, additional fiscal consolidation will be needed to put the public debt ratio firmly on a downward path and rebuild fiscal buffers. Based on measures that have already been identified (including maintaining the current VAT rate through 2016 and limiting discretionary expenditure growth to the CPI growth rate), the IMF expects the deficit to decline to 3.3 per cent of GDP in 2014 and to fall gradually in the medium term. Additional measures of about 1 per cent of GDP will be needed over 2014-16 to meet the authorities’ medium-term objective (MTO) of a 1 per cent of GDP structural deficit, which in turn is essential to reduce the debt ratio. These measures should be identified in advance and could include conducting a broad expenditure review to identify areas where non-priority spending can be reduced. Further cuts in public investment should be avoided.

Bolstering the fiscal and pension frameworks remains important. Finalising the design of a permanent expenditure rule that is simple and transparent, with sufficient countercyclical properties and a clear link to the MTO, would help anchor public finances in the medium term. The ongoing review of the pension system is welcome, and the impact of any prospective changes should be carefully considered in terms of the long-term impact on public finances and the ability of the pension system to provide sufficient income to future retirees. Efforts to align the disability formula with the general pension system and continued reforms of the special occupational pensions are also needed.

Poland’s financial system appears to be resilient. Risks have been managed well and vulnerabilities contained through effective supervisory measures, including on foreign exchange exposure, capital adequacy, and bank funding. Stress tests conducted as part of the recent IMF-World Bank FSAP update mission confirm the sector’s resilience: bank capital and liquidity buffers can withstand large shocks and contagion risks are limited.

Improvements in bank supervision should continue. The frequency of targeted inspections has increased and onsite/offsite coordination has been enhanced. Nonetheless, there is a need to broaden the areas where the Financial Supervision Authority (KNF) can issue binding prudential regulations and to increase the KNF’s supervisory resources and budgetary autonomy and flexibility, especially in light of its expanding perimeter and new regulatory and supervisory initiatives at both the global and European levels.

Safeguarding asset quality will be essential. Banks have been addressing the existing stock of impaired assets, but accounting constraints, tax disincentives (deductibility of loan losses and debt relief), and legal obstacles (insolvency regime) will need to be tackled to speed up progress. Looking ahead, the KNF should intensify its oversight over bank credit risk management practices, especially as the slowing economy will add to impaired loans. In this context, the KNF’s on-going thematic review of impaired loans is timely and should help identify other areas where improvements are needed.

The new macro-prudential and bank resolution frameworks should be put in place as soon as possible. The authorities should advance legislation to create a Systemic Risk Board and establish a formal and explicit macro-prudential framework that will aim to identify, monitor and contain systemic risks to the financial system. They should take this opportunity to delineate the mandates of the various institutions involved in financial oversight, secure sufficient autonomy and accountability for each, and define coordination arrangements. The envisaged overhaul of the bank resolution framework will provide critical tools for orderly bank resolution, and could be supported by explicit depositor preference.

Full press release

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