Poland: Staff Concluding Statement of the 2023 Article IV Mission
March 24, 2023
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. 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, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC:
An International Monetary Fund mission visited Warsaw during March
14-24 in the context of the 2023 Article IV consultation.
Following an impressive recovery from the pandemic, the Polish economy
has been struck by the effects of Russia’s war in Ukraine, which have
contributed to high inflation and slowing growth. Poland is graciously
hosting 1 million refugees from Ukraine, reflecting the commendable
efforts of the authorities and the Polish people. The main policy
challenge is to lower inflation back to the target without unduly
weakening the economy.
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In the short run, fiscal policy should support the central bank’s
efforts to reduce inflation by avoiding a fiscal loosening this
year. Future energy support measures, if needed, should be more
targeted according to need and allow a greater role for price
signals to promote energy conservation.
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The authorities’ announced intention to reduce the role of
off-budget fiscal funds is welcome. Expenditures currently executed
through off-budget funds should be moved to the budget to improve
transparency and permit parliamentary and societal review.
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The authorities should create room within the budget to accommodate
a planned increase in defense expenditures. Having ample fiscal
space has served Poland well during the pandemic and the energy
price shock. Given ongoing uncertainty, it will be important to
preserve the fiscal buffers.
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Monetary policy should continue to respond to changing data and
conditions. The National Bank of Poland (NBP) should be prepared to
raise interest rates further if necessary to reduce inflation to
the target by the end of 2025.
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While banks should proceed with voluntary restructurings of foreign
exchange mortgages, the authorities should explore policy options
to help resolve the uncertainty that legal risks cast over the
banking sector. Financial sector authorities should monitor
challenges to banks’ ability to provide credit to the economy, and
costly untargeted credit holidays should be discontinued.
As elsewhere in Europe, the Polish economy faces headwinds in the wake
of Russia’s war in Ukraine.
While energy shortages have been avoided, growth slowed significantly in
the second half of 2022 as high inflation eroded real wages, monetary
tightening slowed housing activity, and external demand weakened. The
slowdown will continue in early 2023, before a gradual recovery begins in
the second half of the year. Growth in 2023 is projected at 0.3 percent,
down from 4.9 percent in 2022.
Despite the current challenges, the medium-term economic growth outlook
remains favorable.
A cyclical rebound is projected in 2024 and 2025, with growth of 2.4 and
3.7 percent, respectively. Economic growth is projected to exceed 3 percent
annually over the medium term, as the negative effects of population aging
are offset by stronger investment financed in part by Next Generation EU
grants, underscoring the importance of meeting the milestones agreed with
the EU. Even after terms of trade normalize, a small current account
deficit is projected to persist over the medium term, given Poland’s
significant investment needs. The central bank’s foreign exchange reserves
are ample and expected to remain adequate to insulate against external
shocks and disorderly market conditions.
Uncertainty to the outlook remains unusually high.
An escalation of the war in Ukraine or an intensification of recent banking
sector turmoil in advanced economies could trigger greater risk aversion
and weaker external demand. Separately, inflation could remain high for
longer than expected. On the upside, Poland is well positioned to benefit
from a possible increase in nearshoring-related investments. A sustained
increase in immigration would also increase Poland’s competitiveness and
raise medium-term growth.
Following a fiscal expansion in 2022 and amid still-high inflation, the
authorities should avoid budgetary loosening in 2023.
The general government fiscal deficit increased from 1.9 percent of GDP in
2021 to an estimated 3.1 percent of GDP in 2022. This fiscal loosening was
driven by a personal income tax (PIT) reform and the “Anti-Inflation
Shield” temporary tax reductions on food and energy. While the looser
fiscal stance added to existing inflation pressures, the “Anti-Inflation
Shield” tax cuts also helped contain the increase in headline inflation.
Looking forward, the deficit is expected to again widen, reaching 4.5
percent of GDP in 2023, due to the slowing economy and higher interest
payments. While general government debt is projected to remain stable at
about 50 percent of GDP, a tighter fiscal position in 2023 would support
the central bank’s efforts to lower inflation. At a minimum, further fiscal
loosening should be avoided unless major downside risks materialize.
If Poland faces additional energy shocks, policies should be primarily
focused on protecting the most vulnerable and encouraging energy
conservation.
While measures to shield the economy from an extraordinary energy price
shock can be appropriate, they should be temporary and move towards greater
targeting according to household income and energy poverty. In addition,
they should allow a greater role for price signals to improve energy
conservation and support the transition to renewable energy. The “Energy
Shield” of 2023 is a step in the right direction with respect to
electricity, as it introduces block tariffs which allow for greater price
increases above a threshold level of consumption.
To accommodate additional defense expenditures, the authorities should
find offsetting savings to prevent debt from increasing over the medium
term.
Ample fiscal space permitted robust support to the economy during both the
pandemic and the energy price shock. However, Poland now faces new fiscal
pressures in the form of additional defense expenditures, lower PIT
revenue, and higher interest rates. Over the medium term, the general
government deficit is projected to exceed the approximate 3 percent of GDP
level that would stabilize debt around 50 percent of GDP. Keeping debt on a
gradual downward path would preserve policy space to address future shocks
and prepare for long-term pressures related to population aging and the
energy transition. To create fiscal space, the authorities could consider
reforming the property tax to raise additional revenues or curb
expenditures by enhancing the targeting of social benefits and raising the
retirement age. This latter step would also support economic growth by
limiting the gradual decline in the labor force. Ending the reliance on
extra-budgetary funds and instead requiring all spending to go through the
budgetary approval process would also support fiscal scrutiny.
While inflation is likely to decline significantly in 2023, it is
projected to reach the top of the tolerance range of the target only at
the end of 2025.
The large increase in inflation was mostly driven by external energy and
food prices. The stabilization of these prices will drive the projected
near-term fall in inflation from 16.6 percent at end-2022 to 7.2 percent at
end-2023, while remaining high at 11.9 percent on average in 2023. However,
a further decline in inflation to the target will require an easing of core
inflation, which is more domestically driven. Given the tight labor market,
the IMF mission projects that the decline in core inflation will be
protracted, averaging nearly 11 percent in 2023 and more than 7 percent in
2024. Headline inflation is projected to decline to 3.6 percent at
end-2025, near the top of the tolerance range of the target.
The NBP should continue to respond to changing conditions and, in
particular, be prepared to raise interest rates further, if necessary
to reduce inflation to the target by end-2025.
The Monetary Policy Council (MPC) appropriately raised rates during 2021-22
before holding the policy rate at 6.75 percent since October 2022. This
policy tightening has been effective in dampening economic activity through
the interest rate and credit channel. However, the impact of tightening
already delivered and the resulting pace of disinflation are difficult to
predict. As a result, monetary policy should continue to respond to
changing data and conditions. Given the structural labor shortage in
Poland, a reduction in wage growth may be slower than projected, hampering
the pace of core disinflation. Even if food and energy price inflation
persistently declines, the MPC should resume monetary policy tightening if
key indicators – core inflation momentum, wage growth, and the economy –
fail to slow as projected. A new fiscal expansion may also necessitate
additional monetary policy tightening. Accordingly, the MPC should
consistently communicate that its current focus remains on the maintenance
of a tight policy stance, making clear that discussion of rate cuts is
premature.
While the banking sector remains stable and well capitalized, legal and
regulatory challenges could hamper the ability of banks to support the
economy.
Non-performing loan rates remain low, sector-wide capital remains strong,
and higher interest rates have supported earnings. Nonetheless, the sector
continues to face challenges that reduce profitability and could limit its
ability to provide credit to the economy over the medium term. First,
mortgage credit holidays made available to all borrowers – regardless of
income or actual distress – have led to significant costs for banks and
should not be extended. Instead, if needed, the authorities could scale up
existing programs which provide effective support to truly distressed
borrowers. Second, adverse market conditions have complicated the ability
of some banks to issue instruments available for bail-in in the event of
resolution, in line with MREL requirements. Absent an improvement in market
access, these banks may need to meet the requirement with own funds in
early 2024. Finally, foreign exchange (FX) mortgage legal risks continue to
cast a high level of uncertainty over the banking sector. While progress in
voluntary conversion of FX mortgages to local currency has been encouraging
and should continue, the authorities should explore policy options that
help resolve this uncertainty.
The energy strategy should reflect the need for decarbonization while
safeguarding Poland’s energy security.
Meeting energy transition targets will require substantial effort,
especially in the power sector. The forthcoming update of the energy
strategy is expected to propose a strong increase in renewable energy and a
reduced role for natural gas as a transition fuel. Unlocking the growth of
renewables hinges on a reduction in regulatory barriers and a level playing
field to attract private investors. Phasing out the use of coal in
electricity generation and directly by households should also be a
priority. Meeting decarbonization targets under EU policies will be
supported by EU funds, but additional policy instruments may be needed, and
the authorities are encouraged to consider a role for carbon taxation.
The authorities’ successful efforts to promote the integration of
Ukrainian refugees should continue.
Refugees have benefited from the existing Ukrainian diaspora in Poland and
the generosity of the Polish people. The authorities have also implemented
effective policies to support refugees, including financial support and
direct access to the health and education systems. In addition, refugees
have been granted full rights to work, and Ukrainian businesses have been
given operational rights in Poland. Going forward, the authorities could
provide refugees with further training opportunities for reskilling and
upskilling, Polish language training, and access to affordable childcare.
Efforts to facilitate the recognition of Ukrainian professional licenses in
Poland would also support the further integration of skilled workers.
The mission thanks the authorities and other counterparts for excellent
discussions.
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Activity and Prices |
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Public Finances (percent of GDP) 2/ |
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Balance of Payments |
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Memorandum item: |
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IMF Communications Department
MEDIA RELATIONS
PRESS OFFICER: Camila Perez
Phone: +1 202 623-7100Email: [email protected]
