Press Release No. 15/335

Press Release: IMF Executive Board Concludes 2015 Article IV Consultation with the Republic of Poland

July 14, 2015

On July 10, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with the Republic of Poland.

The economy has recovered from the 2012–13 slowdown. Growth accelerated to 3.4 percent in 2014, and further to 3.6 percent in the first quarter of 2015, on the back of buoyant domestic demand, supported by improving labor market and financial conditions. However, inflation has remained negative since July 2014 owing to low commodity prices and weak imported inflation. The current account deficit narrowed from 3.5 percent in 2012 to 1.4 percent in 2014, benefiting from strong exports.

The outlook is for continued robust growth and subdued inflation amid downside risks. Economic expansion is expected to continue, with growth projected at 3.5 percent in 2015 and over the medium term. External downside risks include a surge in global financial market volatility amid asymmetric monetary exit in advanced economies, continued geopolitical tensions in the region, and renewed sovereign stress or protracted low growth in the euro area. Domestically, inflation could fail to pick up owing to external factors or if low inflation expectations become entrenched. On the upside, a stronger-than-expected recovery in the euro area and low oil prices would further lift growth in Poland. Poland’s Flexible Credit Line (FCL) arrangement with the IMF helps mitigate external downside risks.

Policies have focused on supporting growth and rebuilding policy buffers. Monetary policy has remained accommodative helped by a cumulative 100 basis points cut in the policy interest rate since October. Fiscal consolidation has advanced further, allowing Poland to exit the Excessive Deficit Procedure (EDP) one year early. The general government deficit, which declined to 3.2 percent of GDP last year, is expected to narrow further over the medium term. The banking sector has remained well-capitalized and resilient to shocks, while reliance on foreign funding has declined. However, legacy vulnerabilities remain, including a sizable stock of foreign-currency loans and the still-elevated nonperforming loan (NPL) ratio.

Executive Board Assessment²

Executive Directors welcomed Poland’s recovery from the 2012–13 slowdown, supported by very strong economic fundamentals and policies, which pave the way for continued robust growth and further integration with European and global markets. Poland’s strong policy framework has also increased the economy’s resilience. While the outlook is favorable, downside risks remain—including from volatile global financial conditions, geopolitical tensions, and sovereign stress in the euro area. Directors encouraged the authorities to further strengthen policy buffers and advance structural reforms to mitigate risks and ensure a durable and balanced recovery. They noted that the precautionary FCL arrangement continues to provide important temporary insurance against external risks.

Directors welcomed the March policy interest rate cut, which should help limit the risk of prolonged low inflation. While recognizing that low inflation so far did not appear to have negative effects on the real economy, Directors agreed that there may be a need to ease monetary policy further if inflation expectations continue to disappoint. Directors also recommended moderate reserve accumulation to strengthen the resilience to shocks.

Directors commended the continued strong performance of the banking sector, which remains well-capitalized, liquid, and profitable. They welcomed the new bankruptcy and insolvency law and encouraged the authorities to expedite implementation of other key financial sector reforms, including the adoption of comprehensive macroprudential and bank resolution frameworks. Directors recommended continued efforts to address legacy vulnerabilities from still-elevated levels of NPLs and the credit union segment, and supported the authorities’ case-by-case approach to restructuring distressed Swiss-franc-denominated mortgages.

Directors commended the authorities’ strong fiscal consolidation efforts, which allowed Poland to exit the European Union’s EDP one year early. They considered that continued gradual consolidation would create additional policy space to allow for a timely and effective response to shocks without unduly weighing on growth. In this regard, Directors agreed that the medium-term objective of a structural deficit of 1 percent of GDP remains appropriate, and encouraged the authorities to identify specific expenditure savings and reduce the large VAT revenue gap to ensure that this objective will be met. Over the longer run, continued efforts to raise spending efficiency and reform of the special pension schemes would help to address fiscal pressures from population aging.

Directors encouraged the authorities to continue to implement structural reforms to boost productivity, safeguard competitiveness, and allow the economy to move up the value-added chain, thereby facilitating income convergence. They welcomed recent steps to streamline the list of regulated professions, reduce labor market segmentation, and ease administrative requirements for business start-ups. Directors advised that continued productivity gains would require promoting innovation, encouraging greenfield investment, and better targeting education and training to employer needs.