Poland: Strong Institutions a Must For Steady Growth

IMF News, July 5, 2016

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Poland has been growing steadily and was "the only economy in Europe that did not go into recession" during the crisis.
Steady growth allowed Poland to close "more than a quarter of its per capita income gap with the euro area over the last 20 years."
Current macro indicators cited:
- Inflation has been low for the past two years.
- The current account is "almost in balance."
- No signs of asset price bubbles detected.
Authorities have "recently introduced a full-fledged macro-prudential framework."

Some recent government decisions and announcements have "made markets jittery" and contributed to:
- Standard & Poor’s downgrade.
- Moody’s change of the outlook to negative.
Brexit noted as a new risk factor: "vote to leave the European Union" could affect Poland through "trade, financial, and confidence channels," and through spillovers from the euro area.
So far "financial spillovers have been manageable."
IMF view: recent measures may not have major repercussions for near-term growth, but "depending on how they are implemented they could negatively affect longer-term and potential growth, by weakening investor sentiment."

The economy is described as "growing at full capacity."
Concern: "fiscal policy is becoming expansionary" — characterized as "like pouring more fuel into the fire."
Recommendation: "begin fiscal consolidation" — "Given the favorable economic conditions, now is a good time to reduce the deficit."
Authorities are "in a good position to handle systemic risks, including from potential overheating."

Persistent disparities: a "poorer eastern region" (mainly small-scale agricultural, high unemployment) vs. a "more prosperous, faster-growing western part" integrated into the German supply chain.
Recommendations to reduce disparities:
- Strengthen vocational training and align it with employer needs.
- Scale up infrastructure to attract investment.
- Help workers transition out of agriculture into higher productivity sectors, such as manufacturing and services.
- Gradually phase out taxation incentives and retirement privileges for small-scale farming, carried out "over time," with supportive policies to assist the poor, particularly in Poland’s east.

Retirement age policy:
- Current policy: increase the retirement age "for men from 65 to 67 by 2020, and for women from 60 to 67 by 2040."
- IMF concern: Reversal of these increases could "weaken the social and financial sustainability of the pension system" and "undermine growth by reducing the working population."
- Demographic context: "UN projections show that working age population may be reduced by as much as a third by 2060."
Banking tax:
- A new tax on bank assets was introduced.
- IMF calculation: "growth could be reduced by as much as 0.4 percentage points by the end of 2016" because the tax could "undermine credit expansion" and thereby reduce consumption and investment.
- IMF recommendation: replace the tax with "a more growth-friendly financial activities tax, similar to that in Iceland, Israel, and Denmark."
Child benefits program:
- The program is costly: "around one percent of GDP."
- IMF assessment: it "benefits not just poor families, but also those in the upper income brackets," complicating fiscal consolidation.
- It "discourages female labor force participation and does not necessarily encourage fertility."
- Recommendation: redirect some of the budget toward child care, which "has already proven to increase female labor force participation without negative implications for fertility."

About "half a million households" in Poland hold foreign-exchange-denominated mortgages, mainly in Swiss francs.
IMF view on blanket conversion:
- A universal conversion "would be very expensive" and "the costs likely pushed onto banks."
- According to the Financial Supervision Authority, the proposal presented in January "would lead to bankruptcies of several banks."
- IMF cannot support that particular blanket proposal; prefers case-by-case treatment.
Note: The President’s office has unveiled several options; "details and total costs of these proposals are not yet available." The revised proposal is expected to take financial stability concerns into consideration.

IMF emphasizes that "very strong policies and institutions" have been major contributors to Poland’s steady growth and resilience to shocks.
Core features of "solid institutions" identified by IMF:
- A credible fiscal policy framework.
- An independent central bank.
- An independent and effective judiciary system, including the constitutional tribunal, to ensure accountability of executive and legislative branches.
IMF concern: changes to the constitutional tribunal and related measures could "weaken institutions" and endanger the rule of law, which would pose economic risks by undermining the institutional foundations of growth.

IMF Survey Interview, Poland Strong Institutions a Must For Steady Growth — July 5, 2016