20220223-IMF-Republic_of_Poland_2021_Article_IV_Consultation-Press_Release_Staff_Report_and_Statement_by_the_Executive_Director_for_the_Republic_of_Poland_92页_2mb

Summary of IMF Country Report No. 22/58: Republic of Poland

Core Content

The IMF conducted the 2021 Article IV consultation with the Republic of Poland, which concluded on February 18, 2021. The report includes a Press Release, Staff Report, and Statement by the Executive Director, outlining the economic developments, policy responses, and future outlook for Poland.

Main Economic Developments

• Economic Performance:
  The Polish economy experienced a significant contraction of 2.5% in 2020, one of the least severe among EU members. It rebounded strongly in 2021, with GDP growth estimated at 5.7%, and is projected to grow 4.6% in 2022.

  • Output Gap: The output gap is expected to close in 2022, with potential growth projected to decline over the medium term due to demographic challenges.
  • Inflation: Headline inflation surged to 8.6% in December 2021, well above the target range of 2.5% ± 1%. Core inflation also increased, averaging 4.1% in 2021. Inflation is expected to remain elevated in 2022 at 7.4%, and fall within the target tolerance range by the end of 2023.

• Fiscal Policy:

  • The general government deficit declined from 7.1% of GDP in 2020 to 2.9% in 2021, with debt slightly decreasing to 56% of GDP.
  • Over the medium term, the deficit is projected to stabilize around 2.5% of GDP, and debt around 50% of GDP.
  • The government is advised to avoid an expansionary fiscal stance, offset the impact of tax reform, and reduce the fiscal deficit to rebuild buffers.

• Monetary Policy:

  • The central bank has shifted from easing to tightening monetary policy to bring inflation back to target.
  • The asset purchase program has ended, and the central bank is encouraged to maintain flexibility and communicate policy decisions clearly.

• Banking Sector:

  • Bank asset quality and capital adequacy have remained stable during the pandemic.
  • Non-performing loan ratios have stayed broadly stable, and loan performance has not deteriorated post-pandemic.
  • Legal risks from foreign-currency denominated mortgages remain a concern. Banks are encouraged to seek voluntary restructuring agreements with clients.

• Labor Market:

  • The labor market has returned to pre-pandemic tightness, with the unemployment rate remaining between 3.0% and 4.0%.
  • Average wage growth has increased above the pre-pandemic trend, driven by base effects and inflation.
  • Employment losses persist in contact-intensive sectors.

• Current Account:

  • The current account moved into a deficit in 2021, estimated at 0.3% of GDP.
  • It is projected to increase to 1% of GDP over the medium term due to domestic demand outpacing that of trading partners.
  • Gross reserves are adequate, with the level of reserves at about 154% of the Fund's ARA metric.

Key Issues and Policy Recommendations

Fiscal Policy

• Avoid Expansionary Stance: Fiscal policy should avoid an expansionary stance to prevent overheating and maintain economic stability.
• Offset Tax Reform Impact: The fiscal impact of the tax reform should be offset elsewhere in the budget.
• Targeted Support: Targeted fiscal support should be extended if the pandemic significantly disrupts economic activity.
• Deficit Reduction: A moderate reduction of the fiscal deficit over the medium term is recommended to replenish policy space.

Monetary Policy

• Continue Tightening: The central bank should continue tightening monetary policy to drive inflation back to target.
• Flexibility and Communication: Maintain flexibility in policy decisions and communicate clearly to manage expectations.
• Asset Purchase Program: The conclusion of the asset purchase program is consistent with monetary tightening.

Financial Sector

• Phase Out Crisis Measures: Gradual phase-out of crisis-related financial sector measures is appropriate given the stability of the banking sector.
• Voluntary Restructuring: Banks are encouraged to pursue voluntary restructuring of foreign exchange mortgages.
• Virtual Currency Oversight: Continued efforts to enhance oversight of virtual currency trade are recommended.

Structural Policies

• Labor Market Policies: Strengthen active labor market policies to support workforce adaptation and increase labor participation.
• Energy Transition Strategy: Outline a strategy for financing the energy transition, including potential carbon taxation to support emissions reduction.
• Public Investment Coordination: Improve central coordination of public investment to support long-term growth and convergence.

Risks and Outlook

• Near-Term Risks:

  • A new wave of the pandemic, possibly driven by new variants, could disrupt economic activity.
  • Supply chain disruptions may constrain growth.
  • Energy price increases and inflation expectations in wage formation could prolong elevated inflation.
  • Disputes with the EU over rule of law issues may delay the disbursement of Next Generation EU funds, affecting investment outlook.

• Medium-Term Risks:

  • Potential growth could disappoint if total factor productivity (TFP) growth fails to return to pre-pandemic levels.
  • Overheating could occur if households spend excess savings.

Authorities' Views

• The authorities broadly agreed with the IMF staff's baseline scenario and risk assessment.
• They acknowledged the risks from the pandemic, supply bottlenecks, and inflation's impact on real income growth.
• They emphasized ongoing collaboration with the EU on the approval of the National Recovery Plan.
• They expect potential growth to remain around 3.75% over the medium term and minimal scarring from the pandemic.

Conclusion

The IMF Executive Board commended the Polish authorities for their effective policy responses during the pandemic, which helped minimize medium-term economic scarring. They supported the shift from broad emergency measures to more targeted support and encouraged continued efforts to enhance labor market policies, manage inflation, and improve public investment coordination. The banking sector is considered sound, and the gradual removal of crisis-related measures is appropriate. The report highlights the importance of maintaining fiscal discipline, tightening monetary policy, and addressing structural challenges to ensure sustainable growth.