IMF Concludes 2009 Article IV Consultation with Poland

by Mike Godfrey, Tax-News.com, Washington

17 August 2009

The IMF has concluded an Article IV consultation with the Republic of Poland. The IMF stated that sound policies in the past are now affording policy-makers room for manoeuvre, such that adjusting policies as circumstances warrant would help Poland to endure a mild recession this year. However, the IMF recognized that the challenges facing fiscal policy are more complex, reflecting the need to balance short-term cyclical priorities and longer-term objectives.

The IMF reported that the fiscal deficit was allowed to increase as the slowdown set in, with the general government deficit reaching 3.9% of GDP at end-2008, compared with the budget target of 2.5% of GDP. Meanwhile, the decline in inflation, together with the room provided by euro interest rate cuts, prompted the central bank to embark on a loosening cycle since last November. The policy rate was cut by cumulative 250 basis points to 3.5%. Besides renewed price pressures in commodities, recent policy rate cuts have been tempered by concerns about zloty depreciation.

The IMF broadly supported the Polish government decision to raise the deficit limit for 2009 to accommodate the revenue shortfall, noting that the deficit is set to remain above the Maastricht target through the medium term. Welcoming Poland's commitment to take corrective actions to preserve debt sustainability, the IMF expected fiscal consolidation to start in 2010 if the recovery materializes, but considered that there was only limited scope for further delaying the consolidation process if the medium-term deficit targets were to be achieved.

Introducing rolling and binding multi-annual expenditure limits, together with measures to enhance the expenditure prioritization process, could help anchor confidence in the medium-term targets, according to the IMF, and these efforts should be complemented by a further strengthening of fiscal institutions.

Raising Poland’s labor participation rate is the key to boosting long-term growth, and the IMF welcomed last year’s reforms of the early retirement system and the continuing reform of the pension system, including the gradual raising of the retirement age and merging special pension schemes with the general scheme. The IMF saw the reinvigorating of structural reforms more broadly, including the privatization plan, as a positive benefit to the economy’s flexibility, bolstering its long-run potential, and facilitating successful euro adoption in the medium term.

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