IMF Executive Board 2021 Article IV Consultation with the Republic of Poland

F.P. Report

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation 1 with the Republic of Poland on February 18, 2021.

While the pandemic has taken its toll on lives in Poland, as elsewhere, the economy has weathered the pandemic comparatively well. After contracting 2.5 percent in 2020, one of the least-severe recessions among members of the European Union, the economy recovered strongly in 2021, expanding an estimated 5.7 percent. Although a winter wave of the pandemic may slow growth in the near term, the economy has shown increased resilience to successive waves, and the economy is projected to grow 4.6 percent in 2022. Over the medium term, strong household and corporate balance sheets and anticipated Next Generation EU grants should maintain solid economic growth, with little scarring to output anticipated from the pandemic.

Poland’s substantial fiscal buffers permitted a strong fiscal response to the crisis. Many of the initially broad-based measures were extended with greater targeting to support sectors most impacted by later waves of the pandemic. Driven by strong revenue growth associated with the economic recovery and a lower level of pandemic-related fiscal support, the general government deficit is estimated to have declined from 7.1 percent of GDP in 2020 to 2.9 percent of GDP in 2021, with general government debt decreasing slightly to 56 percent of GDP. Over the medium term, the general government deficit is projected to stabilize around 2½ percent of GDP, with debt stable around 50 percent of GDP.

Inflation has increased substantially in 2021, primarily driven by external factors, including energy prices, though core inflation has also increased in recent months and become broader based. After easing monetary policy aggressively at the start of the pandemic, the central bank has pivoted to tightening. Headline inflation is projected to remain elevated in 2022, primarily driven by energy price increases, with inflation falling within the target tolerance range by the end of 2023, assuming some further monetary policy tightening in response to emerging capacity constraints and strengthening wages.

Bank asset quality has remained stable during the pandemic, permitting a gradual removal of pandemic-related regulatory relief. Non-performing loan ratios have been broadly stable, and loan performance has not deteriorated even after the end of pandemic payment holiday schemes. Capital adequacy remains significantly above minimum levels. The legal risks stemming from foreign-currency denominated mortgages remain a source of uncertainty and potential losses for banks.

Executive Board Assessment 2

Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for the effective policy support during the pandemic, which will help minimize medium-term scarring. Given the strength of the recovery and inflation prospects, Directors welcomed the shift of policy focus from broad emergency responses. They recommended extending targeted support if the recovery weakens. They also encouraged continued efforts to increase vaccination coverage.

Directors considered that, given robust private demand, fiscal policy should avoid an expansionary stance and aim at rebuilding buffers. In this context, they stressed the importance of enhancing expenditure policies and transparency, including by phasing out off-budget support and improving the targeting of social benefits to shield low-income households from inflation. They also recommended offsetting revenue losses from the tax reform with savings elsewhere in the budget. Directors encouraged a moderate reduction of the fiscal deficit over the medium term to replenish policy space.

Directors supported the ongoing tightening of monetary policy, noting that further rate increases could be necessary to drive inflation back to the target and stave off overheating. They encouraged the central bank to retain flexibility, taking into account evolving economic conditions and communicating its policy decisions clearly. Directors welcomed the end of the asset purchase program consistent with the shift in monetary policy.

Directors noted that the banking sector remained sound through the pandemic, and welcomed the gradual phase-out of crisis-related measures. Given the legal risks surrounding foreign currency denominated mortgages, Directors welcomed the voluntary restructuring of these loans by banks. They recommended close monitoring of housing market conditions and continued efforts to enhance the oversight of virtual currency trade.

Directors underscored the importance of addressing labor shortages and promoting green and digital transformation, supported by an enhanced public investment framework and EU funds. Active labor market policies, especially those focused on upskilling the labor force, will help workers move to expanding activities and increase labor participation. Directors welcomed the authorities’ intention to gradually reduce the country’s reliance on coal and increase the use of renewables. In this context, they saw value in developing a long-term investment financing strategy, possibly including consideration of carbon taxation to reinforce incentives for emissions reduction.