IMF Executive Board 2020 Article IV Consultation with Republic of Poland

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]with the Republic of Poland on February 3, 2021.

Following a long period of strong growth, the pandemic triggered a recession in 2020, though the estimated contraction of 3.4 percent would be among the least severe in the European Union. The second wave of the virus in the winter appears to have again lowered economic activity, delaying the start of a durable recovery. Economic growth in 2021 is projected at 2.7 percent, likely limited by ongoing restrictions early in 2021 but expected to rebound later in the year as vaccine access improves, with a further acceleration in growth expected in 2022. Over the medium term, sizeable new grants from the EU should facilitate strong investment and boost growth.

Poland entered the pandemic with substantial fiscal buffers, which have permitted a strong fiscal response to the crisis. Key policy actions have focused on preserving jobs and incomes through wage subsidies and benefits for self-employed and unemployed workers and partially forgivable loans for companies. The implementation of these measures has generally been frontloaded and robust. Driven by pandemic-related spending, the general government fiscal deficit is estimated to have increased to 8.4 percent of GDP in 2020, with general government debt increasing to 59 percent of GDP. Over the medium term, the fiscal deficit is projected to stabilize around 3¼ percent of GDP, with debt stable around 58 percent of GDP.

Monetary policies have also been significantly eased during the crisis. The policy interest rate has been reduced to near zero, while the central bank has implemented an asset purchase program. Inflation increased in early 2020 to above the target, driven by tight labor markets and regulated price increases. Headline inflation has recently declined to the target, though core inflation remains more elevated. Inflation is projected to fall further in 2021 while remaining near the target over the medium term.

The authorities have implemented macro-prudential measures to mitigate the impact of the crisis on the banking sector. While banks earnings have declined, asset quality has deteriorated only modestly, and banks remain well capitalized. Legal risks stemming from foreign-currency denominated mortgages remain a source of uncertainty and potential losses for banks.

Executive Board Assessment[2]

Directors welcomed the authorities’ effective policy support during the pandemic-induced recession, which has contributed to the resilience of the corporate sector and labor market and should limit long-term economic damages. Given Poland’s strong fundamentals and available policy space, as well as the sizeable new grants expected from the EU, Directors concurred that Poland is well positioned for a durable recovery. Nevertheless, the unusually high uncertainty calls for continued vigilance and flexibility in the near term.

Directors welcomed the extension of more targeted fiscal support in response to the second wave, while at the same time encouraged the authorities to ensure adequate coverage for those sectors that are more indirectly affected. Directors concurred that, once the recovery is firmly underway, a gradual reduction of the fiscal deficit would be needed over the medium term to replenish fiscal buffers, including through improved revenue administration and expenditure efficiency.

Directors agreed that, with inflation projected to remain near the target, the accommodative monetary policy stance remains appropriate until a recovery is well established. They also stressed that continued clear policy communication would support the effectiveness of the asset purchase program, which should also limit the need for foreign exchange interventions.

Directors welcomed the supervisory actions to mitigate the impact of the crisis on the banking sector. They called for continued vigilance, particularly on cooperative banks, given the higher credit risk and lower earnings brought on by the pandemic. Directors recommended proactively addressing the implications of court rulings on foreign exchange mortgage lawsuits. They also considered that redesigning the bank asset tax could support private credit during the recovery. Directors welcomed the enhanced autonomy of the Financial Supervisory Authority and its increased focus on AML/CFT compliance.

Directors emphasized the importance of advancing structural reforms that minimize the scarring effects of the crisis. They recommended prioritizing labor market reforms that encourage participation and foster the reallocation of labor in the post-pandemic economy. Directors also stressed the opportunity to boost public investment, including through digitalization and green investments, supported by the Next Generation EU funds. In this regard, they encouraged steps to enhance absorptive capacity and coordination among government entities for effective use of these funds.