Polish economy was one of the best in Central and Eastern Europe in the last decade Photo: Pixabay.com
in an interview with IMF survey, Daria Zakharova, head of the IMF mission in Poland, discusses the latest results of the economic situation.
IMF survey: Polish economy was one of the best in Central and Eastern Europe in the last decade. What has contributed to this success?
Daria Zakharova: Polish economy has experienced strong and sustained growth even during the crisis: she was the only economy in Europe, which is not hit by the recession. The steady growth has allowed Poland over the past 20 years, offset by more than a quarter of the difference in income per capita relative to the euro. The greater part of these achievements, Poland owes its strong policies and institutions that have helped to successfully survive both the global financial crisis, and several periods of turmoil since then.
IMF Survey: Despite sustained growth, one the credit rating agencies downgraded its rating of Polish, and the second changed the outlook to negative. Is the Polish clouds gather?
Daria Zakharova: Some recent decisions and announcements have caused concern about the markets and contributed to the downgrade by Standard & amp; Poor’s and Moody’s perspective changes to negative. We do not think that these actions of the authorities must have serious consequences for economic growth in the near term, but depending on how they performed, they may have a negative impact on potential growth and development in the long run, weakening investor sentiment.
New risk factor on the horizon is the result of the vote in the UK on leaving the European Union, which may have an impact on Poland through trade, finance and the overall level of confidence, as well as indirectly through the potential consequences for the euro area. So far, the financial consequences are under control. Polish authorities are well prepared to cope with the turmoil.
IMF Survey: Polish economy is running at full steam. Is there a risk of overheating?
Daria Zakharova: Currently we not worry about overheating of the Polish economy, due to low inflation over the past two years. Current account is close to balance, and do not see any signs of price bubbles. In addition, the authorities have a good starting position for the prevention of systemic risks, including resulting from potential overheating, thanks to the recent introduction of a comprehensive macro-prudential supervision.
However, the truth is that if the economy is growing at its potential, fiscal policy becomes expansionary. It’s like pouring oil on the fire. In these circumstances there is a risk of overheating and the occurrence of price bubbles. We therefore recommend that the authorities have started to fiscal consolidation. Due to the favorable economic conditions, it is now time for deficit reduction.
IMF Survey: In Poland, there are persistent differences between the poorer regions in the east and the richer west. What the government can do to compensate?
Daria Zakharova: Indeed, it looks almost as if we were dealing with two different economies in one country: on the one hand, poorer east, with high unemployment, based largely on small farms, on the other hand the more affluent western Poland, a faster pace of growth, turned to the German supply chain. To quickly reduce these imbalances, the authorities should strengthen the vocational training system, adapting it to the needs of employers, boost infrastructure development in order to attract investment, and to support the transition of workers from agriculture to sectors with greater efficiency, such as manufacturing and services. Therefore, the government should gradually withdraw tax incentives and pension benefits, motivating people to continue operations in small farms. We realize that it is difficult to do it quickly. These actions should be spread over time and should be accompanied by procedures to support the poor, especially in the eastern Polish.
IMF Survey: The government introduced a new program of benefits for the children and a new bank tax, and plans to go back early increase in the retirement age. How do you see the economic effect of those changes?
Daria Zakharova: The most concerned about the possibility of withdrawal of raising the retirement age. The current policy provides for raising the retirement age for men from 65 to 67 years by 2020, and for women from 60 to 67 years by 2040. We believe that it is right, because Poland has one of the most unfavorable demographic trends in Europe: UN projections show that the number of working-age population could fall by as much as one-third by 2060. Lowering the retirement age may therefore undermine social stability and financial pension system and weaken growth by reducing the number of economically active people.
Another decision of the government was to impose a tax on bank assets, which can weaken lending, which in turn can reduce consumption and investment. According to our calculations, because of “distorting” tax increase may be lower by as much as 0.4 percentage points by the end of 2016 years. A better alternative would be to replace the current solution more friendly for the growth of tax on financial activities, similar to that which applies in Iceland, Israel and Denmark.
Terms of program benefits children derive benefit from it, not only poorer families, but also those with above-average incomes. It is therefore quite expensive, consuming around 1% of GDP, which hinders the much needed fiscal consolidation. This program also discourages women to participate in the labor market, and not necessarily encouraged to increase fertility. Instead, we recommend redirecting these funds for child care, which – as has been repeatedly demonstrated – increased participation of women in the labor market, without negative effects on fertility.
IMF Survey: Poland wants to follow the footsteps of their neighbors and systematically replace mortgages in Swiss francs on the local currency. What are the risks of such a conversion, why the IMF prefers individual consideration of each case?
Daria Zakharova: Close to half a million Polish households have mortgages denominated in foreign currencies, mainly in Swiss francs. Collective conversion, including any, would be very expensive, and the costs will most likely be passed on to the banks. According to the Financial Supervision Commission, as costly solution as presented in January, would lead to the collapse of several banks.
For these reasons, we could not support this particular proposal. Office of the President recently presented several variants of addressing the issue of foreign currency mortgage loans. However, there is more detailed information and calculations of the total cost of these proposals. Nevertheless, it is expected that this updated proposal will take into account financial stability issues.
IMF Survey: European Commission officially warned Poland that changes to the Constitutional Court threaten the rule of law. In its assessment, the IMF says about the weakness of institutions, and calls for strong institutions in one of the recommendations. What exactly concern the Fund, and what economic risks associated with recent changes?
Daria Zakharova: As I mentioned, we believe that strong institutions in Poland were the main factor contributing to sustainable growth and helped her survive external shocks and the global financial crisis. Therefore, it is extremely important to maintain a strong framework of policies and institutions in the future. From our point of view, solid institutions is primarily a credible framework for fiscal policy and an independent central bank. Equally important, however, is also an independent and effective judiciary, including the Constitutional Court, controlling the actions of the executive and legislative branches.
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