Poland: Staff Concluding Statement of the 2024 Article IV Mission
October 17, 2024
A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.
The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.
Washington, DC – October 17, 2024:
An International Monetary Fund mission visited Warsaw during October
8-17 in the context of the 2024 Article IV consultation.
Poland’s near-term outlook is positive and has improved relative to last
year despite ongoing sluggish growth across Europe and Russia’s war in
Ukraine. A consumption-led recovery is underway, and the outlook is
further supported by recently unlocked NextGen EU Funds (NGEU).
Inflation has declined helped by a tight monetary stance, and its
descent to the target range by close to end-2025 is on track, provided
prudent policies are maintained. Policy priorities for the near- and
medium-term include balancing the mix of monetary and fiscal policy ,
preserving debt sustainability, while strengthening the economy to face
longer-term challenges. Specifically:
• Monetary policy is appropriately tight and interest rate cuts should
commence only when there is clear evidence that wage growth is
decelerating, and inflation is firmly on track towards the target.
• The medium-term Fiscal Structural Plan is welcome and it targets
sufficient cumulative fiscal consolidation by 2028, meeting the EU’s new
fiscal rules. The full set of measures to achieve this is yet to be
identified.
• Bringing more of the authorities’ medium-term deficit reduction plans
up front in 2025 would build more resilience against future shocks,
reduce debt, and support more rapid interest rate reductions, which
would foster private sector investment and growth while still bringing
inflation to target.
• Population ageing, diminishing cost-competitiveness, and climate
transition present significant challenges to Poland’s export-driven
growth model. Thus, medium-term growth
is expected to decline, unless structural reforms are deepened and
progress on the energy transition accelerates.
Economic growth is accelerating in 2024 led by recovering domestic
demand.
Private consumption has picked up as strong nominal wage growth coupled with
lower inflation led to a sharp rebound in real wages. Fixed investment also
continued its gradual recovery though remaining as a share of GDP below
pre-pandemic levels. Net exports, however, are imposing some drag as imports
recovered on the back of higher consumption while exports are held back by
weak demand from the Euro Area. As a result, growth is expected at 3 percent
in 2024 up from around 0 in 2023.
The near-term outlook is positive due to the ongoing cyclical recovery
in consumption and investment, and the absorption of EU funds.
Growth is expected to accelerate to 3.5 percent in 2025 and 3.4 percent in
2026. Real and nominal wage growth are expected to gradually decelerate,
while profits are expected to continue declining as firms have limited
capacity to pass-through increases in wage costs into prices given that the
output gap remains negative. Stronger consumption, normalization of
inventories, lagged impact of the appreciation of the real exchange rate,
and release of EU funds are expected to support imports and with it a
narrowing in the current account surplus.
Over the medium term, growth is expected to moderate and converge to
potential as the support from rebounding consumption and NGEU funds
subside.
Growth will decelerate to slightly below 3 percent by 2029 as EU-financed
investments decline and the population ages. Productivity is expected to
modestly recover from the impact of recent labor hoarding. However,
productivity growth is not expected to return to pre-pandemic levels given
that much of the productivity gap with advanced economies has already been
closed.
Amidst high uncertainty, risks remain elevated and tilted towards lower
growth and higher inflation.
A slower-than-expected recovery in the Euro Area, delayed absorption of EU
funds, and heightened geopolitical tensions could dampen the recovery. At
the same time, risks to inflation remain elevated from the tight labor
market against the backdrop of accelerating domestic demand and potential
supply-side shocks. There are also upside risks to growth including a
stronger-than-expected catalytic role from EU funds on private investment
and productivity, a larger-than-expected workforce from higher immigration,
and potential nearshoring as a result of geoeconomic fragmentation. Risks
are well mitigated by ample foreign exchange reserves, a flexible exchange
rate, modest debt levels, and robust financial sector buffers.
Monetary policy is appropriately tight.While the policy
rate was kept on hold at 5.75 percent since November 2023, the monetary
stance has tightened as inflation expectations declined. This is appropriate
because inflation is well above the central bank inflation target. The
momentum of core inflation is elevated in the context of strong wages growth
amid still-tight labor market and substantial wage increases in the public
sector.
Monetary policy should remain tight at least through 2025 with rate cuts
commencing only when data and forecasts confirm that inflation is on a
clear downward path towards the target.
Absent surprises, both core and headline inflation should peak in
year-on-year terms before mid-2025, significantly above the target, before
moderating around the upper end of the target range of 2.5±1 percent by
end-2025. However, uncertainty on the inflation trajectory is substantial,
including due to uncertainty regarding energy prices, developments in the
labor market, and the pace of economic recovery. While, monetary policy
should remain both data-dependent and forward-looking, the current context
warrants placing significant weight on realized inflation declining towards
the target over several months on the back of decelerating wages. On this
basis, there may be scope for limited and gradual policy rate cuts to start
around mid-2025.
Near-term growth acceleration presents an opportunity to rebuild buffers
and help complete the disinflation process by tightening fiscal
policies.
The general government (GG) deficit is projected to widen from 5.1 percent
of GDP in 2023 to 5.7 percent of GDP in
2024, due to expansionary policies resulting in a fiscal impulse of 0.4
percent of GDP. The 2025 budget targets a slightly lower GG deficit of 5.5
percent of GDP largely owing to higher growth. Staff recommends a tighter
fiscal stance by around 0.5 percent of GDP. This can be still achievable
within the 2025 budget by saving possible revenue overperformance and
limiting non-priority spending. Such a shift would lower debt, thereby
rebuilding fiscal space to mitigate against future shocks. It would also
lift some of the burden from tight monetary policies to rein in inflation,
potentially freeing space for additional policy rate cuts.
Fiscal consolidation should be anchored in a clear medium-term plan to
stabilize debt.
The recently published Fiscal Structural Plan is an important and welcome
step in this regard as it targets appropriate fiscal balances by 2028 –
entailing an adjustment of about 2½ percent of GDP from 2024 in terms of the
structural fiscal balance – that would allow exiting the EU’s Excessive
Deficit Procedure while stabilizing debt at levels close to 60 percent of
GDP notwithstanding large increases in spending on defense. Fully
identifying the necessary fiscal measures now and bringing more of the
planned fiscal consolidation upfront into 2025 would help strengthen its
credibility.
Potential measures that would support consolidation while also further
reducing inequality include:
i) raising Personal Income Tax revenues by increasing progressivity to bring
them more in line with EU peers , ii) addressing the preferential and
regressive treatment of the self-employed, iii) better targeting of social
benefits to more effectively support the vulnerable, iv) raising property
tax revenues closer to EU comparators, and v) taxing more non-essential
items at the standard VAT rate. In this context, raising the PIT tax-exempt
threshold, which is under consideration, would require even stronger
consolidation measures to offset the fiscal cost. Finally, aligning the
retirement age for men and women and then adjusting it over time in line
with longevity would help limit the expected shortfall in pensions’ adequacy
over the longer-term.
The authorities have made commendable progress in strengthening the
fiscal framework.
They have expanded the coverage of the stabilizing expenditure rule and
improved oversight over extrabudgetary funds. Establishing a fiscal council
as planned would further strengthen accountability and governance.
Financial sector policies should safeguard the nascent credit recovery,
building on a robust banking system.
Systemic risks to the financial sector have moderated, with the banking
sector being well-capitalized and liquid. Past prudential policies have
focused on buttressing stability through regulatory tightening. At the same
time banks had to face large costs of legal risks and regulatory burdens
such as mortgage credit holidays. Together with weak credit demand and
serious legal and regulatory uncertainties, this has created further
headwinds for new credit resulting in one of the steepest declines in
private sector credit-to-GDP in the EU. Moving forward, policy makers
should: (i) take into account the impact of possible further tightening of
regulations on the nascent credit recovery, while enhancing regulatory
stability; (ii) proactively reduce legal risks to financial sector
stability, including by exploring legislative solutions; (iii) even the
playing field for private sector credit by replacing the bank asset tax in a
manner that eliminates the preferential treatment of public debt` and (iv)
allow the mortgage credit holiday to expire.
After two decades of impressive income convergence, Poland’s growth
model needs to adjust to new economic conditions.
Exports, especially to the EU, have played a significant role in Poland’s
success. However, sizable real appreciation over the past two years weighs
on cost-competitiveness. Meanwhile, the regional growth outlook remains
subdued, and geopolitical conflicts and geoeconomic fragmentation present
headwinds to penetrating new markets. In addition, shallow domestic capital
markets and low savings weigh on investment, with population ageing posing a
substantial drag on the future size of the workforce. To sustain growth,
policies should focus on: i) deepening capital markets (including steps
towards a capital market union within the EU), ii) lowering barriers to
resource reallocation (for example by strengthening re-skilling programs for
adults), iii) fostering innovation capacity (including by promoting private
equity and venture capital), and iv) supporting higher labor participation
especially for women (by ensuring adequate child and elderly care). The new
program supporting young parents’ return to the labor market aims to address
this gap. Building on the successful absorption of refugees from Ukraine
into the Polish labor market, ongoing efforts to enhance the integration of
immigrants can further help contain labor shortages.
The government’s new decarbonization targets are appropriate; meeting
these while safeguarding competitiveness and social cohesion will
require strong measures.
Significant progress has been made on climate mitigation, but more is needed
given Poland’s costly dependence on coal, which also undercuts
competitiveness. The recent draft energy strategy update outlines additional
policy targets and measures for bringing emissions in line with EU climate
goals. Its success will be supported by EU funds, and depends on removing
barriers to private investment in renewable energy, including by adopting EU
legislation on faster permitting for green projects, liberalizing
regulations for onshore windfarms, and prioritizing NextGen EU funds for
expanding electricity grids. Extending carbon pricing to transportation and
heating would also be important for reducing emissions; an early and gradual
introduction would help limit adjustment costs. The authorities must address
social challenges from the climate transition by cushioning the social
impact on coal mining regions and reducing energy poverty.
The mission thanks the authorities and other counterparts for the
fruitful discussions.
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