Overview

A SUPPLEMENT TO EUROMONEY

Introduction

Three years ago, the Polish Government implemented an economic program called Strategy for Poland, a macroeconomic blueprint for the period between 1994 and 1996.

The principle aims for the government’s policy were, and continue to be:

• to ensure the conditions for a high GDP growth rate;

• to reduce inflation;

• to reduce budgetary imbalance to a budget deficit not higher than 2.5% of GDP and to a level of public debt not higher than 60% of GDP for the coming years;

• to improve people’s living standards, including an increase in real wages, and to reduce unemployment.

The principle macroeconomic ratios for 1996 suggest that Poland’s macroeconomic policy has been effective. GDP increased by 7% in 1995 and an increase of 5.5% is forecast for this year. This places Poland among the fastest-developing countries in the world. This year industrial production growth has greatly influenced GDP, which increased by about 8.8% in the first 9 months. The share of industrial production in GDP is about 40%.

Investment demand

Improving investment demand in Poland, and changes to its structure, indicate that development in the economy is fast. It is estimated that the investment expenditure of the country’s economy will increase in 1996 by 20% over 1995. Types of investment have changed with increased expenditure on equipment and transport.

The main factors creating investment demand were investment income tax benefits and the improvements in corporate performance and financial restructuring. Foreign capital is becoming more important in the investment process. Foreign direct investment is expected to reach $12 billion in 1996. Direct investment from private foreign companies between 1990 and the first quarter of 1996 was $7.8 billion.

Import and export growth

A 10% increase in exports and a 28% increase in imports is forecast for 1996. The official statistically registered balance of trade will be negative as imports grow faster than exports. This will be counterbalanced by the revenues of unregistered cross-border trade and direct foreign investment flows. Net international reserves increased between January and September 1996 by $1.1 billion to $21.6 billion, equal to more than seven months of imports.

GDP growth

Debt position

Poland’s external debt totalled $43.6 billion at the end of August 1996. A $300 million decrease from December 1995 was mainly the result of the devaluation of the currencies of Poland’s debts against the dollar. Poland will pay $2.5 billion in interest and principal payments which is more than 11% of total exports.

1996 was an important year for Poland’s economic transformation. Domestic demand and foreign trade growth contributed to a dynamic production, trade and services sector. This influenced household revenue growth and created new jobs, preserving a high level of consumption. Individual consumption is expected to increase by 6% in 1996 and a 3% increase in general consumption is forecast. Buying power increased for the third time in 1996. The average gross wage in 1996 will be 4.4% higher than 1995. Public sector wages will increase in real terms by 4.9%.

Unemployment

Unemployment decreased in 1996 to the lowest level for 8 years. Between January and September it fell by 287,800 to a rate of 13.5%, compared with 14.9% in December 1995.

Inflation

Retail price growth is increasing. In 1994 average monthly price growth was 2.2%, in 1995 1.6% and in the period between January and September 1996 the rate was 1.5%. Inflation for December 1996 is forecast at 17.8%, compared with 21.6% in December 1995 and 29.5% in December 1994. The cabinet’s policy is to reduce inflation to 14% in 1997.

Inflation

Improving bank sector

Banks in Poland have improved, with carryings increasing by 26.2% in the first half of 1996. Costs incurred by banks increased by 14.1%. Changes in regulations (liberalization of foreign currency law, market rule for foreign currencies against the Polish zloty and open market operations) and a good business climate improved the financial performance of the banks. The increase in banks’ deposits has been influenced by wage increases and household savings. Between December 1995 and September 1996 real money supply increased by 3.7%. Bank deposits denominated in Polish zlotys are growing. The share of Polish zloty bank deposits in total bank savings increased from 72.9% at the end of September 1995 to 77.7% at the end of September 1996. Interest in bank credit increased from both individuals and companies in 1996. A decrease in interest rates from 3.1% to 3.5% has increased credit activity.

Financial ratios

The ratio of state budget revenues to nominal GDP will be about 27.6% in 1996. This is 2 percentage points lower than in 1995, which limits the redistribution of the state budget. The ratio of expenditure to GDP (about 30.4%) will also be lower than in 1995. The budget deficit will be 2.8% of GDP in 1996, meeting one of the criteria set in Maastricht. The projected budget deficit for 1997 will be lower at 2.6% of GDP. The ratio of public debt to GDP will be about 54%, compared with 56.2% in 1995. The rate will be lower than the secure level for public finances and lower than that defined by the Maastricht agreement. Polish public debt is changing, with a decreasing share of foreign debt and a relative growth in domestic debt. Financing the budget deficit with domestic non banking resources, while issuing treasury bonds with maturities of up to 10 years, has caused the structure change.

Conclusion

Compared with other central and eastern European countries, Poland’s economic situation is very good. The country plans to take a leading position in GDP growth rate, investment, industrial performance, foreign trade and foreign currency reserves. Like most other countries in the region, Poland still has a very high levels of inflation and unemployment. It needs social security system reform, national health service reform and public finance improvements.

During the October 1996 IMF/ World Bank meeting in Washington, deputy prime minister and minister of finance Grzegorz W. Kolodko said the following:

“Poland in fact boasts the best performance to date among all the transition economies. In 1994 ­ 1996 GDP growth accelerated to an average of just under 6%; Poland was first to overtake its 1989 real income.

“Unemployment, which in 1994 reached 16.9% of the workforce, has come down to 13.5% in September 1996. Inflation has declined and is now within striking distance of the 17% target for 1996. The private sector has continued to grow, reaching nearly 65% of GDP in 1996; there are over 2 million private enterprises; over 200,000 trade in the international market.

“The zloty has been appreciating in real terms, occasionally in nominal terms, without upsetting Polish competitiveness, thanks to exceptional labour activity increases higher than wage growth. Both exports and imports have boomed, integrating Poland further into the European and world economies.

“Growing international confidence is witnessed by Poland’s improved credit rating (by both Standard & Poor’s and by Moody’s); by the invitation last July to join OECD, giving Poland the stamp of approval as an open, advanced market economy; and by the excellent prospects for Poland’s early accession to full membership of the European Union.”