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Poland

Author(s):
International Monetary Fund
Published Date:
April 1997
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I. Introduction

1. It has become commonplace in recent years to name Poland as one of the most successful of the transition economies. A pioneer in transition from the very start, the country has since confirmed this status on numerous occasions, most importantly in being the first to reverse the output decline in 1992 and then to surpass the pretransition level of output in 1996. Rooted in the bold and comprehensive reforms of the initial “big-bang”, this success owes equally to the remarkable continuity of commitment to the principles of market orientation and financial stability, irrespective of the composition of the seven governments that have been in power since 1990. Two particular milestones in this regard were a major “second round” of fiscal adjustment and structural reforms in 1992–93, and sustained adherence to those principles by the new left-wing coalition that came to power in late 1993, embodied in the medium-term Strategy for Poland adopted in mid-1994. The results have been five successive years of economic growth, averaging 6 percent over the past three years; steady, even if gradual, progress to moderate inflation; and a dramatic shift from a chronically weak external position to one of fundamental strength with a large reserves cushion and an appreciating currency (Figure 1).

Figure 1.Poland: Selected Economic Indicators, 1990–96

Sources: Polish authorities; and staff estimates.

2. While much has been achieved, transition is by far not finished, in part reflecting the somewhat fitful progress in structural reforms after the initial “big bang”. Increasingly, moreover, the agenda of outstanding reforms is dominated by Poland’s over-arching goal of full integration with the most advanced industrial economies, in particular its objective of early accession to the European Union (EU). From a macroeconomic perspective, key issues here include Poland’s relatively low savings and investment ratios (both below 20 percent of GDP) and its still high inflation rate (just below 20 percent), both obstacles to the kind of sustained rapid growth required for smooth integration. A strategy to overcome these obstacles should center around further fiscal consolidation, tight monetary policy, and structural measures to bolster private savings, most important among them comprehensive and deep pension reform. Another key policy imperative arises from the still pervasive role of the state in the economy; in particular, rapid privatization of most of the remaining 4,000 or so enterprises still under the umbrella of the state will be pivotal in raising efficiency and attracting private capital on the scale required to ensure continued rapid economic growth.

3. Recent economic developments can be divided broadly into two phases: a period of accelerating, export-led growth (1994–95), followed by a period in which rising domestic demand became the main engine of growth (1996).1 Strong improvements in competitiveness combined with the recovery in western markets to produce the export boom of 1994–95, with official export earnings up by about two thirds and a near tripling of inflows from unrecorded trade. Transformation-induced rapid productivity growth, together with a devaluation and large fiscal adjustment in 1993, were the main factors boosting Polish competitiveness during this period. The downside of this was a halt in disinflation as the progressively undervalued exchange rate produced external surpluses that proved difficult to sterilize, pushing monetary expansion and keeping inflation at 30–35 percent for nearly two years.

4. In fact, persistent inflation as well as a strong recovery of investment were signs already in 1995 that macroeconomic forces were at work to reverse the necessarilyt emporary boom in net exports and competitiveness. The basic policy question then was essentially whether to restore equilibrium through nominal currency appreciation or inflation-induced real appreciation (barring further fiscal adjustment). The authorities’ decision in 1995 to opt for nominal appreciation set the stage for the transition first to sharply lower inflation, followed by a weakening in the external accounts, accelerating real wages and consumption, and sustained strong investment growth in 1996. The exchange rate-induced rebalancing of growth from external to domestic demand was compounded by the slowdown in western Europe and an unexpectedly sharp acceleration of domestic credit, fueled by lower interest rates (lowered by the National Bank mainly in an effort to contain capital inflows and limit the costs of sterilization), largely successful completion of commercial bank restructuring, and generally improved confidence. The outcome in 1996 was sustained rapid GDP growth of about 6 percent, notwithstanding a 4 percent of GDP swing in the external current account (to a small deficit of less than 1 percent of GDP) as domestic demand expanded by nearly 10 percent. Reflecting the exchange-rate based stabilization strategy, inflation came in under 20 percent, down from over 30 percent in mid-1995. By end-1996, a key policy issue was how to ensure a smooth completion of the transition to a moderate current account deficit, with continued progress on disinflation and high investment to provide for sustained mediumterm growth.

5. The following five sections of this paper examine Poland’s recent transition experience in greater detail, with particular emphasis on developments in 1995–96. In Chapters IIV, the focus is on macro-economic developments in the real, fiscal, monetary, and external sectors, respectively, while structural policies are reviewed in Chapter VI. Brief Appendices on the Polish tax system, the exchange and trade system, and poverty provide additional factual information. Four background studies attached to this paper analyze selected key issues particularly relevant to the 1996 Article IV consultation for Poland (SM/97/41 (2/11/97)). Attachment I examines targets and instruments of Poland’s monetary policy in recent years; estimates of the demand for money are presented in Attachment II; Attachment III contains an empirical analysis of the effectiveness of sterilization; and Attachment IV discusses factors influencing external trade performance.

II. Output, Employment, and Prices2

A. Overview

6. Seven years into transition, Poland in 1996 experienced its fifth consecutive year of economic growth. After falling almost 18 percent in 1990–91, Poland’s gross domestic product has recovered significantly, and now exceeds the levels recorded before embarking on transition. In terms of growth performance, Poland has established itself as the clear leader among the transition economies of Central and Eastern Europe (Figure 1). Indeed, the true picture may be even stronger, since recent research by the Central Statistical Office finds that official data may have exaggerated the severity of Poland’s initial recession. This impressive record, moreover, has been achieved despite the wholesale economic restructuring and changes in the product mix needed to bring the capacity to supply goods more closely into line with underlying investment and consumption demands. These very real—but difficult to quantify—effects mean that macroeconomic statistics may even understate performance over the last seven years.

Figure 1.Visegrad Countries: Gross Domestic Product and Inflation, 1988–96

(GDP Peak = 100)

Source: IMF, World Economic Outlook, October 1996.

7. Despite these achievements, Poland’s economic record during transition has not been without blemish. In particular, inflation has proven more resilient than anticipated and remains significantly higher than in many of the advanced central and eastern European economies. Though there was considerable success in fighting inflation in the first year of transition—conditions of near-hyperinflation being brought swiftly under control—subsequent progress has been more modest. In particular, from late 1993 to about mid-1995, inflation remained in the 30–35 percent range as large external surpluses weakened monetary control. This was followed by several months of rapid disinflation (to the low 20 percent range) mainly as a result of a hardened exchange rate and a good harvest in 1995. However, progress slowed again in 1996, with inflation ending the year at just under 20 percent. High unemployment, with large regional disparities, and a heavy social cost for certain parts of the population were other strains that have marked Poland’s transition experience. More generally, and partly related to these shortcomings, progress with structural reforms has been mixed, which continues to distort the economy’s true growth potential and makes the fight against inflation more difficult.

8. These problems notwithstanding, Poland’s record of accelerating recovery and sustained, if somewhat slow and fitful, disinflation testifies to the overall success of its transition strategy. As is well known, this strategy combined wide-ranging external and domestic liberalization with generally tight financial policies, under a “multiple-anchor” approach that included low fiscal deficits, hard budget constraints on enterprises, an incomes policy, and an exchange rate anchor. Over the past two years, in particular, the hardening of the exchange rate has brought with it firmly lower inflation and, with falling interest rates, a welcome rebalancing of growth toward domestic demand. A key challenge for economic policy at this juncture is to manage this rebalancing in a way that sustains growth while maintaining progress with disinflation. From a medium-term perspective, policies aimed at raising Poland’s relatively low savings rate (below 20 percent of GDP) and removing the major structural barriers to growth will be necessary to sustain the recent pace of output performance.

B. Demand and Supply

9. Poland’s economic recovery started back in 1992, only two years after the “big bang” of macroeconomic stabilization and economic liberalization. At first the recovery was tentative, consumption-led and vulnerable to balance of payments constraints. The recovery strengthened in 1994 and 1995, led by sizeable increases in exports: the share of domestic demand in GDP fell, and the contribution of external demand to real GDP growth became strongly positive (Table 1). Sustained rapid increases in productivity, moderate real wage increases, and the lagged effects of devaluation in August 1993 boosted competitiveness, allowing Polish exports to benefit fully from the economic recovery in its main trading partners. The result was two consecutive years of 20 percent growth in export volumes, and a dramatic increase in unrecorded cross-border exports, with GDP growth averaging more than 6 percent in 1994 and 1995.3

Table 1.Poland: Composition of Aggregate Demand, 1992-96
1992199319941995Estimate

1996
(In percent of GDP)
Domestic demand 1/98.599.098.298.1101.7
Consumption83.383.582.581.383.1
Private61.763.063.963.565.5
Government21.620.418.617.817.6
Gross capital formation15.215.615.716.818.6
By type:
Fixed investment16.815.916.117.119.0
Net exports 1/3.20.32.63.9-0.6
Exports18.518.020.422.020.7
Imports17.520.221.323.526.7
Unrecorded trade2.22.63.45.35.4
(Percent change in real terms)
Domestic demand-0.16.34.97.39.6
Consumption3.54.83.94.06.7
Private2.35.24.34.58.0
Government6.43.82.82.93.5
Gross capital formation-13.012.89.019.519.0
By type:
Fixed investment2.32.99.218.518.0
Change in stocks 2/-3.41.8-0.10.00.0
External demand 2/1.3-3.63.92.2-4.9
Net exports of goods and nonfactor services 2/0.6-4.32.5-1.0-6.3
Exports of goods and nonfactor services3.94.021.320.09.2
Imports of goods and nonfactor services1.425.19.824.429.8
Unrecorded trade 2/0.70.71.43.21.4
Statistical discrepancy 2/1.51.2-2.8-2.90.9
GDP2.63.86.06.55.5
(In billions of zlotys)
Gross domestic product114.9155.8212.0286.8360.0
Sources: Central Statistical Office; and staff estimates.

Excluding statistical discrepancy.

Contribution to GDP growth

Sources: Central Statistical Office; and staff estimates.

Excluding statistical discrepancy.

Contribution to GDP growth

10. Since then, the export-led recovery has broadened into a recovery fueled increasingly by domestic demand. Appreciation of the real exchange rate and the slowdown in Western Europe moderated export growth, while lower interest rates and strong real earnings growth strengthened domestic demand. Thus, while net exports made a sizeable negative contribution to growth in 1996, buoyant domestic demand was able to sustain GDP growth of around 6 percent.

11. Fixed investment increased by 9 percent in 1994 and 18.5 percent in 1995 (as measured on a national accounts basis), and is estimated to have grown by around 18 percent in 1996. The pickup in investment was encouraged by expanded investment tax credits, but also by rapid productivity gains coupled with modest real wage increases which increased profitability, particularly in the export sector. While retained earnings have been a major source of investment finance during the early stages of the upswing, more recently there has also been a rapid expansion of enterprise credit (Chapter IV). Finally, inflows of foreign direct investment (FDI) have also risen rapidly in recent years, albeit from a comparatively low base; at less than 2 percent of GDP (measured on a payments basis) there appears still ample scope for higher FDI inflows that should underpin sustained growth in the future.

12. Notwithstanding a sharp drop during the initial phase of transition, the manufacturing sector still dominates Polish investment, accounting for almost a quarter of total investment outlays, and increasing by half in real terms in 1994–95. Reflecting the increasingly broad-based recovery, investment growth in 1995 widened to include virtually all sectors, with higher than average increases in the service sectors (Table 2). During transition, the functional composition of investment has changed noticeably: while buildings and structures still account for around one-half of total investment expenditures, this ratio fell by ten percentage points from 1991–95, with the share of machinery and equipment increasing by almost twenty percentage points (Table 3). However, according to official statistics, the increase in the share of the private sector in total investment has been less pronounced, rising only 4 percentage points in the years 1991–95.

Table 2.Poland: Sectoral Breakdown of Investment, 1991-95 1/
Share of Total at Current PricesAnnual Growth Rate at Constant Prices
1991199219931994199519911992199319941995
(In percent of total)(Annual percentage change)
Agriculture, hunting and forestry4.43.23.23.03.3-47.6-30.2-7.65.812.3
Fishing0.10.10.10.00.0-63.2-58.374.2-55.9-69.2
Mining and quarrying4.14.44.24.33.517.53.5-12.215.82.7
Manufacturing23.922.720.124.824.9-15.8-11.1-0.332.716.2
Electricity, gas and water supply10.612.414.414.314.331.316.16.63.716.3
Construction4.14.74.14.64.6-1.914.1-15.522.316.2
Trade and repair3.95.86.86.38.113.241.021.00.946.2
Hotels and restaurants1.10.81.01.11.161.7-33.431.215.124.1
Transport, storage and
communication7.58.710.29.710.80.511.618.5-0.427.9
Financial intermediation2.53.63.94.74.9112.443.16.121.732.4
Real estate and business activities28.724.118.914.912.9-1.6-9.3-18.2-9.51.9
Public administration and defence
compulsory social security1.11.01.51.61.315.8-3.333.09.810.7
Education2.82.42.72.22.34.9-3.017.7-11.620.2
Health and social work2.22.22.82.62.8-15.8-4.631.4-4.727.6
Other community, social and
personal service activities3.03.96.15.95.2-5.933.151.24.26.8
Total100.0100.0100.0100.0100.0-4.10.42.38.217.1
Source: Data provided by the Polish authorities.

According to the Polish version of the NACE-EKD classification system.

Source: Data provided by the Polish authorities.

According to the Polish version of the NACE-EKD classification system.

Table 3.Poland: Investment by Type and Decision-Making Entity, 1991-95
19911992199319941995
(In billions of zlotys at current prices)
By type:
Building and structures 1/9.7311.5713.6417.6822.56
Machinery and equipment4.546.389.3213.9421.94
Domestic2.493.344.947.7214.08
Imported2.053.044.386.227.86
Other outlays2.612.211.762.242.64
Total16.8820.1624.7233.8647.14
By decision-making entity:
Public sector9.9911.2914.1218.9726.29
State property8.639.0410.8514.5120.11
Municipal property1.211.953.024.125.32
Other0.150.300.250.340.86
Private sector6.898.8610.5914.8920.85
Of which:
Private domestic property6.587.668.3810.4914.29
Of which:
Cooperative3.793.332.452.092.81
Total16.8820.1524.7133.8647.14
(As a share of total investment, in percent)
Buildings and structures57.657.455.252.247.9
Machinery and equipment26.931.637.741.246.5
Private sector40.844.042.944.044.2
Of which:
Cooperative22.516.59.96.26.0
Public sector59.256.057.156.055.8
Source: Data provided by the Polish authorities.

Data for 1991 refer to construction and assembly works.

Source: Data provided by the Polish authorities.

Data for 1991 refer to construction and assembly works.

13. Consumption too has contributed to the recent recovery in domestic demand, increasing by around 4 percent in real terms in both 1994 and 1995, and by an estimated 7 percent in 1996. Real retail sales have grown rapidly, owing to (i) substantial increases in real wages—the fruits of successful economic transition—and (ii) rapid increases in real household credit (though from a low base), aided by falling interest rates. These factors, together with increasing recognition of the success and permanence of the transition to a market economy, have helped strengthen consumer confidence (Figure 2).

Figure 2.Poland: Selected Consumption Indicators, 1993–96

(Index; 1993 = 100)

Sources: Polish Central Statistical Office; Demoskop; and the National Bank of Poland.

14. The structure of Polish production has changed drastically with transition (Tables 4 and 5). The share of services in GDP has increased from little over one-third in 1989, to more than one-half in 1996, though part of this reflects statistical reclassification of economic activity. Despite this substantial increase, the share of services still remains low compared with the two-thirds share typical for OECD countries, though it should rise with the increasingly domestic demand-driven recovery.

Table 4.Poland: Value Added by Sector, 1989-95
1989 1/1992199319941995
(In percent of total value added)
Agriculture, forestry and fishing12.96.97.27.07.6
Industry and Construction52.343.642.742.639.3
Industry35.535.736.233.3
Mining and Quarrying3.54.04.84.9
Manufacturing28.027.427.424.2
Electricity, Gas and Water Supply3.94.34.14.3
Construction8.17.16.46.0
Services34.849.350.050.353.1
Trade and Repair13.716.215.315.1
Hotels and Restaurants0.40.60.60.7
Transport, Storage and Communications6.46.66.77.0
Financial Intermediation0.50.61.11.4
Real Estate and Insurance6.76.36.77.8
Public Administration and Defense6.35.65.05.6
Education4.03.53.94.2
Health and Social Security4.44.24.04.3
Miscellaneous Services6.86.36.87.1
Total100.0100.0100.0100.0
(Volume, percentage change)
Agriculture, forestry and fishing7.0-15.111.9
Industry8.610.39.9
Mining and Quarrying-9.8-1.97.7
Manufacturing11.911.212.6
Electricity, Gas and Water Supply1.516.2-2.8
Construction1.12.77.3
Trade and Repair5.8-1.54.4
Hotels and Restaurants2.37.35.9
Transport, Storage and Communications-5.30.53.1
Financial Intermediation29.1102.119.4
Real Estate and Insurance1.56.95.6
Public Administration and Defense5.27.84.1
Education0.110.31.4
Health and Social Security4.14.12.9
Miscellaneous Services3.43.42.1
Sources: Central Statistical Office, OECD, and staff estimates.

For 1989, in percent of GDP.

Sources: Central Statistical Office, OECD, and staff estimates.

For 1989, in percent of GDP.

Table 5.Poland: The Growth of Production, 1991-95(Annual percent change in real terms)
19911992199319941995
Industrial production-8.02.86.312.19.4
Mining and quarrying-4.14.6-0.9
Manufacturing10.413.611.4
Food products and beverages8.612.79.2
Coke, refined petroleum, etc.12.37.24.4
Chemicals and chemical products6.117.412.6
Basic metals1.916.714.8
Machinery and equipment9.315.519.3
Electricity, gas and water supply-11.24.70.6
Construction and assembly production11.46.68.00.58.1
Agriculture-1.6-12.76.8-9.311.7
Sources: Central Statistical Office and staff estimates.
Sources: Central Statistical Office and staff estimates.

15. Though the share of industry in GDP has declined (measured in current prices), much of this reflects sharp adjustment in the early stage of transition, as well as some trend decline in the relative price of industrial products. In the early years, industrial output fell much more dramatically than in the more sheltered sectors of the economy, such as construction or services. Since then, industry has recovered strongly (Figure 3): in real terms, industrial value added has grown at close to 10 percent per annum from 1993 to 1995, and is estimated to have grown a little under 8 percent in 1996. Manufacturing continues to lead the way, with particularly rapid growth in 1995 and 1996 in such sectors as food products, leather goods, rubber goods, furniture, printing and publishing, and motor vehicles. While the volume of production in the mining sector has increased little, its share in value-added has increased largely because of sizeable increases in the domestic relative price of coal: unit labor costs are high relative to international standards, and large losses continue to be made. Measured in terms of value added, output in the construction sector was slower to recover, only rising strongly in 1995, when it increased 7.3 percent (Table 4). Growth slowed in the first quarter of 1996, the effect of a particularly harsh winter; however, with low real interest rates and the general pickup in domestic demand, the construction sector soon recovered in the remainder of the year, and is estimated to have recorded growth of around 4 percent for the year as a whole.

Figure 3.Poland: Selected Production Indicators, 1990–96

Sources: Polish Central Statistical Office; and staff calculations.

16. Agriculture still plays a major role in the Polish economy. Though its share in GDP has fallen five percentage points since 1989, to only a little over 7 percent in 1995 (Table 4), it still makes up more than a quarter of total Polish civilian employment. In addition, the considerable room for productivity improvements means that the agricultural sector itself has substantial growth potential; also, if utilized effectively, surplus labor in the agricultural sector should help sustain growth in other sectors of the economy. Finally, with food making up 40 percent of the CPI basket, and given the high levels of trade protection in agriculture, agricultural conditions are still the source of frequent supply shocks to inflation.

17. Four crops dominate Polish agricultural production: grain, rape, sugar beet, and potatoes (Tables 6 and 7). Together, these account for 80–85 percent of land under cultivation. In 1995, favorable weather conditions, combined with the trend increase in yields reflecting increased usage of fertilizers, created a bumper crop. Real value added in agriculture increased 12 percent that year, well above the average rate of GDP growth. In addition, the fall in food prices that resulted meant that consumer prices fell 0.9 percent that July, and increased only modestly in subsequent months, ratcheting the annual rate of inflation down by around 5 percentage points.

Table 6.Poland: Production and Yields of Selected Crops, 1989–95
Share of

Gross Output 1/
Annual

Average
19891986–1989199019911992199319941995
(In thousands of tons)
Plant production57.4
Cereals15.325,64028,01427,81119,96223,41721,76325,905
Of which:
Wheat5.97,8729,0269,2707,3688,2437,6588,668
Rye3.36,4026,0445,9003,9814,9925,3006,287
Barley2.24,1154,2174,2572,8193,2552,6863,279
Oats1.02,3302,1191,8731,2291,4931,2431,495
Potatoes12.236,09736,31329,03823,38836,27023,05824,891
Sugar beets7.014,16216,72111,41211,05215,62111,67613,309
Oil plants1.31,3251,2331,0577696067771,401
Fodder-root crop10,0589,7248,5196,3248,4197,0626,393
Meadow hay1.214,82814,38412,8618,80310,99511,01511,850
Straw 2/26,13628,44424,98618,17720,80319,87824,041
Vegetables7.15,4855,6286,0194,7746,1385,3695,928
Tree fruits 3/4.21,5109791,3651,8892,2231,7211,654
(Yield per hectare in quintals)
Yields
Cereals30.732.831.924.027.525.730.2
Of which:
Wheat36.939.638.030.633.331.836.0
Rye25.626.125.819.622.621.825.6
Barley32.635.934.423.527.926.031.3
Oats27.228.427.318.423.320.125.1
Potatoes188.3197.9167.6133.1206.0135.9163.5
Sugar beets337.3379.8315.8294.1391.6291.6346.2
Oil plants25.423.521.917.616.719.522.1
Fodder-root crops458.7471.6432.8331.6431.8360.0377.1
Meadow hay60.359.654.137.747.542.552.2
Straw 2/37.039.233.826.129.128.133.8
Source: Data provided by the Central Statistical Office.

At current prices; in percent of total.

From four cereals plus triticale.

Total fruit production.

Source: Data provided by the Central Statistical Office.

At current prices; in percent of total.

From four cereals plus triticale.

Total fruit production.

Table 7.Poland: The Growth and Structure of Agricultural Production, 1989-95 1/
(1970 = 100)2/(1990 = 100)3/
1989199019911992199319941995 4/
(Volume of production)
Gross agricultural production128.6125.898.485.991.783.292.9
Final production 5/137.1129.698.487.994.984.799.8
Of which:
Marketed output153.6150.396.289.689.480.789.7
Net final production 6/131.1124.1104.291.9101.1
Value added 7/99.2104.8
(In percent of total at current prices)
Share of nonsocialized agriculture in: 8/
Gross agricultural production79.677.280.084.686.587.989.1
Final production78.376.279.383.986.287.288.0
Of which:
Marketed output76.273.275.679.781.884.786.0
Net final production82.381.783.586.988.990.4
Value added84.985.4
Share of state procurement in:
Gross agricultural production47.442.435.93228.629.427.6
Final production66.558.849.848.643.943.443.0
Marketed output78.367.858.454.752.952.754.7
Sources: Central Statistical Office, Rocznik statystyczny (various issues); and data provided by the Polish authorities.

Excludes agricultural services.

According to the KGN classification.

According to the Polish version of NACE-EKD.

Provisional data.

Gross agricultural production minus intermediate consumption.

Final agricultural production minus value of products of agricultural origin bought by agricultural producers.

Gross agricultural production minus material costs.

Data for individual farms.

Sources: Central Statistical Office, Rocznik statystyczny (various issues); and data provided by the Polish authorities.

Excludes agricultural services.

According to the KGN classification.

According to the Polish version of NACE-EKD.

Provisional data.

Gross agricultural production minus intermediate consumption.

Final agricultural production minus value of products of agricultural origin bought by agricultural producers.

Gross agricultural production minus material costs.

Data for individual farms.

18. In 1996, the severe winter held back farm production. Output in agriculture is estimated to have barely increased, with value-added actually declining; grain production is expected to fall 2 million tons to only a little over 24 million tons. At the same time, world wheat prices also rose significantly. This has had a direct impact on the CPI but also, by raising the price of feed, it set in train a classic “hog cycle”. The price of pork fell early in the year as (unprofitable) pigs were sent to slaughter, but picked up later in the year, reflecting the reduction in pig supply. Finally, with food prices falling less this year than last, the annual inflation rate picked up in the summer. Even so, for the year as a whole, the increase in food prices in 1996 was still below the overall CPI inflation rate.

C. Wages and the Labor Market

19. Despite recent rapid growth in output, employment increases have been surprisingly modest: total employment first increased only in 1994—two years after the recovery in output had started—and then only by 1 percent (Tables 8, 9 and 10). The increase in private sector employment has been more substantial, though in part this reflects classification changes. These modest gains may reflect considerable labor hoarding in the early years of transition, as the collapse in output far exceeded the fall in employment. Measured labor productivity fell in the early years but, as output growth accelerated, more recently there have been significant increases in measured labor productivity, particularly in manufacturing, achieved initially with relatively little increase in investment.

Table 8.Poland: Employment by Sectors, 1989-93(Annual averages)
19891990199119921993
(In thousands of persons)
Total employment 1/17,00216,28015,32614,67714,330
Public sector9,5468,9427,6336,8006,184
Industry3,5603,2502,7452,4132,152
Construction914792546357231
Agriculture653594458329225
Forestry1401251079184
Transport and communications868820715629595
Trade516322212172133
Services2,8953,0392,8502,8092,764
Private agriculture3,7423,6003,5323,4103,436
Other private sector3,7143,7384,1624,4664,711
(Percentage change)
Total employment-0.2-4.2-5.9-4.2-2.4
Public sector-6.3-14.6-10.9-9.1
Industry-8.7-15.5-12.1-10.8
Construction-13.3-31.1-34.6-35.3
Agriculture-9.0-22.9-28.2-31.6
Forestry-10.7-14.4-15.0-7.7
Transport and communications-5.5-12.8-12.0-5.4
Trade-37.6-34.2-18.9-22.7
Services5.0-6.2-1.4-1.6
Private agriculture-3.8-1.9-3.50.8
Other private sector0.611.37.35.5
Memorandum item:
Total manhours worked in the socialized sector
(excluding agriculture) 2/-9.0-7.4-4.52.21.7
Source: Data provided by the Polish authorities.

According to the KGN national classification.

Since 1993 in the public sector.

Source: Data provided by the Polish authorities.

According to the KGN national classification.

Since 1993 in the public sector.

Table 9.Poland: Total Employment by Sector, 1993-95(Annual averages)
19931994199519941995
(In thousands of persons)(Percent change)
Total employment14,33014,47514,7571.01.9
Agriculture, hunting and forestry3,6883,8873,8525.4-0.9
Industry3,6713,6413,763-0.83.4
Mining and quarrying421393376-6.7-4.3
Manufacturing2,9792,9713,109-0.34.6
Electricity, gas and water supply2712762781.80.7
Construction853820836-3.92.0
Trade and repair1,8721,8631,861-0.5-0.1
Transport, storage, and communication871854844-2.0-1.2
Education8138428523.61.2
Health and social welfare9759771,0140.23.8
Other1,5871,5911,735
(As share of total)
Total employment100.0100.0100.0
Agriculture, hunting and forestry25.726.926.1
Industry25.625.225.5
Mining and quarrying2.92.72.5
Manufacturing20.820.521.1
Electricity, gas and water supply1.91.91.9
Construction6.05.75.7
Trade and repair13.112.912.6
Transport, storage, and communication6.15.95.7
Education5.75.85.8
Health and social welfare6.86.76.9
Other11.111.011.8
Sources: Central Statistical Office and staff estimates.
Sources: Central Statistical Office and staff estimates.
Table 10.Poland: Private Sector Employment by Sector, 1993-95(Annual averages)
19931994199519941995
(In thousands of persons)(Percent change)
Employment in private sector8,1478,5959,1365.56.3
Agriculture, hunting and forestry3,4263,6983,7057.90.2
Industry1,4221,5861,86711.517.7
Mining and quarrying7101142.910.0
Manufacturing1,4101,5691,84611.317.7
Electricity, gas and water supply571040.042.9
Construction6076296853.68.9
Trade and repair1,7251,7371,7490.70.7
Transport, storage, and communication2042112223.45.2
Education1919250.031.6
Health and social welfare584878-17.262.5
Other686667805
(Private sector share of total employment)
Employment in private sector56.959.461.9
Agriculture, hunting and forestry23.925.525.1
Industry9.911.012.7
Mining and quarrying0.00.10.1
Manufacturing9.810.812.5
Electricity, gas and water supply0.00.00.1
Construction4.24.34.6
Trade and repair12.012.011.9
Transport, storage, and communication1.41.51.5
Education0.10.10.2
Health and social welfare0.40.30.5
Memorandum item:
Total employment14,33014,47514,757
Sources: Central Statistical Office and staff estimates.
Sources: Central Statistical Office and staff estimates.

20. Despite the small reported increases in employment, the unemployment rate has fallen significantly. After peaking at almost 17 percent in mid 1994, the unemployment rate has fallen to a little over 13 percent at the end of 1996. The divergence between figures for employment and unemployment in part reflects developments in the shadow economy, but also the progressive tightening of rules governing eligibility for unemployment benefits (Chapter VI). For example, in 1996 unemployment benefits for school-leavers were replaced with grants for training or apprenticeships: the result was 100–200,000 fewer school-leavers than usual registering as unemployed in the summer, reducing the unemployment rate by 0.5 to 0.9 percentage points. Existing eligibility rules have also been more tightly enforced, and the value of unemployment benefit has been reduced by indexing to prices instead of wages, bringing unemployment benefit indexation in line with the indexation of the minimum wage.

21. Correcting for these effects, the fall in Poland’s unemployment rate may have been more gradual than suggested by the official registered unemployed rate. The Labor Force Survey, conducted using ILO-based methods, counts as unemployed only those who actively seek work but who do not work at all, whereas the registered unemployed may include people with informal, part-time employment. This method suggests that the unemployment rate peaked at 15.9 percent in early 1994, and then fell gradually to 11.6 percent in August 1996 (Figure 4).

Figure 4.Poland: Unemployment Rates, 1992–96

(In percent)

Source: Polish Central Statistical Office.

22. Figures from the Labor Force Survey present a complex pattern of Polish unemployment. As in its Western European neighbors, there is a significant share of long-term unemployed (just under 40 percent), the youth unemployment rate is relatively high, and unemployment rates are disproportionately high amongst the least educated. However, the increasing rate of flow into and out of unemployment (Table 12) suggests that a more fluid labor market may be emerging.

Table 11.Poland: Population, Labor Force, Employment and Unemployment, 1989-95(In thousands of persons; end of year)
1989199019911992199319941995
Population38,03838,18338,30938,41838,50538,58138,609
Of which:
Working age 1/21,88921,96222,05522,18122,33322,50222,647
Nonworking age16,14916,22116,25416,23716,17216,07915,962
Total employment 2/17,38916,14515,44315,01114,76114,92414,968
Of which:
In the public sector9,2788,2437,0526,6066,0605,8785,623
Registered unemployment1,1262,1562,5092,8892,8382,629
(In percent of civilian labor force)6.311.813.616.416.014.9
Reported vacancies542923222521
Source: Data provided by the Polish authorities.

The working age for men/women is defined to be between the ages of 18 and 64/59.

Employment statistics exclude workers doing military service, working in defense and public-safety related institutions, living abroad, or serving a jail sentence. These workers, however, are classified as part of the active labor force. Taking into account the different statistical treatment accorded to these workers, the calculated unemployment rate was close to zero through 1989.

Source: Data provided by the Polish authorities.

The working age for men/women is defined to be between the ages of 18 and 64/59.

Employment statistics exclude workers doing military service, working in defense and public-safety related institutions, living abroad, or serving a jail sentence. These workers, however, are classified as part of the active labor force. Taking into account the different statistical treatment accorded to these workers, the calculated unemployment rate was close to zero through 1989.

Table 12.Poland: Main Factors Determining Change in Unemployment, 1990-95(In thousands of persons)
Unemployment

increase
Flow into unemploymentFlow out of unemployment
TotalPreviously

employed
TotalInto

employment
1990 1/1,1261,5951,140469319
1991 1/1,0301,7201,277690501
19923541,5601,2371,206656
19933801,9711,5821,591761
1994-522,0941,5662,1461,094
1995-2092,3711,7742,5801,268
Source: Data provided by the Central Statistical Office.

Inflows and outflows are estimates.

Source: Data provided by the Central Statistical Office.

Inflows and outflows are estimates.

23. Regional disparities in Polish unemployment are immense, and reflect deep-rooted structural characteristics of the Polish economy. The disappearance of certain sections of heavy industry—especially when concentrated in one-company towns—and the liquidation of state farms have created regional pockets of high unemployment. In addition, the relatively small stock of housing and the lack of a well-developed housing market militate against labor mobility, making the problem of regional unemployment harder to solve.

24. Wage growth has picked up with the improved labor market conditions. After barely rising in 1994, latest official estimates suggest that economy-wide real wages increased 3.0 percent in 1995, net of income tax. This increase is estimated to have accelerated in 1996, to around 5 percent. Developments in the gross wage tell a similar story (Table 13), with wage growth outpacing consumer price inflation. Wage growth in the mining sector has been particularly erratic, rising much faster than average back in 1993 and 1994, before falling back a little in 1995. Wage growth in manufacturing has been consistently strong. Finally, while wage growth in the enterprise sector led the way in 1994, in 1995—reflecting indexation agreements and past election commitments—budgetary sector wages recovered to grow faster than average, narrowing the differential with the enterprise sector.

Table 13.Poland: Wages and Salaries, 1992-96
1992199319941995Jan.-Sep. 1/

1996
(Average monthly wage, in zlotys)
Nominal gross wage290390525691863
Of which:
Enterprise sector299410571754
Budgetary sector271357473639
Industry303417583759960
Mining and quarrying4766831,0451,3371,488
Manufacturing267362495657860
Electricity, gas and water supply3775547881,0101,219
Construction297368464601812
Wholesale and retail trade; goods repair258323438577814
Hotels and restaurants211261366492672
Transport, storage and communication304413558727892
Financial intermediation4345847671,0011,247
Real estate and business activities325427566736952
Public administration and defense3694926388591,108
Education258350458618779
Health and social work255333430573710
Nominal net wage244320425561703
(Percent change from year earlier)
Nominal gross wage34.834.531.625.4
Of which:
Enterprise sector37.139.332.1
Budgetary sector31.832.435.1
Industry37.839.830.127.1
Mining and quarrying43.553.028.028.3
Manufacturing35.436.732.727.7
Electricity, gas and water supply46.842.328.224.5
Construction23.926.329.427.1
Wholesale and retail trade; goods repair25.435.431.828.5
Hotels and restaurants23.739.934.530.7
Transport, storage and communication36.235.030.227.6
Financial intermediation34.731.230.531.6
Real estate and business activities31.332.730.028.5
Public administration and defense33.329.634.637.7
Education35.530.735.033.4
Health and social work30.629.233.332.4
Nominal net wage31.332.931.825.5
Consumer price index43.035.332.327.820.1
Sources: Central Statistical Office and staff estimates.

Figures for 1996 cover only the first nine months and, being based on a smaller statistical sample, are not directly comparable with figures for earlier years. However, the growth rates of wages for the first nine months of 1996 have been calculated using a consistent sample for both years, and hence are comparable.

Sources: Central Statistical Office and staff estimates.

Figures for 1996 cover only the first nine months and, being based on a smaller statistical sample, are not directly comparable with figures for earlier years. However, the growth rates of wages for the first nine months of 1996 have been calculated using a consistent sample for both years, and hence are comparable.

25. The process of wage formation continues to evolve. In the early stages of transition, enterprise wages were controlled by the excess wages tax, or popiwek. This tax was designed to keep state enterprise wage growth in check, at a time when market mechanisms of control were still weak. At first, to bolster the macroeconomic stabilization, the marginal tax rate on enterprise average wage growth in excess of the pre-specified norm was set at the punitive rate of 500 percent. However, as hard budget constraints took hold, and the microeconomic distortions of the popiwek grew larger (disproportionate taxation of the most profitable firms, hindering their expansion), the system was progressively relaxed and finally abandoned at end-1994.

26. Under the present system of wage setting, increases in the base wages (excluding profit-related bonuses) of workers in firms with 50 or more employees are set by indicative wage norms, agreed on by a Tripartite Commission of government, trades unions, and employers’ organizations, taking into account government projections of such economic variables as real GDP growth, the inflation rate, and the maximum average wage increase. For example, the wage norm for 1996 was set at 21.8 percent, assuming 19.8 percent annual average inflation. Though the wage norms are not legally binding, the managers of state owned enterprises are subject to loss of pay or even dismissal for violating the wage norm if profitability deteriorates as a result. In extreme cases, sanctions might also include withdrawal of tax allowances to enterprises that violate the norm.

27. However, the wage norms have not proved particularly effective at restraining wage growth. First, they contain elements of de facto indexation. The initial wage norm allowed average annual increases of 16 percent, 22 percent, 26 percent and 30 percent in the four quarters of 1995: an average annual increase of 23.5 percent, against 22.7 percent projected consumer price inflation. However, when consumer price inflation looked set to exceed the initial assumptions, the wage norm was revised at midyear to permit increases of 32 percent and 38 percent in the last two quarters of 1995, an annual average increase of 27 percent. Second, the wage norms have not proved binding. In 1995, wages actually increased 32.9 percent in enterprises governed by the wage norm, after substantial wage increases in the fourth quarter. Third, given the marked seasonal pattern of Polish wage growth, the quarterly phasing of the wage norm has been too generous in the first half of the year, and unrealistically harsh—and hence disregarded—toward February 19, 1997 the end of the year. Even so, the flexibility inherent in the wage norm system does at least offer the potential for greater relative wage flexibility, and for strengthening the link between wages and enterprise profitability.

28. In contrast, budgetary wages have been formally indexed to the rate of inflation for three consecutive years. This reflects the government’s commitment to raise budgetary wages relative to wages paid in the enterprise sector, so as to move closer to the pretransition pattern of relative wages. Indeed, the government is under a legal obligation to provide real growth in budgetary wages for the years 1995–98. For 1995, agreement was reached on an increase of average budgetary wages of some six percentage points above actual inflation; for 1996, and again in 1997, the increase was set at 5.5 percentage points. The amount of the real increase, and the timing of payment, is negotiated within the Tripartite Commission.

29. Thus, it is fair to conclude that considerable indexation remains in the Polish economy.4 Certainly pensions and unemployment benefits, and the minimum wage are indexed—initially to average wages, but increasingly to prices. In addition, budgetary wages have also been explicitly linked to actual inflation. The wage norm is more complex: it contains elements of forward looking indexation, but in practice it is revised with actual inflation developments. On the whole, it would seem that, as long as the authorities meet their inflation targets and the wage norm is adhered to, wage growth should not prove an obstacle to inflation reduction. However, there are at least two caveats. First, if the authorities miss their inflation target, the system will generate a rapid wage response, making subsequent inflation reduction even more difficult. Second, the wage norm has so far failed to bind. In fact, it may inadvertently establish a floor for wage increases, even in inefficient or loss-making enterprises.

D. Inflation and Prices

30. Against the impressive growth record of recent years, Poland’s inflation performance has lagged somewhat. Although hyperinflation has long since disappeared, inflation in Poland remains well above the average of its fellow Visegrad countries, let alone the average inflation rate in the European Union. Even so, generally tight financial policies have ensured a continued downward path for inflation, even if immediate progress has at times been complicated by undervaluation of the exchange rate (1994–95) or supply side shocks to the economy.

31. After declining sharply from over 600 percent during 1989 to 38 percent during 1993, inflation became stuck in the 30–35 percent range (Tables 14 and 15, Figure 5). In part, this was because gradual reductions in the rate of crawl were unable to resolve the underlying inflation problem caused by undervaluation of the level of the exchange rate. In addition, part of the explanation lies in the poor harvest of 1994: agricultural production fell, and food prices increased.

Table 14.Poland: Price Developments, 1989-96(Percent change)
19891990199119921993199419951996
GDP deflator298.5480.155.338.530.530.527.0
Of which:
Consumption 1/257.6517.463.839.429.629.628.0
Investment 2/196.6569.040.319.624.623.122.9
Consumer price index (annual average)251.1585.870.343.035.332.227.819.9
Commodities264.3559.860.036.734.232.127.219.8
Foodstuffs320.1574.746.136.933.633.027.018.6
Alcoholic beverages247.9388.787.636.523.629.228.625.4
Other226.7591.275.836.536.831.427.320.7
Services170.9780.7131.567.638.132.529.320.1
Consumer price index (end period)639.6249.360.444.337.629.521.618.5
Producer prices 3/
Industry212.8622.448.128.532.3
Fuel and power138.3933.087.039.942.3
Metallurgy232.8783.319.718.134.0
Electro-engineering203.2553.637.619.331.7
Chemicals195.0676.040.721.828.5
Minerals201.3626.444.924.627.4
Wood and paper232.6559.743.022.229.9
Textiles and leather products224.0408.337.120.428.6
Food processing290.9528.052.436.026.9
Construction186.5550.046.317.424.1
Agriculture251.5296.428.957.634.5
Producer prices 4/
Industry40.934.531.925.325.412.1
Mining and quarrying77.831.248.040.522.911.6
Manufacturing39.626.829.324.225.910.8
Electricity, gas and water supply40.586.740.123.627.115.1
Construction and assembly production47.417.224.619.721.919.2
Administered prices (annual average)
Producer prices
Electricity 5/21.130.941.560.2
Gas
Retail prices 6/
Alcoholic beverages222.7346.987.533.019.135.734.6
Fuel91.91,044.5132.337.646.837.418.3
Medicines646.4885.231.638.834.938.235.7
Electricity80.51,383.7151.770.637.337.428.0
Gas95.71,176.9369.5145.829.230.324.6
Central heating and hot water54.41,203.5222.8222.568.465.931.3
Source: Data provided by the Polish authorities, and staff calculations.

Final consumption expenditure.

Gross fixed capital formation.

For industry, producer prices are defined by the index of sales prices for sold output; for agriculture and construction, by the price index of gross output produced. According to the national classification (KGN).

According to the Polish version of the NACE-EKD classification system. Until 1993 indices include VAT; 1994-95 excluding VAT, including excise tax; from 1996 onwards excluding VAT and excise tax.

Producer prices in commercial heating plants.

The range of prices administered by the state has fallen over time. In 1996: the price of spirit alcohol is controlled; furnace fuels (coal, wood) are no longer controlled; control of medicine prices applies to a limited range of domestically produced pharmaceutical goods; the price of natural gas delivered through municipal installations is controlled; the state sets maximum prices for central heating and hot water—the index measures actual prices in force, which are sometimes below the state-set maximum.

Source: Data provided by the Polish authorities, and staff calculations.

Final consumption expenditure.

Gross fixed capital formation.

For industry, producer prices are defined by the index of sales prices for sold output; for agriculture and construction, by the price index of gross output produced. According to the national classification (KGN).

According to the Polish version of the NACE-EKD classification system. Until 1993 indices include VAT; 1994-95 excluding VAT, including excise tax; from 1996 onwards excluding VAT and excise tax.

Producer prices in commercial heating plants.

The range of prices administered by the state has fallen over time. In 1996: the price of spirit alcohol is controlled; furnace fuels (coal, wood) are no longer controlled; control of medicine prices applies to a limited range of domestically produced pharmaceutical goods; the price of natural gas delivered through municipal installations is controlled; the state sets maximum prices for central heating and hot water—the index measures actual prices in force, which are sometimes below the state-set maximum.

Table 15.Poland: Recent Price Developments(Percent change from a year earlier)
19951996
Q1Q2Q3Q4Q1Q2Q3Q4
Consumer price index33.031.625.822.020.619.920.119.0
Commodities31.831.424.922.020.419.620.518.8
Foodstuffs34.033.822.519.617.417.120.319.4
Alcoholic beverages30.130.928.425.631.127.025.918.9
Other29.028.527.524.823.022.120.018.1
Services36.632.228.322.021.120.519.119.4
Consumer price index (end period)33.130.324.221.620.419.519.518.5
Producer prices 1/
Industry30.028.925.519.813.913.810.9
Mining and quarrying22.124.222.924.313.512.811.3
Manufacturing30.229.626.220.312.510.68.9
Electricity, gas and water supply38.529.424.917.518.918.511.7
Consturction and
assembly production21.821.821.821.921.220.118.8
Source: Data provided by the Polish authorities.

According to the Polish version of the NACE-EKD classification system. Data in 1995 excluding VAT, including excise tax; from 1996 onwards excluding VAT and excise tax.

Source: Data provided by the Polish authorities.

According to the Polish version of the NACE-EKD classification system. Data in 1995 excluding VAT, including excise tax; from 1996 onwards excluding VAT and excise tax.

Figure 5.Poland: Inflation Developments, 1993–96

(Annual percent change)

Source: Polish Central Statistical Office.

32. However, from mid-1995 onwards, inflation resumed its downward path. An improved harvest pushed down both food prices and overall prices during the summer. This, together with a significant hardening of the exchange rate (see Chapter V), brought the year-on-year inflation rate down by some 8 percentage points in the space of four months, despite rapid expansion of the money supply. Inflation fell to 21.6 percent by the end of 1995: a considerable achievement but still well above the official inflation target of 17 percent.

33. Though inflation has continued to fall through 1996, consolidating the substantial gains of 1995, progress slowed substantially. The authorities’ December inflation target of 17 percent was again exceeded, but this time only by 1½ percentage points. While average inflation for the year fell from 27.8 percent in 1995 to 19.9 percent in 1996, in large part this was simply carryover from the sharp decline in the second half of 1995. Indeed, progress in reducing inflation in the second half of 1996 has been minimal, making it more difficult to reach next year’s target of 15.5 percent annual average inflation.

34. Exchange rate policy lies at the heart of the inflation reduction achieved since 1995. Reductions in the rate of crawl, combined with a series of small step appreciations in 1995, have put direct downward pressure on domestic inflation through lower import prices. The effect is seen vividly in the dramatic reduction in the rate of producer price inflation, which has fallen from 30 percent at the start of 1995 to only a little above 10 percent by end 1996.5 At the same time, the trend increase in consumer prices relative to producer prices has re-emerged (possibly obscured in 1995 by the undervalued exchange rate as well as falling food prices). Such a trend is consistent with rapid productivity growth in the tradables sector, but could also reflect the return of competitiveness to more normal levels (see Chapter V for a more detailed discussion of the exchange rate and competitiveness).

35. Administered prices account for almost 20 percent of the Polish CPI basket. These can be broken into two groups: goods with officially set prices (electricity, natural gas, central heating and hot water, medicines and spirit alcohol), and goods whose prices are not strictly administered, but which are influenced by excise taxes (beer and wine, tobacco, and liquid fuel and gasoline).6 In 1996, as in 1995, administered prices were increased less than originally intended, in order to contain inflation. For example, the increases in excise tax for tobacco and beer planned for the second half of 1996 were canceled, and the seven percent increase in VAT for medicines intended for July was abandoned. In addition, the government has used sales of agricultural reserves and extensions of duty free grain quotas to contain food price increases.

36. Delaying administered price increases to meet inflation targets has obvious risks: cost recovery is delayed—increasing the burden either on enterprise finances or on the budget—and even larger administered price increases are simply postponed to the future. Fuel provides a particularly telling example. During 1996, higher world oil prices made it unprofitable to import crude oil, refine it, and then sell it on the domestic market. The result was sporadic fuel shortages, offset only partly by sales of state oil reserves and duty free import quotas. In October, the government allowed slight increases in the price of fuel, lowered the excise tax on diesel, and expanded the duty free quota, in an attempt to increase the profitability of domestic refining. Even so, in practice, to overcome the shortages, fuel has been imported and sold above the official price (which applies only to domestically produced fuel). Long delayed for fears of its inflationary impact, fuel prices were finally liberalized in February 1997.

37. Why has inflation proved so resilient in Poland? Structural weaknesses offer one explanation. These include indexation, high tariff protection, monopolization, the need to raise relative prices to world levels, and the reduced effectiveness of monetary policy in an economy which still has sectors sheltered from market discipline (Chapter II of SM/95/316 (12/27/95)). A two-handed approach combining tighter financial policies with intensified structural reforms could substantially reduce the costs of disinflation, increase the effectiveness of macroeconomic policy, and thereby help lay the foundation for sustained economic growth.

38. The environment. Poland’s impressive economic performance during transition has been accompanied by a major effort to protect and clean up the environment. The adoption of the 1991 National Environmental Plan, and Poland’s commitment to harmonize its environmental standards with the EU (in line with its Association agreement) have both contributed. The share of investment expenditures in environmental protection has roughly doubled to around 1 percent of GDP; tighter regulations against the sources of environmental pollution have been introduced; higher quality fuels have been utilized; and industrial restructuring has promoted more efficient energy use and a diminished role for high-polluting heavy industry. As a result, between 1989 and 1994, total emissions of particulates fell by 42 percent, with nitrogen dioxide emissions falling by 25 percent and sulphur dioxide by one-third.

39. Unfortunately, these improvements have been made relative to a poor pretransition starting point. Total emission of air pollutants ranks among the highest in Europe; only 55 percent of the population is served by municipal sanitation services and less than 40 percent benefit from sewage treatment plants (compared to western European averages of more than 90 percent); and seasonal fluctuations and regional rainfall differences lead to periodic water shortages. Thus, Polish environmental quality still ranks well below OECD averages.

III. Recent Fiscal Developments7

A. Overview

40. After the large fiscal imbalances associated with the early and most difficult years of transition, Poland achieved a major fiscal turnaround in 1993, through a series of ambitious reforms and a rigorous budget. Since then, the general government deficit has been held consistently below 3 percent of GDP, compared with close to 7 percent in 1991–92 (see Table 1 and the tabulation below).

Table 1.Poland: Consolidated General Government Operations, 1991-96 1/
19911992199319941995Prel. est.

1996
(In billions of zlotys)
Revenue of general government34.250.374.2100.0135.3164.5
Tax revenue28.641.960.983.3111.5139.4
Personal income tax2.38.114.020.527.732.0
Social security contributions7.911.114.619.326.937.2
Profit tax5.95.16.67.29.310.9
Popiwek2.71.71.00.40.00.0
Turnover, VAT, excises, surcharge6.110.317.824.232.843.5
Import duties1.72.74.47.59.19.4
Other (residual)1.93.02.54.25.77.0
Non-tax revenue5.58.012.114.519.621.0
Dividend1.30.80.70.60.81.3
Central bank transfer0.71.11.42.43.00.3
Other (residual)3.56.010.011.515.818.7
Capital revenue0.20.51.22.24.24.2
Expenditure of general government39.657.978.7104.2143.1172.2
Current expenditure36.753.572.997.5135.4162.0
Wages and salaries17.223.430.4
Subsidies4.13.73.56.98.56.0
Transfers to households14.022.932.146.661.374.9
Interest payments1.33.75.38.713.815.0
Other current expenditure17.323.232.018.128.435.7
Investment expenditure3.03.95.16.78.310.2
Net lending0.50.70.0-0.6
Overall balance-5.4-7.6-4.5-4.2-7.8-7.7
State budget-5.7-8.9-5.3-5.4-9.9-7.8
Rest of general government0.21.30.81.12.20.0
Financing5.47.64.54.37.87.7
Domestic4.28.64.78.45.67.6
Bank4.18.03.56.70.92.6
Non-bank0.10.61.11.74.75.0
Foreign (net)-0.1-0.3-0.6-4.30.9-0.7
Change in arrears1.3-0.60.40.21.20.8
(In percent of GDP)
Revenue of general government42.343.847.647.647.245.7
Of which: Personal income tax2.97.09.09.79.78.9
Social security contributions9.89.79.49.29.410.3
Profit tax7.34.44.23.43.33.0
Turnover, VAT, excises, surcharge7.69.011.411.511.512.1
Import duties2.12.32.83.63.22.6
Non-tax revenue6.86.97.86.96.85.6
Expenditure of general government49.050.450.549.649.947.8
Of which: Current expenditure45.446.646.846.447.245.0
Subsidies5.13.22.33.33.01.7
Transfers to households17.419.920.622.221.420.8
Investment expenditure3.63.43.33.22.92.8
Overall balance-6.7-6.6-2.9-2.0-2.7-2.1
State budget-7.0-7.7-3.4-2.5-3.5-2.2
Rest of general government0.31.10.50.50.80.0
Financing: Bank5.17.02.33.20.30.7
Non-bank0.10.50.70.81.61.4
Foreign-0.1-0.2-0.4-2.00.3-0.2
Sources: Data provided by the authorities, and staff calculations and estimates.

Data are on a cash basis except for state budget expenditure, which is on a domestic commitments basis.

Sources: Data provided by the authorities, and staff calculations and estimates.

Data are on a cash basis except for state budget expenditure, which is on a domestic commitments basis.

General Government Performance, 1991–96
Preliminary
199119921993199419951996
(In percent of GDP)
Program/projected deficit0.64.54.83.73.12.7
Deficit outturn6.76.62.92.02.72.1
Revenue42.343.847.647.647.245.7
Expenditure49.050.450.549.649.947.8
Memorandum item:
Strategy for Poland deficit
(state budget)2.83.73.32.8
Sources: Strategy for Poland, information provided by the authorities; and staff estimates.
Sources: Strategy for Poland, information provided by the authorities; and staff estimates.

41. Besides maintaining the deficit at 2–3 percent of GDP since 1993 and a primary surplus since 1994, Poland has cut its public debt from 147 percent of GDP to 53½ percent of GDP between 1992 and 1996, while building a substantial government bond market from scratch. It has accomplished difficult reforms of income taxation, indirect taxation, and—lately—trade taxation; and has recently begun equally key reforms of government institutions and the social security system (pensions, disability, and unemployment).

42. These achievements have not come easily. The Government that came into office in 1993, while committed to continued stabilization and reforms, saw its mandate as one of enhancing equity in a more gradually paced transition. This limited its ability to reform the large social spending blocks in the budget: health, education, and pensions; these remain the main impediments to expenditure consolidation. Moreover, the revenue ratio has resumed its decline; structural reforms have imposed at least short-run costs on the budget; and a drive to decentralization has made fiscal management more complex. There have been, on the other hand, offsetting positive factors—significant debt relief, the return to growth, and a continued broadbased consensus on the principles of stabilization and market-oriented reforms. The Strategy for Poland, the new Government’s medium-term policy framework adopted in early 1994, adopted these principles and has guided fiscal consolidation over the past three years. The time horizon of the Strategy was extended by a new initiative in 1996 (Package 2000) to underpin Poland’s goal of joining the European Union soon after the turn of the century.

B. State Budget

43. Within general government, the state budget (core central government8) is responsible for about two-thirds of revenue and gross spending; it is the almost exclusive focus of the domestic fiscal policy debate. Through the 1990s, it has run a deficit slightly larger than for overall general government, supporting small surpluses in other agencies by various types of transfers (Table 2).9

Table 2.Poland: Components of General Government Budget, 1991-95 1/
19911992199319941995
(In billions of zlotys)
A. State budget
Revenue21.230.945.963.183.7
Expenditure26.939.851.268.593.6
Balance-5.7-9.0-5.3-5.4-9.8
B. Local authorities
Revenue5.06.414.720.0
Of which: intra-government transfers1.32.07.2
Expenditure4.56.514.819.8
Of which: intra-government transfers0.21.74.5
Balance0.5-0.1-0.10.2
C. Extrabudgetary funds
Revenue14.624.533.243.556.3
Of which: intra-government transfers4.49.012.020.426.3
Expenditure15.023.832.843.354.8
Of which: intra-government transfers
Balance-0.40.60.40.21.5
D. Extrabudgetary units of the state budget
Revenue1.72.22.64.94.3
Of which: intra-government transfers0.50.40.40.40.3
Expenditure1.51.82.64.63.9
Of which: intra-government transfers0.10.30.10.10.4
Balance0.20.40.00.20.4
E. Extrabudgetary units of the local authorities
Revenue3.35.57.7
Of which: intra-government transfers1.32.32.8
Expenditure3.25.67.6
Of which: intra-government transfers0.50.91.0
Balance0.00.00.1
F. Consolidated general government
Revenue34.250.374.2100.0135.3
Expenditure39.657.978.7104.2143.1
Balance-5.4-7.6-4.5-4.2-7.8
Change in arrears1.3-0.60.40.21.2
Balance (cash basis)-4.1-8.3-4.1-4.0-6.6
(In percent of GDP)
State budget
Revenue26.226.829.529.829.2
Expenditure33.334.632.932.332.6
Balance-7.0-7.8-3.4-2.5-3.5
Consolidated general government
Revenue42.343.847.647.247.2
Expenditure48.950.450.549.249.9
Balance-6.7-6.6-2.9-2.0-2.7
Change in arrears1.6-0.60.30.10.4
Balance (cash basis)-5.1-7.2-2.6-1.9-2.3
Memorandum items: (cash basis, national definition)
State budget balance (billion zlotys)-4.4-7.3-4.4-5.7-7.5
State budget balance (percent of GDP)-5.4-6.4-2.8-2.7-2.6
Sources: Data provided by the Polish authorities and staff estimates.

Data are on a cash basis except for state budget expenditure, which is on a domestic commitments basis. Beginning in 1994, the data are compiled according to GFS (except that privatization receipts are shown as revenue). Hence, 1994-95 data may not be strictly comparable with previous years’. The state budget comprises central government and regional authorities. Expenditure of the state budget includes all “unidentified expenditure”; this is mainly complementary period adjustments.

Sources: Data provided by the Polish authorities and staff estimates.

Data are on a cash basis except for state budget expenditure, which is on a domestic commitments basis. Beginning in 1994, the data are compiled according to GFS (except that privatization receipts are shown as revenue). Hence, 1994-95 data may not be strictly comparable with previous years’. The state budget comprises central government and regional authorities. Expenditure of the state budget includes all “unidentified expenditure”; this is mainly complementary period adjustments.

44. Having peaked at nearly 8 percent of GDP in 1992, the state budget deficit was more than halved in 1993 and has now been reduced to just over 2 percent.10 The policies underlying this consolidation were more consistent than perhaps annual deficit movements might suggest. The marked tightening in 1994 and the offsetting upward shift in the 1995 deficit are explained mainly by changes in the timing of debt service, a lengthening of maturities, and the resumption of full commercial debt service in 1995, together with first steps in dismantling trade taxes—which continued in 1996.

45. For 1997, the state budget incorporates a significant income tax reduction that, together with the continuing trade tax reform, explains the apparent 0.7 percent of GDP widening of the state budget deficit—to 2.8 percent of GDP in 1997.11 Since the budget was prepared on the earlier assumption of a 2.6 percent of GDP deficit in 1996, the sizeable overperformance last year would suggest the potential for a similar margin in 1997.

C. Revenue

46. While Poland has not been spared the characteristic transition revenue decline, the initial sharp fall of 1989–91 was braked by strong policy action from 1992 on, and the revenue ratio has since been kept high, at around 46–47 percent of GDP for general government (28 percent in the state budget). This, however, has masked a continuing underlying weakness in core revenues, which has resurfaced recently in revenue aggregates, and is likely to be maintained under the Government’s plan for medium-term tax reduction.

47. The 5½ percent of GDP revenue drop during the first phase of the transition (10 percent in the state budget) resulted from a wide spectrum of problems, including a pronounced decline in enterprise profitability, an erosion of indirect tax bases, and the virtual elimination of trade taxes. After restoring import tariffs in 1991, the authorities began several rounds of ambitious tax reform in 1992 to rebuild revenues. A new personal income tax law was introduced to capture the shift in income shares from profits to wages; the corporate tax was reformed to broaden the definition of enterprise income; VAT was implemented in mid-1993 to provide a broad-based source of consumption taxation; and a broad-coverage import surcharge was imposed to recapture incomes in the relatively healthy trade sector. Within two years, these measures raised an additional 7 percent of GDP, although half of that was offset by a further drop in enterprise tax receipts.12 During 1993—95, despite a 1994 increase in PIT rates13 and a focused initiative on broadening the tax net, the revenue ratio remained around 47½ percent of GDP, before dropping by about 2 percent of GDP in 1996; a further fall is projected for 1997 even before the income tax cuts.

48. The recent gentle revenue decline is to some extent welcomed in Poland as an indicator of diminishing government pressure on the economy. Unlike earlier losses it is orderly, in the sense that it is largely anticipated in the budget and compensated by spending restraint. It can partly be explained by the recovery, and in particular, by its unevenness. Almost inevitably, given the transition strategy, growth surfaced first in investment, exports, and services—relatively lightly taxed sectors. Traditional tax bases, concentrated in lagging sectors, have continued to shrink as a share of GDP. Other causes include the following: (1) Starting in 1995 the import surcharge was phased out and disappears from the beginning of 1997. Tariffs have been cut each year by an average 20 percent for industrial goods and about half that for agricultural goods. (2) Privatization is now reducing the base for state enterprise dividend payments to the budget (though privatization revenues have been significant during the past three years). (3) Central bank profit transfers have dropped to one-tenth the level of previous years, mainly because of the costs of sterilizing large external surpluses (see Attachment I).

49. In 1996, the revenue decline of 1½ percent of GDP was influenced also by specific factors. The personal income tax lagged because publicity about a tax-preference for family donations trebled deductions compared with budget. Also, some planned excise increases were delayed and the excise on diesel fuel was lowered—largely in an effort to contain inflation. On the other hand, VAT and trade taxes were buoyant, mainly because of higher than expected imports. Privatization receipts and related nontax revenue from sales of concessions and licenses also exceeded expectations.

50. The sharper decline in state budget revenue than for general government as a whole has been notable for several years (Table 3). It can also be explained by the recovery: earmarked monies such as social security contributions and own-revenues of extrabudgetary funds have grown relative to fungible “core” taxes on income and trade, because of rising real wages and intensifying commercialization within state agencies. Hence, the state budget’s share in revenue has dropped from 77 percent in 1990 to only 60 percent in 1996. This has been the major recent change in Poland’s revenue structure. Perhaps contrary to expectations, the direct-indirect tax split has changed little, because the strong performance of the PIT and payroll taxes has compensated for the falling enterprise tax base.

Table 3.Poland: State Budget Revenue, 1991–96
1991199219931994Revised

Outturn

1995
Prelim.

1996
(In billions of zlotys)
Total revenue21.230.945.963.183.799.7
Current revenue21.030.445.161.581.196.4
Tax revenue18.027.340.356.574.890.4
Direct taxes9.714.019.224.732.536.9
Personal income tax (PIT)2.07.211.917.423.526.2
Enterprise income tax (EIT)5.15.16.36.88.810.7
Excess wage tax (EWT)2.71.71.00.50.20.0
Domestic indirect taxes6.110.317.824.333.043.9
Of which: VAT 1/15.020.727.7
Excise revenues9.112.115.9
Trade taxes1.72.73.47.59.19.4
Import surcharge (incl. various levies)0.00.00.02.63.32.9
Customs duties1.72.73.44.95.86.5
Others (incl. taxes abolished) 2/0.50.30.00.00.10.2
Non-tax revenue3.03.14.85.16.36.0
Transfers from NBP0.70.81.42.43.00.3
Dividend requirement1.30.90.70.60.81.3
Receipts from abroad0.00.00.0
Interest0.30.00.00.00.00.0
Receipts of budget units, other revenue0.81.42.72.12.54.4
Capital revenue (privatization)0.20.50.81.62.63.3
(In percent of GDP)
Total revenue26.826.829.529.829.227.7
Tax revenue23.723.726.526.626.125.1
Direct taxes12.012.212.311.611.310.3
Personal income tax (PIT)6.36.37.78.28.27.3
Enterprise income tax (EIT)4.44.44.03.23.13.0
Excess wage tax (EWT)1.51.50.60.20.10.0
Domestic indirect taxes9.09.110.911.511.512.2
Of which: VAT 1/0.00.00.07.17.27.7
Excise revenues0.00.00.04.34.24.4
Trade taxes2.12.32.23.53.22.6
Non-tax revenue2.72.72.42.42.21.7
Of which: Transfers from NBP0.70.70.91.11.00.1
Dividend requirement0.70.70.40.30.30.4
Capital revenue (privatization)0.40.40.50.80.90.9
Sources: Data provided by the authorities, and staff estimates.

Includes turnover tax through 1995.

The stamp duty and the real estate tax were abolished in 1990.

Sources: Data provided by the authorities, and staff estimates.

Includes turnover tax through 1995.

The stamp duty and the real estate tax were abolished in 1990.

51. For 1997, the budget envisages a further 1.8 percent of GDP drop in the revenue ratio. The income tax reform package passed by Parliament in November 1996 is seen by the Government as the first step in implementing the medium-term fiscal reforms outlined in Package 2000. It has three main sets of provisions: (1) cuts in personal income tax rates from the current 21/33/45 percent scale to 20/32/44 percent in 1997 and to 19/30/40 percent in 1998; (2) a cut in the corporate income tax rate from 40 to 38 percent; and—importantly for alleviating the cost of the package—(3) the recision or reduction of several tax exemptions, notably on investment income and family donations. To offset part of the resulting revenue loss in 1997, the authorities added Bank Handlowy, the preeminent state-owned bank, to the list of state assets to be privatized this year (Chapter VI). Besides the cost of the income tax package, the revenue side of the 1997 budget reflects the continuing trade tax reform, specifically the elimination of the import surcharge at a loss of around 0.8 percent of GDP, and further tariff cuts. Central bank transfers are projected to remain depressed, reflecting the still-large volume of outstanding open-market operations. Higher planned privatization receipts and scheduled increases of VAT rates for energy products partly offset these costs.

D. Expenditure

52. Expenditure has also gently trended down since 1992, despite many opposing pressures. The orderly containment of spending has been key for Poland’s fiscal success, given the pressures on revenue. At the general government level, outlays declined from 50½ percent of GDP in 1992–93 to less than 48 percent in 1996; state budget expenditure dropped from 33 percent to 30 percent of GDP over the period (see Tables 1 and 4).

Table 4.Poland: State Budget Expenditure, 1991-96
19911992199319941995Prel. Est.

1996
(In billions of zlotys)
Total expenditure and net lending (cash basis)25.638.250.368.991.2106.7
Current expenditure23.835.847.165.286.4101.0
Wages4.66.89.110.914.817.7
Social security contributions1.52.33.03.75.15.2
Purchase of goods and services6.88.811.316.424.332.3
Interest1.33.15.38.714.015.0
Domestic0.52.04.16.910.711.3
Foreign0.71.11.21.83.33.7
Subsidies4.13.93.64.65.15.0
Transfers to social security funds 1/4.39.012.416.016.617.9
General transfer to local governments1.21.82.44.96.57.9
Capital expenditure and net lending1.82.43.23.74.85.7
Capital expenditure and capital grants1.72.02.53.14.15.6
Net lending (invoked guarantees)0.10.50.70.50.60.1
Changes in arrears and residual expenditure--0.60.9-0.42.40.8
Total expenditure and net lending
on domestic commitment basis 2/25.638.851.268.593.6107.5
(In percent of GDP)
Total expenditure and net lending (cash basis)31.633.232.332.531.829.6
Current expenditure29.431.130.230.830.128.1
Wages5.66.05.85.15.24.9
Social security contributions1.82.01.91.71.81.5
Purchase of goods and services8.47.77.27.78.59.0
Interest1.62.73.44.14.94.2
Domestic0.71.82.63.23.73.1
Foreign0.91.00.80.91.11.0
Subsidies5.13.42.32.21.81.4
Transfers to social security funds 1/5.37.88.07.55.85.0
General transfer to local governments1.51.51.52.32.32.2
Capital expenditure and net lending2.22.12.01.71.71.6
Capital expenditure and capital grants2.11.71.61.51.41.6
Net lending (invoked guarantees)0.10.40.40.30.20.0
Changes in arrears and residual expenditure0.00.50.6-0.20.80.2
Total expenditure and net lending
on domestic commitment basis 2/31.633.732.832.332.629.9
Memorandum items:
Defense expenditures (in percent of GDP)2.12.12.11.91.81.7
Sources: Data provided by the Polish authorities; and staff estimates.

Includes pensions for uniformed personel and family allowances, and transfers to other state budget funds.

In 1990 and 1991 arrears and residual expenditure included in current and capital expenditure.

Sources: Data provided by the Polish authorities; and staff estimates.

Includes pensions for uniformed personel and family allowances, and transfers to other state budget funds.

In 1990 and 1991 arrears and residual expenditure included in current and capital expenditure.

53. The pressures that have made control of spending difficult include: (1) the perceived need to rebuild government wage rates, which had been among the hardest hit in the transition, and which, after several years of real hikes, are at around 85 percent of wages in the rest of the economy; (2) social security payments linked to a wage index which has tended to grow faster than the CPI and GDP deflators; (3) several rounds of Constitutional Tribunal rulings requiring government compensation for earlier under-indexation of wages and benefits; (4) periodic arrears bail-outs (see below); (5) growth in demand for unemployment benefits; and (6) rising demands for funding from local governments as their responsibilities increase (see below). Moreover, despite significant savings in debt service in recent years compared with budget, (7) interest payments have increased by 2½ percent of GDP since 1991, because of the recommencement of full debt service payments abroad as the quid pro quo of the 1994 debt reduction, and the growth of domestic debt carrying relatively high nominal interest rates.14

54. Spending reductions were concentrated on subsidies and in capital and net lending. The recent subsidy cuts were a less drastic continuation of the sharp cuts of the early transition years: the already much-reduced explicit support for enterprise losses was eliminated and housing subsidies curtailed (though these are intrinsically long lived and still remain important).15 Direct investment outlays have dropped by around ½ percent of GDP since 1992—from already low levels—and budget responsibility for guaranteed project borrowing has been successfully curbed, saving another ½ percent of GDP.

55. The declining trend in overall expenditure sharpened in 1996, when spending fell by more than 2 percent of GDP. Overruns in wages and unemployment benefits were offset by large savings in debt service and transfers to social security funds (FUS). Capital outlays and subsidies also came in below budget. The social security transfers were lower than budgeted not only because high wages boosted contributions but also because of an interim arrangement governing benefit indexation, which was designed to limit real growth to 2½ percent.16 A potential threat to the budget, the ruling of the Constitutional Tribunal that government must pay compensation for under-indexation of pensions in the fourth quarter of 1995, was deferred to 1997.

56. As in 1996, spending in the draft 1997 budget is largely driven by policies for wages and pensions. The budget provides for a 5 percent average real increase in government wages, with larger increases planned for workers in education and health. A new law on pension indexation, based mainly on prices, with room for additional increases depending on budgetary possibilities, is expected to generate savings in future years, given likely labor productivity growth. Despite this welcome reform, average pensions are projected to grow by up to 7 percent in real terms during 1997, because of the combined impact of a catch-up payment for lower-than-budgeted pensions in 1996, and compensation on account of the Constitutional Tribunal ruling for 1995. The latter is currently estimated to cost about Zl 2.5 billion.17 There will be some savings to the transfer bill from the impact of 1996 reforms tightening eligibility for disability and unemployment benefits. The budget provides for real growth in spending on education, health, housing, agriculture, and defense/security. The 5 percent real increase in defense outlays is mainly wage related but also incorporates Poland’s commitments to the Partnership for Peace. An estimated 1.7 percent of GDP in 1996, Poland’s defense outlays have been declining steadily throughout the transition.

57. Five years of discretionary expenditure cuts have caused the structure of general government spending to change significantly, even after the first sharp shift from subsidies to income transfers in the “big bang” of 1990. The share of transfers to households in total spending rose by more than 20 percent in 1992–96, and now amounts to 43 percent of outlays. The interest share trebled, to 9 percent of spending. For the incomplete period over which the wage bill can be measured, it has trended up and currently accounts for 17½ percent of outlays. The subsidy cuts—by a further two-thirds following their initial decline—have reduced subsidies to less than 4 percent of spending. Finally, the capital budget, always small, now amounts to less than 6 percent of spending.

58. A further apparent change in the structure of spending can be traced to the transfer of state budget responsibilities to local governments and big cities, largely in 1995–96. This decentralization—mainly in the area of education—has reduced the state budget’s wage bill and raised intergovernmental transfers. Estimates are, however, that the overall size of the public sector labor force has actually grown by around 1 percent over the period, so the smaller wage bill observed in the budget is a poor indicator of wage pressure on government finances. The responsibilities and size of extrabudgetary funds have also increased, though some have been abolished (Table 5). While all of these developments reflect government priorities, it is clear that the growth of entitlements, wages, and interest, and the policy of devolution, have by now limited the room for future discretionary expenditure adjustment.

Table 5.Poland: Operations of Extra-Budgetary Funds, 1991-95 1/
19911992199319941995
(In billions of zlotys)
Extra-Budgetary Funds—Total
Contributions and own revenues10.215.621.429.240.6
Expenditures15.024.033.044.655.9
Balance before budget transfer-4.8-8.4-11.6-15.4-15.3
Budget transfer4.49.011.916.116.6
Overall balance-0.40.60.40.71.3
Of which:
I. Main Social Insurance Funds -- Total
Contributions and own revenues9.614.319.627.338.0
Expenditures14.322.830.942.953.4
Of which: pensions10.216.822.832.441.7
Balance before budget transfer-4.7-8.5-11.3-15.6-15.4
Budget transfer4.38.811.715.816.1
Overall balance-0.40.40.40.20.7
II. Other Funds-Total
Own revenues0.61.31.71.92.5
Expenditures0.71.22.11.72.4
Balance before budget transfer-0.10.1-0.30.20.1
Budget transfer0.10.20.30.30.4
Overall balance0.00.30.00.50.5
(In percent of GDP)
Extra-Budgetary Funds -- Total
Contributions and own revenues12.613.513.713.814.0
Expenditures18.620.821.221.119.3
Balance before budget transfer-5.9-7.3-7.4-7.3-5.3
Budget transfer5.47.87.77.65.7
Overall balance-0.50.60.20.30.4
Of which:
I. Main Social Insurance Funds -- Total
Contributions and own revenues11.812.512.612.913.2
Expenditures17.719.819.820.318.5
Of which: pensions12.614.614.615.314.4
Balance before budget transfer-5.8-7.4-7.2-7.4-5.3
Budget transfer5.37.77.57.55.6
Overall balance-0.50.30.30.10.2
II. Other Funds -- Total
Own revenues0.81.11.10.90.9
Expenditures0.91.01.30.80.8
Balance before budget transfer-0.10.1-0.20.10.0
Budget transfer0.10.20.20.10.1
Overall balance0.00.20.00.20.2
Source: Data provided by the authorities, and staff estimates.

Data are on a cash basis. There were 14 funds in 1991,18 in 1992,17 in 1993, 18 in 1994, and 17 in 1995. Details of the three biggest funds (the main social funds) are shown in Table 6. The other funds cover veterans’ and other health concerns, geological and environmental issues, agriculture, and culture.

Source: Data provided by the authorities, and staff estimates.

Data are on a cash basis. There were 14 funds in 1991,18 in 1992,17 in 1993, 18 in 1994, and 17 in 1995. Details of the three biggest funds (the main social funds) are shown in Table 6. The other funds cover veterans’ and other health concerns, geological and environmental issues, agriculture, and culture.

59. Several of the institutional reforms currently under way are designed to give the government additional room to manoeuvre in managing expenditure. The most important are the reforms of the pension system and unemployment insurance, which aim to curb the growth in the transfer bill (see Table 6 and Chapter VI below). One goal of the decentralization strategy is to make spending on education more efficient, with closer control of costs and arrears. A debate on possible health care reform—particularly controversial—has recently been revived. There is also an on-going initiative for civil service reform (though it focuses more on the development of professional cadres than on managing the public sector wage bill). Finally, the 1997 draft budget provides for some expansion of capital spending.

Table 6.Poland: Finances of the Main Social Insurance Funds, 1991-95 1/
19911992199319941995
(In billions of zlotys)
FUS -- Social Insurance Fund
Contributions and own revenues9.013.618.325.335.5
Expenditures11.518.224.633.540.7
Of which: pensions8.814.719.827.835.5
Balance before budget transfer-2.6-4.6-6.3-8.2-5.2
Budget transfer2.25.06.68.36.0
Overall balance-0.40.30.40.10.8
KRUS -- Farmers’ Social Insurance Fund
Contributions and own revenues0.10.10.20.30.3
Expenditures1.62.33.35.06.5
Of which: pensions1.42.13.04.66.2
Balance before budget transfer-1.4-2.2-3.1-4.7-6.1
Budget transfer1.42.23.14.76.1
Overall balance0.00.00.00.00.0
FP--Labor Fund
Contributions and own revenues0.50.71.11.72.2
Expenditures1.22.33.04.46.3
Of which: unemployment benefits1.02.01.92.73.8
Balance before budget transfer-0.8-1.6-1.9-2.7-4.1
Budget transfer0.81.62.02.84.0
Overall balance0.00.00.10.10.0
(In percent of GDP)
FUS -- Social Insurance Fund
Contributions and own revenues11.111.811.812.012.3
Expenditures14.215.815.815.814.1
Of which: pensions10.912.812.713.112.3
Balance before budget transfer-3.2-4.0-4.0-3.9-1.8
Budget transfer2.74.34.23.92.1
Overall balance-0.40.30.20.10.3
KRUS -- Farmers’ Social Insurance Fund
Contributions and own revenues0.20.10.10.10.1
Expenditures1.92.02.12.42.2
Of which: pensions1.71.81.92.22.1
Balance before budget transfer-1.7-1.9-2.0-2.2-2.1
Budget transfer1.72.02.02.22.1
Overall balance-0.10.00.00.00.0
FP--Labor Fund
Contributions and own revenues0.60.60.70.80.8
Expenditures1.52.02.02.12.2
Of which: unemployment benefits1.31.71.21.31.3
Balance before budget transfer-0.9-1.4-1.2-1.3-1.4
Budget transfer0.91.41.31.31.4
Overall balance0.00.00.00.00.0
(In percent of total revenues of respective funds)
Memorandum items:
State budget transfers to:
Social Insurance Fund (FUS)19.826.726.524.714.5
Farmers’ Social Insurance Fund (KRUS)90.397.193.794.894.8
Labor Fund (FP)61.470.564.362.764.4
Source: Data provided by the Polish authorities; and IMF staff estimates.

On a cash basis.

Source: Data provided by the Polish authorities; and IMF staff estimates.

On a cash basis.

E. Financing and Public Debt

60. Government’s contribution to demand pressures has been reduced somewhat more than the relatively minor movements in the deficit would suggest. For a number of reasons, domestic bank financing has declined significantly, from 7 percent of GDP in 1992 to 0.7 percent in 1996 (Table 1). First, the domestic market for government paper has expanded rapidly. In 1995–96, domestic nonbank borrowing supplied around 1½ percent of GDP in deficit financing, up from almost zero in the early 1990s.18 In 1996, too, local governments began to issue bonds for the first time. A second factor is that foreign financing, which had been negative through the 1990s, became positive in 1995. In 1997, some regression of the financing pattern is projected, because (unduly generous) tax preferences for investors in government paper are being eliminated as part of the tax reform package (see above). This is expected to dampen nonbank finance significantly (albeit with a large margin of uncertainty, since the impact of the tax preferences in creating demand for treasury bonds is not known). Also, foreign financing—always conservatively projected—is projected to reverse to marginal negative net flows. Hence, bank borrowing of nearly 2½ percent of GDP is implicit in the 1997 budget.

61. Despite the buoyant domestic demand for government paper, public debt has fallen sharply. While the primary surplus has contributed, the decline, from 147 percent of GDP in 1992 to an estimated 53 ½ percent in 1996 and 49 percent in 1997, is mainly explained by developments on the external side. The second stage of the Paris Club agreement in 1994 reduced Polish official debt by nearly US$3 billion, and a London Club agreement cut commercial debt by nearly 50 percent. The drop is also testimony to the benefits of recovery—the combination of strong real growth, favorable exchange rate movements, and falling interest rates. At end-1996, just over 60 percent of outstanding debt was external; foreigners also hold domestic paper, but their claims currently represent less than 2 percent of the debt.

F. Other Levels of Government

62. Besides the state budget, the general government includes social funds (the second-largest component), local governments, and extrabudgetary agencies at central and local levels (Table 2). Supported by transfers from the state budget, these agencies—the rest of general government—have run a small but significant surplus throughout the 1990s.

63. The financial position of the social funds before transfers has been a main policy concern, and a prime motivation for the ongoing benefits reforms (Chapter VI). It has improved significantly since 1994; the budget transfer dropped from 7.7 percent of GDP to 5.6 percent of GDP in 1995 and a preliminary 5 percent of GDP in 1996 (Tables 5 and 6). Savings were realized in part because of buoyant wage growth (and thus contribution growth), while there has also been a sizeable decline in expenditures of the main pension fund (FUS) relative to GDP, reflecting both a lower-than-expected influx of new pensioners and the effect of some recent reforms (Chapter VI).

64. As regards subnational levels of government, there have been significant changes in structure and management since 1995, mainly in the direction of decentralization. Beginning in 1996, 46 large cities became self-governing; their number is likely to increase in 1997. They, and other municipalities, took responsibility for primary schools and some vocational training. In 1997, the administration of additional educational establishments will be shifted to them. The additional tasks are currently financed by direct budget transfers over and above the regular share of personal income tax kept by local governments.19 The long-planned elimination of the road tax (a main own-revenue source) has been deferred. A working group has been established to draft a new local government law by end-1997, within a wider brief to articulate a decentralization strategy, and with a particular focus on developing modalities for moving local governments further towards self financing. Besides these measures, control of over 3,000 firms still in state hands is being handed over to provincial governors; from now on the central government will supervise only larger strategic enterprises. A proposal to reestablish intermediate levels of subnational administration (poviats), between municipalities and provinces, is also up for debate.

65. Besides the on-going shift in responsibilities between levels of government, 1996 has also witnessed a major reorganization within central government. Seven ministries are being abolished, including the Central Planning Office and the Ministry of Foreign Economic Relations, and four new ones created, including a Treasury and Ministry of Economy. The Treasury has taken over the state’s ownership function in large firms and will also be responsible for privatization. The main goals of the reorganization were to eliminate the branch structure of oversight for state enterprises and instead concentrate industrial policy issues in a new Ministry of Industry, and to decentralize governance and small-scale privatization to lower levels of government.

G. Outstanding Fiscal Issues

66. Despite Poland’s consistently sound fiscal performance, a number of shortcomings remain to be dealt with for the completion of the stabilization process. These include: the remaining agenda for tax reform; persistent government expenditure arrears; the fact that consolidation has been achieved partly by temporary measures; the need to align medium-term fiscal targets with other financial objectives; and the exceptionally high level of uncertainty in fiscal policy—partly a budget management challenge.

67. Tax reform. The tax reforms of the last five years have dealt with many of the previous important distortions in the tax system.20 Perhaps the most immediate unresolved issues are: remaining VAT exemptions that have proved politically difficult to remove; and the impending need to identify permanent revenues (or expenditure cuts) to replace privatization receipts.

68. Arrears. As in other transition countries, the state budget outcome has been affected by relatively small but recurring arrears. Now almost exclusively concentrated in education and health, they have contributed 0.1–0.4 percent of GDP to the commitments deficit in most years. The authorities have carried out several rounds of bail-outs, most recently as part of the closure of the 1995 and 1996 budgets. The latter, if fully effected as planned, could cost 0.6 percent of GDP in 1997; it is intended to be the last such exercise. To insure against recurring arrears, repayment will be authorized only to spending units with no new arrears. Previous rounds have also been associated with measures to correct not only the stock, but also the flow problem, although apparently with limited success to date. For example, the transfer of primary schools to local government was partly motivated by the desire to control their spending more closely.

69. The underlying fiscal gap. The deficit target has been achieved each year with the help of one-time revenues, such as privatization receipts and license fees, of 1 percent of GDP or more. Excluding these one-off factors would put the general government deficit at 3.6 percent of GDP in 1995, 3.1 percent in 1996, and a budgeted 4 percent in 1997. This higher underlying gap, coupled with the possible weakening of the fiscal balance if the current high growth rates were to slow, implies that more adjustment is likely to be needed for longterm stability than recent data might suggest.

70. Medium-term goals. The need to address the underlying fiscal gap is of importance particularly from a medium-term perspective, given the widely-agreed need to raise savings and investment ratios, reduce inflation, and provide for contingencies like the recent large capital inflows. However, Poland’s medium-term fiscal direction is somewhat unclear. The Government’s new medium-term program, Package 2000, was approved in mid-1996, with the aim, inter alia, of furthering convergence towards Maastricht criteria. It envisages a declining deficit path consistent with achieving 5–7 percent inflation and 5 percent growth in 2000 (see tabulation below). Specifically, the 1997 state budget deficit was to be 2.2 percent of GDP (down from a projected 2.5 percent of GDP in 1996), falling to 1.7 percent of GDP in 2000. The plan incorporated phased reductions in corporate and personal income taxes, as a key input to achieving the growth target. These were the motivation for the November 1996 tax package. However, unlike in the Package, the tax reforms came at the cost of loosening the state budget deficit to 2.8 percent of GDP (up from an estimated 1996 deficit of 2.2 percent of GDP). Whether this remains compatible with the goals of Package 2000 will depend on actual budget implementation in 1997 and success in bringing 1998 budget plans back on the envisaged medium-term track.

Medium-Term Fiscal Goals (State Budget), 1994–2000
BudgetAverage
19941995199619971998199920001996-2000
(In percent of GDP)
Deficit
Package 20002.72.32.01.81.72.1
Outturn/budget2.53.52.22.8
Revenue
Package 200029.129.429.529.128.229.1
Outturn/budget29.829.227.826.0
Expenditure
Package 200031.831.731.530.929.931.2
Outturn/budget32.832.629.928.8
Memorandum item:
Strategy for Poland
deficit3.73.32.82.5
Source: Package 2000 (April 1996); staff estimates.
Source: Package 2000 (April 1996); staff estimates.

71. Uncertainty. A central characteristic of Poland’s fiscal experience in the 1990s has been substantial subannual volatility. This has made the deficit outturn difficult to forecast, complicated program management, and heightened uncertainty about financial parameters. Specifically, each year since 1992, within-year indicators and unbudgeted-for shocks have signaled potentially serious spending overruns, but factors mainly linked to the intensifying recovery eventually bailed the budget out. In recent years, declining interest rates and the strengthening of the zloty brought debt service in below target; privatization receipts have generally come in above budget; and since 1995 rising real wages have boosted social security contributions and temporarily alleviated structural pressures on the pension system. High growth has also made it possible to grant real increases in politically sensitive areas of expenditure while still compressing spending in terms of GDP. And overruns in actual inflation compared to target boosted revenues while depressing real spending. It is not clear how safe the 2½–3 percent deficit would be if growth were to slow, prices and wages to stabilize, privatization to be completed, and real exchange rate appreciation to pause.

IV. Money, Credit, and Interest Rates21

72. This chapter reviews recent monetary developments and issues: Poland’s monetary policy framework and the challenges it has faced during the transition; developments in monetary aggregates and interest rates; and the central bank’s monetary policy guidelines for 1997. Bank privatization, restructuring, and supervision are covered in Chapter VI on structural reforms. Monetary issues are also addressed in Attachments IIII, which cover, respectively, the evolution of the targets and instruments of monetary policy, estimates of money demand in Poland, and an empirical analysis of the effectiveness of sterilization.

A. Framework and Challenges

73. Throughout Poland’s transition, monetary policy has operated with the exchange rate as a key nominal anchor. In 1990–91, the turnaround from near hyperinflation to inflation below 50 percent occurred under a fixed exchange rate regime, with high interest rates, a large fiscal adjustment, and the opening of the economy to foreign competition. The more gradual disinflation since has also been achieved with a largely exchange rate based strategy. Between October 1991 and May 1995, monetary policy was conducted under a crawling peg arrangement, with periodic reductions in the rate of crawl in line with the disinflation objective and several step devaluations to preserve external balance. Since May 1995, Poland’s exchange rate regime has formally been a crawling band of ± 7 percent around the central parity, with several small step appreciations and a further reduction in the rate of crawl. However, exchange rate fluctuations within the band have so far been rather limited.

74. In practice, the exchange rate has not been the only nominal anchor. As discussed in Attachment I, the authorities have followed a multiple anchor approach to achieve moderate disinflation without jeopardizing the recovery and with a view to preserving external balance. Domestic interest rates and the rate of crawl have generally been geared to the inflation target, while the level of the exchange rate has been set with a view to securing external balance. Fiscal and incomes policies have acted as additional anchors.

75. The intermediate and operational targets of monetary policy have also been set in a flexible manner. While the National Bank of Poland (NBP) has formally used broad money as the intermediate target in its monetary framework, in practice, as noted above, interest rates have been set mainly with a fairly direct view toward the goal of moderate disinflation. Until recently, short-term interest rates were the operational target of monetary policy. This choice reflected mainly the underdeveloped nature of Poland’s financial markets. With effect from January 1996, the NBP switched to reserve money as the operational target, although the level of money market interest rates has continued to be an important target in the day-to-day conduct of monetary policy.22

76. The circumstances under which monetary policy has been operating have not been easy:

  • Early on, there was a need to establish a modern central bank, with well-functioning indirect instruments of monetary control. As described in detail in Piero Ugolini, National Bank of Poland: The Road to Indirect Instruments, IMF Occasional Paper No. 144 (October 1996), this task is largely completed. In particular, open market operations have been the primary instrument of monetary policy already since 1993.
  • Large fiscal deficits in 1991–92 (following a temporary surplus in 1990) put considerable pressure on monetary aggregates. This pressure was exacerbated by Poland’s low degree of monetization—at that time, broad money amounted to 30 percent of GDP, less than half of the money-to-GDP ratio in the Czech Republic and also much below that in Hungary.
  • Banking sector problems have at times hampered efficient transmission of monetary policy actions. While bank privatization is still incomplete and some co-operative and specialized banks are yet to turn the corner, a major restructuring of the commercial bank sector starting in 1993 has been largely successful, with bank profits and solvency improving rapidly in recent years. Moreover, prudential regulations have been established, and bank supervisory capacity has been strengthened.
  • The shocks and uncertainties of transition have likely caused structural changes in behavioral relationships, making judgements on the appropriate stance of monetary policy difficult. For example, there have been large unforeseen and in part unexplained shifts in private savings.
  • Disinflation in Poland is rather costly, reflecting a number of structural reasons, including entrenched indexation practices, protracted relative price changes, and slow restructuring of enterprises.23 Together with the need to sustain the recovery, this has at times tended to result in a somewhat accommodative monetary stance, including devaluations.
  • The increased openness of the economy has reduced the scope for independent monetary policy. While interest sensitive capital movements were relatively limited until Poland’s full normalization of relations with commercial creditors in late 1994, several factors have worked to increase capital mobility since. These factors include: increased confidence in the economy (owing to the strong recovery and improving external position); the development of Poland’s financial markets; liberalization of capital account restrictions, including permission for foreigners to participate in the Treasury bills market; and, during 1995, widespread expectations of zloty appreciation. Under the existing exchange rate system, maintaining independence of monetary policy has required heavy sterilization.
  • Although the NBP has considerable autonomy in fulfilling its central bank functions, the need for Parliamentary approval of the NBP’s monetary policy guidelines and the availability of central bank financing for the budget indicate that full independence is yet to be achieved. A new central bank law, which would significantly strengthen NBP independence, is under discussion in Parliament.

B. Recent Monetary Developments

77. In early 1995, monetary policy faced a difficult task. Inflation, which had been close to 30 percent in the previous year, was targeted to decline to 17 percent. However, net international reserves (NIR) had since mid-1994 increased at a rapid rate, with the sources of the increase somewhat unclear at the time.24 Moreover, the planned fiscal stance was at best neutral. In this situation, a harder exchange rate—through reductions in the rate of crawl and a series of small step appreciations—became the main anti-inflationary weapon. Headline interest rates were also raised early in the year, prompted by a high January inflation outcome, but as higher interest rates were found to contribute to capital inflows and with a harder exchange rate improving prospects for disinflation, interest rates were cut significantly later in the year. In the event, inflation was contained to below 22 percent during 1995, also helped by a good harvest.

78. Monetary management was little easier in 1996. Inflation was again targeted to decline to 17 percent, but the pressures turned out to be quite different than in the previous year. After continuing its rapid rise through March, NIR stabilized, in part owing to a weakening current account and reduced expectations of zloty appreciation. While the weakening of the external position made the authorities cautious about further use of the exchange rate instrument, the lagged effects of past exchange rate actions helped inflation to decline below 20 percent by June. With the inflation target within reach and the harvest proving to be normal, the NBP relaxed the stance of monetary policy from mid-year, by reducing headline interest rates, reserve requirements, and open market operations. The last mentioned action was also prompted by the NBP’s increased concern over its profits, which threatened to turn negative under the weight of sterilization. In large part because of this relaxation, but also because of banks’ increased willingness to lend following the cleaning up of their balance sheets, credit to nongovernment accelerated markedly in the second half of 1996, supporting a strong pick-up in domestic demand. The demand pressures kept inflation from declining at the targeted rate, and the year ended with inflation at 18.5 percent. With credit expansion showing no signs of deceleration, the NBP in December 1996 and early 1997 tightened the stance of monetary policy, effecting a 2–3 point rise in market interest rates and announcing increases in reserve requirements.

Money and credit

79. Following a stagnation in the money-to-GDP ratio in 1993–94, the Polish economy has since been remonetizing (Table 1 and Figure 1). Adjusted for temporary factors, in 1995 broad money increased by almost 40 percent in nominal terms and by 15 percent in real terms.25 At the time it was unclear whether this rapid expansion represented a large monetary overhang with significant inflationary implications, or a welcome build-up of real balances from depressed levels. However, recent money demand studies by both NBP and Fund staff conclude largely in favor of the latter explanation, suggesting that the rapid decline in inflation in the second half of 1995 induced a marked increase in real balances.26 Developments in 1996 are also in line with this explanation: with disinflation slowing down significantly, real broad money growth declined to 7 percent by end-year (only slightly more than real GDP growth).

Table 1.Poland: Monetary Survey, 1992-96
MarchJuneSept.Est.

Dec.
19921993199419951996
(In billions of zlotys; stocks at end of period)
Net international reserves12.818.727.550.457.058.660.362.7
(In millions of U.S. dollars)8,1208,75511,29020,43622,03521,54221,43321,811
Net domestic assets28.337.249.853.853.658.363.171.8
Credit to nongovernment24.933.241.656.259.664.270.680.2
Households1.22.33.35.66.47.89.411.7
Enterprises23.730.938.250.653.256.361.268.5
Net credit to general
government 1/18.328.239.541.841.444.645.646.6
Other items, net-14.9-24.2-31.3-44.2-47.4-50.5-53.1-55.1
Money and quasi money41.155.977.3104.3110.6116.9123.3134.5
Zloty money30.939.855.283.089.595.4100.9111.1
Foreign currency deposits10.216.122.121.321.121.523.023.6
(In millions of U.S. dollars)6,4647,5399,0518,6308,1647,9177,9668,125
(12-month percent change)
Net international reserves79.646.047.283.381.557.233.524.3
Net domestic assets49.231.533.78.17.516.327.633.4
Credit to nongovernment32.733.425.235.333.134.036.042.7
Households66.788.347.868.380.490.799.3108.5
Enterprises31.330.623.532.429.028.629.735.4
Net credit to government111.454.240.15.6-1.110.015.011.7
Money and quasimoney 2/57.536.033.839.436.133.830.427.1
Zloty money 2/57.328.832.457.351.142.936.731.6
Foreign currency deposits58.057.937.1-3.4-4.34.27.89.7
Memorandum items:
Consumer price inflation44.437.629.521.620.419.519.518.5
Real money growth 2/9.1-1.13.314.613.011.99.17.3
Real growth of credit 3/-22.0-5.3-3.312.012.415.818.827.6
Velocity of broad money (level)3.523.293.313.293.07
Share of foreign currency
deposits in broad money (percent)24.828.828.520.419.118.418.217.4
Sources: Data provided by the Polish authorities; and staff estimates.

The change in the stock of net credit to general government can be reconciled with the flow change in bank financing in the fiscal table after adjustments are made for valuation effects on the dollar-denominated debt of the government and capitalized interest on the bonds issued to recapitalize the state-owned banks.

For 1994-96, the growth rates have been adjusted to correct for an exceptional decline in the banking system’s payments float at end-1994 (by Zl 2.5 billion, because of currency redenomination) and at end-1996 (by a provisionally estimated Zl 2 billion, because of a switch to a new reporting system.).

Credit to nongovernment excluding capitalized interest and interest due but not paid, deflated by the consumer price index.

Sources: Data provided by the Polish authorities; and staff estimates.

The change in the stock of net credit to general government can be reconciled with the flow change in bank financing in the fiscal table after adjustments are made for valuation effects on the dollar-denominated debt of the government and capitalized interest on the bonds issued to recapitalize the state-owned banks.

For 1994-96, the growth rates have been adjusted to correct for an exceptional decline in the banking system’s payments float at end-1994 (by Zl 2.5 billion, because of currency redenomination) and at end-1996 (by a provisionally estimated Zl 2 billion, because of a switch to a new reporting system.).

Credit to nongovernment excluding capitalized interest and interest due but not paid, deflated by the consumer price index.

Figure 1.Selected Countries: Ratio of Broad Money to GDP, 1990–96

(In percent)

Sources: Polish Central Statistical Office; WEO, October 1996; and staff calculations.

80. The acceleration of real money growth over the past two years is entirely attributable to zloty money (Figure 2). With nominal increases (year on year) at times exceeding 50 percent, real zloty balances have risen by over one third since end-1994. By contrast, foreign currency deposits have remained almost flat in nominal zloty terms (and declined markedly in U.S. dollar and real terms, as well as relative to broad money). This reversal of currency substitution, which was strongest in 1995 and showed some signs of slowing down in late 1996, is evidence of increased confidence in the zloty, and was associated in 1995 with widespread expectations of zloty appreciation.

Figure 2.Poland: Real Broad Money and Its Composition, 1992–96 1/

Source: National Bank of Poland.

1/ Nominal variables deflated by the CPI and indexed so that real broad money equals 100 in January 1992.

81. The sources of money growth have varied greatly in recent years (see tabulation below).27 While the government’s recourse to bank financing accounted for half of broad money growth in 1994, credit to government has since been subdued, owing to moderate fiscal deficits and increased nonbank and foreign financing of the budget. In 1995, the massive current and capital account surpluses made net international reserves by far the largest source of money expansion. Reserves stabilized in 1996, when a rapid acceleration of credit to nongovernment became the dominant source of money growth, especially in the second half of the year.

Contributions to Broad Money Growth
199419951996
(In percent)
Broad money growth33.839.427.1
Contributions by:
Credit to government16.81.22.5
Credit to nongovernment12.516.723.1
Net international reserves11.629.53.6
Other items, net-7.1-7.9-2.2

82. The surge in net international reserves from mid-1994 to early 1996 greatly complicated monetary management. To contain the impact of this surge on liquidity and interest rates, the NBP resorted to increasingly large-scale open market operations (Table 2). These operations were at first carried out through reverse repurchase agreements based on Treasury bills, but later also through outright sales of Treasury bills and auctions of NBP bills. With the help of the sterilization, reserve money growth in 1995 was held to about one third of the increase in the NBP’s net foreign assets. However, this result was achieved at increasing quasi-fiscal cost (estimated to have peaked at close to an annualized 1 percent of GDP in early 1996), as the NBP accumulated low-interest foreign reserves in exchange for high-interest domestic securities. Moreover, with capital becoming more mobile internationally, the effectiveness of open market operations was put increasingly in question.28 Starting in the second quarter of 1996, sterilization operations were scaled down, pushing down market interest rates, in part with a view to preventing a return of large capital inflows.

Table 2.Poland: Balance Sheet of the National Bank of Poland, 1992-96(In billions of zlotys; stocks at end of period)
MarchJuneSeptemberDecember
19921993199419951996
Net foreign assets6.07.711.336.645.147.749.051.9
(In millions of U.S. dollars)3,7743,6094,65314,84017,42317,53417,43618,033
Net domestic assets8.98.38.3-8.2-15.0-14.7-16.4-17.7
Claims on banks4.86.47.58.28.09.59.9
Refinancing credit3.54.75.46.46.15.95.76.8
Other1.31.62.11.82.03.64.2
Nonreserve liabilities to banks-0.8-1.4-3.5-9.5-17.0-15.5-14.0-15.2
Reverse repos0.0-0.7-1.0-3.5-4.6-2.2-0.8-2.7
NBP securities-0.8-0.7-2.5-5.9-12.4-13.3-13.2-12.5
Net credit to general government10.913.516.88.19.88.46.76.6
Other items, net-6.1-10.1-12.5-15.1-15.8-17.0-19.0
Reserve money14.916.019.628.430.133.032.634.2
Currency9.512.214.822.423.124.925.927.4
Bank deposits5.33.84.86.07.08.26.76.8
Memorandum items:
Money multiplier 1/2.763.503.943.683.683.543.783.93
Currency-deposit ratio 2/23.421.718.923.122.923.623.021.2
Obligatory reserve ratios 2/
Zloty demand deposits23.023.020.020.020.017.017.017.0
Zloty time deposits10.010.010.09.09.09.09.09.0
Foreign currency deposits0.00.01.01.02.02.02.02.0
Sources: Data provided by the Polish authorities; IMF, International Financial Statistics; and staff estimates.

Broad money divided by reserve money.

In percent.

Sources: Data provided by the Polish authorities; IMF, International Financial Statistics; and staff estimates.

Broad money divided by reserve money.

In percent.

83. The recent rapid expansion of credit to nongovernment is, to an extent, a healthy development (Figure 3).29 During 1992–94 credit to nongovernment had declined by a cumulative 29 percent in real terms, as banks were undercapitalized and burdened with bad loans; in that situation, and reflecting the fragile stage of the recovery, banks considered lending to firms and households risky and preferred to invest in government securities. Against this background, the cumulative 43 percent real increase in 1995–96 can be seen as a welcome rebound, owing in part to the increased willingness of the restructured banking sector to lend to firms which now have a longer track record. The increased credit demand has also reflected a strong pick-up in investment. Nevertheless, cuts in interest rates, compounded by a mid-year reduction of reserve requirements, also bear part of the responsibility. Indeed, the NBP viewed the accelerating growth rates of credit to nongovernment during the second half of 1996—to annual nominal rates exceeding 100 percent for household credit (albeit from a very low base) and 40 percent for enterprise credit—with increasing concern, and around the end of the year tightened monetary conditions by effecting increases in market interest rates and reserve requirements.

Figure 3.Credit Developments, 1992–96

Sources: National Bank of Poland; Polish Central Statistical Office; andstaff calculations.

1/ Deflated by the CPI and indexed so that the total equals 100 in January 1992.

Interest rates

84. The NBP sets its headline (official) interest rates—the rediscount and Lombard rates—with a view to signaling the central bank’s broad policy intentions (Table 3).30 With excess liquidity in the banking system in recent years, the influence of these rates on the banks’ behavior has been declining. They are of direct relevance to the Government, however, as the interest rate on restructuring bonds (issued to recapitalize banks) is a six-month average of the rediscount rate, and as the Lombard rate applies to London Club bonds (issued by the Government to get NBP financing for the agreement with commercial creditors) and to the financing of central investment.31

Table 3.Poland: Interest Rates, 1991-96 1/(In percent)
NBP RatesMarket RatesInterest Differentials 6/
Refinance 2/Intervention 3/Six-MonthPrimeTreasury BillsWIBOR 5/Six-Month26-Week
Deposits 4/Lending13-Week26-Week52-Week3-MonthDepositsT-Bills
1991
March72.074.072.0
June59.060.059.067.3
September40.043.040.048.4
December40.041.040.047.010.0
1992
March40.042.540.046.549.054.446.311.120.1
June40.042.540.045.748.652.046.611.120.2
September38.037.738.042.444.347.144.66.417.0
December38.037.039.041.442.945.944.27.115.2
1993
March35.030.535.028.627.436.535.32.81.3
June35.030.535.033.034.638.133.52.87.6
September35.030.535.033.434.738.234.06.010.4
December35.029.535.033.735.138.334.44.710.6
1994
March35.027.029.535.029.833.038.033.45.38.1
June33.026.529.032.028.929.531.132.24.84.1
September33.026.529.531.026.827.629.330.66.43.1
December33.026.028.531.027.027.426.328.46.23.0
1995
March35.028.029.028.028.127.527.430.39.25.9
June31.026.624.526.025.025.925.927.66.54.9
September29.026.122.324.024.725.625.326.22.94.7
December29.025.521.324.024.224.725.025.61.84.1
1996
January26.023.620.023.323.023.423.225.03.15.5
February26.022.819.322.821.521.320.922.72.53.7
March26.022.819.322.821.421.221.122.72.43.4
April26.022.919.322.821.421.221.122.72.53.4
May26.021.719.321.821.221.621.121.92.73.7
June26.021.619.321.821.021.121.121.62.73.1
July25.020.219.020.520.219.920.320.52.21.9
August25.019.017.619.519.419.619.819.71.01.8
September25.019.118.119.518.619.119.419.81.41.3
October25.019.117.819.518.619.119.519.81.21.4
November25.019.118.319.518.619.219.519.91.61.5
December25.021.618.319.518.819.319.622.11.61.5
Source: Data provided by the Polish authorities; and staff calculations.

The NBP refinance rate and the deposit and lending rates are end-period values, while all the other rates are monthly averages.

From January 1996, the refinancing rate for central investment loans guaranteed by the State Treasury is equal to the Lombard rate (shown in the table); for other refinancing loans the rate is 1 point higher.

One-day reverse repo rate in 1994-95,14-day reverse repo rate in 1996.

Midpoint of the range of rates offered by principal commercial banks.

Warsaw interbank offered rate.

Interest rate on zloty instrument minus interest rate on equivalent U.S. dollar instrument minus annualized rate of crawl.

Source: Data provided by the Polish authorities; and staff calculations.

The NBP refinance rate and the deposit and lending rates are end-period values, while all the other rates are monthly averages.

From January 1996, the refinancing rate for central investment loans guaranteed by the State Treasury is equal to the Lombard rate (shown in the table); for other refinancing loans the rate is 1 point higher.

One-day reverse repo rate in 1994-95,14-day reverse repo rate in 1996.

Midpoint of the range of rates offered by principal commercial banks.

Warsaw interbank offered rate.

Interest rate on zloty instrument minus interest rate on equivalent U.S. dollar instrument minus annualized rate of crawl.

85. In recent years, headline rates have been kept moderately positive in real terms, and changes in them have usually been in response to developments in and prospects for inflation (Figure 4). As mentioned above, in early 1995, headline rates were raised by 2–3 points following an unexpectedly high January inflation outcome. Later in the year, in connection with step appreciations (of 5 percent in May and 1 percent in September) and with inflation starting to decline, headline rates were cut by 4 and 2 points, respectively. In January 1996, following another small step appreciation and in the wake of a favorable end-1995 inflation outcome, headline rates were cut by 2–3 points. With disinflation slowing down, headline rates have since been reduced only once, by 1 point in mid-1996.

Figure 4.Poland: Interest Rates, 1992–96

(In percent)

Sources: National Bank of Poland; and staff calculations.

86. Since 1994, the NBP has also had direct influence on short-term market rates (especially the Warsaw Interbank Offered Rates, or WIBOR) through its “intervention rate”, which is the rate on its open market operations (mainly reverse repurchase agreements). With the yield curve in Poland fairly rigid and flat, the intervention rate tends to guide movements in longer term market rates, such as those on Treasury bills, as well. Having been negative between mid-1994 and mid-1995, the real market rates became moderately positive by late 1995, reflecting a gradual decline in nominal rates at a time of rapid disinflation. During 1996, market rates were pushed down by more (5–6 points) than headline rates (3–4 points), and in the second half of the year market rates were only barely positive in real terms. In this situation, with credit to nongovernment rising rapidly, the NBP raised its intervention rate by 2–3 points around the turn of the year.32

87. Banks in Poland have been free to set their rates already since 1990, although market-based mechanisms in determining the cost of funds have gained prominence only slowly, with the development of money and government securities markets. Deposit rates have tended to be negative in real terms. Nevertheless, since the beginning of 1995 the interest differential compared to foreign currency deposits (adjusted for exchange rate expectations) has been large enough to induce a major dedollarization, as described above. With the interest rate spread at 7–8 percent in the past few years, real lending rates have typically been comfortably positive, even though only marginally so in late 1996. The relatively large spread reflects a combination of factors, including inefficiencies in the banking system and rather high and unremunerated reserve requirements.33

C. Monetary Policy Guidelines for 1997

88. The main targets for monetary policy are presented annually in the NBP’s monetary policy guidelines which, after discussion, are voted on by Parliament along with the budget act. These guidelines present a detailed monetary program—covering broad and reserve money growth, budget financing, expansion of credit to the nongovernment sector, and the expected change in net international reserves—based on broad macroeconomic assumptions, including the inflation target, adopted by the Government for the budget. In practice, implementation of the monetary program has been quite pragmatic, with the guidelines often having been overtaken by unexpected developments.

89. The guidelines for 1997 were designed to be consistent with the Government’s goals of GDP growth of 5½ percent and reducing inflation to 13 percent during the year. In the NBP’s plan, broad money is the intermediate target, while reserve money acts as the operational objective. Consistency of the monetary program requires that, given planned policies and prospective developments, the various sources of money supply (domestic credit to government and nongovernment, NIR expansion, and other items, net) should equal the projected increase in money demand. Among the key assumptions is that net international reserves will remain broadly unchanged in U.S. dollar terms in 1997, with capital inflows offsetting a widening current account deficit. Broad money expansion is projected at Zl 27.4–28.6 billion (20.4–21.3 percent), with growth in reserve money targeted at Zl 6.1–6.6 billion (17.8–19.3 percent).34 The rate of crawl is assumed to slow down to about 9 percent annually, or to an average of some 0.7 percent monthly.

90. In the NBP’s view, the 1997 budget will complicate monetary management. With the general government deficit target fixed at 3 percent of GDP (2.8 percent for the state government), the expansion of credit to nongovernment is targeted to decelerate sharply. Specifically, assuming bank financing of the general government deficit at Zl 8.3–10.2 billion (an increase of 17.8–21.9 percent in the stock),35 the guidelines envisage credit to the nongovernment sector increasing by Zl 17.1–19.0 billion (21.3–23.7 percent, down from 43 percent in 1996).

V. External Sector Developments

91. The transformation of Poland’s balance of payments has matched the dramatic changes occurring elsewhere in the economy. From the very start of transition, Poland has used trade liberalization to redirect the economy toward a more market-oriented system, and also to bring down inflation through increased import competition. Though goods markets were soon opened to foreign competition, capital market integration has progressed more slowly. Until recently, foreign capital was deterred by Poland’s heavy foreign debt burden, as well as by delays in normalizing relations with commercial bank creditors.

92. Poland’s balance of payments experience since transition can be divided broadly into three phases. In the first phase the problem was how best to shore up reserves. With the economy open to foreign trade, but capital inflows negligible, Poland had to build up reserves by generating current account surpluses, at a time when—instead of accumulating claims abroad—foreign savings might have been used profitably to help finance the pressing investment needs of transition. The fragile external position also forced monetary and exchange rate policy to be geared in part toward safeguarding the level of international reserves.

93. This changed in 1994. With surpluses on both current and capital accounts, international reserves became plentiful. Devaluation in late 1993 and rapid growth in productivity had provided a substantial boost to competitiveness, which lead exports to increase by almost 70 percent over the next two years. The result was a current account surplus (including unrecorded trade) averaging 2.8 percent of GDP in 1994–95. Second, and of greater permanence, successful completion of a Brady style debt and debt-service reduction (DDSR) agreement in late 1994 paved the way for the return of capital inflows. These were to account for approximately half of the spectacular US$9 billion increase in net international reserves in 1995.

94. 1996 has been a year of transition to a third phase. Instead of current account surpluses, capital inflows now explain the bulk of—substantially smaller—reserve accumulation. Reflecting some reversal of the earlier gains in competitiveness, a slowdown in the growth of foreign markets, and rapid growth of domestic demand, the current account has worsened significantly. Including unrecorded trade, the current account is expected to show a modest deficit of less than 1 percent of GDP in 1996, widening further in 1997. In contrast, the capital account has remained in sizeable surplus.

95. In itself, the recent emergence of a current account deficit is no cause for concern: Poland needs additional resources to finance the increased investment necessary to sustain rapid growth. What bears watching is the speed with which—as in many other transition countries—the current account turnaround has taken place. Present analysis suggests that the current account deficit should stabilize at sustainable levels, assuming a slowdown in the growth of domestic demand.36 To sustain rapid medium term growth, the key challenge at present is to ensure that the current account deficits—and the foreign savings they represent—are used for efficient investment, adding to—rather than replacing—domestic savings.

A. Exchange Rate Policy and Competitiveness

96. The exchange rate has played a dual role in Poland’s stabilization, at times acting as the main anchor for domestic policy, while also being responsive to developments in external competitiveness.37 For example, as part of the initial “big bang” reforms, the exchange rate was fixed in 1990 as a means of reducing inflation—a classic nominal anchor approach—but only after the external position had been safeguarded by an initial devaluation of almost 50 percent. Though inflation came down sharply, it still remained well above partner country levels, and international competitiveness worsened. Because of this, and to adjust to the shock of the CMEA collapse, in May 1991 the exchange rate was devalued by 16.8 percent and pegged to a basket of five currencies. This was followed in October 1991 by the introduction of a crawling peg exchange rate system. Since then, the initial 1.8 percent rate of crawl has been progressively lowered to the present rate of 1.0 percent per month (Table 1).

Table 1.Poland: Exchange Rate Developments
PeriodExchange Rate PolicyActionComments
Before 1990Multiple exchange rates, adjustable peg to a basket of currenciesFrequent and substantial devaluations
Jan. 1, 1990Fixed exchange rate systemUnification of official and black market ratesExchange rate: Zl 9,500 per U.S. dollar
Devaluation (46.2 percent)
May. 17, 1991Fixed exchange rate systemDevaluation (16.8 percent against the dollar). Shift from a dollar peg to a basket pegExchange rate: Zl 11,100 per U.S. dollar. Basket includes: U.S. dollar (45 percent), deutsche mark (35 percent), pound sterling (10 percent), French franc (5 percent), Swiss franc (5 percent)
Oct. 15, 1991Preannounced crawling pegRate of crawl announced: 1.8 percent per month (Zl 9 per day)
Feb. 25, 1992Preannounced crawling pegDevaluation (12.0 percent against the basket). Rate of crawl: 1.8 percent per month (Zl 11 per day)Exchange rate: Zl 13,360 per U.S. dollar
Jul. 10, 1992Preannounced crawling pegRate of crawl: 1.8 percent per month (Zl 12 per day)Basket unchanged
Technical adjustment made
Aug. 27, 1993Preannounced crawling pegDevaluation (8.1 percent against the basket) Rate of crawl reduced: 1.6 percent per month (Zl 15 per day)Basket unchanged
Sep. 13, 1994Preannounced crawling pegRate of crawl reduced: 1.5 percent per monthBasket unchanged
Nov. 30, 1994Preannounced crawling pegRate of crawl reduced: 1.4 percent per monthBasket unchanged
Jan. 1, 1995RedenominationOne new zloty equal to 10,000 old zlotys
Feb. 15, 1995Preannounced crawling pegRate of crawl reduced: 1.2 percent per monthBasket unchanged
Mar. 6, 1995Preannounced crawling pegIncrease in the spread for NBP/banks transactions to +/- 2 percent around the NBP mean rateBasket unchanged
May. 16, 1995Preannounced crawling peg. with the fixing rate fluctuating within +/- 7 percent around central parityInitial appreciation of fixing rate to 5 percent below central parity (3 percent below NBP buying rate). Rate of crawl: 1.2 percent per monthBasket unchanged
Sep. 8, 1995Preannounced crawling peg. with the fixing rate fluctuating within +/- 7 percent around central parityFurther appreciation to 6 percent below central parity. Rate of crawl: 1.2 percent per monthBasket unchanged
Dec. 22, 1995Preannounced crawling peg. with the fixing rate fluctuating within +/- 7 percent around central parityOfficial appreciation of the central parity by 6 percent, initial appreciation of the fixing rate to 2.5 percent below the new central parity. Rate of crawl: 1.2 percent per monthBasket unchanged
Jan. 8, 1996Preannounced crawling peg, with the fixing rate fluctuating within +/- 7 percent around central parityRate of crawl reduced: 1 percent per monthBasket unchanged

97. Despite the primarily exchange rate based strategy, the authorities have also been ready to adjust the exchange rate, both to preserve competitiveness and, when necessary, to restore its nominal anchor role. At first these adjustments were mainly devaluations, prompted by concerns over the weak external position. In 1995, these became appreciations, in an effort to correct for undervaluation of the zloty and to stem speculative capital inflows. A series of small step appreciations meant that the nominal effective exchange rate depreciated by only 8 percent through the year, far less than would be implied by the rate of crawl. Indeed, changes in cross rates meant the zloty depreciated by only 3 percent against the U.S. dollar. The result was a substantial appreciation of the real effective exchange rate during 1995 (Figure 1, Table 2). In addition, the real appreciation has been magnified by the substantial tariff reductions that have taken place in recent years (Chapter VI; and Tables 3 and 4).

Figure 1.Poland: Exchange Rate Developments

(January 1990 - November 1996)

Sources: Polish authorities; IMF, Information Notice System, and staff estimates.

1/ Partner country inflation converted to zlotys at actual exchange rates.

2/ Unit labor cost calculated by the Competitiveness Indicator System.

Table 2.Poland: Effective Exchange Rates, 1990-96(Quarterly average indices, January 1992 = 100)
Real Effective

Exchange Rate
Nominal

Effective

Exchange

Rate
Wage

Based 1/
Price

Based 2/
1990:I46.9126.3
II57.2125.6
III61.2119.3
IV66.2113.8
1991:I81.1115.7
II91.0116.4
III90.9107.2
IV95.0103.5
1992:I93.894.494.9
II82.591.183.8
III81.393.978.5
IV81.999.576.7
1993:I84.7102.174.5
II80.7102.870.3
III83.4102.965.6
IV78.5101.560.1
1994:I74.6101.557.1
II75.7102.353.9
III72.9104.750.9
IV74.4106.748.5
1995:I74.4108.046.6
II77.9111.445.5
III79.3115.245.4
IV80.6116.844.5
1996:I82.3120.744.2
II80.1122.742.9
III83.9123.141.3
Sources: IMF Information Notice System; and staff estimates.

Based on data on unit labor costs in Poland and partner countries.

Nominal effective exchange rate index deflated by seasonally adjusted index of relative consumer prices; a decrease indicates depreciation.

Sources: IMF Information Notice System; and staff estimates.

Based on data on unit labor costs in Poland and partner countries.

Nominal effective exchange rate index deflated by seasonally adjusted index of relative consumer prices; a decrease indicates depreciation.

Table 3.Poland: Evolution of Customs Tariff Structure, 1989–96 1/(Percentage rates)
Harmonized Commodity Description

and Coding System (HCDDCS)
January

1989
August 1990

to

August 1991
August

1991
December

1993 2/
June

1995 3/
December

1996 4/
January

1997 4/
All commodities18.35.518.419.09.48.06.3
Agriculture products17.24.026.226.219.518.317.3
Industrial products18.716.317.08.06.85.1
Mineral products7.83.48.98.92.33.12.1
Chemical products13.53.914.113.76.86.63.4
Plastics19.95.515.014.99.59.13.9
Fur and leather products17.25.125.723.510.36.67.9
Wood and paper products18.77.413.413.45.34.63.6
Textiles, footwear, clothing22.29.720.621.412.48.26.9
Industrial mineral and metal
products15.44.214.717.610.18.96.7
Machinery, transport equipment,
precision instruments21.93.916.116.616.312.79.1
Jewelry, arms, art objects,
miscellaneous manufactured
products19.911.619.117.013.29.86.9
Sources: Ministry of Foreign Economic Relations; Organization for Economic Cooperation and Development; and data provided by the Polish authorities.

Based on average frequency, including suspended tariffs and tariffs on duty-free tariff quotas.

Estimates based on CN classification.

Estimates based on CN clarification, including suspended tariffs and Free Trade Agreements.

Including free trade agreements.

Sources: Ministry of Foreign Economic Relations; Organization for Economic Cooperation and Development; and data provided by the Polish authorities.

Based on average frequency, including suspended tariffs and tariffs on duty-free tariff quotas.

Estimates based on CN classification.

Estimates based on CN clarification, including suspended tariffs and Free Trade Agreements.

Including free trade agreements.

Table 4.Poland: Recent Tariff Developments 1/(Percentage rates)
July 1995December 1996January 1997
AverageEffective

Average
Trade-Weighted

Effective

Average 2/
AverageEffective

Average
Trade-Weighted

Effective

Average 2/3/
AverageEffective

Average
Trade-Weighted

Effective

Average 2/3/
All commodities14.3312.779.4413.028.017.4711.6110.705.77
Agricultural products25.1524.7221.2422.7818.2715.7823.1418.4114.07
Animal products33.0633.0031.5728.3824.4624.4628.0528.0424.07
Vegetable products15.8715.748.2817.9111.756.8015.7410.534.46
Fats and oils16.2216.2214.9222.1817.1517.1515.8416.8416.51
Prepared foodstuffs29.5328.4826.6226.0623.2522.1325.3622.9920.64
Industrial products12.9611.267.9511.896.836.5110.409.824.82
Mineral products3.832.762.304.273.083.033.313.302.06
Chemical products11.7610.796.8310.275.234.868.618.323.24
Plastics13.3711.979.5011.086.606.009.128.873.83
Leather products11.229.507.4214.2610.249.0610.7710.777.05
Wood products12.3312.028.9910.206.576.578.348.344.39
Wood pulp products4.300.090.018.954.482.597.316.442.06
Textile products16.0614.8712.2514.719.559.4213.1812.886.47
Footwear17.1517.1515.6816.4413.8013.8014.6014.6011.37
Stone products11.6611.228.5911.246.286.049.268.923.42
Precious materials18.5718.5714.7016.709.999.9915.3315.337.02
Base metal products16.3813.0310.3514.938.248.0113.5813.336.48
Mechanical and electrical machinery13.8111.295.4411.584.814.639.568.472.98
Transport equipment22.9822.9620.6820.4315.4015.1520.2519.5214.00
Optical products13.3910.087.1211.756.986.619.718.214.41
Arms33.0033.0028.6731.0026.7326.7329.0029.0024.10
Miscellaneous manufactured products15.8415.8412.9613.489.119.1111.0311.035.96
Art------------------
Source: Data provided by the Polish authorities.

Based on CN nomenclature excluding tariff free quotas.

Including Free Trade Agreements.

Weights based on trade structure for January-July 1996.

Source: Data provided by the Polish authorities.

Based on CN nomenclature excluding tariff free quotas.

Including Free Trade Agreements.

Weights based on trade structure for January-July 1996.

98. Appreciation was brought to a halt in 1996. After the rate of crawl was reduced to 1 percent in January, there were no changes to exchange rate policy during the year, save for some tentative steps toward creating greater exchange rate flexibility within the band. Concerns over competitiveness delayed the reduction in the rate of crawl that had been intended for the second half of the year. As a result, the producer price based real effective exchange rate barely changed during the year, consistent with the re-emergence of some form of purchasing power parity. Preliminary staff estimates suggest that, with the period of exchange rate undervaluation now over, the earlier link from foreign producer-price inflation to domestic producer prices is visible again (Figure 2).

Figure 2.Poland and Partner Countries: Producer Prices, 1991–96

Sources: Polish Central Statistical Office; and staff estimates.

99. How should one assess the competitiveness of the Polish economy from the various measures of the Polish real exchange rate shown in Figure 1? One approach is to argue, based on the commodity composition of Polish exports, that Polish firms can largely be considered price takers on international markets. The stability of the PPI-based real exchange rate during 1996 is consistent with this view. With prices given, competitiveness then depends critically on developments in relative unit labor costs, which determine relative profit margins across countries. In 1993–94, rapid gains in labor productivity far exceeded real wage increases. Unit labor costs increased by less than producer prices, and profit margins increased as a result. This created a highly competitive real exchange rate. More recently, labor productivity growth has fallen a little (though still remains high), and real wage growth has been strong (particularly the real product wage—deflated by the PPI), bringing the period of undervaluation to an end. Profit margins in the production of traded goods have fallen back in line with margins elsewhere in the economy, returning competitiveness to more normal levels.

100. This interpretation is borne out by recent studies of the Polish Foreign Trade Research Institute. Their survey of over 1,500 Polish exporters, accounting for more than 60 percent of total exports, indicates a continued deterioration since 1995 in the profitability of exporters relative to producers oriented toward the domestic market. From the first quarter of 1995 to the first quarter of 1996, the overall profitability of exporters has fallen by about 1½ percentage points. In early 1996 the profitability of exporters fell below that of nonexporters for the first time. The survey indicates that coal and shipbuilding remain the least profitable export sectors, while profitability is strongest in relatively homogenous products such as chemicals, construction, and rubber.

B. Developments in the Current Account

101. Recent large swings in Poland’s current account are dominated by significant changes in the merchandise trade account, both official and unrecorded (Table 5). The official trade deficit worsened from 0.9 percent of GDP in 1994 to 1.5 percent in 1995, and is estimated to have reached almost 6 percent in 1996. The slight deterioration in 1995 was dwarfed by a surge in unrecorded trade, which raised the adjusted current account balance to a surplus of 3.3 percent of GDP, and contributed to that year’s substantial increase in net international reserves. In 1996 the adjusted current account returned to broad balance, as recorded trade moved into large deficit while the growth of unrecorded trade slowed (Figure 3).

Table 5.Poland: Balance of Payments, 1990-95 1/(In millions of US dollars)
199019911992199319941995
Trade balance2,21451512-2,293-836-1,827
Exports10,86312,76013,99713,58516,95022,878
Imports8,64912,70913,48515,87817,78624,705
Nonfactor services (net)-15023634436957150
Receipts1,3271,5771,6121,8462,1003,190
Payments1,4771,3411,2681,4772,0433,040
Interest (net)-3,329-2,863-1,741-1,392-1,632-747
Receipts581541527400272472
Payments due3,9103,4042,2681,7921,9041,219
o/w:paid8881,0758701,1101,146
Transfers (net)1,9813535319291,1826
Private (net)1,6763082508211,025-285
Official, net (incl. converted debt)30545281108157291
Investment income (net)0085100147119
Current account (unadjusted)716-2,223-269-2,287-1,082-2,299
Reclassified current inflows (net) 2/01,3191,8252,2033,2116,260
Current account (adjusted)716-9041,556-842,1293,961
Capital and financial account-2,233-9,273-1,452-760-5305,168
Capital account000000
Financial account-2,233-9,273-1,452-760-5305,168
Medium and long-term capital (net)-2,526-6,059-292-47131132
Disbursements428786562922894702
Amortization due (net)2,9546,8458541,393863570
o/w:paid369347443923373503
Credit extended (net)4213-112-1129
Direct investment101172845805421,134
Portfolio investment000001,171
Cost of debt reduction0000-1,9480
Short-term capital (adjusted)-119-2,573-1,227-1,1086231,701
Valuation adjustment and errors and omissions360-771-2162272331,001
Overall balance-1,517-10,177104-8441,5999,129
Net international reserves (-, increase)-4,6071,317-1,615-553-2,534-9,146
Official reserves, net-1,7461,188-4736-1,154-10,336
Gross official reserves-2,246866-473144-1,748-8,936
Liabilities (+, increase)5003220-138594-1,400
Of which: Fund credit, net5003220-138594-1,400
Other int reserves, net-2,529129-1,142-559-1,3801,487
Gross other reserves-2,359276-1,434-401-1,5301,006
Other liabilities-170-147292-158150481
Debt relief9,0544,38220207,90017
Principal (and arrears)02,93920207,20415
Interest01,443006950
Change in arrears-2,9304,4781,3091,397-6,9650
Sources: Polish authorities; and Fund estimates and projections.

Convertible currency trade on a payments basis from commercial banks.

Foreign currency purchases in the kantor market that reflect current account transactions, as described in SM/95/310 and SM/95/316.

Sources: Polish authorities; and Fund estimates and projections.

Convertible currency trade on a payments basis from commercial banks.

Foreign currency purchases in the kantor market that reflect current account transactions, as described in SM/95/310 and SM/95/316.

Figure 3.Poland: External Sector Developments, 1993–96

Sources: Polish authorities; and staff estimates.

1/ Staff estimates for final quarter of 1996.

2/ Trade volumes on a balance of payments basis. Excluding unrecorded trade.

102. Exports of goods and services took off in 1994 and 1995, due to improved external conditions and the competitive real exchange rate. The dollar value of merchandise exports grew 35 percent in 1995, after increasing 25 percent in 1994. In volume terms, export growth was more steady (rising by around 20 percent in both 1994 and 1995), reflecting the weakening of the U.S. dollar in 1995. In 1996, slower growth of foreign demand and the real appreciation of 1995 combined to dampen export performance.

103. According to customs data, the dollar value of overall exports increased only 7.2 percent year-on-year in the first half of 1996.38 However, behind this aggregate figure lies a wide dispersion in export performance. Exports in sectors with lower value-added—such as nonprecious metals (15 percent of total Polish exports)—fell 3.6 percent, these sectors being particularly affected by slower growth in the European Union (EU) and the fall in world commodity prices. In contrast, exports of more sophisticated products (electro-machinery, transportation equipment) and light manufactures (furniture and lighting) grew much more rapidly than average.

Recent Developments in the Composition of Polish Imports
Share of Total ImportsGrowth Rate From Year Earlier
January-JuneJanuary-JuneJanuary-June
199519961996
(In percent)
Investment goods11.913.240.7
Consumer goods18.519.937.4
Raw materials and intermediate inputs68.966.422.0
Sources: Central Statistical Office and staff estimates.
Sources: Central Statistical Office and staff estimates.

104. As the domestic recovery has gathered pace, the growth in imports has also accelerated (Figure 3). Intermediate inputs still predominate, accounting for two-thirds of total imports. However, this share declined slightly during the first half of 1996, with imports of investment and consumption goods growing twice as rapidly. In general, import growth has been highest in the “restructuring sectors,” such as electrical machinery and chemicals, prompted by the transformation of the Polish economy and increased foreign direct investment. However, import growth of consumer durables, such as cars, has also been strong, reflecting the recent rapid recovery in private consumption.

105. The transition to a market economy has also seen a massive geographical reorientation of Polish trade patterns. With the dissolution of the Council for Mutual Economic Assistance (CMEA) in 1991, exports weakened and trade in nonconvertible currencies virtually disappeared (Table 58). Because of the disintegration of established preferential trading relationships, exports stagnated from 1990 to 1992. However, imports surged, especially from EU countries. Since 1992, both exports and imports have grown strongly, helped by increased trade with the EU and, in particular, Germany. Between 1992 and 1995, Polish exports to the EU as a share of total Polish exports increased by 12 percentage points, to 70 percent. The import share increased by a similar amount, rising to 65 percent.

Table 6.Poland: Current Account of Balance of Payments in Convertible and Nonconvertible Currencies, 1983-95 1/(In millions of U.S. dollars)
1983198419851986198719881989199019911992199319941995
Exports f.o.b.
In convertible currencies4,8065,3245,1205,3166,1637,2487,57510,86312,76013,99713,58516,95022,878
In nonconvertible currencies6,1946,4765,7626,2425,4395,9634,3374,15154643137417
Imports f.o.b.
In convertible currencies3,8903,9444,0324,2815,1236,3077,3358,64912,70913,48515,87817,78624,705
In nonconvertible currencies6,6927,0186,4046,6335,6805,7574,1222,2763699020213368
Trade balance
In convertible currencies9161,3801,0881,0351,0409412402,21451512-2,293-836-1,827
In nonconvertible currencies-498-542-642-391-2412062151,875177-47-189-59-51
Services and unrequited transfers, net
In convertible currencies-2,328-2,154-1,706-1,700-1,457-1,521-2,083-1,498-2,274-7816-246-472
Of which: Interest payments, net-2,736-2,549-2,444-2,557-2,815-2,855-3,087-3,329-2,863-1,741-1,392-1,632-747
In nonconvertible currencies15037841088072771196364383111
Of which: Interest payments, net-54-89-110-106-100-100-85-371561302915
Current account 1/
In convertible currencies-1,412-774-618-665-417-580-1,843716-2,223-269-2,287-1,082-2,299
In nonconvertible currencies-348-505-558-283-1612782921,99424017-151-28-41
Source: Data provided by the Polish authorities; and staff calculations.

Represents the summation of transactions, expressed in U.S. dollars, unadjusted for unrecorded trade. Transactions in transferable rubles were converted into U.S. dollars at the cross commercial rate.

Source: Data provided by the Polish authorities; and staff calculations.

Represents the summation of transactions, expressed in U.S. dollars, unadjusted for unrecorded trade. Transactions in transferable rubles were converted into U.S. dollars at the cross commercial rate.

Table 7.Poland: Balance of Payments in Transferable Rubles with Members of the CMEA, 1988-95 1/(In millions of transferable rubles)
1988198919901991 2/1992 2/1993 2/1994 2/1995 2/
A. Current account5601,1047,121556-78-401-95-192
Merchandise exports, f.o.b.11,57311,32013,4931,175501181191
Merchandise imports, f.o.b.11,07710,3426,8857951224081770
Trade balance4969786,608380-72-397-96-191
Services: credit1,3271,5631,9493651230
Shipment and other transportation430405411560000
Travel1932604081630000
Interest receipts3334161130
Other7018951,0961300100
Services: debit1,2661,4421,4671907621
Shipment and other transportation147161169434300
Travel442435157680000
Interest payments285309253251101
Other392537888542200
Unrequited transfers, net353110000
B. Medium- and long-term capital (net)-572-721-698-2484896-200-122
Credits received-602-654-743-3160000
Drawings1451077500000
Repayments7477618183160000
Credits extended8-7939-164896200-122
Repayments193614230589600
Drawings1111510346100200122
Other capital (net)22126840000
C. Short-term capital and other items (net)12-383-6,423-30830304295314
D. Overall balance (items A through C)00000000
Memorandum items:
Trade balance (in U.S. dollars)2283291,46276-11-46-9-17
Current account (in U.S. dollars)2573721,575111-12-46-9-17
Cross exchange rate (rubles per U.S. dollars)2.182.974.525.046.498.6410.8411.54
Source: Data provided by the Polish authorities.

Excluding trade in convertible currencies or under bilateral agreements.

Transactions reflect execution of contracts signed before end-1990. The transferable rouble denominated trade arrangement came to an end on January 1, 1991.

Source: Data provided by the Polish authorities.

Excluding trade in convertible currencies or under bilateral agreements.

Transactions reflect execution of contracts signed before end-1990. The transferable rouble denominated trade arrangement came to an end on January 1, 1991.

Table 8.Poland: Transactions Under Bilateral Payments Agreements, 1990-95 1/(In millions of U.S. dollars)
199019911992199319941995
A. Current account42513029-105-19-57
Merchandise exports, f.o.b.1,1663133512670
Merchandise imports, f.o.b.7532117115511768
Trade balance413102-36-143-50-68
Services: credit364185413117
Shipment and other
transportation560000
Interest receipts142779302915
Other17861122
Services: debit241320306
Shipment and other
transportation500000
Interest payments31018000
Other1632306
B. Medium- and long-term capital
account (net)3143254-2831
Credits extended (net)3143254-2831
C. Short-term capital and
other items (net)-456-134-61514726
D. Overall balance000000
Source: Data provided by the Polish authorities.

Figures are on a cash basis.

Source: Data provided by the Polish authorities.

Figures are on a cash basis.

106. Though a natural consequence of reintegration with developed market economies, this redirection toward the EU may have been somewhat exaggerated. So far, economists have relied on two methods to predict the “normal” geographical distribution of Polish trade: predictions from estimated “gravity models” of trade, and comparison of current trading patterns with pre-socialist trading patterns. Both approaches predict a substantial role for trade with the EU, confirming that trade with the EU before transition was artificially repressed. However, the findings suggest that the present proportion of trade with the EU is somewhat greater than might be expected.39 With the disappearance of such temporary factors as the breakdown of the CMEA and the initial output collapse in Poland’s partner transition economies, Polish trade outside the EU should also expand. This is borne out by the recent recovery in Poland’s trade with Central and Eastern Europe.

107. In addition to official trade, there is considerable unrecorded foreign trade in the Polish economy. Poland is home to a large number of open air bazaars and informal trading centers, attracting visitors from Germany and also from the former communist countries of Central and Eastern Europe, as well as the former Soviet Union. The bulk of these transactions are made in cash, converted generally through the currency booth or “kantor” market. By their nature these transactions are extremely difficult to measure.

108. Until 1995, the sales of foreign currency from kantors to the commercial banks were recorded in the balance of payments as part of short term capital. However, a survey by NBP branches that year concluded that 85 to 95 percent of such purchases were attributable to border trade and services rendered by Polish residents to nonresidents. Given the difficulties in preparing monthly estimates of this ratio, and the margin of error attached to such estimates, from 1996 onwards the NBP decided to include the entire amount of such foreign currency cash transactions in the current account, as a clearly identified separate category: “Unclassified transactions on current account, net”. Staff estimates broadly concur with this approach, placing 80 percent of such transactions in the current account for 1995 (a year of much short term speculative activity, based on expectations of zloty appreciation), and the entire amount in the current account for 1996, following the approach of the authorities.40 However, ideally, this item together with other foreign currency cash transactions, should be allocated explicitly across its appropriate balance of payments components.

109. Since 1994, the Central Statistical Office has conducted border trade surveys every six months, in an attempt to measure unrecorded trade activity. These surveys suggest that foreign visitors purchased just over Zl 5 billion (US$1.9 billion) in Polish goods and services in the first half of 1996, a 27 percent increase from a year earlier. This would imply that unrecorded exports make up approximately one-seventh of total Polish exports. The surveys also suggest that the ratio of unrecorded to official exports is highest for countries on the eastern border such as Ukraine, where unofficial exports are almost one half of the official figure.

Recent Developments in Cross-Border Trade
1994 I-XII1995 I-XII1996 I-VI
Estimates of border trade
(In millions of U.S. dollars) *2,1163,6781,922
Travel statistics (in millions of U.S. dollars)
Credit126222157
Debit316422289
Visitors to Poland (thousand persons) *74,25382,24437,995
Numbers of Poles visiting abroad
(thousand persons) *34,29636,38719,012
Foreign currency transactions
(net, millions of U.S. dollars)3,2117,7543,497
Current transfers (net, millions of U.S. dollars)367–793–733
Source: National Bank of Poland, except for * which is Central Statistical Office.
Source: National Bank of Poland, except for * which is Central Statistical Office.

110. However, the survey evidence does not provide a complete picture of unrecorded trade activity. The surveys sample only a small fraction of those crossing the border, do not attempt to cover all modes of border crossing, and their questions are geared more toward reporting consumer spending than the activities of informal traders. If taken literally, they would imply average spending per visitor to Poland of only US$50. It is true that there is evidence that the surplus on unrecorded trade may be reaching saturation point: new supermarkets are being constructed on the German side of the border and there are increased import restrictions on Poland’s eastern border. Even so, it is clear both from official data, and from surveys, that unrecorded trade makes a significant contribution to Polish exports (Figure 4).

Figure 4.Poland: Unrecorded Trade, 1992–96 1/

(Millions of US Dollars)

Source: National Bank of Poland.

1/ As measured by ‘Unclassified Foreign Currency Cash Transactions’ in the Balance of Payments.

111. Compared to developments in merchandise trade, the balance of trade in services has been small and relatively stable. Transportation dominates, with around 30 percent of total trade in services. However, recent years have seen a trend increase in receipts from foreign travel, license payments, financial services, and consulting, consistent with the increasing role of services in the overall economy.

112. Data on private transfers are more difficult to interpret. The National Bank of Poland measures private transfers by the inflows and outflows from residents’ foreign currency denominated bank accounts. While these flows include such transfers as workers remittances, they also reflect border trade cash transactions, and simple currency substitution (which should not appear in the balance of payments at all).41 Ideally, foreign currency cash transactions should be excluded from data on private transfers, and instead be allocated across appropriate balance of payments components, or as a second best, be added to the category “Unclassified transactions”.42

C. The Capital Account, International Reserves, and External Debt

113. Since 1994, the Polish economy has experienced a tendency toward increasing capital inflows. Together with unrecorded trade, these have more than covered the official trade deficit. As a result, there have been substantial increases in foreign exchange reserves, which rose by US$9.1 billion alone in 1995, the equivalent of 8 percent of GDP or almost one quarter of broad money. Net capital inflows moderated somewhat in 1996, but are expected to increase in 1997, easily financing the emerging current account deficit.

114. Portfolio investment was not identified as a separate item in the Polish balance of payments until 1995. In that year, foreign purchases of short-term domestic treasury bills increased significantly, raising the share of foreign holdings from almost zero in 1994 to a peak of more than 20 percent in the first quarter of 1996. Several waves of inflows during 1995 responded to favorable interest differentials and expectations of nominal exchange rate appreciation. After the December 1995 appreciation, inflows continued for a few months, partly in anticipation of reductions in the rate of crawl and in interest rates. Short-term portfolio inflows have subsided since then, following several rounds of interest rate reductions and the progressive widening of the official trade deficit which dampened exchange rate expectations. As a result, the foreign share in treasury bills dropped back to below 8 percent by end-1996.

115. The Polish government has also re-entered international capital markets with a successful US$250 million Eurobond issue, which was awarded an investment grade by the credit agency Moody’s. A similarly successful DM 250 million issue followed in 1996, and the government plans to raise up to US$500 million on international capital markets in 1997. Poland has since acquired an investment grade rating from all three major credit rating agencies. However, its bonds typically trade at much lower yields than paper of similar grade.

116. These initial bond issues have not been prompted by budgetary needs, but by the desire to re-establish Poland’s presence in international capital markets, and to create a benchmark against which investors might judge Polish corporate or municipal bond issues. The state-owned Bank Handlowy itself issued a US$100 million Eurobond in 1996, and private placements by Polish companies and banks have started to increase.

117. Foreign direct investment (FDI) has increased steadily from a little over US$500 million in 1994 to an estimated US$2.2 billion in 1996. But even this is likely an underestimate. These official figures are measured on a payments basis, and only record investment transactions conducted through the banking system. Thus, they omit investment in kind and reinvested earnings, among other things. Estimates from the State Foreign Investment Agency (PAIZ) show a much greater role of foreign participation, suggesting that the stock of FDI had passed US$10 billion by June 1996, with commitments to future investment of US$8 billion.

Foreign Investment in Poland
Number of Registered CompaniesValue of Foreign Investment

(U.S. Dollar Millions)
19898678
19902,799105
19914,796324
199210,1311,408
199315,1673,041
199419,7374,321
199524,0866,832
1996 (June)25,00010,155
Source: Polish Agency for Foreign Investment (PAIZ)
Source: Polish Agency for Foreign Investment (PAIZ)

118. Even these figures may be on the low side. PAIZ data are based on the voluntary reports of companies that have declared investments exceeding US$1 million: this covers only about 400 out of the total 25,000 foreign registered companies. Thus, the figures omit undeclared investment, and also investments by small foreign companies.

119. Until now, most of the foreign investment has come from the United States, and has been concentrated in industry, particularly food processing (Table 15). However, East Asian and particularly Korean firms have demonstrated great investment interest, with one large investor alone announcing plans to invest US$2 billion in cars, electronics, banking, and office construction.

Table 9.Poland: External Trade, 1990-95 1/(Percentage change)
199019911992 2/1993 2/19941995
Exports
Value (U.S. dollar)6.24.0-3.5-7.721.932.8
Volume13.7-2.4-2.6-1.118.316.7
Price (U.S. dollar) 3/-6.66.6-0.9-5.43.313.8
Imports
Value (U.S. dollar)-8.361.14.46.014.534.7
Volume-7.937.813.918.513.420.5
Price (U.S. dollar) 3/0.416.9-9.5-11.71.911.8
Terms-of-trade-7.0-8.88.57.11.41.8
Source: Data provided by the Polish authorities; and staff estimates.

Customs basis: merchandise exports, excluding unrecorded trade.

Provisional estimates.

Price indices for years 1990–91 were calculated as quotient of the turnover value index in foreign currency prices and turnover volume index; since 1992 indices are obtained as results of foreign currency price surveys.

Source: Data provided by the Polish authorities; and staff estimates.

Customs basis: merchandise exports, excluding unrecorded trade.

Provisional estimates.

Price indices for years 1990–91 were calculated as quotient of the turnover value index in foreign currency prices and turnover volume index; since 1992 indices are obtained as results of foreign currency price surveys.

Table 10.Poland: Direction of Trade by Commodity Group, 1995(Share, in percent; SITC classification)
Central and Eastern

European Countries
Developed

Countries
Developing

Countries
Percent

of Total

Trade
TotalOf Which:

CEFTA
TotalOf Which:

EU
Exports (f.o.b.)
Food, live animals9.23.10.35.65.20.5
Beverages, tobacco0.70.60.00.10.10.1
Inedible crude materials4.50.50.33.43.30.6
Mineral fuels8.22.91.14.94.70.5
Oils, animal fats0.20.10.00.10.10.0
Chemicals7.82.30.74.74.00.8
Manufactures classified by material27.63.11.721.820.52.7
Machinery, transport equipment21.12.40.916.515.12.2
Miscellaneous manufactured articles20.82.50.518.017.10.3
Other0.00.00.00.00.00.0
Total100.017.55.575.170.17.7
Imports (c.i.f.)
Food, live animals8.11.00.74.53.72.6
Beverages, tobacco0.80.10.00.40.30.3
Inedible crude materials5.42.20.22.41.80.8
Mineral fuels9.15.60.42.72.00.9
Oils, animal fats0.70.10.10.40.40.1
Chemicals14.92.41.411.910.40.7
Manufactures classified by material21.62.41.618.117.11.0
Machinery, transport equipment29.91.30.926.322.62.4
Miscellaneous manufactured articles9.30.40.37.36.31.6
Other0.30.00.00.30.10.0
Total100.015.55.674.364.710.4
Source: Data provided by the Polish authorities.
Source: Data provided by the Polish authorities.
Table 11.Poland: Commodity Composition of Trade, 1990-95(At current prices, in millions of U.S. dollars; SITC classification)
ValuePercent of Total
1990 1/1991 1/199219931994199519901995
Exports (f.o.b.)
Food, live animals1,4821,0991,6861,4101,7352,10011.09.2
Beverages, tobacco6746751372401640.50.7
Inedible crude materials9197481,1287878101,0296.84.5
Mineral fuels1,4471,4371,4131,3741,5661,87010.78.2
Oils, animal fats2918201820350.20.2
Chemicals1,2301,2391,1349641,1631,7749.17.7
Manufactures classified by material3,1022,9613,5853,7464,7426,31423.027.6
Machinery, transport equipment3,5392,5902,5232,9663,4114,82926.221.1
Miscellaneous manufactured articles1,0067871,5472,7393,5424,7727.520.8
Other6797197641195.00.0
Total13,50111,64313,18614,14317,24022,895100.0100.0
Imports (c.i.f.)
Food, live animals4885151,5311,8381,8762,3395.98.1
Beverages, tobacco1391401621461852171.70.7
Inedible crude materials5786258618661,1111,5627.05.4
Mineral fuels1,7862,5292,6742,3462,2532,65121.79.1
Oils, animal fats38441061171591890.50.7
Chemicals6848262,1452,5073,1684,3408.314.9
Manufactures classified by material9496541,8823,4824,3546,26611.521.6
Machinery, transport equipment3,0412,2994,7425,5686,2268,68837.029.9
Miscellaneous manufactured articles5233671,6421,9112,1332,7016.49.3
Other3716752103970.00.3
Total8,2298,00615,91318,83421,56929,050100.0100.0
Source: Data provided by the Polish authorities.

Only public sector.

Source: Data provided by the Polish authorities.

Only public sector.

Table 12.Poland: Commodity Composition of Trade with Nonsocialist Developed Countries, 1990-95(At current prices, in millions of U.S. dollars; SITC classification)
ValuePercent of Total
1990 1/1991 1/199219931994199519901995
Exports (f.o.b.)
Food, live animals1,2999001,1611,0451,1741,29015.57.5
Beverages, tobacco4928211937200.60.1
Inedible crude materials6395148325996337757.64.5
Mineral fuels1,0731,0729221,0321,1211,13212.86.6
Oils, animal fats2918181412160.30.1
Chemicals7987727785636941,0659.56.2
Manufactures classified by material2,4432,6122,7232,7073,7104,98729.229.0
Machinery, transport equipment1,0821,2441,6312,1082,4453,77712.922.0
Miscellaneous manufactured articles6877091,3372,5403,1564,1198.224.0
Other275448543993.30.1
Total8,3738,3169,47510,63012,99117,189100.0100.0
Imports (c.i.f.)
Food, live animals3824249881,3001,1271,2997.76.0
Beverages, tobacco9510796781021221.90.6
Inedible crude materials3323263844104987006.73.2
Mineral fuels3373961,1138927777736.83.6
Oils, animal fats364180811081280.70.6
Chemicals5766841,7832,0972,5683,46211.616.0
Manufactures classified by material5955241,5313,0053,7275,26712.024.4
Machinery, transport equipment2,2671,7594,1734,9225,5137,62745.835.3
Miscellaneous manufactured articles3282771,2441,5361,6902,1236.69.8
Other2112550101940.00.4
Total4,9504,54011,51614,37116,21221,595100.0100.0
Source: Data provided by the Polish authorities.

Only public sector.

Source: Data provided by the Polish authorities.

Only public sector.

Table 13.Poland: Commodity Composition of Trade with Nonsocialist Developing Countries, 1990-95(At current prices, in millions of U.S. dollars; SITC classification)
ValuePercent of Total
19901991 1/199219931994199519901995
Exports (f.o.b.)
Food, live animals5439111921201064.26.1
Beverages, tobacco3323148120.20.7
Inedible crude materials1811431581008514514.08.3
Mineral fuels15610110511911812112.16.9
Oils, animal fats0000010.00.1
Chemicals13910115812612517410.89.9
Manufactures classified by material19920761273767062715.435.8
Machinery, transport equipment40541245041655449331.428.1
Miscellaneous manufactured articles4924534169733.84.2
Other10592160008.10.0
Total1,2911,1211,6861,6441,7491,752100.0100.0
Imports (c.i.f.)
Food, live animals45643603946097447.625.0
Beverages, tobacco2119515672783.52.6
Inedible crude materials11711212011016923519.77.9
Mineral fuels28054143837025725147.38.4
Oils, animal fats1191421270.20.9
Chemicals1011731021401921.76.4
Manufactures classified by material51331201632052928.79.8
Machinery, transport equipment37372824274656976.223.4
Miscellaneous manufactured articles30503182943554605.115.4
Other00382230.00.1
Total5938671,8081,9322,2952,979100.0100.0
Source: Data provided by the Polish authorities.

Only public sector.

Source: Data provided by the Polish authorities.

Only public sector.

Table 14.Poland: Commodity Composition of Trade with Former CMEA and other Former Socialist Countries, 1990-95 1/(At current prices, in millions of U.S. dollars; SITC classification)
ValuePercent of Total
1990 2/1991 2/199219931994199519901995
Exports (f.o.b.)
Food, live animals1301614142724417043.417.8
Beverages, tobacco1615311041941320.43.3
Inedible crude materials999113889921082.62.7
Mineral fuels2182643872233276175.715.6
Oils, animal fats00258170.00.4
Chemicals2933671992753445357.613.5
Manufactures classified by material46014225130236270012.017.7
Machinery, transport equipment2,05393344244241255953.514.1
Miscellaneous manufactured articles270541571583175807.014.7
Other29917960207.80.0
Total3,8372,2062,0261,8692,4993,954100.0100.0
Imports (c.i.f.)
Food, live animals62281831431402962.36.6
Beverages, tobacco2314161112160.90.4
Inedible crude materials1291883563464446274.814.0
Mineral fuels1,1691,5921,1231,0841,2191,62743.536.3
Oils, animal fats12172330350.00.8
Chemicals981322903084606863.715.3
Manufactures classified by material3039623031442370711.315.8
Machinery, transport equipment73750328822024836427.48.1
Miscellaneous manufactured articles164408181871186.12.6
Other1640000.00.0
Total2,6872,6002,5892,5313,0634,476100.0100.0
Source: Data provided by the Polish authorities.

Data for trade settled in transferable rubles (TRs) were converted into U.S. dollars using cross rates derived from the commercial rates of the zloty vis-à-vis the TR and the dollar.

Includes only the public sector.

Source: Data provided by the Polish authorities.

Data for trade settled in transferable rubles (TRs) were converted into U.S. dollars using cross rates derived from the commercial rates of the zloty vis-à-vis the TR and the dollar.

Includes only the public sector.

Table 15.Poland: Foreign Investment in Poland by Sector through July 1996(In millions of U.S. dollars)
Disbursements 1/PercentCommitmentsPercent
Agriculture150.100.0
Industry6,33462.44,12251.3
Fuel and energy1671.61,50118.7
Metallurgy780.8227