On July 7, 2017, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation [1] with Poland.

The near-term growth momentum remains strong, supported by accommodative monetary and fiscal policies and sizeable EU transfers. The economy is operating above potential, with the unemployment rate at a historical low. Growth is projected to accelerate to 3.6 percent in 2017 and remain strong in 2018. Long-term growth, however, will be more subdued, unless adverse demographics and structural constraints on investment and productivity growth are addressed.

Risks to the near-term outlook are broadly balanced. Externally, while stronger-than-expected recovery in advanced economies would be a boon for Poland, on the downside, a faster-than-expected tightening in the global financial conditions, as well as growth, financial or political shocks in Europe, would have a negative impact. Domestically, both growth and inflation can surprise on the upside if the EU funds’ absorption and investment rise further or if wage growth accelerates faster than expected. On the downside, a delayed monetary policy response could lead to inflation overshooting its target, while a weakening of institutions or fiscal slippages could dent investor confidence.

Policies have focused on supporting growth, with the central bank aiming to ensure a gradual return of inflation to target. Monetary policy remains accommodative, with policy rate kept at a historically low level since early 2015. The 2017 general government budget deficit of 2.9 percent of GDP represents a pro-cyclical stance and is only marginally below the Excessive Deficit Procedure (EDP) limit. In this regard, the fiscal performance so far this year has been very encouraging, and the authorities intend to resume fiscal consolidation next year with an adjustment in the structural and headline deficits of about half a percent of GDP. The banking sector remains well capitalized, but profitability continues to decline amid low interest rates and rising non-interest costs. The final solution to foreign currency mortgage loans is still pending, but will likely entail further costs to banks. The recently adopted Responsible Development Strategy sets ambitious targets to achieve fast convergence to the EU living standards, but much work lies ahead to translate the strategy into concrete reform plans and to ensure a consistent policy mix.

Executive Board Assessment

Executive Directors commended Poland’s very strong policy and institutional frameworks. They noted, however, that maintaining strong and inclusive growth over the medium term would require advancing structural reforms to lift investment and productivity, as well as addressing demographic challenges. Sound institutions and macroeconomic policies would strengthen Poland’s resilience against external risks.

Directors agreed that the accommodative monetary policy stance is appropriate for now, but stressed the need to closely monitor domestic inflationary pressures. Given the uncertainties surrounding future wage growth, monetary policy should be data‑dependent to ensure a timely response and avoid overshooting the inflation target. A clear state‑contingent rather than time‑bound communication strategy would help to better guide inflation expectations.

Directors commended the strong fiscal performance and improved tax collection so far this year. They urged the authorities to start consolidation as soon as possible to reverse the pro‑cyclical stance, and build a buffer relative to the Excessive Deficit Procedure (EDP) limit already this year, taking advantage of the cyclical upswing and saving any revenue overperformance. Directors welcomed the authorities’ intention to reduce the headline and structural deficits by about half a percent of GDP per year during 2018–19, and supported the medium‑term objective of cutting the structural deficit to one percent of GDP.

Directors stressed the importance of high quality and permanent measures to underpin a growth‑friendly fiscal adjustment. They noted the authorities’ efforts to improve tax administration, but suggested conservative budgeting of potential gains. They urged the authorities to consider additional measures to ensure that they achieve their fiscal objectives. Such measures could include eliminating preferential VAT rates and exemptions, rationalizing current spending and improving public expenditure efficiency, and gradually phasing out preferential pension regimes.

Directors stressed the importance of preserving financial sector resilience for future growth. They noted that the banking sector remains sound, but that profitability has continued to decline amid a low‑interest rate environment and rising regulatory and tax burden. Directors highlighted the need to monitor the impact of the bank asset tax. They also underscored that the solution to address consumer protection concerns related to foreign‑currency mortgages should preserve financial stability and banks’ lending capacity, and noted that a case‑by‑case approach would be preferable. Directors also noted the rising sovereign‑bank linkages, and underscored the need to maintain strong and independent financial supervision and macroprudential oversight.

Directors encouraged the authorities to advance structural reforms to boost potential growth. They noted the ambitious targets set by the Responsible Development Strategy, and called for prioritization with the focus on streamlining product market regulations, implementing more effective labor market policies, and improving the efficiency of the EU‑funded investment in infrastructure and R&D. Directors also encouraged measures to increase labor force participation and incentivize employees to remain longer in the workforce.