Sept. 22 (Bloomberg) -- Poland, the largest of the European Union’s eastern members, is “unlikely” to make its 2012 goal of cutting the budget deficit to within the EU limit, the head of the International Monetary Fund’s Polish mission said.

“The structural deficit seems to be increasing at the moment, or being allowed to drift,” said Mark Allen, the IMF’s senior regional representative for central and eastern Europe, in an interview in Warsaw. Reaching the 3 percent EU budget threshold in 2012 “would be very hard work.”

Poland abandoned its 2012 euro target in July, the same month the European Commission placed the country under the excessive deficit procedure, giving the government three years to comply with budget rules. The main priorities should be a gradual reduction of debt and greater currency stability, Allen said. The zloty declined 6.8 percent against the euro in the first half, though it has since erased those losses.

“I don’t think economic policy should be absolutely driven by the most rapid possible euro-adoption schedule,” Allen said. “Poland should get all the targets met, should get inflation down, get interest rates down, keep the debt level down, get the deficit down, and have a stable exchange rate as soon as possible -- and then it can choose when it is convenient to enter the euro zone.”

Delay Likely

Poland’s public debt may reach 56.3 percent of gross domestic product next year, Fitch Ratings said yesterday. That would trigger legislation that obliges the government to impose austerity measures to bring debt to within 55 percent of GDP.

The general government deficit will swell to 5.5 percent of GDP this year and 6.3 percent in 2010, “making a delay to potential euro adoption beyond 2013 likely,” Fitch said.

Prime Minister Donald Tusk today criticized the report, calling it “inadequate,” and adding that Poland’s fiscal situation is “by no means dramatic.”

Even so, Tusk has said the country will struggle next year to contain the budget shortfall even after being spared the worst of the global credit crisis. Poland will be the only state of the EU’s 27 members to avoid an economic contraction since the credit crisis started, the Commission said this month.

Domestic demand, accounting for more than two thirds of the economy, has held up and while it may weaken through the rest of the year, external demand will pick up the slack, the Commission forecast.

The economy expanded 1.1 percent in the second quarter from a year earlier. Output will grow about 0.9 percent this year, compared with 4.9 percent in 2008, the government estimates.

Skepticism

The Commission expects the country’s general government deficit, the key measure for the EU when assessing a country’s readiness to adopt the euro, to widen to 7.3 percent of GDP next year from 3.9 percent in 2008.

Deputy Finance Minister Ludwik Kotecki said this month that the country will be able to reach the 3 percent goal in 2012, though the government’s outlook has been met with skepticism by other observers than the IMF.

Achieving a deficit within “3 percent in 2012 sounds pretty implausible,” said Christoph Kind, who manages $20 billion as head of asset allocation at the Frankfurt Trust. “Poland would need an incredibly quick recovery to manage it, and I don’t see that happening.”

‘Trickle-Through’

The government may be too optimistic, according to Vanessa Rossi, a senior research fellow in the international economics program at London’s Chatham House. Faster-than-expected growth in the second quarter in Germany, the EU’s biggest economy, was largely based on slowing imports, she said, which hit countries like its neighbor and main trading partner, Poland.

“We’re still seeing a trickle-through effect from Germany -- even if Poland is less dependent on exports, the situation there increases Polish unemployment and that then affects domestic demand,” she said by phone. “We should be cautious on Poland’s scope for recovery. The comeback could be hard going.”

Fitch , which ranks Poland’s long-term foreign- currency debt A- with a stable outlook, warned yesterday deteriorating public finances in Poland, Hungary and the Czech Republic may trigger downgrades.

“A credible plan to reduce the deficit from 2011 is needed to prevent Poland’s deficit and debt trends becoming inconsistent with rated peers,” Fitch wrote.

Planned presidential elections in 2010 and a general election due in 2011 “add to the risks for the medium-term budget outlook,” Fitch said.

To contact the reporter on the story: Katya Andrusz in Warsaw at kandrusz@bloomberg.net

Last Updated: September 22, 2009 05:55 EDT