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IMF Praises Polish Policy Mix as Economy Slows on EU Ties

Jan. 24 (Bloomberg) -- Poland is acting “appropriately” by cutting interest rates and easing deficit targets as the euro-area crisis damps growth in the European Union’s biggest eastern economy, the International Monetary Fund said.

Poland’s economy will expand 1.7 percent this year as growth slows in its main trading partner, Germany, the IMF said in a staff report released today. That is slightly lower than the 1.75 percent predicted in November by the Washington-based lender. It estimates gross domestic product rose 2.2 percent in 2012.

“Risks are on the downside as a deeper or more protracted slowdown in Europe, or a re-intensification of the crisis, would affect Poland through substantial trade and financial channels, including through possible disorderly deleveraging by European parent banks,” according to the document.

The report was compiled in response to Poland’s request for a renewed credit line of $33.8 billion, granted last week, to ensure against external risks. The two-year credit replaced a $30 billion facility that expired this month and was never used. Poland vowed to treat it as precautionary in a letter to the IMF, included in today’s report.

Poland’s economy, the only one in the 27-nation EU to avoid a recession in 2009, slowed to its weakest in nearly three years in the third quarter last year as exports to the euro area declined and domestic demand dropped. Prime Minister Donald Tusk has responded by easing budget-deficit goals, while the central bank, headed by Governor Marek Belka, has cut rates by a combined 75 basis points to 4 percent since November.

Policy Mix

“The policy mix appropriately consists of an easing monetary stance while allowing fiscal automatic stabilizers to operate,” according to the report, which estimated a fiscal deficit of 3.4 percent of GDP and public debt of 56 percent of GDP this year.

Still, additional fiscal consolidation will be needed in the medium-term to achieve the goal of narrowing the structural deficit to 1 percent of economic output and putting debt on a downward trajectory, the IMF said in the report.

The new, flexible credit line will continue to support “overall macroeconomic strategy and bolster Poland’s external buffers,” IMF staff said. “The authorities’ intention to continue to rebuild policy space to counter adverse shocks provides comfort that they will be prepared for a timely exit from the FCL arrangement when external conditions improve.”

To contact the reporter on this story: Jeffrey Donovan in Prague at jdonovan26@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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