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Stability and growth: challenges for the Polish economic policy


Poland is entering a difficult period, when a compromise needs to be found between attempts to stabilize the economy, and in particular the speed of disinflation on the one hand, and support for economic growth on the other. Neither the dogmatic approach to monetary policy that seems to be prevailing in the Monetary Policy Council, intent on achieving the inflation target at any cost, nor the claims of many politicians that growth can and should be "bought" at the cost of higher inflation, well address the complex and difficult situation facing Poland over the coming years.

Let us remind ouselves of some facts: over the last 12 months the rate of inflation has been cut from over 10% to 6.9%, and the current account (C/A) deficit from over 8% to below 6% of GDP. However, raising real interest rates and the appreciation of the currency have caused economic growth to diminish from 6% to less than 3%, and the rate of unemployment to increase by 3 percentage points.

Obviously, there is no way that the low unemployment could have been "bought" by spoiling the currency. We cannot, however, rule out the possibility that the excessively tight macroeconomic policy could lead to a steeper than necessary economic slowdown, or even recession. Something that should be borne in mind when assessing the Polish macroeconomic policy dilemma is that macroeconomic stability (both internal and external) is not an end in itself, but a condition for the economic development.

Our assessment of the main challenges facing Polish macroeconomic policy is based on the strong belief that the key reason for instability is the relatively low propensity to save. The somewhat poor credibility of the macroeconomic policy is only an unwelcome additional factor that makes the problem more complicated. Directly targeting inflation obviously helps to fight the latter. It does not, however, help a lot in fighting the former.

Our view of the most important challenges is as follows. Firstly, the policy of stabilising the economy will only be efficient if there is a strong base of cooperation between the central bank and the government. The current situation, with NBP trying to use monetary policy as the only tool to combat inflation, without adequate support from the government (and, possibly, against the government's will in a few months' time) cannot lead to satisfactory and sustainable results. Secondly, the aim of the policy should be to find a reasonable compromise between determination, which increases credibility, and elasticity, to lower the costs of implementing the policy. As an example, NBP should constantly be analysing Poland's economic situation and assessing whether the inflation target is achievable at an acceptable cost. Thirdly, the inflation target cannot be approached at the price of increased external disequilibrium. Currently, in its attempts to hit the inflation target, NBP is allowing for a drastic appreciation in the exchange rate. This type of short-sighted policy can be quite dangerous for the Polish economy: too strong a currency may not only hinder the expansion of the export market and check improvement in the current account figures, but it could also backfire and reverse the improvement in the disinflation as well. As soon as investors realise that the zloty is at an unsustainably high level, they will pull out of Poland, and the exchange rate will rapidly fall.

CPI inflationC/A deficit (% GDP, est.)GDP growth (est.)Real interest rateUnemployment rateExchange rate appreciation

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