Poland Renews IMF Credit Line for $33.8 bn

The IMF’s Executive Board has approved the renewal of Poland’s Flexible Credit Line (FCL) for two years. The amount of the new FCL, which the authorities intend to treat as precautionary, will be for about $33.8 billion.

In its latest assessment of the Polish economy, the IMF said that Poland’s economy has started to slow after showing resilience since the onset of the global economic crisis, thanks to sound policy frameworks and prudent economic management.

“The new two-year credit line will support Poland’s overall macroeconomic strategy by providing a cushion against risks and by bolstering market confidence,” said Julie Kozack, IMF mission chief for Poland after the Board decision on January 18. 

The FCL was created in 2009 for countries with very strong policy frameworks and track records in economic performance. Qualified countries have the flexibility to draw at any time within a pre-specified window on the credit line, or to treat it as a precautionary instrument. 

Speaking to IMF Survey, Kozack explained the rationale for renewing the credit line, the reasons behind Poland’ resilience to the eurozone crisis, the policy priorities, and the medium-term challenges the economy faces.

IMF Survey: Poland was the only European Union (EU) economy not to enter into recession during the global financial crisis, and has been one of the best performers in the EU. Recently, though, the economy has slowed. What are the reasons behind the slowdown, and how big an impact is the troubled eurozone having on Poland’s growth prospects?

Kozack: Both external and domestic factors are driving the slowdown of the economy. The demand for Poland’s exports has weakened, as most of the country’s main trading partners are in the euro area.

Developments in the euro area are also taking a toll on domestic demand—Polish households and businesses have started to consume and invest less because they are concerned about continued uncertainty in Europe. Rising unemployment and tighter credit are also affecting household consumption. 

But I would emphasize that Poland is experiencing only a growth slowdown. We do not anticipate a recession this year.

IMF Survey: Poland has asked for a renewal of its Flexible Credit Line. What benefits does it derive from having an FCL in place?

Kozack: Poland has derived many benefits from having an FCL. For example, the arrangement allowed for a more flexible policy response at the onset of the global financial crisis in 2008-2009. It subsequently provided useful insurance for Poland as the crisis evolved, particularly as it hit the eurozone. The FCL has also played a critical role in allowing the Polish government to rebuild policy space and to strengthen the institutional policy framework. 

IMF Survey: In its last annual assessment of the economy, the IMF said that Poland continues to have strong economic policies that have helped the country retain market credibility in spite of the challenging external environment. If this is the case, why does Poland need to renew its credit line? And why did the IMF approve a bigger amount this time?

Kozack: Poland can continue to benefit from the FCL. The arrangement will provide useful extra insurance and a cushion against potential risks that Poland might face. It will also provide very important breathing space for the government to continue to rebuild policy buffers through fiscal consolidation and by increasing reserves. Finally, the FCL will allow more time for any unfavorable economic conditions that might affect Poland to dissipate and recede. 

As for the increase in the size of the credit line, we believe that 2013 will be a difficult year both for Poland and some of its major trading partners. Poland also faces some withdrawal of external funding from its banking sector. And volatile capital flows may also pose risks. For these reasons we think that the country will continue to benefit from an FCL in the requested amount.

IMF Survey: Coming back to the economy, what immediate policy issues does Poland need to deal with?

Kozack: I would highlight three areas.

The first one is on the fiscal side, where the challenge is to strike the right balance between continuing belt-tightening and supporting the slowing economy. We believe that the 2013 budget appropriately balances these objectives. 

Second, on monetary policy, the central bank should continue to cut policy interest rates to support the economy. 

Third, on the financial sector, there will be some new challenges arising from the slowing economy, particularly with respect to the rise in loans that are in default. This is an issue that financial supervisors will need to tackle going forward. 

IMF Survey: What reforms does Poland need to undertake in order to sustain growth and create jobs in the medium term?

Kozack: Poland needs to maintain its very strong policy framework and economic underpinnings that have worked so well since the global economic crisis. But there are some areas where the government can undertake further reforms to boost potential growth. 

One important challenge is to find ways to raise the labor participation rate, which is relatively low in Poland. There are also measures that policymakers can implement to improve the business climate by reducing red tape and administrative obstacles to investment. We believe that such measures would boost growth, allowing Poland to maintain stability and create more jobs. 

IMF Survey: Finally, do you think Poland’s successful economic policies hold lessons for other countries in Central and Eastern Europe?

Kozack: Poland has shown that very strong fundamentals and sound policies help strengthen a country’s resilience to crises. I think this is a key lesson that other countries can draw from Poland's experience.