Washington DC, June 1, 2023 – The International Monetary Fund (IMF) said the Polish economy had slowed down significantly in 2023 amid still-high inflation after a rapid recovery of 5.1 percent from pandemic in 2022.
The IMF announced this on Thursday after its Executive Board concluded the Article IV Consultation 1 with the Republic of Poland and considered and endorsed the Staff Appraisal.
It said that with the high inflation eroding real wage growth and investment facing headwinds from energy prices and interest rates, economic growth in Poland was projected at 0.3 percent in 2023 before a projected rebound in 2024.
“Over the medium term, Poland’s potential growth is projected to remain around 3 percent, with strong investment, supported by Next Generation EU grants, temporarily offsetting the negative effects of population aging.
“As the authorities implemented a personal income tax reform and temporarily reduced taxation on food and energy to prevent higher inflation, the general government deficit widened to 3.7 percent of GDP in 2022 from 1.8 percent of GDP in 2021, with general government debt declining to 50 percent of GDP.
The IMF said general government’s deficit in Poland was projected to widen further to 4.5 percent of GDP in 2023 mainly due to the slowing economy.
It said that over the medium term, the general government deficit was projected to stabilize around 3.5 percent of GDP and debt to increase to about 55 percent of GDP.
“While the substantial increase in inflation in 2022 was driven primarily by external factors, including food and energy prices, core inflation also increased and remains at high levels.
“The central bank tightened monetary policy significantly in 2021-22 before pausing in late 2022.
“The projected stabilization of food and energy prices is projected to drive a significant decline in headline inflation in 2023, though the easing of core inflation is projected to be more protracted. Inflation is projected to decline near the target by the end of 2025,” it said.
The IMF said that in spite of the low growth rate, the country’s banks’ asset quality had remained stable, and sector-wide capital adequacy levels remain significantly above regulatory requirements.
“Supported by rising lending interest rates, banks remained profitable in 2022, despite the cost of mortgage credit holidays.
“The legal risks stemming from foreign-currency denominated mortgages remain the most significant source of uncertainty and potential losses for banks,” IMF concluded.
The IMF said the Polish labour market remained tight, though some signs of cooling had emerged.
“High inflation has been driven primarily by food and energy price shocks – exacerbated by Russia’s war in Ukraine – though underlying inflation has also accelerated.
“The external position is preliminarily assessed to be broadly in line with medium-term fundamentals and desirable policies.
“Foreign exchange reserves are adequate to insulate against external shocks and disorderly market conditions.
Despite the projected slowdown in 2023, medium-term economic prospects remain favourable.
“In the near term, high inflation has eroded real wage growth, while investment faces headwinds from energy prices, interest rates, and declining housing activity.
“As shocks fade and real wage growth recovers, the economy is projected to rebound in 2024 and 2025. Nevertheless, considerable near-term uncertainty will require deft policy management as policymakers seek to lower inflation without incurring an excessive cost to economic output.
“A fiscal expansion in 2023 should be avoided to help combat still-high inflation.
“While the fiscal deficit is projected to widen in 2023 mainly due to the slowing economy, any policy driven fiscal loosening should be avoided unless major downside risks materialise. “Further energy price measures, if needed, should be temporary, targeted, and preserve price signals,” IMF said.
