Approved journey

Milton Friedman wrote that money is not an object of consumption. It is just a means that can be used to purchase other goods and services. A curtain behind which there are true determinants of the nation’s wealth, such as the possibilities, diligence, ingenuity and resourcefulness of its citizens, plus the tools they use and systems of their political and economic organization. The wealth of nations does not depend on the number of zeros on banknotes or on the language printed on the paper being a legal tender in a given country. This does not mean that economic processes do not matter or that money cannot be spoiled by interfering with its amount or exchange rate. Examples include countries such as Venezuela or Zimbabwe, wherein last couple of years the local currency collapsed.

LITMUS TEST

It’s not that bad with PLN, though. Nevertheless, the currency is considered a litmus test showing the strength of a country’s economy or its condition over time. For example, unfavorable changes in the law discourage investments and cause capital to flee the country, leading to a weakened currency. The same is happening in developing countries, during crises or pandemics. Moreover, politicians and economists in every country having an independent currency and a central bank face the question of whether the pockets of ordinary citizens should be aided at the expense of industry. Or maybe the economy should be boosted with low-interest rates, i.e. cheap loans, at the expense of costs. A strong currency, among others, is useful when we go abroad but also when we buy foreign products brought in by importers. It is fair to say that a strong currency is beneficial for the vast majority of society. At the same time, for example, economic migrants or exporters are doing worse with a weak currency. An industry that produces exports and employs workers generates much greater profits and the economy accelerates. The golden mean — the best option — is to maintain a relative market balance.

The coronavirus and the threat of further restrictions in 2020-2021 may have contributed to the decline in the Polish currency. Successive waves of Covid-19 and thus restrictions and limitations exerted on business brought about an unstable economic situation. This goes along with growing fears that the number of cases will increase even more, and thus further restrictions will be introduced, which will harm the condition of companies and their employees, which will consequently lead to slowing down the economic recovery. This factor may have had a negative impact on PLN, putting the Polish currency under sales pressure during the pandemic.

STRENGTHENING OBSERVED

From the beginning of November 2020, along with the improvement in global sentiment — including due to positive information about vaccines against Covid-19 — a strengthening of PLN was observed. As a result, the euro rate dropped from over PLN 4.60 to around PLN 4.43, and the dollar dropped from PLN 3.96 to PLN 3.62. When it seemed that we would end this year with a relatively stronger PLN, the NBP unexpectedly entered the game. Quietly, in December, without any announcement, it started buying foreign currencies on a large scale while selling PLN. The fact that currently Poland has the highest price increase in the EU and the PLN is getting weaker is no coincidence. NBP can print and produce its country’s currency unlimitedly, exchanging it for foreign currency, leading to its weakening. In this way, it can, if exaggerated, easily make citizens poor. The other way around, it is not so easy, because foreign currency reserves are limited.

The NBP interventions, the purpose of which was to present a higher profit at the end of the year, were motivated by increasing the value of foreign exchange reserves to increase the NBP profit, almost all of which (95 percent) were supplied to the state budget at the end of 2020. It is worth paying attention to this because such actions create the possibility of further interventions, which investors are afraid of. Once the central bank decides to help the government and make such a move, it may decide to do this again. Why not, right? 

Secondly, it leads to an inflationary effect. The weakening of PLN will also result in more expensive imports, even in the event of weak consumer demand, particularly with an increase in the prices of food commodities, the share of which in the Polish CPI basket amounts to nearly 25 percent. The accumulation of an increase in commodity prices in the world, more expensive food and a weakening PLN may in a short perspective result in a sharp increase in the prices of consumer goods and services on the domestic market.

‘HIDDEN TAX’

Inflation often is called a "hidden tax" because it increases government revenues and at the same time, can hit the lowest-income households the hardest. Third, the more important effect of such NBP interventions and keeping interest rates at a level too low is, in fact, contrary to the purpose of the central bank’s existence — i.e., maintaining a stable price level to keep inflation under control — may permanently weaken the credibility of NBP and Poland.

In March, when the EUR/PLN rate approached 4.70 and reached the highest levels in twelve years, among the reasons were bad epidemic situation and turbulence on global markets as well as the assumption that PLN might be weakened further by NBP. Even though the pace of economic recovery in Poland and the condition of Polish currency depends on the further developments of “defrosting” of the Polish economy, the implementation of the vaccination policy and the scenarios of returning to a relatively open and safe economic activity, the prospects for GDP growth in the short term are optimistic. The results of the Polish economy will be influenced by, among others, postponed demand following the pandemic, improvement in consumer sentiment, improvement in the situation of most industries most affected by pandemic restrictions and increased activity among Poland’s main trading partners. PLN should strengthen if the NBP allows it. The strengthening of the currency, however, might be hampered by the unresolved case of the European Union’s allegations of compliance with the rule of law in Poland and the issue of a favorable ruling for borrowers in Swiss Francs (CHF), which may have serious financial consequences for Polish currency, banks and economy.