Budget deficit a worry for economists
A growing budget deficit could limit interest rate cuts for the rest of the year despite falling inflation figures, according to economists.
"Now Poland is at a crossroads and everything will depend on the policy mix," said Katarzyna Zajdel-Kurowska, head of treasury research at Bank Handlowy.
Policy options will be limited by Poland's budget deficit, which hit zl. 15.06 billion ($3.6 billion) 73.3% of the government's 2001 budget plan for the first three months of the year, according to preliminary figures.
"The one solution to support the Monetary Policy Council (RPP) (http://www.nbp.pl/home_en.html) in its work is to cut spending," Zajdel-Kurowska said. "Then they will be able to cut rates more aggressively."
The interest-rate-setting RPP this year cut lending rates twice, though it is unclear what it will do when it meets again on April 25-26. Consumer price inflation registered at 6.2% year on year in March, according to figures released last week by the Central Statistical Office (GUS) (http://www.stat.gov.pl/english/index.htm), well within the 6-8% band set by the RPP as this year's goal. Producer price inflation is down to 3.9% year on year, GUS said. Meanwhile, Poland's industrial output increased 14.6% in March, which is 2.8% higher than in March 2000, and a fair turnaround after a 2.5% drop-off in February, according to unadjusted figures from GUS.
"These figures are good news and bad news," said Krzysztof Rybinski, chief economist at ING Barings. "We think the economy is taking off and we will see higher growth. But it is bad news because it should be growing at 5-6%. Very soon we will see unemployment above 17%. The economy is recovering a bit but not strong enough to add jobs."
More than 2.8 million Poles were registered as unemployed in February a rate of 15.8% the highest level since early 1995, according to GUS. Lower interest rates should speed up the economy by making it easier to borrow money and boosting investment and consumption demand.
"But the data does not bode well for interest rates because we are concerned that the budget is a big mess this year," Rybinski said. "Revenues are not coming. It suggests a budget revision later this year is a likely scenario."
The RPP cut the 28-day money market rate to 17%, the rediscount rate to 19.5% and the Lombard lending rate to 21% last month, the second 100 basis-point cut in two months. Though rates are still the highest in the region, RPP members warned against hopes for another quick move following the last meeting.
RPP board member Grzegorz Wojtowicz last week said lower inflation is a good sign and makes the year's inflation target realistic but cautioned against reading too much into the latest statistics. "I think the result that was presented by the Central Statistical Office was within our band and the news is nothing new and is no additional signal for our activity," he said. The RPP has been especially concerned with fiscal policy.
If the government overruns fiscal deficit targets, expenditures will have to be cut down, said Jacek Krzyslak, head of the Finance Ministry's finance and statistics department. He said it is too early to consider revising the budget. "Three months is just not enough to make such decisions," he said, adding that most government revenues come in during the second half of the year and the deficit appears to balloon early on in every fiscal cycle. "This is a trend that has repeated itself every year," he said.
Others see the situation differently.
"The budget is in deep, deep trouble this year," Rybinski said.
Depending on how the budget situation develops and on this fall's elections, economists expect either the current Solidarity Election Action (AWS) government or a new Democratic Left Alliance (SLD)-led government to have to deal with the widening budget gap, probably by cutting spending. Until the fiscal situation is clearer, they expect the RPP's job to more difficult.
"Probably because of recent fiscal data, the rising deficit, and uncertainties about inflation, the Monetary Policy Council will decide to hold," Zajdel-Kurowska said. "We still think that current (interest rate) levels are too high to help the economy. Maybe problems on the fiscal side will be an argument to keep rates on hold this time."
Prime Minister Jerzy Buzek and his government's top deputy last week added pressure to the RPP by calling for lower interest rates. A cut would be a "great present," Buzek said last week during an event to celebrate the Warsaw Stock Exchange's 10th anniversary. Deputy Prime Minister Janusz Steinhoff told a business lobby that there is no reason for rates to be so high.
The statements from AWS leaders come on the heels of an SLD announcement that the government should consider stripping the RPP of its power to set inflation goals.
