Budget woes limit RPP cuts
By : Jeffrey Sparshott
Poland's Monetary Policy Council (RPP) (http://www.nbp.pl) last week dropped interest rates for the fourth time this year, acknowledging historically low inflation and a sluggish economy but limiting the cut due to continuing budget problems.
The RPP has been widely criticized by elected officials for maintaining high rates that choke economic growth but the 10-member council has countered that persistent fiscal problems limit their room for action.
"The main source of uncertainty is the situation in the public finance sector, relating to the 2002 budget," the council said in a statement.
The RPP lowered the central bank's main interest rate to 14.5% from 15.5% the last time rates were below 15% was October 1999. With July's consumer price index at 5.2% year on year, the lower cost of borrowing is still one of the highest real rates in the region.
"I think that they should have paid less attention to the budget and cut a little more," said Erik Nielsen, an economist with Goldman Sachs in London. "People are too concerned about the draft 2002 budget. Though the law dictates the government present a budget by the end of September, everybody knows that they're not winning the (Sept. 23 parliamentary) election so this is a theoretical exercise."
According to poll projections, the opposition Democratic Left Alliance (SLD) is heavily favored to win the parliamentary election, which would probably cause an official change in government in October.
Uncertainties with the budget remained in place last week as the Solidarity Election Action (AWS)-led government failed to offer alternatives to Finance Minister Jaroslaw Bauc (http://www.mofnet.gov.pl)'s austerity plan. Bauc has projected that the budget deficit could reach zl. 90 billion ($21.4 billion), or 11% of gross domestic product (GDP), in 2002 without new sources of revenue and some severe cutbacks. Cabinet members foresee a maximum budget deficit around zl. 40 billion ($9.5 billion) a level that most elected officials and economists agree is the most Poland could afford.
The cabinet is expected to discuss the budget this week. Last week Economy Minister Janusz Steinhoff announced the hiring of four economists to review the finance ministry's bleak 2002 projections. Cabinet ministers have been unable to cobble together an alternative to Bauc's plan that foresees slow growth and limits the deficit to zl. 35.3 billion ($8.4 billion), or 4.5% of GDP.
"We are waiting for the official document," said Marek Wagner, an SLD deputy who serves on the Sejm's Public Finance Committee. "It will be different from the guidelines presented by Bauc. But it will not be realistic. The government will present the official bill after elections but before Sept. 30. The document will be perfunctory, just to file anything, which will be amended anyway."
Wagner said that the zl. 40 billion budget deficit limit is barely feasible. The shape of an SLD budget is not clear, however, and according to analysts the post-election government will have limited room to maneuver.
Wagner told the Business Journal that Bauc's proposals for an import tax and savings on administration expenditures and on bills already passed do not raise objections from his party. Bauc proposed a 5% import tax in 2002, followed by a 2.5% tax in 2003 to generate zl. 10.2 billion ($2.4 billion). He also called for lowering administration and government agency budgets by zl. 870 million ($207 billion).
The deteriorating finances concern the RPP.
"That uncertainty has been partially lowered by the decision of the Council of Ministers to cap the 2002 budget deficit level at zl. 40 billion, as well as the opposition's declaration of the same level as the budget deficit ceiling," the RPP statement read. "However, only fast implementation of a package of laws introducing structural changes to the economy and public finance sector will enable carrying out those declarations."
Economist Nielsen said the budget is partly due to the RPP's high interest rates, which are slowing growth.
"A very big part of the overrun is due to lower revenues, which is due to low GDP growth, which is due to tight monetary policy," he said. "The government has not been promiscuous. The revenue shortfall is due to lower growth."
The RPP supports Bauc's austerity package and suggested spending cuts are preferable to higher taxes.
The RPP last week also set the consumer price index target at 4-6% by the end of 2002, compared to this year's 6-8% target. The RPP would like to see inflation at 4% by the end 2003.
Opposition deputies earlier this year led a charge to remove the RPP's prerogative on setting inflation goals, but those efforts fell short. Wagner and his SLD colleagues have called for much deeper interest rate cuts.
The RPP has sliced 4.5 percentage points from interest rates this year. The council last cut rates as aggressively in 1998, but macroeconomic shocks in 1999 including increasing oil prices and zloty depreciation forced an about-face through the end of 1999 and 2000, with the main interest rate peaking at 19% in August 2000 and holding there until February of this year. Inflation spiked to 11.6% in July 2000 but as of last month was 5.2% year on year. The RPP overshot its inflation targets in 1999 and 2000 and is expected to undershoot the 2001 goal.
Robert Wylot contributed to this article
