Deficit blamed on fiscal policy
By : Jeffrey Sparshott
The Monetary Policy Council (RPP) (http://www.nbp.pl/home_en.html) is unlikely to cut interest rates when it meets this week, instead maintaining its tight policy that will continue to support an overly strong zloty and clamp down on economic growth while keeping inflation in check, economists said.
The RPP is likely to be influenced by April's inflation data, which showed the consumer price index rising to 6.6% year on year, and a widening budget gap, which reached 89.7% of the planned 2001 deficit at the end of April, the government announced last week.
While the economy remains fundamentally sound, the overall policy mix is bad news, economists said. The budget deficit implies that loose fiscal policy could contribute to inflation. The high interest rates will help check inflation but slow growth and contribute to a strong zloty.
"It's not the right policy mix, unfortunately," said Dariusz Filar, chief economist at Pekao bank.
Others agree. "Poland is at a crossroad," said Katarzyna Zajdel-Kurowska, head of treasury research at Bank Handlowy. "The policy mix - loose fiscal and restrictive monetary policy - is very dangerous. I don't expect in the long term this can be supportive for the economy. It has to be changed."
While the gross domestic product (GDP) will continue to grow, a lower rate means a long time in catching up to the West and no job creation. The GDP grew 2.4% in 2000's fourth quarter and projections for the first part of 2001 see a similar figure.
"In an emerging market, 2-3% is not enough to catch up to European Union (EU) countries," Zajdel-Kurowska said. "We need 5-7% growth to catch up with Greece and Spain in 20 years, instead of 50."
While most economists do not expect the RPP to cut rates at a May 29-30 meeting, the council is difficult to predict because it was closely split and the last rate cut, in March, followed a 5-5 vote, with National Bank of Poland President Leszek Balcerowicz casting the tiebreaker. The main interest rate was set to 17%.
Super zloty
High interest rates support a strong zloty. The currency has been below zl. 4 to the dollar and zl. 3.5 to the euro at times this month, which economists consider unsustainable in the long term. Heavy foreign direct investment inflows, solid portfolio investment, expected slave labor compensation payments from Germany and positive international sentiment toward Poland's currency have also influenced the exchange rate.
Most economists are forecasting that the zloty will slide by year's end, possibly to as low as zl. 4.6 to the dollar. There is some risk of a sudden crash, but most economists predict a correction in the second half of the year due, in part, to a slowing economy, political risk related to September elections, the global economic situation and probable interest rate cuts. Meanwhile, the strong currency is affecting Polish companies, especially exporters.
"I do not think the strong zloty could stop the dynamics of Polish exports," Filar said. "Exports are very dynamic. Polish exporters will do anything to stay in European markets. The problem is they export (successfully), but their financial situation deteriorates."
Polish companies reported starkly lower net profits in the first quarter of 2001, compared to the same time in 2000, as costs grew quicker than sales, the Central Statistical Office (GUS) (http://www.stat.gov.pl/english/index.htm) reported last week. Public and private-sector firms reported net financial results that show non-financial companies breaking even, after reporting net profits of zl 1.5 billion ($375 million) in 2000, GUS said.
High interest rates and slower growth are partly to blame, analysts said. At its April meeting, the RPP told the government it would have to tame fiscal policy to stabilize the economy and set the stage for lower interest rates. But the budget gap approached 90% of 2001's plan after only four months. By comparison, the deficit reached 58% in 2000 and in 1999, a year marked by difficult structural adjustments, it was 73%. Economists think the government will have to revise the budget, but officials are holding to their projections.
"Officially we are not changing any forecasts," said Jacek Krzyslak, head of the Finance Ministry's finance and statistics department, last week. "Of course in light of the macroeconomic developments we have made some working scenarios because those developments made us prepare some recalculations."
The Finance Ministry will have to spend no more than it receives in the coming months if it plans to hold onto the budget deficit target set by lawmakers. A part of the government's income, through privatizations, is in doubt because major deals have been delayed. The Treasury Ministry, for example, recently announced that Powszechny Zaklad Ubezpieczen (PZU), the country's largest insurer, will not be floated on the stock market until 2002. Other revenue can compensate for the loss, Krzyslak said.
So far this year the government has received zl. 1.3 billion ($325 million) of the zl. 18 billion ($4.5 billion) outlined in the budget, Krzyslak said. "In 2000 we planned for zl. 21 billion ($4.8 billion) in revenue and finally we managed to raise zl. 27 billion ($6.1 billion). And this can be the case again," he said.
