"Government Watch": Government vs. the NBP

The National Bank of Poland's autonomy has been one of the cornerstones of Poland's economic transformation up until now. As in other countries, the central bank's head often becomes embroiled in disputes with the finance minister over interest rates but successive governments have respected the NBP's autonomy and have not attempted to curb its powers by statute. Will this government be the first to try and make the NBP toe its line? Certainly the parliamentary forces backing this government and parts of the opposition have made it plain that they support a bill to widen the Monetary Policy Council's (RPP) mandate, forcing it to take account of issues such as economic growth and unemployment. The junior partners in the governing coalition, Labor Union (UP) and the Peasants Party (PSL), have such a draft ready and waiting. It is supported by Andrzej Lepper's Self-Defence Party and proposes not only to widen the remit of the RPP but also to increase the number of members of the council. The added members would be appointed by Parliament.

The Democratic Left Alliance (SLD) and its ministers have so far been content to castigate NBP's President Leszek Balcerowicz and the RPP for keeping interest rates high without actually backing the legislation that would emasculate it. There are several reasons for the reticence shown by the dominant governing party: " It is actually quite handy to have a scapegoat for economic problems. If the expected economic upturn does not materialize, Balcerowicz and the RPP can continue to serve as a very useful alibi before a disgruntled electorate. Balcerowicz has always been a convenient bogeyman to scare the voters into line.

" The SLD-led government is well aware that autonomy of the NBP and the RPP is a big reason investors view Poland as financially credible and stable. The autonomy of the central bank and its interest-rate-setting council serves to maintain good relations with the EU, the World Bank and the International Monetary Fund. Tampering with this may bring some temporary relief in the shape of forcing interest rates down but may cause long-term complications that loss of confidence and trust can bring for a country. The powers that be at the European Commission have already dropped hints that this would not make the accession negotiations any easier.

" Finance Minister Marek Belka has made it clear that he does not support any heavy legislative arm-twisting. As a respected economist of liberal persuasion he does not want to place the NBP in the hands of the parliamentarians. What is more important, his former employer, President Aleksander Kwaśniewski (Belka was his economic adviser before becoming finance minister), has gone on record saying that he would not sign such a bill. Even though the SLD together with PSL and Self-Defense would have enough votes to overturn a veto in Parliament, the government is reluctant to travel down the path of all-out confrontation with Poland's most popular politician. For these three reasons we are more than likely to have to endure the spectacle of ritual exchanges of fire between the government and the NBP. The government will always argue that interest rates are stifling economic growth. The NBP and the RPP will retort that it is the government's inability to reduce significantly the budget deficit, which is leading it to issue too many government securities and in that way making złoty purchases attractive. The demand for these securities inevitably leads to the currency getting stronger and hurts exporters. However, a rapid reduction in interest rates would mean that the government could not contain the budget deficit and a rapid fall in the value of the currency would spark off the return of inflation.

Since economists cannot agree, do not expect a layman to adjudicate on who is right. Surely it is Belka's reluctance to tamper with the autonomy of the central bank and the RPP that should prove decisive. Belka understands that there is never any point in throwing the baby out with the bath water. The RPP may be pursuing an overly cautious line. But in its ability to check the appetites of election-focused politicians lies the guarantee of relative economic stability that in the long run brings investors on board. If you remove the autonomy of the central bank and place government yes-men on the RPP what protection have we against a return to the days of printing money that lead to the hyperinflation that bedeviled the Polish economy in 1989? The RPP's policy of "better safe than sorry" may not be as unwise as many in the government, so impatient for a quick fix, imagine.

Chris Mularczyk is a Warsaw-based consultant. He can be e-mailed at cmularczyk@wbj.pl.