High interest rates dampen budget optimism
By : Bogda Zukowska
Concerns are mounting among industry analysts that the 2001 budget forecast for economic growth is too high and will not be achieved unless interest rates come down.
The budget, which was approved by Parliament earlier this month, estimates 4.5% gross domestic product (GDP) growth this year. While welcomed by the interest-rate setting Monetary Policy Council (RPP), the budget forecast is not considered enough to cut interest rates, according to RPP members Grzegorz Wojtowicz and Boguslaw Grabowski.
Following the council's decisions to raise interest rates last year, the present levels are among the highest rates in Central and Eastern Europe at 19-23%. The RPP succeeded in curbing inflation to 8.5% last December, but industry watchers said the tight monetary policy also contributed to the slowdown in Poland's economy.
"A prolonged period of very high interest rates could cause a deeper and longer growth slowdown, which could backfire on the budget," said a Deutsche Bank (DB) report on emerging markets last December.
Recent economic indicators released by the Central Statistical Office (GUS) last Monday confirmed DB's concerns. According to GUS, the Polish economy grew by only 2% in the fourth quarter of 2000 and by only 4.1% throughout the whole of last year, the same level as 1999. Meanwhile, domestic demand was up by just 2.8%.
After the lackluster performance of the economy, many analysts revised their forecasts down for 2001. Analysts at Schroeders Salomon Smith Barney revised their figures for GDP growth in 2001 to 3% from 3.8% late last year. Citibank also revised its estimates down to 3.8% from 4.3% and Stanislaw Gomulka, a professor at the London School of Economics and adviser to the finance minister, predicted 3-4%.
"The major challenge in the 2001 budget is the pace of economic growth," said Arkadiusz Krzesniak, head economist with Wielkopolski Bank Kredytowy (WBK). He predicted GDP growth at about 4%, mainly due to high interest rates and a slowdown in the world's economy. "While exports rose by 15% last year fueling economic activity, in 2001 that will not be the case," Krzesniak said.
Businesspeople are also concerned with the budget. "In the budget there are no incentives for business, particularly for export-oriented and job-creating sectors," said Bogdan Golik, deputy president of Krajowa Izba Gospodarcza (KIG), the largest chamber of commerce in Poland. He said the strong zloty will also backfire on export-oriented companies.
The budget predicts inflation falling to 7% in 2001. "We do not need such a low inflation rate," Golik said. As a businessman, he said it affects exporters' profit and encourages imports. "In this way we subsidize jobs abroad, while the unemployment rate in Poland hits record highs."
Unemployment is estimated to rise to 15.5%, a level not seen since the mid-1990s. "To fight this problem, the budget should be accompanied by more flexible labor code regulations and less fiscal policy," Golik said. "Seventy percent of a company's profit goes to various taxes and duties."
According to Stanislaw Zieba, head of the meat exporters association, the 2001 budget is generous in spending public money, but it doesn't give much encouragement to businesses. He said that out of zl. 20 billion-zl. 21 billion ($5 billion-$5.25 billion) set for the agricultural sector in the budget, only about zl. 5 billion ($1.25 billion) may be spent improving the sector's competitiveness. The remainder would subsidize the farmers' pension fund. "There is no evidence that taxpayers' money will be better managed than last year," Zieba said.
In the early 1990s, Poland's raw and processed meat exports reached 300,000 metric tonnes, while this dropped to 150,000-180,000 last year. "The government has been promising an export-oriented policy, but neither in last year's budget nor in the present one are there any incentives," Zieba said. As a result, Poland has been losing foreign markets to heavily subsidized products from the European Union, he added.
