NBP determined to rein in troubled current account
While keeping its eye steadily on inflation, the National Bank of Poland (NBP) is now setting its sights on bringing down Poland's worrisome current account deficit, which is expected to come in at 7.3% of gross domestic product (GDP) for 1999.
In that aim, the NBP said it would focus next year on continuing to cool consumer demand, NBP President Hanna Gronkiewicz-Waltz said last week in a speech to the Private Employers' Confederation. Analysts in turn said that the NBP's focus would likely result in yet another rate hike in the mid-term.
"We don't (want to) cool down the economy," Gronkiewicz-Waltz said. "We want to cool down domestic demand."
After cutting rates at the beginning of 1999, the NBP later raised the intervention rate twice to the current 16.5% and Lombard and discount rates once, to 20.5% and 19%, respectively.
The current account deficit is the difference between exports and imports plus privatization inflows. To improve exports, the NBP plans to try to keep the zloty from strengthening considerably by holding 40% of revenue from privatization in a special new account, Gronkiewicz-Waltz said. Inflows from privatization, which are converted from hard currency to zlotys, have caused the currency to strengthen artificially this year, she said. A strong zloty in turn makes Polish products more expensive internationally, thus hurting exports.
"It's one of the mechanisms to control the current account deficit," Gronkiewicz-Waltz said.
Poland's GDP grew 4% in 1999, and according to Citibank (Poland) is expected to expand 5.1% in 2000. Inflation stood at 9.2% year-on-year at the end of November. The NBP expects year-on-year inflation for 2000 to end up at 5.4-6.8%.
Fast-growing consumer demand at home has been one of the major impetuses for GDP growth. That demand, however, combined with lackluster productivity in many Polish industries, caused the current account deficit to swell to 7.3% of GDP by the end of last year from 4.3% at the end of 1998. The deficit is expected to amount to 6.8% of GDP in 2000.
Dousing demand at home would force Polish firms to export, which would require them to become more competitive, Gronkiewicz-Waltz said. That is the lesson Poland learned in the early 1990s when consumer demand deflated and Polish companies turned to world markets to sell their products, she said.
"And increased domestic demand makes them lazy," Gronkiewicz-Waltz said.
She said that it is normal for an emerging market to rack up a high current account deficit as the country imports modern technologies. It is important, however, for the deficit not to spiral out of control as such a scenario would scare off foreign investors, eventually deplete hard currency reserves, likely cause hikes in interest rates and eventually open the door for devaluation of the currency.
"It would be good if (the deficit) doesn't grow any further," Gronkiewicz-Waltz said.
Analysts interviewed last week said they were skeptical as to whether the NBP's plan of holding 40% of privatization revenue in a special hard currency account would actually have any great impact on the current account deficit. With the government anticipating it will see about $5 billion in privatization revenue this year, roughly $2 billion would be delegated to the account.
Jaroslaw Malkowski, deputy president with LG Petrobank, said that NBP's program should definitely help to stabilize the zloty as compared to key currencies, but he said he doubted that a stable zloty alone would be enough to stimulate exports. For exports to percolate, he said that Polish companies must first improve their productivity.
Mateusz Szczurek, an economist with ING Barings, was even less convinced that the NBP's plan would work. The idea itself is logical, he said, but at the end of the day demand and supply of the zloty will remain the same.
"Privatization revenue will be substantial this year," Szczurek said. "But we will have even larger spending."
This year Poland will spend about $2.8 billion servicing its external debt. "So of course, it would be pointless to exchange dollars into zlotys and later back into dollars," Szczurek said.
