New finance minister says the right things but reveals little substance

Finance Minister Grzegorz Kołodko's much-anticipated speech last week might have pacified financial markets, but Polish economists question his plan to rein in the swelling budget deficit. For the first time since his July 5 appointment as finance minister, Kołodko outlined his financial plans at a press conference last Tuesday, which immediately strengthened the złoty and government bonds. His speech focused on exchange rate policy, the government's relationship with the National Bank of Poland, inflation and unemployment - key areas of uncertainty after his predecessor's resignation. Most important, economists said, Kołodko said that he intends to shrink next year's budget deficit below the approved zł. 43 billion ($10.5 billion). But it is unclear how Kołodko will trim the deficit, given a government strategy to pursue other potentially costly reforms, such as debt restructuring and tax breaks for small companies. "Unfortunately, over the fiscal deficit he was not clear," said Krzysztof Rybiński, the chief economist at Bank Przemysłowo-Handlowy PBK. "Without any other details, it's a fairly weak plan." The finance minister led off his speech with the budget issue. "We will pursue fiscal discipline," Kołodko said. "We are currently working to make the budget deficit lower than 2002 and lower than current 2003 assumptions. There would be difficulties in financing the debt if a certain (deficit) border were crossed."

He did not provide further fiscal policy details, but delved into the other potentially expensive reforms, including debt relief for struggling firms and some tax breaks. "The first part (of the plan) is about restructuring the debt of those that cannot cope with it," Kołodko said. "The debt will be canceled in return for a restructuring fee and implementation of a restructuring program." Rybiński said that the funds for tax breaks do not already exist in the approved budget plan, and the government would have to find the money elsewhere. Some economists were satisfied with the initial overview of Kołodko's policies. "He is not tending toward radical changes," said Dariusz Filar, the chief economist at Bank Pekao. "He (has) undertaken his devotion to keeping fiscal policy under control. Fiscal instability is the most challenging, and he will be committed to what (former Finance Minister Marek) Belka was doing." Kołodko carries more political power with the ruling Democratic Left Alliance (SLD) than Belka did, so he may find it easier to cut the deficit where Belka could not, Filar added. Also last week, Kołodko attended the Monetary Policy Council's (RPP) monthly meeting to set interest rates. The government and the RPP have been at odds over central bank interest rates but the new minister distanced himself from harsher rhetoric. "He clarified and resolved the important part of the relationship with the (RPP)," Rybiński said. "Many worried about the independence of the central bank."