Sassanpour:
By : Roseanne Gerin
The International Monetary Fund (IMF), the global watchdog of national macroeconomic policies, set up shop in Poland in 1991 to supply the country with large loans for its economic shock therapy and austerity program. Nowadays, the IMF monitors the stability of monetary and fiscal policy. Cyrus Sassanpour, 50, was appointed the IMF's senior resident representative in Poland last September. The Iranian national came to Warsaw after spending most of his career with the IMF in South Asia, including India, Sri Lanka and Pakistan, and at the organization's headquarters in Washington, D.C. where he tracked Middle Eastern economies. Unlike South Asia where poverty and development issues prevail, Poland's economic policies are inextricably linked to European Union accession, Sassanpour said. Today, the country's financial bill of health calls for a sound prescription to cure its double-digit interest rates, unemployment levels that top 15%, and high but slowly decreasing inflation. Last month, Sassanpour talked to the Business Journal's Roseanne Gerin about interest rates, the current account deficit, unemployment, inflation, foreign debt and the national budget, and their impact on the country's finances. The following is an edited version of their conversation.
Q: One of the biggest issues today is Poland's 19-23% interest rates (since lowered to 18-22% on Feb. 28). What are the arguments for and against reducing them?
A: The interest rates are clearly very high, and for a majority of borrowers the real interest rates are in the double digits. But we have to remember why they were raised in the first place. Interest rates were raised in 1999 and 2000 by 600 basis points, and this was in reaction to rising inflation and a widening current account deficit. The last increase was in August 2000, when inflation and the current account deficit were at their worst. Since then, inflation has started turning downward, and the current account deficit also has started coming down, so inflation is pretty much on track. The Monetary Policy Council (RPP) has an inflation target of 6-8% by December. The RPP looks at a host of issues when deciding on when and how much to reduce interest rates. Of course, this is only part of the picture. The flip side is that this high interest rate policy has had costs in terms of growth. The challenge for the RPP is to try to balance the risks associated with keeping inflation on track by keeping interest rates high, and the cost to growth from delays in lowering interest rates.
Q: The new central bank chief, Leszek Balcerowicz, said that finding a balance between public finances and labor reform was key to cutting interest rates. Does the IMF agree?
A: Yes, we agree in principle. There are two sets of issues. Labor reform is not a short-term issue. It's more of a medium-term or long-term issue. Balancing the budget is a perennial issue. With the short-term (issues), the more important considerations are the pace of inflation, the improvements in the current account deficit and the strength of the zloty. These are the issues I'm sure the RPP takes into account. But what's also obvious is that in the last few years, the RPP alone cannot carry the burden. They need some help from fiscal policy, so there has to be a remixing of macroeconomic policy, meaning that it's very important for the fiscal policy to help in the process.
Q: Some say that Poland's current account deficit is high, while others say it isn't high because it's import driven. What is the IMF's approach?
A: The current account deficit last year was 6.2% (of gross domestic product) for the year as a whole, although on a monthly basis it peaked around 8.2-8.3% of GDP in August. This year, our expectation is that it will come down. But with current account deficits on the order of 6-7%, the short answer to your question would be this is high, but it needs to be qualified in the context of Poland. The current account deficits are the counterparts of capital inflows. These capital inflows, in turn, finance profitable investment opportunities that are being created in the process of transition and in the process of catching up to the rest of Europe. So in a sense these capital inflows finance production investment and contribute to growth and higher exports. And indeed in the case of Poland, the internal demand has a high import component, mostly for investment. This is reflected in the current account deficit. In that sense, one could argue that there are benefits to the high current account deficit. On the other hand, we have to see what the costs are. The cost of maintaining a high current account deficit increases the vulnerability of the balance of payments to other countries, to changes in sentiment. But in that context, it's also important to look at that structure of capital inflows. If the current account deficit were being financed by short-term borrowing, I would be more concerned than now because (the deficit is) financed by fairly stable foreign direct investment that is mostly driven by privatization.
Q: Poland's unemployment rate has been rising and recently surpassed 15%. In the IMF's view, what are the solutions to lowering the country's unemployment rate?
A: The unemployment rate is very high, and one cannot ignore its social implications. It has increased over the past two years, and there are a number of factors explaining it. One is demographics. Another factor was job losses due to the Russian crisis (1998) and the industries affected by it. (Unemployment was also affected by) the restructuring of some key industries, like coal. There is also some rigidity in the labor market, including the high minimum wage relative to the average wage. The minimum wage to the average wage in Poland is about 40%, which is higher than in the Czech Republic and Hungary. To some extent this has prevented the employment of young people, the new entrants to the labor market. There are wide disparities in regional unemployment, and there are certain reasons for that beside the wage structure. For example, the housing situation. Although there may be employment opportunities in places like Warsaw, the housing situation and labor mobility are very limited. One of the key issues here would be to increase the flexibility of the labor market to allow job creation and employment opportunities.
Q: The IMF's December assessment of the economy said Poland's inflation rate should fall to 6-8% in 2001. The IMF also said that although the rate is falling, 'vigilance would be needed to reach the target inflation of below 4% in 2003.' How will the RPP accomplish these goals?
A: As I mentioned earlier, I think the policies are on track, and the trends are favorable to achieve the target for this year. But to meet the medium-term target I think it's very important to meet the 2001 target and particularly to end up at the lower half of the 6-8% band. From then on, what's required is to make sure that the growth of active demand is sufficiently controlled so it would not give rise to inflationary pressures.
Q: Last September, former central bank chief Hanna Gronkiewicz-Waltz said inflation was a tough issue due to the influence of dollar-denominated imports, especially imported oil. Does the IMF agree?
A: Inflation is always a touchy and sensitive issue, and it carries costs, and it's a very regressive form of taxation because it affects lower-income people the hardest. And a country like Poland, having lived through this period of high inflation in the early 1990s, is well aware of the costs of inflation. But inflationary pressures arise from both supply and demand. The point she was making is that there are supply shocks in the economy arising from higher oil and food prices, as we saw last year, which pushed up inflation. Oil prices have moderated somewhat in the meantime and the food price indications may not be as high as last year. If those two supply shocks are alleviated, then there will be less pressure on the headline inflation.
Q: Starting this year, the current amount of foreign debt that Poland has to repay will skyrocket since the country still carries old debt. Will Poland be able to meet its payments in the upcoming years?
A: First I will have to correct that statement. It's not true that the foreign debt will go up this year because of the accumulation of foreign debt from the past. Actually the Paris Club's rescheduling of Poland's debt in 1991 and the London Club's rescheduling of Poland's commercial bank debt in 1994 resulted in the reduction of debt stock. Presently, Poland's external debt is about 40% of GDP and debt servicing in 2001, about $2.4 billion, is about 19% of current receipts the receipts on exports and the current account. These figures are quite manageable so we don't see any pressure arising this year or over the medium term. Looking over the medium term, the debt-to-GDP ratios are expected to even decline, and the debt service payments are expected to remain fairly stable in the range of 19-21% of current account receipts, so there is no pressure that we can see over the next few years.
Q: How should Poland balance the budget in the long term taking into account that pension reform must be completed?
A: We have supported pension reform and like most other international organizations we see that it's pretty much on track. There are definitely some short-term costs to the budget, but you also have to understand the long-term benefits arising from the fully funded pension system. The costs to the budget are basically transfers paid by the budget to ZUS (Social Security Administration) to be transferred to the second pillar, the fully funded part of the pension system. These costs are now about 1.5-1.6% of GDP, which may be 2% of GDP in the next few years. These expenditures have to be covered from available resources. Poland has already set a target to eliminate the economic deficit within the next two to three years, so that means these higher costs and spendings have to be met within the resource constraints of the budget.
Q: What policies should Balcerowicz stress as head of the central bank?
A: The strongest mandate for any central bank is inflation control. I'm sure that's high on the list of priorities for Balcerowicz and the RPP. But the central bank also has other mandates including making sure the payment system functions smoothly and the banking system is adequately supervised. In those areas, substantial progress has already been made and further progress is being made to bring it up to international standards.
