So who runs Poland?
The criticisms of the budget draft that appeared on the Central Bank's web site on Oct. 4 were certainly blunt. The draft was not consistent with the declared economic aims of the government, they said. If the finance ministry was serious about reducing unemployment, improving state finances and stimulating economic growth, then this budget was not the one to achieve any of these goals.
Perhaps the most stinging criticism came when the Monetary Policy Council (MPC) declared that it would continue to set monetary policy on the basis of economic reality, and not on the "over optimistic forecasts" contained in the draft budget proposal.
The cabinet adopted the draft budget for 2003 on Sept. 20. It estimates projected revenues at around €38 billion (zł. 155 billion), which is 6.6% more than in 2002. Government spending will be at €47.3 billion (zł. 193 billion), a 4.5% increase on the previous year's outgoings. Finance Minister Grzegorz Kołodko estimates that he can reduce the state's crippling budget deficit by €319 billion (zł. 1.3 billion) and to a figure that represents 4.5% of GDP. By 2005 the government thinks that it can get the deficit below 3%. This is crucial: to enter the European Monetary Union and adopt the euro, the Maastricht Treaty demands that deficits must be below this figure. Poland hopes to be using the euro by at least 2007.
Ambitious
Unemployment will not fall next year but will hold steady and inflation will increase slightly to 2%, according to the draft. Kołodko has admitted the budget is "ambitious", while Prime Minister Leszek Miller said in a televised address on Sept. 23 that the proposals are a "budget of development and a messenger of good hope." The MPC, obviously, does not share his optimism.
Market reaction to the proposals from the finance ministry appear to support the Central Bank's view that these estimates are unrealistic.
"We think that around zł. 4 billion of revenue will not materialise due to over optimistic assumptions," said Krzysztof Rybiński, the chief economist at BPH PBK. "We also urge some caution on the inflationary projections. Our estimates are higher than those stated in the draft budget."
Kołodko's approach to budget expenditure differs from that of his predecessor Marek Belka, who resigned after only eight months in the job last July. The famous "Belka Rule" stated that an increase in expenditure would only rise at a rate of "inflation plus one percent". But in his first speech to the Sejm on July 24, Kołodko announced that, "We want to reduce spending from the previously planned 4% to 3.7%." Analysts think that this projection is unobtainable if taken with other measures contained in the draft budget.
"It is possible that GDP growth will reach around 3%, but we are not as optimistic as the finance minister," said Rafał Antczak from the Centre for Social and Economic Research (CASE). "We think 2.3% is more realistic."
The actual criticisms from the MPC have surprised nobody. But the tone and context in which the criticisms were made, has led some to believe that the hostility between the Central Bank and the government is more than a spat and macroeconomic analysis. The coalition government headed by Leszek Miller, and the Central Bank, have never really been great friends. In fact, at times, things have gotten really nasty.
This conflict has existed since the left-wing government took power after the last parliamentary elections. Marek Belka immediately said that the MPC's policy of high interests had slowed down the pace of economic growth.
"Interest rates were defiantly too high for too long and needed cutting substantially", said Stanisław Gomułka, a lecturer at the London School of Economics and an economic adviser to previous governments in Poland.
The SLD's coalition partners, the Polish Peasants Party (PSL) and the Labour Union (UP), submitted a draft bill to change the laws in relation to the Central Bank. The bill aimed to change the composition of the MPC by adding new members put forward by the coalition. It also wanted to limit the NBP's independence and give the government more control over monetary policy.
The MPC in Poland is one of the most independent in the world. On Aug. 29, 1997 Poland adopted the Law on the National Bank of Poland and established a new institution, the Monetary Policy Council. The idea was to make the bank independent on the spirit and principles of the European Central Bank. The MPC was comprised of ten members who were all elected for six years. Poland's constitution stated that "the basic objective of the NBP's activity shall be to maintain price stability." This has been interpreted as being to give the Council the power to determine inflation targets.
Council members cannot be dismissed by the government. All members, bar one, are external to the government. Three are appointed by the President, while six others are elected by Parliament. Most of the ten members elected in 1998 have political connections with the then government coalition of the Freedom Union and Solidarity Election Action (AWS). The Council is chaired by the Governor of the Central Bank, currently Leszek Balcerowicz, the former finance minister of that government.
Members of the Council are skilled politicians and are regulars in the media exposing their views on all areas of economic policy, even in areas that are not their responsibility.
"The MPC has effectively become, as far as economic policy is concerned, a kind of shadow government," Gomułka said.
Even during the AWS administration conflict existed between government and MPC. The Council favoured changes in the Labour Code, for instance, while the trade union-led government did not. But the real bone of contention then, as it is now, was about monetary and exchange rate policy.
The reduction in the rate of inflation has been faster since the Council became active. This trend became even more noticeable last year when inflation fell by 7%. The reduction in prices since 1998 has consistently been at a rate above even the Council's own estimates. This has led many to think that its monetary squeeze on inflation was achieved by maintaining too high interest rates.
"The increase in monetary tightening occurred in the second half of 1999 and the first half of 2002," Gomułka said. "It can be argued that the consequences of this were a reduction of both domestic demand and overall economic growth, and a sharp increase in unemployment."
The MPC argues that its tight grip on interest rates has been necessary due to the sharp increase in inflation during 1999 and 2000 caused by a three-fold increase in the price of oil in that period. Wage inflation and inflationary expectations followed. Though this external shock was short-lived, with other factors, such as the Russian economic crisis, a global downturn and the sharp increase in the budget deficit, and the Council felt confident in keeping real interest rates high.
Antagonisms
So antagonisms between Council and government are almost built in to the system. But the call by the UP and the PSL to limit the independence of the MPC this year was going too far for some. Things were getting out of control. In July 2002, the US Federal Reserve said that the "attacks" by the government had tarnished Poland's image abroad. William J. McDonough, the president of the Federal Reserve in New York, said that foreign observers were "puzzled as to whether the Polish government's verbal offensive against the National Bank was merely propaganda or a more serious threat to its statutory independence."
The situation got so bad that in June, Leszek Miller had to call for the mediation of President Aleksander Kwaniewski to settle the dispute. After meeting with the Council, the President said at a joint press conference with Central Bank head Leszek Balcerowicz, "We have recognised that there is a need for co-operation between the government and the MPC. We talked about easing pressure on the appreciating złoty and the exchange rate strategy, especially in the context of Poland's entry to the European Union."
Balcerowicz said that the MPC would continue to make decisions over monetary policy on a purely economic basis, and without political considerations.
"This is our constitutional responsibility," Balcerowicz said. "There is no doubt as to the independence of the MPC and the Polish president guards this independence," he said.
Since then hostilities between government and bank have eased. This is due in the main to the fact that the MPC has been reducing interest rates steadily all year. In fact there have been six rate cuts this year. On Sept. 25, the MPC reduced the rate by 0.5% to 7.5% for the reference rate, 8.5% for the rediscount and 10% for the Lombard.
In July, Marek Belka resigned as finance minister and enter stage left, Grzegorz Kołodko. For many weeks the new finance minister's strategy remained a mystery. And then Kołodko announced a revised and more upbeat forecast for economic growth in 2003. This new projection was arrived at "after analysing the internal and external conditions".
Casting doubts
But the MPC didn't miss the opportunity to cast doubts on this more rosy view of future economic growth.
"It is easier to construct a budget with a lower deficit when one assumes a higher rate of GDP growth," Dariusz Rosati, a member of the MPC, said. "If the forecast does not come true then we will face a higher deficit next year."
Grzegorz Kołodko's appointment as finance minister was not designed to please Balcerowicz. Kołodko is of an expansionist economic bent; Balcerowicz has always been associated with supply-side economics, a tight fiscal policy and deregulation of the economy. The political duel between the two was prefaced by an intellectual one.
Both taught at the Warsaw School of Economics, and they have acted as leaders of opposite wings at the economic faculty. Kołodko has described Balcerowicz's view on economic policy as a "false and growth killing doctrine".
But are the recent squabbles over the budget for 2003 motivated by politics and not economics?
"The recent comments made by the MPC were based solely on economic realities and had no political component at all," Rybiński said.
Since Grzegorz Kołodko has entered, the finance ministry confrontations with the Central Bank have lost some of their heat. The government is getting what it wanted: lower interest cuts to stimulate growth in a low inflationary environment. But are there further rate cuts in the pipeline?
Benign
"If the pressure on inflation is benign, then there is room for further cuts," said Cyrus Sassanpour, the IMF's senior resident representative in Warsaw. "I think this is in line with market expectations. And judging by the statement made by the MPC on the budget draft, even they would agree with that too. But some caution is needed as well."
"The criticisms made by the MPC of the draft budget were merely echoing what had already been said by independent analysts, so their comments were not very original," said Antczak of CASE. "But they are not acting against the government. The Central Bank has cut interest rates substantially over the past year and we expect more cuts to follow. If the MPC was acting against the government, then they would be putting rates up not down. Monetary policy and fiscal policy are two instruments that can only work together and not apart. So, just as the government has the right to criticise what the Central Bank is doing, so the MPC has the right to criticise what the government is doing."
The independence of the Central Bank is assured if Poland wants to enter the EU, as this is part of the criteria of accession. The government and Central Bank have agreed on the need for a speedy entry and adoption of the euro. So its constitutional place seems secure. But the antagonisms between the MPC and the government won't be going away. As Gomułka noted, "This is part of the political reality of Poland. The MPC criticising the government is a normal part of economic and political life here."
