Leszek Balcerowicz, Poland’s central bank governor of nearly six years, is preparing to leave. The country’s new populist prime minister, Jaroslaw Kaczynski, has said that his term will not be renewed when it ends in January of next year.
.With a population of over 38 million, Poland is the largest economy to have joined the EU in 2004, and the direction it takes under its new government will affect emerging markets investors in Europe and beyond.
“Until 1989 the prospects were clear: it could only get worse,” Balcerowicz tells Emerging Markets. “Today, Poland’s economy is very strong, but for the longer term we need to maintain what is positive. Achieving monetary stability is one of those ingredients. And at the same time we must try to repair Poland’s weaknesses: to reduce the deficit; complete privatization; lift restrictions on market forces; and strengthen, not weaken, the rule of law.”
Since coming to power in November 2005, Poland’s conservative, euro sceptic government, dominated by the Law & Justice party, has clashed with institutions from the courts to the media. The central bank headed by Balcerowicz, who as finance minister (and deputy prime minister) between 1989 and 1991, was the architect of Poland’s post-communist privatizations, is no exception.
In March he was summoned to parliament after defying government demands to block the merger of two Polish banks (Pekao and BPH) owned by Italian bank Unicredito. Since then, the government has legislated to strip the National Bank of Poland of its financial regulatory powers, unifying them in a separate supervisory agency that will also regulate the securities market, pensions and insurance. It has also proposed to expand the central bank’s responsibilities from fighting inflation to maintaining economic growth.
WIDENING MANDATE?
On the proposal to widen the central bank’s mandate, which was part of Law & Justice’s election manifesto, Balcerowicz is forthright. “It is against the Polish constitution, it is against European law, and it poses a risk to long-term economic growth in Poland.”
Poland’s macroeconomic framework is more than adequate, says Balcerowicz. The economy is growing at around 5%, and inflation has come down from 15% 10 years ago to less than 1% today. Macroeconomic discipline has brought the current account deficit down too, from 6% of GDP in 2000 to under 2% last year. The private sector, invigorated by restructuring, posted exports of $92.7 billion last year.
The proposed law “would create a legal basis for pressing the central bank to ease monetary policy excessively before an election”, and risks adding to inflationary pressure.
An economist at a leading investment bank operating in the country is also worried about the impact on Poland. “In terms of importance for the macroeconomy, watering down the central bank’s target is much worse [than bringing the financial regulators under one roof]. If the central bank faced two conflicting goals, market uncertainty over inflation would ‘trickle back’ to the economy through higher interest rates and exchange rate volatility, which would eventually hurt growth.”
The government’s motives are ideological, he says: “They believe the government should have control of the financial sector.” However, it will be difficult for parliament to water down the central bank’s mandate because of its obligations to the EU’s economic framework.
The government’s overhaul of financial services regulation in Poland has proceeded despite strong criticism from the IMF and the European Central Bank.
Analysts say the new super-regulator is not necessarily bad news; it would have to demonstrably hurt the competitiveness and efficiency of Poland’s strong banking sector or financial markets to threaten stability. Balcerowicz is perturbed by what he sees as a politically motivated attack on an independent central bank.
NEW MOVES
The government has not stopped there. A special commission has been established to investigate all banking privatization and banking supervision in Poland since 1989. Poland’s banks are now 70% foreign-owned.
Balcerowicz describes the investigation as unconstitutional, showing disrespect for the rule of law and disproportionate. “There is a serious risk that the commission is not investigating in the sense of explaining, but will try to publish … insinuations.
“This is not only a personal issue but a dangerous precedent for any future central banker in Poland,” he adds. “The risk is that, if he disregards the government’s suggestions on monetary policy, he will face an investigation that has nothing to do with monetary policy.”
Balcerowicz is concerned that Poland should “go forward and not go back”. This means respecting division of power and the independence of public institutions, strengthening the courts and the rule of law, cutting the deficit, pressing on with privatization, and regulating sectors where market forces cannot operate.
Some analysts ask whether the Law & Justice government’s bark is worse than its bite. David Heslam, Poland analyst at rating agency Fitch, describes it as an “aggressive, opposition-like government” that is good at picking fights. “A lot of scare stories turn out to be unfounded.”
“It sells well domestically for Poland to be standing up to the EU on regulatory practices … but behind the scenes there are negotiations, and the wording of the law may not match the words of the politicians,” he says.
Fitch has Poland on BBB+ with a positive outlook, notwithstanding uncertainty over public finances. Poland’s budget deficit exceeds 3% of GDP, and public debt is running at 43%. The next budget, which will be finalized in October, includes proposals to raise welfare spending while privatization receipts are drying up.
However, Balcerowicz still has his reputation to defend. Prime Minister Kuczynski and his populist coalition partners have criticized the reforms he oversaw as finance minister in 1989, accusing him of selling off state assets and causing mass unemployment, which today stands at 16.5%. “One should not assume that, since populists are more vocal, that everyone is critical of reforms,” he responds. “This is an acoustic illusion. In Poland, like in most countries, there are some politicians who for calculation or ignorance are trying to make political careers based on criticism of reform.”
“I am not complaining,” he continues. “The opposite. I have been honoured with the responsibility for Polish reforms … If I regret anything, it is that I did not do more … because there were political blockades.”
And the end of his term as central bank governor does not mark the end of Balcerowicz’s role in public life: “Politics in the sense of party politics is not in my plans … one thing is sure: I will not be inactive.”