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Emerging Markets

Poland must cut spending – Balcerowicz

Poland must pursue “proper” fiscal reforms rather than banking on privatization proceeds to plug the gaping public deficit, Leszek Balcerowicz, a founding father of the Polish market reform, has said.

His comments come as the country’s finance minister has told Emerging Markets that proceeds of higher growth and sale of state assets will bridge the budget gap.

“Privatization should not be a substitute for proper fiscal reforms because we need to cut spending to GDP levels,” Balcerowicz, the former Polish central bank governor, said in a telephone interview yesterday.

Although Poland is the only country in eastern Europe that will avoid a recession this year, revenues have plunged as exports have collapsed. The general government deficit may increase to 5.5% of GDP this year and 6.3% in 2010, according to ratings agency Fitch.

Analysts say banking on the proceeds of higher growth and privatization sales to plug the budget gap is risky, given the fragility of global markets.

But Poland’s finance minister Jacek Rostowski in a recent interview with Emerging Markets said the “very positive” performance of global stockmarkets gave him “confidence” that foreign investors would snap up Polish state assets.

If this strategy fails, the Polish government may break the constitutional limit that caps the ratio of government debt to GDP at 55%.

Rostowski said the government “was absolutely committed” to ensure this limit would not breached. He argued that a projected central government deficit next year of 52 billion zloty would be covered primarily by privatization of key assets that should generate up to 36.7 billion zloty by the end of 2010.

However, the minister ruled out a removal of tax cuts – a stance that will increase the structural deficit. Wage increases for teachers and infrastructure spending are also on the cards. He added that belt-tightening measures would kick in 2011.

Balcerowicz, who in the 1990s led the country’s trail-blazing economic liberalization (“shock therapy”), said privatization was “a good thing to increase productivity”. However, he said the government needed to enact structural fiscal reforms to address the “expansionary fiscal policies took place between 2005 and 2007” as well as pursue labour market reforms.

In other comments, Balcerowicz, the only central and eastern European member of the Group of Thirty, called for better “macro-prudential regulation of the banking sector to ensure credit to GDP growth does not grow too fast”.

Poland has been spared the brunt of the global banking volatility due to imposition of curbs on credit growth and bank capital and liquidity levels during his tenure at the central bank, he said. “To my knowledge we were the only ones in the region to impose such strong macro-prudential regulations”.

In the bull run, policymakers were hesitant to curb credit expansion, as this would undermine economic growth. However, much of central and eastern Europe, in particular, is suffering the ill effects of global deleveraging as the region’s growth was primarily driven by credit-fuelled domestic consumption by Western banks.

To avoid a further global crisis, monetary policy needs to consider potential asset bubbles as well as fiscal prudence, Balcerowicz said. “It is no accident” that countries that have suffered the worst effect of the crisis had “expansionary fiscal policies.”

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