By Oonagh Leighton
Known as the founding father of the Polish market economy, central bank governor Leszek Balcerowicz is a key figure in the country's development into one of the most sophisticated economies in emerging Europe.
Balcerowicz, whose past posts include both finance minister and deputy prime minister, is also used to navigating Polish politics. This is just as well. The past 12 months have seen the central bank governor fighting not only to control inflation but also government interference in monetary policy.
Last year, Poland's finance minister, Gregorz Kolodko, tried to implement a budget plan that would have subsumed close to one-third of the central bank's revaluation provisions, put aside in preparation for European Union accession. Balcerowicz rightly sensed that, if Kolodko was successful, this would severely damage the credibility of the central bank and call into question its very independence. Balcerowicz emerged victorious from the battle.
Dominik Radziwill, vice-president of debt capital markets at Dresdner Kleinwort Wasserstein in Warsaw, says: ?This went to the core of Balcerowicz's ideals. By law the central bank is independent, and this was being called into question. Balcerowicz successfully played his card. This was an important victory.?
?Balcerowicz is highly regarded internationally and locally, and he is a great figurehead for the country,? he adds. ?Importantly, he has always been completely clean. In an environment strongly touched by corruption, no one has ever even raised this point.?
Eurozone entry
Balcerowicz's other key goal is to bring Poland into the eurozone as soon as possible, possibly even as early as 2007. Again he faces political opposition. The government has said that, in particular due to the country's high budget deficits and rise in debt, it will be impossible for Poland to fulfil all necessary Maastricht criteria by 2007. This would mean an entry date no earlier than 2009.
In May Balcerowicz said: ?The best thing to do would be to meet the eurozone entry requirements fast. It is difficult to say what will happen because of the political situation. What's most important is the problem of strategy, what date to choose from the point of view of development.?
He added: ?In order to enter the eurozone, it is necessary to reform public finances, and the sooner that happens the better. If Poland enters later it will be because there is not enough strength and mobilization for reforms.?
The problem is that the governing party, a weakened centre-left coalition, has put an emphasis on boosting economic growth and reducing the very high levels of unemployment, hovering around 20% for the past few years. This is going to delay necessary structural reforms that directly impact the country's fiscal position and debt ratios.
Debt levels
An August report by ratings agency Moody's Investors Services explains that the figures for Poland's budget deficit vary if using the Polish methodology or the official European Union methodology ? ESA 95. The former calculates a public finance deterioration from -3% in 2000 to -5.4% in 2003. If using the ESA methodology, the equivalent figures are -1.8% in 2000 to -3.9% in 2003.
the good news
The same explanation applies to the figures for Poland's public sector debt. Polish methodology puts the country's public sector debt at 40% of GDP in 2000 rising to 51.6% in 2003. According to European Union methodology, these figures are lower at 36.8% and 45.45% respectively. Either way the story is the same: debt levels are rising.
The one piece of good news is that Poland's debt levels are not excessive by European standards. While the debt-to-GDP ratio is above that of the Czech Republic, it is well below that of Hungary and the overall Euro area. It is below that of AAA-rated core EU states of France and Germany, and far below the debt-to-GDP ratio for Belgium, Greece and Italy (all of which have a higher sovereign rating than that of Poland).
Observers have said that it is unlikely that Balcerowicz will have the necessary political mandate to see through entry into the European Monetary Union before his terms ends in 2007, although he will have laid the groundwork to do so.
Jonathan Schiffer, an analyst at Moody's in New York, says: ?As the basis of the country's fiscal woes is widely known, the independent variable becomes the presence or absence of the political will and ability to institute the necessary structural reforms. Until an election occurs ? probably within the next 12 months ? we do not foresee much appetite (due to the lack of government cohesiveness) for undertaking the necessary measures.?
inflation
Of more immediate concern is the country's rising inflation. High oil prices, the cost of European membership and relatively strong growth are all contributing to inflationary pressures.
Earlier in the year Balcerowicz said: ?The maximum effect of the EU entry-related price growth is 0.9%. We do not see reasons why it should fully materialize.? He added that the positive effects of Poland's entry to the EU will become visible in autumn when grain prices fall, which will translate into a fall in bread prices.
However, inflation is beginning to rear its ugly head, and there are concerns that the rate could break through the upper end of the 3.5% target set by the monetary policy council. In July, year-on-year inflation was 4.6%, the highest rate of inflation in more than three years. Balcerowicz instigated another rise in interest rates in a bid to bring inflation levels closer to 2.5%. This represents the third interest rate hike in as many months.
However, Moody's Schiffer remains confident that inflation will abate. He says: ?As the causes of price rises are temporary [currency weakness, oil and food prices, tax effects], Moody's expects annual inflation to fall back to around 2% next year.?
He adds: ?The low current account deficit suggests ample room for expanding domestic demand to sustain solid growth over the next two-plus years. There should also be some real currency appreciation and fiscal tightening.?
boom
In the meantime, Poland's economic boom has truly arrived. Moody's is forecasting GDP growth of between 5% and 6% for the end of 2004. It expects this level to be sustained in 2005 at 5%. Schiffer says: ?The main growth engines are industrial output and exports. Industrial growth is surging in high-tech industries, capital goods and consumer durables. Stable growth in private consumption is yielding a broader-based economic expansion than has been expected.?