Economy and Trade
Since the collapse of Communism in 1989, Poland has adopted a free-market economy. It became a member of the European Union in 2004, and the current government aims to join the Eurozone on January 1, 2012. Over the past 20 years, Poland has attracted considerable foreign investment, while there has been a massive movement of workers to Western Europe, particularly since joining the European Union. Consequently, wage remittances constitute a significant source of capital (totaling approximately US$6 billion in 2007), much of which is invested in housing and business start-ups. Poland has enjoyed positive economic growth for the past 18 years, but remains one of the EU’s least-developed countries. It still has a very large and inefficient farming sector, and poverty is particularly widespread in rural areas. The country’s infrastructure remains inadequate. Trade is heavily geared towards the European Union—neighboring Germany is Poland’s main trading partner.
Economic Policy over 12 Months
Poland’s economic polices are focused on gaining entry into the Eurozone as rapidly as possible. In December 2008, Poland issued “The Convergence Program Update 2008,” which sets out the measures it will adopt to meet the economic target set by the European Union as a prerequisite for entry into the Exchange Rate Mechanism-2 (ERM-2), the “ante room” for the Eurozone. The conditions (for all applicants) include: containing the budget deficit to less than 3% of GDP; limiting the government debt to no more than 60% of GDP; and achieving a rate of inflation that is no more than 1.5 percentage points above the average rate of the three EU members with the lowest inflation.
The government plans to join ERM-2 in the first half of 2009, with the goal of entering the Eurozone in 2012. It opened talks with the European Union on the issue in February 2009. However, at the same time, the governor of Poland’s central bank said that there were no good economic reasons for entering ERM-2 in 2009, and that the Polish economy was not ready to do so. The Polish president, Lech Kaczynski, also voiced misgivings about entry into ERM-2. Nonetheless, the government believes that entry into ERM-2 would help to stabilize the zloty, which came under severe downward pressure during the second half of 2008 and early 2009.
In December 2008, the government adopted a stimulus plan worth U$31.4bn to kickstart the economy amid the global slowdown. However, in February 2009, it announced plans to cut government spending by US$5.6 billion in order to contain the budget deficit to within the 3% limit prescribed by the Eurozone convergence criteria. The government said that just over half the savings would come from cuts in central government spending, while the remainder would come from revamping the financing of infrastructure projects. In January 2009, the European Union estimated that the government’s budget amounted to 2.5% of GDP and that it would rise to 3.6% in 2009. (The forecast was clearly made before the announcement of spending cuts in February 2009).
The central bank, the National Bank of Poland (NBP), targets an inflation rate of 2.5%. The central bank began tightening monetary policy from April 2007, raising interest rates eight times, to 6% in June 2008. Over this period, the zloty appreciated in response to a widening spread of domestic interest rates over euro and dollar interest rates. However, monetary policy began to ease in the latter part of 2008 as the global economic slowdown intensified. Rates fell by 25 basis points in November, and by 75 basis points in both December and January 2009, leaving the benchmark reference rate at 4.25%.
Economic Performance over 12 Months
Poland’s economic growth slowed to 4.8% in 2008, down from 6.7% a year earlier, as the global financial crisis took its toll. In January 2009, the government said that GDP growth could slow to 1.7% in 2009, while independent economists’ forecasts vary from zero to 2% growth.
The European Commission forecast, in January 2009, that private consumption, fueled by cuts in personal income tax, indexation of pensions, and decelerating inflation would be the main engine of growth in 2009. However, it said that the expansion of private consumption would slow in 2009 and 2010, as unemployment rises.
The economy certainly deteriorated markedly in late 2008 and early 2009. Poland’s industrial output fell for the third consecutive month in January 2009, declining at an annual rate of 15%, while unemployment surged to 9.5% in December 2008, from a record low of 8.8% in October 2008. Labor Minister, Jolanta Fedak, said in February 2009 that the jobless rate could rise to 12% by mid-2009. Workers returning home after losing their jobs in Western European countries will add to the unemployment total.
During the first six weeks of 2009, the currency weakened by more than 16% in a sell-off that also engulfed other currencies in Eastern Europe, due to worries over a collapse in the growth of their export-dependent economies and financing. Between mid-2008 and mid-February 2009, the zloty weakened by around 30 per cent against the euro.
The currency’s woes are hitting homeowners and the corporate sector, raising doubts about whether they will be able to service their debts. Both have taken out large debts in foreign currencies—around 70% of all mortgages are denominated in foreign currencies, mostly Swiss francs. Furthermore, Polish borrowers need to repay about US$71 billion of debts owed to Western banks in 2009, much of it denominated in foreign currencies.
Despite the weakening currency, Polish inflation eased to an annual rate of 3.1% in January 2009, down from 3.3% in December 2008, and 3.7% in November. Inflation averaged 4.2% in 2008, up from 2.5% in 2007. Sharp hikes in food and energy costs were the main factors driving inflation in 2008. Similarly, easing commodity prices should help inflation to subside in 2009, although clearly a slump in the value of the zloty would place upward pressure on inflation.
Support for Inward Investment and Imports
Poland has attracted significant levels of foreign direct investment (FDI) since the end of Communism. Poland limits foreign ownership of companies in selected strategic sectors, and also limits foreign acquisition of real estate, especially agricultural land, but in general foreign companies enjoy unrestricted access to the Polish market. In recent years, Poland has also introduced reforms to improve the climate for foreign and domestic investment. For more information on investing in Poland, see the website of the Polish Information and Foreign Investment Agency.
Following its entry into the European Union, Poland became part of the EU customs union. Currently, decisions regarding quotas or customs suspensions to be applied to goods imported into Poland are taken at the Community level.
The government offers various tax exemptions. These include:
Income received by taxpayers from governments of foreign states, international organizations, or international financial institutions, deriving from non-returnable aid, including funds from framework programs regarding research, development, and introduction of the European Union, and from NATO programs.
Income earned from economic activity carried on within a Special Economic Zone on the basis of an appropriate permit.
GDP growth: 4.8% (2008, government figures)
GDP per capita: US$22,000 (2008, est.)
CPI: 3.3% (December 2008, government figures)
Key interest rate: 4.25% (January 2009)
Exchange rate versus dollar: zlotych (PLN) per US dollar—2.3 (2008 est.)
Unemployment: 9.5% (December 2008, government figures)
FDI: US$196.1 billion (2008, est.)
Current-account deficit/surplus −US$29.51 billion (2008, est.)
Population: 38,500,696 (July 2008, est.)
Source: CIA World Factbook except where stated