FOR Communication 10/2023: IMF: The biggest challenge for Poland is the fight against inflation
The International Monetary Fund’s mission carried out an assessment in Warsaw on 14-24 March under art. IV of the IMF’s Articles of Agreement. The mission pointed to the most important problems of the Polish economy and presented recommendations related to them.
The IMF advises the Polish government to tighten fiscal policy, and in particular, to abolish common energy subsidy programs and credit holidays. It also calls for an increase in the retirement age.
The Monetary Policy Council should be ready to further increase interest rates if it proves to be necessary to bring inflation down to the target by the end of 2025.
IMF's findings and recommendations remain consistent with FOR's analyzes and postulates.
The International Monetary Fund’s mission carried out an assessment in Warsaw on 14-24 March under Art. IV of the of the IMF Articles of Agreement. The mission pointed to the most important problems of the Polish economy and presented related recommendations.
The Fund's delegation pointed out that the most important challenge is to bring inflation down to the target (which upper band of deviations is 3.5%). Therefore, it becomes necessary to tighten fiscal policy this year. Thanks to the "Polish Deal" and the so-called anti-inflation shields (the effectiveness of which is questionable - see, for example, FOR 6/2022 announcement), the public finance deficit increased from 1.9% of GDP in 2021 to 3.1% of GDP in 2022, and the forecasted deficit for 2023 amounts to 4.5% of GDP. The reasons for the projected increase in the public finance deficit are strong slowdown in economic growth and rising cost of public debt maintenance, which we pointed out in FOR 6/2023 and 9/2023 announcements - the Polish economy is expected to grow only by 0.3% this year, and the state will pay the highest interest rate of any European Union member state.
The IMF calls for a government’s responsible fiscal policy that would support the Monetary Policy Council in the fight against inflation. The Fund forecasts that the public finance deficit will remain at the level of approx. 3% of the GDP in the medium term, pointing out at the same time, that a consistent reduction of public debt would be very beneficial for the Polish economy, as it would create an appropriate reserve in fiscal policy to respond to possible shocks and tensions arising from an aging population, energy transition and an increase in defense spending. Here, the Fund recommends raising the retirement age and limiting social benefits so that only people in real need of support can benefit from them. Raising the retirement age – by limiting the outflow of working people from the market – would also strengthen future economic growth. We have pointed this issue out in, for example, the FOR’s report: Poland: stagnation or growth? Work, rule of law, investment, innovation.
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