$Unique_ID{COW02957}
$Pretitle{362}
$Title{Poland
Progress Review of the Government's Program.}
$Subtitle{}
$Author{Polish Embassy, Washington DC}
$Affiliation{Polish Embassy, Washington DC}
$Subject{foreign
per
imports
cent
polish
enterprises
trade
prices
economy
exchange}
$Date{1990}
$Log{Table 1.*0295701.tab
}
Country:     Poland
Book:        Poland's Economic Transformation
Author:      Polish Embassy, Washington DC
Affiliation: Polish Embassy, Washington DC
Date:        1990

Progress Review of the Government's Program.

     1. On January 1, 1990 Polish Government launched the program of
stabilization and systemic transformation of the economy. This program aims
at radical deceleration of inflation and elimination of the prevailing
shortages, and hence - at restoring fundamental equilibrium in the domestic
market. The long - term objective of the program is transformation of the
formerly centrally planned economy into a market economy of Western type.
Poland seeks to introduce into her economy not just any market mechanisms and
institutions but those which proved efficient in other industrial countries.

     The sequence of the program has been predetermined by the situation of
Polish economy in 1989. During the second half of 1989 prices rose at an
annual rate of 2000 per cent, and inflation was accelerating. The budget was
in deep deficit and credit generation was out of control. Nominal wages were
rising rapidly despite declining industrial output. Food shortages intensified
as farmers hoarded their products in anticipation of further price increases.

     2. The stabilization package included five policy measures focussing
primarily on radical reduction of domestic demand:

     a/ Reduction of the fiscal deficit. Measures were taken to reduce the
fiscal deficit from 8% of GDP in 1989 to 1% in 1990. They included deep cuts
in government expenditures, like food and energy subsidies, military and
security expenses, as well as expanding budget revenues through elimination of
various tax exemption schemes, increase of sales - tax rates (from an average
10% in 1989 to a more uniform 20%), and strengthening fiscal discipline of tax
collection. Cuts in subsidies were of particular importance, and the share of
subsidies in government expenditures was planned to decline from 36% in 1989
to some 10% in 1990.

     Subsidies on coal, transport, and electric energy we radically reduced
as of January 1, 1990 and housing subsidies were to be gradually lowered. Most
of the other subsidies were eliminated. To compensate for subsidy reduction
the price of coal was raised by 500%, the price of electricity by 300% and of
transport 200%, thus bringing such prices closer to world levels.

     b/ Monetary and credit restraints were imposed to cool off the economy.
The goal was to achieve positive real interest rates that would obviate the
need for credit rationing. Eliminated was also automatic financing of budget
expenditures through non-interest bearing credits by the central bank.

     c/ Price liberalization. Prior to the reform 50% of all prices were
administratively determined; since then, 90% have been market-determined. The
government still administers producer prices of gas, electricity and
plant - protection chemicals, and excercises, in adclifion to that, controls
of consumer prices of bread, pharmaceuticals, public transportation, public
health services and alcohol.

     Although the price liberalization should essentially be regarded as a
major institutional reform, it had a strong stabilization impact, as it
contributed to a rapid elimination of excess liquidity, helping to restore the
fundamental market equilibrium.

     d/ The wage "anchor". To eliminate the wage-price spiral, wage increase
rules were tightened. For January, the maximum permissible increase in the
wage bill was set at 30%  of the cost of living increase and for February and
March at 20%. In subsequent months the degree of indexation was to be revised.
At present it amounts to 60% of the inflation rate. Enterprises exceeding
these limits by less than 200% were burdened with excess - wage tax of 200%
paid out of net profits, and 500%, if the wages grew more than 2% above the
limit.

     e/ Foreign exchange policy. Measures applied by the government included
sharp devaluation of the Polish zloty and the introduction of its internal
convertibility. The zloty was devalued in the second half of December 1989 by
58 per cent, and the new rate was set at 9500 zloty per U.S. dollar
corresponding to the prevailing parallel market rate. The moves were intended
to balance the supply and demand for foreign exchange, allow to remove
administrative restrictions in foreign exchange allocation, and unify a
segmented foreign exchange market. Poland became the first country in
East-Central Europe to introduce convertibility on current account
transactions. The system operates as follows:

     a/ It applies to all current transactions with payment in convertible
foreign exchange. Payments for merchandise imports and their attendant
services, as well as receipts from exports are channeled through the banking
system. Capital movements and non-commercial transfers are still subject to
foreign exchange restrictions.

     b/ Exporters have to surrender the receipts from exports in convertible
currencies and are credited with the equivalent amount in Polish currency.
They may open and maintain accounts in Poland only in Polish currency. The
foreign exchange retention system introduced in the early 1980s has been
discontinued. Under that system exporters were permitted to retain a part of
export receipts in their own foreign currency accounts. They may still hold
their foreign exchange accounts but there are no new deposits made to them.
Old deposits may be used to pay for imports and other expenditures until fully
utilized.

     c/ Equal and unlimited access to convertible foreign exchange has been
created for all importers. Banks are obliged to accept and execute payment
orders for all imports in convertible currencies if they comply with the
existing import regulations. The National Bank of Poland must provide the
adequate amounts of foreign currency to commercial banks to secure liquidity
of the system of internal convertibility. There is no distinction between
imports made by firms or households.

     d/ A permit is needed to open an account abroad or to draw foreign
credits exceeding the amount of US $ 500.000 annually. Joint ventures may draw
credits in foreign banks without a permit.

     3. Trade liberalization. As part of the program of stabilization and
systemic transformation, the Government has taken important steps towards
opening of the economy to the world by establishing a transparent,
market-based trade regime. Exposure to international competition has become an
effective instrument of the policy aimed at promoting structural adjustment,
increasing efficiency, and ending monopolies of large state enterprises.

     On January 1, 1990 all quantitative restrictions on imports paid in
convertible currency were eliminated. With very few exceptions such imports
can now be made without official authorizations (concessions) and import
licenses.

     Concessions, which some years ago were required for the majority of
import as well as export trade, are practically non existent. They are
required only in case of imports (and exports) of radioactive materials and
arms. Consequently, imports of these goods are subject to import licensing. It
is worth pointing out that until January 1, 1990 most transactions required an
import license. It is against this background that the present liberal import
trade regime should be viewed.

     Important changes were introduced into the customs-tariff regime. The
so-called non-commercial trade turnover was eliminated. In what follows
customs tariffs are presently applied uniformly to all imports irrespectful of
who the importer may be. There is no differentiation of tariff rates between
imports made by economic entities or individuals.

     Polish tariff schedule is based on the Harmonized Commodity Description
and Coding System - the Harmonized System recommended by the GATT.

     The average tariff incidence in the beginning of 1990 was 8 per cent,
with duty rates on investment goods ranging from 10 to 15%, and those on raw
materials and unprocessed goods remaining within the range of 0-10%.
Relatively higher duties were applicable to some industrial consumer goods.
Since then customs tariffs were substantially reduced or temporarily
suspended in an attempt to increase imports and industrial output.

     Liberalization of imports has been accompanied by a major deregulation of
the export trade regime. The producers are free to choose the channel through
which they will export (or import) their products. It may be one of the
trading companies, both former FTOs (they are dealing mainly in commodities,
e.g. copper, coal, sulphur, oil, grains, meat), or any firm selected from the
diversified network of specialized foreign trade companies. The decision
whether to use these established channels or export (and import) independently
is left entirely to Polish firms.

     While imports paid in convertible currencies are fully liberalized, the
authorities still excercise some controls over Polish exports. Export of
important raw materials and agricultural products such as coal, coke, paper,
copper, sulphur, petrochemicals meat, butter etc. are subject to quota
restrictions and export licenses. These measures serve to prevent the
re-export of raw materials imported from the CMEA trading partners and to
ensure adequate supplies to the domestic market in the transition to a market
economy. They will be lifted as conditions permit.

     The quotas on textiles, shoes and steel products are applied however as a
consequence of the quotas imposed by other industrial countries on imports
from Poland of these goods.

     Summing up, the present foreign trade regime is based on the liberalized
pricing system allowing for competition of imports with domestic goods and a
free transmission of price signals from the world economy to the domestic
economy, as well as on the free access to foreign exchange and commercial
transactions (internal convertibility of the zloty, demonopolization of
foreign trade), and a liberal customs-tariff regime.

     4. Effects of stabilization and of price liberalization.

     Prices. An initial price surge of unanticipated magnitude rapidly
subsided and the hyperinflation was brought under control. In terms of the
Consumer Price Index the January, 1990 prices rose by 79 per cent over the
average for December 1989. This initial increase reflects to a large extent
the adjustment of prices to a market-clearing level. Shortages and queues
promptly disappeared as did the black market. In February prices rose by 24
per cent over the January average. From March till July prices rose at about
four per cent per month; in August by only 1.8 per cent. The trend is highly
encouraging, especially given the fact of the continuing upward adjustment of
administered prices, and especially of fuel and housing. The Government is
firmly resolved to consolidate the gains and to maintain a tight fiscal and
credit policy.

     The Budget. During the first six months of the year the Government
budget was in surplus. The consolidated revenues of the Central and of the
Local governments exceeded the consolidated expenditures by 8%. Also in the
period July-September each month the revenues of the central budget exceeded
its expenditures. There is every indication that the budget will be balanced
for the year as a whole.

     Interest Rate Policy. The National Bank of Poland set its January, 1990
discount rate at 36% per month. Because of the unexpected magnitude of the
price surge, the real interest rate was negative. Yet since rate is floating,
i.e. since it applies to old as well as to new loans, the sharp rise in
nominal rates had a clear restraining effect. In the subsequent months, the
nominal rate was gradually lowered, and, in July and August it stood at 2.5%
per month. But since the inflation subsided, the real rate was positive
throughout this period, July being the only exception.

     Wages. As previously mentioned, the permissible wage increase was set
for January at 30% of the cost of living increase, The actual raises were
granted on the basis of a price increase forecast which proved to be much too
conservative, leaving room for future upward revisions of nominal wages. The
permissible wage increases were set at 20% for February, March and April, and
again the actual wage increases were lower than the limit. In May and June the
indexation was raised to 60 per cent. In July there was a sharp increase in
coal and electricity prices. To gain social acceptance of these changes the
July wages were fully indexed, and, counting bonuses, real wages rose by 6.8%
relative to June. However, for the seven month period as a whole real wages
fell by 35 per cent. To continue the fight against inflation, the degree of
indexation was lowered to 60 per cent for August and September.

     Production. The stabilization measures resulted in a sharp drop of
production in January and in February. Output leveled off during the
March-June period. During the first six months as a whole, output sold by the
State manufacturing sector was 28.7% below the previous year's level. Other
sectors were affected to a lesser extent; the private activities continued to
grow. It is estimated that GDP as a whole declined by 15% to 16% relative to
the first half of 1989. A mild recovery occurred in July and in August. In
September industrial output grew by 7,2% from its level in August this year.

     Employment. In January, 1989 the nationalized sector had 7,2 million
workers and employees. By December the number declined to 6,7 million. The
slack was taken up by the expanding private sector, and visible unemployment
was insignificant. The stabilization measures accelerated the reduction of the
labor force in the national sector. In September, 5,9 million persons were
thus employed. In the private sector employment grew less than in the previous
year, and not enough new jobs were generated to employ the workers released by
the public sector and the new entrants into the labor force. By the end of
September 1990, the number of jobless reached 926,000, that is 6,9% of the
labor force.

     Foreign Trade and the Balance of Payments. The decline in production
caused a sharp fall in imports. For the first nine months of this year imports
from the COMECON countries amounted to 60 per cent of the level of the
corresponding nine months of the previous year, and convertible currency
imports to 76 per cent. There was also an initial dip in exports. But domestic
demand curtailment, and the sharp devaluation of the zloty against the dollar
made foreign markets more attractive. During the first nine months of the year
exports to the convertible currency countries rose by 24,6% relative to the
previous year. Poland realized a trade surplus of $ 3,3 billion dollars,
giving strength and stability to the Polish currency. Though exports to the
rouble block reached only 91,5 per cent of last year's level, a 3.2 billion
rouble surplus was also achieved. The positive trade outcome made possible
a further liberalization of trade and the suspension of customs duties on a
wide range of imports.

5. Privatization.

     The strategic objective of the government's program is
to establish in Poland an open market economy, relying on a strong private
sector, and guided by profit motive. Although the task of mass privatization
of large scale enterprises still lies ahead, the devolution of governmental
and public enterprise property has been proceeding apace. It concerns:

     - Transfer of centrally-owned assets to local authorities;

     - Breaking-up and privatization of pseudo- "cooperatives".

     A number of enterprises were given the formal structure of cooperatives,
though, in fact, they were State monopolies;

     - Divestment by public enterprises. Many public enterprises sold off
their ancillary activities, such as transport units and distribution outlets
to private individuals and corporations. Currently 50% of the road transport
is already in private hands. In all, between the beginning of the year and the
end of August, more than 15,000 small shops, retail outlets and other small
establishments have been sold or leased to private entities or individuals.

     The Privatization Law. The Act on the Privatization of State-Owned
Enterprises, adopted by Parliament last July by an overwhelming majority
envisages two different procedures in addition to the ones discussed above.

     It is envisaged that small companies will be privatized through the asset
liquidation procedure. Under this procedure, assets of a company may be sold
in part or in whole to the company's employees or to a third party.

     The second procedure, applicable mainly to large units takes place in two
phases. In phase 1 a State-owned enterprise is transformed into a Joint Stock
Company with the Treasury as the sole stockholder. Divestment will occur in
Phase 2. A fraction of the shares will be sold for coupons to be issued to the
entire Polish population. The coupons will be valid for the purchase of shares
of individual companies, or of financial intermediaries, such as Matual Funds
which will purchase shares on behalf of the shareholders. Shares are also to
be offered to cash purchases either through auctions or on a basis of
offerings. Arrangements will be made to permit Polish citizens to buy shares
on installment. Foreign investors may freely purchase ten per cent of equity
in any company; purchases of a larger block must be sanctioned by the
President of the Foreign Investment Agency.

     Employees will be given the opportunity to buy shares at a 50 per cent
discount, subject, however to two limitations: (1) no more than 20 per cent of
the shares are to be sold at a discount, and (2) the amount of subsidy per
employee is not to exceed the average annual wage paid by the State enterprise
in the preceding 12-month.

     Program implementation. A pilot privatization project is being carried
out with the cooperation of foreign investment banks. Seven enterprises are
readied to be privatized by private offering; two of them will be put up for
sale this Fall.

     Large scale privatization will start in 1991. In the course of the year
between 100 and 200 large scale, and about 350 medium and small scale
enterprises will be privatized. Enterprises still remaining in the possession
of the State will undergo the first stage of privatization, that is, they will
be transformed into State-owned Joint Stock companies. Wage regulations will
apply with less rigor to such companies (though, unlike in the private there
will not be complete freedom to set wages), while management will enjoy
greater discretion. The enterprises thus transformed will be fully privatized
in the following years.

6. Other Structural Changes.

     Demonopolization. An Anti-Monopoly law was passed in March and an
independent anti-monopoly office was created in April. National meat
processing and trading monopolies have already been eliminated, and action has
been taken to demonopolize transport, mining, the sugar industry..

     Banking and Finance. Poland's banking system is undergoing change as the
Central Bank and the Finance Ministry impose market-oriented behavior on
commercial banks, hived off earlier from the Central Bank. They are shortly to
be converted into joint-stock companies and will eventually be privatized. At
the same time foreign banks are being courted. As many as seven Polish banks
with foreign ownership or foreign branches may have lending activities
onshore within the next six months. There will also be some 15 representative
offices of foreign commercial and investment banks.

     A new State-owned Polish Development Bank (PDB) is currently being
incorporated. The bank, with an initial capital of 800 billion zlotys (USS
84.2 million) will provide credit to enterprises being restructured prior to
privatization, and to the emerging private sector. It will also provide
venture capital in equity form. It is expected that the PDB will be the World
Bank's principal partner for channeling reconstruction credits to Polish
enterprises, and that it will have close links with the European Development
Bank and with the new European Bank for Reconstruction and Development.

     Insurapnce Company Reform The State insurance monopoly was abolished.
Under the new law, consistent with the laws of the European Economic
Community, mixed ownership as well as private domestic and foreign insurance
companies are permitted to operate in Poland on a commercial basis.

     Budgetary reform The structure of the budget was simplified and
clarified. Extra-budgetary accounts will be abolished.

     Local autonomy. Genuine local autonomy was established. Some State
properties were transferred to the local jurisdictions, which also received
the right to levy property and other taxes.

     The tax system. A complete revision of the tax code is under way. Under
the new system, to be introduced in 1991/92 the existing turnover tax will be
replaced by a value added tax.

     Establishment of a stock market A stock exchange is to be established in
1991 to facilitate trading in the securities of the privatized companies and
in other stocks and bonds.

[See Table 1.: Statistical Appendix]