CNN Newsroom: Global View

home *** CD-ROM | disk | FTP | other *** search

/ CNN Newsroom: Global View / CNN Newsroom: Global View.iso / eur / pol / pol.ec3 < prev next >

Wrap

Text File | 1994-05-02 | 36KB | 675 lines

<text> <title> Poland: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Poland </hdr> <body> 1. General Policy Framework The Polish Government continues to push ahead with its program of stabilization and systemic transformation of the economy. The Government's program aims at radical deceleration of inflation and elimination of prevailing shortages in order to restore fundamental equilibrium in the domestic market. Other objectives include a fully convertible currency, a restructured tax system, and rapid privatization of state enterprises. The long-term objective of the program is transformation of the formerly centrally-planned economy into a western-type market economy. The Government's initial emphasis has been on stabilization, in order to deal with the high inflation, the deep budget deficit and other fundamental economic problems the government inherited from the previous regime. The stabilization package included the following measures aimed at radical reduction of domestic demand: Reduction of the Fiscal Deficit: Both expenditure cuts and revenue enhancement measures have been taken to continue reducing the fiscal deficit from its level of eight percent of GDP in 1989. Cuts in government subsidies were of particular importance and resulted subsidies accounting for just under 9 percent of government expenditures in 1991, down from 18.2 percent in 1990 and 28.6 percent in 1989. The budget registered a small surplus in 1990, but has returned to deficit in 1991, reflecting a large shortfall in projected revenues, particularly from state industry. The 1991 deficit is expected to reach 3-3.5 percent of GDP. Monetary and Credit Restraint: The Government has aimed at eliminating credit rationing, with reliance on credit markets for both private sector and government borrowing. Real positive interest rates were achieved for much of 1990 and 1991. Price Liberalization: Ninety-five percent of prices have been converted from administratively-determined to market-determined. The Wage "Anchor": Permissible wage increases for workers in state enterprises have been limited to a percentage of the cost-of-living increase. Private sector wages are not restricted. The Government's program, developed in cooperation with the IMF, effectively controlled hyper-inflation in the first six months of 1990. The annual inflation figure for 1991 is expected to be 60 to 70 percent, but the trend continues downward, and in recently averaged just over 3 percent monthly. The Government has also unified the exchange rates and established convertibility for current transactions, including merchandise imports and services. The cost of economic stabilization has come at the price of recession; industrial production has declined significantly and unemployment has emerged as a significant factor (10.8 percent of the labor force at the end of October 1991). Poland's economic transformation plans center on making its large state enterprises commercially viable and eventually privatizing them. Demonopolization of some state sectors is underway. Legislation, passed in mid-1990, established a Ministry of Ownership Transformation (Privatization) and created a legal framework for large-scale privatization of the state sector. The first five public offerings of shares in large state enterprises were completed in January 1991. An additional half-dozen large firms were privatized in this manner during the subsequent months of 1991, and another five enterprises were sold through "trade sales" to foreign investors. Simultaneously, around 800 small- and medium-sized companies have been "liquidated" and will be sold either in whole or in parts to private entities (280 cases have been completed). Over the longer term, the government has declared its intention to transfer half of state sector assets to the private sector over a three-year period, and to reach an ownership pattern resembling that of western Europe in five years. Privatization of banks is also planned. Another pillar of the government's economic program has been the opening of the economy to competition from foreign trade. Tariffs have averaged 14 percent since the introduction of a new tariff schedule in August 1991, although increased tariffs on many imports were introduced on January 1, 1992. Poland is renegotiating its accession rights to the GATT, as a standard contracting party. Private trade in imported consumer goods has been an explosive area of growth. The lifting of import licensing requirements on most convertible currency transactions has encouraged growth of this sector. The private sector's share of exports rose to 14 percent for the January-September period; for imports, the private sector's share rose to 43 percent. Only 23 percent of total trade in 1990 was with Council for Mutual Economic Assistance (CMEA) partners, down from 37 percent in 1989. (The organization ceased to function in 1991.) In 1990, CMEA imports dropped 34 percent, while exports fell by 10 percent; Poland's 1990 CMEA trade surplus was 4.4 billion transferable rubles, almost double the previous year's. Hard currency exports surged by 41 percent, while imports rose by a much smaller 6 percent. Poland's leading trading partners in 1990 were: Germany (including the former GDR, 23 percent), the USSR (17 percent) the United Kingdom (6 percent), and Switzerland (5 percent). Trade with the U.S. constituted 2 percent of Poland's foreign trade turnover. Poland is currently running a small trade deficit in its convertible currency account; the non-convertible currency account is in surplus. In 1991, the collapse of Poland's exports to the Soviet Union dealt a sharp blow to overall export performance. However, this was largely offset by strong hard currency export performance. Even so, the need to settle in hard currency for Soviet raw materials and energy prevented a repeat of Poland's 1990 trade surplus. For the January-October 1991 period, Poland posted a trade deficit of $175 million. Polish foreign exchange reserves dropped in early 1991 but stabilized and even grew somewhat in mid-year to settle at $4.2 billion at the end of October 1991. The current government is under pressure to ease the burden of reforms. It will present its new economic program in early 1992. Initial indications show that emphasis will shift toward lifting Poland out of recession and away from fighting inflation. Details of the program will not be known until the budget is presented to Parliament in mid-March, 1992. 2. Exchange Rate Policies The zloty has been convertible for all current transactions (merchandise imports and services) since January 1, 1990 when the official exchange rate was unified and devalued from 6,500 zlotys to the dollar to 9,500 zlotys to the dollar. There is no limit on access by companies or individuals to foreign currency to make purchases abroad (both merchandise imports and services). Capital transactions remain controlled; consequently, a license from the National Bank is required to either grant or receive foreign exchange credits. The National Bank of Poland (the Central Bank) introduced a "crawling peg" exchange rate mechanism beginning in October 1991. The purpose of the new mechanism is to devalue the zloty by small increments (up to 1.8 percent per month) on a daily basis to offset domestic inflation and maintain the competitiveness of Polish exports. According to the current procedure, the zloty's rate of exchange is devalued by nine zlotys per day against a basket of key international currencies. The basket includes the U.S. dollar, German mark, Pound sterling, French franc and Swiss franc. The exchange rate is adjusted to reflect shifts in the values of the currencies in the basket (i.e., to reflect appreciation/depreciation of the dollar against the mark). Prior to introduction of the new