Since the global financial crisis began and economic growth slowed worldwide, Polish fiscal policy has appeared to be one step ahead of events, at a time when most governments could only react to what had already happened. The rationalisation and reduction of personal income tax rates passed in 2008, to create just two rates of 18% and 32%, helped stimulate domestic demand just as Poland's key export markets in the EU and Russia were slowing.
And while the International Monetary Fund (IMF) was advising countries to pursue fiscal stimulus in early 2009, Polish finance minister Jacek Rostowski was already proposing measures to bring down a budget deficit, swollen by lower tax collection and rising social spending pressures, the natural consequences of slower growth. The aim was to cut 17bn zloty ($6bn) from the budget for 2009, partly by delaying some long-term infrastructure investments.
"The difference between our analysis of the Polish economy and that of the opposition and other commentators was that we were convinced that the Polish economy was strong, and had been built to high levels of tolerance over the past 20 years, and therefore it did not need particular support. We allowed automatic stabilisers to work, but instead of putting in additional stimulus, we did exactly the opposite," says Mr Rostowski.
His confidence was borne out by the 1.7% gross domestic product (GDP) growth that Poland recorded in 2009, compared with a 5% decline in Germany, Poland's major export market. He attributes this calm and timely strategy partly to his past experience. He worked as an advisor to Leszek Balcerowicz - the architect of Poland's post-communist transition programme after 1989 - and again as an advisor to the finance ministry from 1997 to 2000. That second period took in the economic collapse in neighbouring Russia and the contagion from banking crises in Argentina and Turkey in 2000. These turbulent times taught Mr Rostowski a particular approach to handling volatile conditions, he tells The Banker.
"I know what happens during a crisis. Every single piece of information needs to be checked at least four times, and analysed at least twice, because there is so much false information, the fog of crisis," he says.
In the final quarter of 2008, there was widespread concern that international banks were withdrawing liquidity from the Polish banking system. Mr Rostowski was under pressure to step in and guarantee all interbank lending in the country, or even to forbid foreign banks from transferring funds out of Poland, despite the damage to their operations that this would cause.
"We refused to do that, as I did not believe the information, even when we were getting it from the Polish bank CEOs. When we finally got the statistics, it turned out that far from withdrawing liquidity from the Polish banking system, international banks had injected something like €10bn in the final quarter. They had supported the system," he says.
Defending the zloty
Although banks with strong strategic commitments in Poland stayed on board as the crisis spread to central and eastern Europe (CEE) in the first quarter of 2009, portfolio investors were more fickle. Nursing losses in other markets and fearing debt levels, contagion and protectionism across the EU, funds pulled out of CEE markets, leaving several currencies, including the Polish zloty, in sharp decline. To stem this pressure, in May 2009 Mr Rostowski was the first European finance minister to turn to the IMF's newly created flexible credit line (FCL), which was offered on a pre-qualification basis.
As Poland had already passed that pre-qualification test, Mr Rostowski quickly secured a $20.6bn FCL without having to discuss IMF suggestions about fiscal stimulus. This backstop funding remains entirely undrawn but had the desired effect of encouraging investors to keep faith with the zloty, knowing that the IMF was on hand to help in the event that local banks began to run out of foreign currency liquidity. As Mr Rostowski had expected, that worst-case scenario that never unfolded.
"The depreciation seemed to be running out of control a little before we got the FCL and intervened at the right moment on the foreign exchange markets. There was a real fear that if that depreciation did run out of control, it could undermine the banking system. There are no perfect exchange rate systems, but for countries hit by a major banking crisis, it is probably better to be in the eurozone than outside," says Mr Rostowski.
Eurozone still distant
This inevitably raises the question of when Poland might adopt the euro, which is still the government's stated aim, but without commitment to a specific date. Mr Rostowski has not concluded that the Greek debt crisis will prevent new members joining the eurozone, but believes it will change the attitude of member states to the Maastricht criteria for entry.
"The real mistake that will have to be dealt with over the medium term is the stress that was put on the budget deficit criteria, while the debt-to-GDP criteria was rather underplayed for political reasons," he says.
Poland's public debt has remained below the Maastricht threshold of 60% of GDP, although the IMF forecasts it will peak at 62% in 2014. The fiscal deficit presents more of a challenge, approaching 7% of GDP, or more than double the 3% Maastricht target. In addition to the measures announced in late 2008 and early 2009, Mr Rostowski presented a fresh package in March 2010 that he hopes will allow Poland to comply with Maastricht by 2013. This includes ending pension privileges for the police and military, and a fiscal responsibility rule limiting expenditure increases to 1% over inflation.
"It is a mixture of things that will have immediate effect and structural reform, which is what we have been doing right from the beginning of the crisis. In December 2008, we completed the pension reform that will cut future pension liabilities by 27% of GDP, and at the same time we took expenditure cuts and revenue measures," Mr Rostowski explains.
But putting his plans into effect is not so straightforward. In theory, the Polish president is a non-partisan figure who gives up party membership. But the current president, Lech Kaczynski, has not been particularly co-operative with the government since the defeat of the Law and Justice Party, run by his brother Jaroslaw, at elections in October 2007. President Kaczynski has vetoed a number of key government measures, although on this occasion he has given a provisional promise not to block Mr Rostowski's fiscal reform package.
Jacek Rostowski receives The Banker's European Finance Minister of the Year Award from editor Brian Caplen
Privatisation plans
One key element of Mr Rostowski's plan that is less susceptible to political blockage is the privatisation programme, which has already started promisingly. The initial public offering of power company PGE raised almost 6bn zloty for the Polish treasury in November 2009, with a further 2.06bn zloty from the sale of a 10% stake in copper miner KGHM in January 2010. Including these two deals, Mr Rostowski hopes the programme will bring in revenues of 36bn zloty for the government by the end of 2010, equivalent to about 3% of GDP, which will be used to pay down debt.
"This is a major structural reform. It is about the money, but it is less about the money and more about the fundamental change in management and efficiency. State-owned firms have a record of being relatively badly managed, partly because of the political nature of many of the senior appointments. This is something we want to get away from, so that the people working in those firms will have more stability, more security and end up being better paid," says Mr Rostowski.
Interestingly, the government's 51% stake in PKO Bank Polski is not in Mr Rostowski's immediate plans for privatisation, although he does not rule out a partial sale in the future. He points out that 75% of the Polish banking sector is already foreign-owned - far more than any country in western Europe - and the crisis reaffirmed the need for some balance, even if international banks behaved responsibly.
"Management decisions and styles change, and the fact that international banks behaved well in this crisis does not guarantee that they will behave the same way in the future. There is a certain stability and benefit to be gained from a degree of diversity, as you do not want to put all your eggs into the same kind of basket. And PKO has always turned quite a handsome profit, so the kind of problems we have with other state-owned companies do not apply," he says.
