Few days ago IMF has published a concluding statement after its regular article IV consultation with Poland. People and institutions learn as time goes by, for those who like to see these changes I suggest looking at IMF policy recommendations given to Asian countries after 1997 crisis and comparing with those given to countries after 2008 crisis. But do not take me wrong, it is good that people learn from their past mistakes.
IMF statement has “surprised” some economists, take a look at Dr Piatkowski comment (he has spent some time in Washington working for Bretton Woods institutions). He rightly notes that IMF praises Poland for engineeering large discretionary fiscal stimulus which raised fiscal deficit from 2% to well above 7% of GDP. I have noted on this blog that Polish finance minister is a modern version of Dr Jekyll and Mr Hyde, he tells foreign investors and FT that Poland runs completely different fiscal policy then the rest of the crowd, ie. we are fiscally prudent. But at home he generates (or tolerates) one of the largest structural deficits in the EU and adopts massive creative budgeting.
IMF key recommendations are as follows: do not reduce fiscal deficit too fast (this is easy, as government has not proposed any real fiscal tightening measures) and if zloty continues to strengthen reduce interest rates and intervene of the FX markets. IMF – in politically correct language – also calls Fedak/Rostowski proposal to capture OFE (pension second pillar) savings insane (quote: “We are concerned that this could be seen as a more fundamental reversal of pension reforms …“).
IMF report should kick-off a much needed debate about the right policy mix for Poland. I have prepared proposals and gave them to important decision makers in 2008. I suggested that when zloty appreciates to levels that are seen as threatening Polish growth prospects (here the number) Poland should adopt Chinese strategy: intervene, create larger foreign exchange reserves and invest the surplus according to the Polish economics interests. We should create professionally managed PSF (Polish Sovereign Fund) and learn from best practices (Norges Bank, GIC, Temasek, ADIA, …). If you wish to understand the benefits of such strategy take a look at chapter 1 (Rybinski, Krynska Global Reserve Management) in a recently published book Central Bank Reserves and Sovereign Wealth Management, Palgrave Macmillan, 2010. In case of excess liquidity problems Poland should make more active use of the mandatory reserve requirement tool, with interest on these reserves going into special Financial Stability Fund. Among other things such a fund would finance large scale financial education of Poles. And last but not least, foreign currency borrowing should be more restricted via regulatory decisions (low LTVs, requirement that person wishing to borrow in CHF or EUR completed a two week course on financial risk financed by the Financial Stability Fund). People who know the topic will immediately see the positive externalities that emerge from my proposals.
Conclusion: Poland needs a very different policy-mix that the one that has been set in motion by government. We need weak zloty and credible fiscal path. Presently we have strengthening zloty and lack of fiscal credibility. It is time to change. It is time to learn from China.