Professor Grzegorz W. Kołodko, Deputy
Premier and Minister of Finance, talks to Wanda Jelonkiewicz and Andrzej
On Jamuary 23-28 the 33rd Annual Meeting of the
World Economic Forum in Davos is taking place. What is the Polish delegation
has brought to the table in Davos?
Credible evidence that Poland is on course for returning to a sustainable
growth path at a rate within the range of 5%-7%, thanks to major re-structuring.
This includes: the reform of public finances, further privatization,
Foreign Direct Investment of almost $ 62 billion, and above all our
rich experience with post-communist transformations and the certainty
of early accession to both the EU and EMU, with the increasing convergence
- institutional, real, fiscal and monetary - with the European Union
that accession entails.
What are the biggest challenges the Polish economy is facing currently?
First, overhauling public finances, re-structuring both public revenues
and expenditures, broadening the tax basis and shifting expenditure
away from unnecessary or wasteful transfers towards growth-oriented
Second, reducing the budgetary pressures created by Polish EU accession.
It is true that Poland will receive greater transfers from the EU budget,
under structural funds and other sources, that it will pay to it in
membership charges and other contributions. However most of the benefits
will accrue to the economy as a whole - including local authorities
and the private sector - while the membership costs, plus most of the
co-financing involved in EU-funded projects, will come from the state
budget. Fiscal tensions will be alleviated, in the longer run, by the
growth induced by greater integration and FDI flows, but in the short-medium
run this will represent a major challenge.
In 2002 the Ministry of Finance announced it would present a concept
of reforming public finance. When is that going to happen and what are
the main points of the reform?
This is a long-term undertaking, which will last for several years.
The critical mass of such reform will be presented for public and political
debate in the second and third quarters of 2003; its accepted version
will be broadly implemented in the last quarter, in time for the difficult
budget of 2004. Such reform will involve: 1) decreasing that considerable
part of budgetary expenditure which is rigidly pre-determined; 2) improving
the performance of quasi-budgetary funds and agencies, including downsizing
some of them through consolidation and even liquidation if necessary;
3) shifting expenditure away from certain ineffective or disposable
uses, in favour of development aims; 4) re-structuring expenditure to
make available funds for co-financing projects under structural and
cohesion funds provided by the EU; 5) reforming the tax system by reducing
or eliminating tax exemptions, and changing tax brackets and scales.
Entrepreneurs in Poland complain about high taxes as one of the factors
that hamper economic development. Is a thorough reform being contemplated?
Some entrepreneurs do complain, but many do not complain at all. Indeed
Poland has one of the lowest tax burdens not only in the EU but among
OECD countries. Nominal corporate tax is only 27%,after the latest tax
cut of 1% effective from the beginning of 2003; the actual rate after
various reductions and exemptions is about 23-24%; together with the
tax on dividends Poland has a tax burden on enterprise incomes of 38.8%,
compared to an average of 48.8% in OECD countries and of as much as
50.1 % in the European Union. In the longer run, once Poland will have
resumed its earlier course of sustained growth at an annual rate of
5% and more, we will be in a position to consider further reductions.
For Polish entrepreneurs the main problem is not taxation, but the high
cost of finance discouraging investment and the super-strong exchange
rate which is associated with high interest rates and handicaps Polish
The exchange rate of the zloty has remained high for many months,
which hurts the profitability of Polish exports. In your opinion, should
the central bank intervene on the money market in order to weaken the
The strength of the zloty has nothing to do with Polish market fundamentals;
it is the consequence of large scale speculative capital inflows attracted
by interest rates differentials caused by the NBP policy of high interest
rates. The NBP is claiming to counteract imaginary inflationary pressures
allegedly deriving from the fiscal stance, neglecting that actual inflation
- currently at under 1 % per annum - in the second half of 2002 has
been well below its target range of 2-4%. Inflationary expectations
and core inflation have also been falling and the strong exchange rate
raises serious worries about deflation rather than inflation. In similar
conditions the Czech National Bank has reduced interest rates below
those of the European Central Bank, while NBP interest rates are still
well above euro-rates. Lower interest rates would correct the zloty
over-valuation without the need for central bank intervention in foreign
In its wisdom the supremely independent NBP is serious lagging behind,
in its interest rate policy, Polish inflation trends. Nevertheless market
forces, and concern about the implicit subsidy granted to foreign currency
investors, have forced a reduction of 11.5 percentage points in just
over a year, and further reductions are expected. The zloty is being
at least stabilized by current processes of fiscal and monetary convergence,
thus allowing export competitiveness to improve regardless of NBP preferences.
How will Poland's economic situation be influenced by the influx
of EU funds in the coming years?
We have already discussed above the macroeconomic implications of such
an influx. Those funds will also make an important contribution to microeconomic
restructuring, adding momentum to regional development and to the catching
up of less developed areas, as well as improving the efficiency in the
allocation of other public funds. All in all, EU transfer should make
a contribution of the order of 1 % per year to Polish long term GDP
The end of 2002 brought about some signs of an economic upturn -
growth of exports and growth of industrial production. What are the
forecasts for 2003? Is there a chance for a substantial acceleration
of this trend?
In the second half of 2002 we have witnessed the beneficial effects,
on employment and on economic growth, of the policy package introduced
in mid-year on the financial restructuring and bail-out of industrial
enterprises, brought to the verge of bankruptcy by the so-called "cooling"
of the economy introduced by the previous government. Over 60,000 enterprises,
of which more than 95% small and medium size enterprises, have participated
in those schemes. The process of growth acceleration has been visible
and steady. In the last quarter of 2001 GDP annualized growth was 0.2%;
in each quarter of 2002 it accelerated respectively to 0.5%, 0.8%, 1.6%
and around. Moreover, there has been a visible shift from a model of
meagre consumption-led growth to a more robust export-led growth: it
is no accident that the largest increase in production over the period
July-November 2002 occurred in export sectors, such as chemicals (13%),
rubber (15.1 %), pulp and paper (11.8%) as well as in computers, radio
and communications equipment (17.4%), furniture (8.7%). Such firm, steady
and continuous trends, quantitative and qualitative, lead to reasonable
expectations of a GDP growth of the order of 3.5% in 2003.