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Wywiad z Wicepremierem, Ministrem Finansów
prof. Grzegorzem W. Kołodko
(The Warsaw Voice, Nr 4 z 26 stycznia 2003 — wersja angielska)

Working Papers




Professor Grzegorz W. Kołodko, Deputy Premier and Minister of Finance, talks to Wanda Jelonkiewicz and Andrzej Ratajczyk.


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 uses.
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 competitiveness.

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 Polish currency?

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 exchange markets.

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 growth.

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.