Developments Since Transition Poland began its transition to a market economy in 1990 under exceptionally difficult macroeconomic conditions, marked by hyperinflation, a high rate of hidden unemployment, a large legacy of external public debt, a high black market foreign exchange premium, and an obsolete state enterprise sector. Polish policymakers liberalized prices, made the Polish Zloty convertible, lowered import barriers, and started privatization. Many predicted that Polish enterprises would not be able to cope with market conditions, leading to mass bankruptcy and social upheaval. On the contrary, thanks to competent policy management at the macroeconomic level and thorough restructuring of enterprises, Poland became a frontrunner among European transition countries. Recent Economic Performance After five years of strong economic performance, the global financial crisis has worsened Poland’s macroeconomic and fiscal outlook, even though Poland is faring better than other countries in the region. Declining demand for Poland’s exports, a slowdown of credit activity, and lower FDI inflows are impacting the economy adversely. Poland’s economy is relatively strong after five years of solid growth (4.8 percent in 2008) and historically low unemployment rate (7.1 percent in 2008). Inflation, the current account deficit (5.5 percent of GDP), external debt (56 percent of GDP), the fiscal deficit (2.7 percent of GDP) and public debt (46 percent of GDP) in 2008 are all moderate, and the foreign-dominated financial system is relatively sound and well-capitalized. Poland’s floating exchange rate regime is helping to absorb the external shock. Polish enterprises and households have moderate exposure to foreign currency risks. Poland’s financial system seems to be well-poised to cope with the current adverse external environment. Challenges Ahead Despite its recent progress, the country still faces significant economic challenges. A more efficient public sector is needed to support dynamic growth, investment in public infrastructure, and retreat from non-competitive sectors in which the government continues to be a big player. Institutional reform of public finance, completion of privatization, an overhaul of the judicial system, reform of the health sector, strengthening of the education sector, and achievement of nominal convergence on a sustainable basis permitting euro adoption are among key priorities. In addition, with fewer resources and in an economic environment that is evolving quicly, the Government faces the difficult challenge to reconcile three objectives: ensure fiscal consolidation over the medium-term, protect priority programs, and mitigate the social cost of the crisis. The government is also moving to support the economy and seeking to accelerate structural reforms. In late November, the government announced a 7% of GDP “Plan for Stability and Development” aimed at supporting the economy in 2009-2010. This included a doubling of the limit on state guarantees, support for lending to small and medium-size enterprises, acceleration of investments co-financed from EU structural funds, new investments in renewable energy, previously scheduled personal income tax cuts and VAT simplification, and creation of a Reserve of Social Solidarity to support people vulnerable to the projected economic slowdown. Economic policy objectives in the medium-term were set by the Government in the March 2008 Convergence Program and confirmed in the December 2008 Update of the program. These objectives are: (i) reduction of the tax burden (personal income tax reduction and simplification in 2009); (ii) increase of growth-enhancing expenditure (infrastructure, science, education, and R&D), shifting social spending towards programs supporting growth of economic activity, and changes in health and pensions aimed at enhancing efficiency; (iii) increase of labor activity; (iv) economic liberalization (elimination of obstacles to doing business, administration reform, and better functioning of judiciary); and (v) acceleration of privatization.
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