How the global crisis hit Poland
The recent economic and financial crisis originated in the US where monetary excesses, partly caused by FED easy monetary policy in the period 2001-2007 (see Picture 1) , prompted a housing boom, which in turn led first to financial markets turmoil, and then to the real economy crisis that spread worldwide between 2007 and 2008. The first symptoms of financial crisis were observed on the USA mortgage market already in the first half of 2007, but only with the collapse of Lehman Brothers in September 2008, the crisis extended from the financial sector to American real economy, and from there it broadened globally.
The financial turmoil hit Poland in late 2008. Following the inception of the crisis, the country experienced a rapid capital outflow, a significant depreciation of the zloty, and a freezing of the interbank market. The subsequent decline in credit growth, combined with lower exports, contributed to a marked decline in GDP growth. Nonetheless, Poland turned out to be one of the most robust European economies as it was the only one not to contract during the crisis and its aftermath.
Impact on actual and potential growth
Since Poland's accession to the EU, from 2004 until the middle of 2008, Poland registered strong economic growth, with GDP growth getting to its highest point in 2007 with a 6.8% increase. This upward trend was interrupted in 2008, when GDP increased only by 4.9% (see Picture 2). Specifically, after the first three quarters of the year displaying economic growth at 5.7%, a clear slowdown was observed in the last quarter of 2008 and first quarter of 2009, when growth rate started dropping (2.9% and 0.8%). In the second quarter of 2009 GDP recorded a +1.1% growth rate, showing the first signs of recovery (see Picture 3).
According to the National Bank of Poland (NBP) “Inflation Report” issued in February 2010, last data available indicate that GDP in real terms increased by 1.7% y/y in the third quarter of 2009 (as compared to 1.1% y/y in the previous quarter), and preliminary estimates set that GDP growth increased to 2.9% y/y in the last quarter of 2009.
Domestic demand, which has been the main growth factor of GDP in the last few years, experienced gradual decrease in its growth rate, from 7.3% in the first quarter to 3.5% in the fourth quarter. The overall annual growth rate was 5.4% (compared to 8.7% in 2007).
One of the main components of domestic demand growth rate in 2008 has been total consumption, which increased by 5.9% in the same year, mainly driven up by individual consumption. Indeed, individual consumption was spurred by the 3.7 % rise in employment and 6 % rise in real salary observed in the course of the year.
The positive effects of consumption were partly counterbalanced by the other main component of domestic demand, i.e. investments. Indeed, the high acceleration of investments recorded since 2006 continued throughout the first half of 2008, when they increased by approx. 15%; while in the second half they increased by mere 4%. All in all, the annual increase of investment capital in 2008 was 8.2%, as compared to 17.6% in 2007. The increase in investment in 2008 basically resulted from continuing investment processes from previous years, which compensated the effects of economic recession and credit tightening that in turn reduced new investment undertaking.
An increase in the growth of real disposable income was conducive to further development of consumer credit market, with simultaneous increase in household deposits. The nominal growth rate of household credit increased from 139% in 2007 to 145% in 2008. According to the Polish National Bank, the real increase rate of household credit was over 30% in 2008. In the second half of 2008, financial markets suffered the consequences of the crisis, which brought to limitation of credit granting and freezing inter-bank markets. The reluctance of interbank markets basically mirrored the difficulties in global financial markets.
In the first half of 2009, a drop in domestic demand was brought about by the deterioration of the economic climate, and in particular by the further slowdown in consumption growth and a fall in investment. The slow consumption growth was mainly the result of low growth in household disposable income, connected to a deterioration in the labour market situation, and clearly slower growth in consumption loans. On the other hand, investments decline eased off in the third quarter of 2009 and in the last quarter there was a rise in investments in year-on-year terms. After four quarters of strong inventory reduction, in the last quarter of 2009 this trend was significantly curbed, which resulted in the change in inventories having only minor negative contribution to GDP growth. This eventually drove GDP the annual growth up in the second half of 2009.
Impact on public finance
Further to the comprehensive reforms and restructuring activities pursued in the 1990s, which required substantial funds and placed a heavy burden on the public finance sector, in recent years the situation in terms of public debt and deficit had significantly improved, until the economic slowdown and world crisis of 2008/2009 let to a new significant deteriorated.
State Budget receipts
In 2008 the actual state budget receipts were lower than planned. They amounted to Polish Złoty (PLN) 253.5 billion. As compared to 2007, the state budget receipts grew by 7.3% in nominal terms, and by 2.9% in real terms. The ratio of budgetary revenue to GDP in 2008 was 19.9%.
The state budget tax receipts accounted for 86.6% of total receipts (amounting to PLN 219.5 billion) and were 3.8% lower than the amount planned in the Budget Act, mainly due to lower than expected receipts on indirect tax. Conversely, the non-tax receipts amounted to PLN 19.3 billion, which accounted for 7.6% of total state budget receipts, and exceeded by PLN 0.9 billion (4.9%) the planned non-tax receipts.
State Budget expenditure
The total state budget expenditure in 2008 amounted to PLN 277.9 billion. Compared to 2007, the expenditure was higher by PLN 25.6 billion, i.e. by 10.1% in nominal terms and by 5.7% in real terms. The share of executed state budget expenditure in the estimated GDP accounted for 21.9% in 2008. At the time of planning the budget, it was estimated that its share in the budget would amount to 24.8%.
In 2008 fixed expenditures, i.e. required under statutory provisions or legally binding commitments entered into previously, represented 72.7% of total expenditures. The current structure of budgetary expenditure is hence limits the possibilities of the government to model the level of budgetary deficit.
Primary (budget) deficit
The general government deficit in Poland reached 3.9% of GDP in 2008, above and not close to the 3% reference value set by the Stability and Growth Pact.
Since Poland's general government deficit over the past five years averaged 4.3% of GDP; while at the same time GDP growth on average exceeded 5%, the breach of the threshold might reflect the fact that throughout public finance consolidation, i.e. deep reforms on the expenditure side, were only partly carried out.
According to Ministry of Finance last estimates, the general government deficit in relation to GDP according to ESA95 reached 7.2% in 2009. The growing fiscal imbalance is, on the one hand, the consequence of the slowdown of economic growth which has led to a significant deterioration in the sector's revenues, and, on the other hand, of the rise in the structural deficit in 2008-2009. The central budget deficit in 2009 reached PLN 23.8 billion (as compared to PLN 24.4 billion in 2008), which constitutes 84.9% of the annual plan following the amendment of the Budget Act for 2009.
At the end of 2008, the debt amounted to PLN 597.8 billion, which accounted for 47% of GDP, and the rise in debt, as against the previous year, amounted to 13.3%. At the end of May 2009, the State Treasury debt amounted to PLN 602.5 billion - 5.7% more than at the end of 2008. One of the determinants of public debt increase is the zloty exchange rate depreciation observed between 2008 and 2009.
Impact on labour market and employment
Despite a noticeable improvement on the labour market since 2004, the Polish economy still faces the problems of low employment rate and significant mismatch between labour demand and supply, in particular it experiences a surplus of low-qualified and a shortage of highly-qualified workers. Structural mismatch results mainly from a relatively low flexibility of the Polish education and salary systems. The former is inadequately developed to provide adults with professional mobility; whereas the latter, in the government sector in particular, is little sensitive to changes in the relation between the labour demand and supply on the market. Spatial concentration of unemployment, caused by a relatively low mobility of labour force, also leads to structural mismatch. Underdeveloped regions, where labour demand is lower, have highest unemployment rates in the country. At the same time, there are shortages of workers in dynamically developing regions, in large urban agglomerations in particular.
In 2008, the average unemployment level in Poland was 1 211 thousand persons, i.e., 7.1% of economically active people, with the unemployment rate of 8.0% for women and of 6.4% for men. Compared to 2007, the number of the unemployed dropped by 25.0%.
According to the registered unemployment statistics, 1 473.8 thousand persons remained out of work at the end of 2008. The registered unemployment rate was 9.5%, i.e., 1.7 p.p. lower than in 2007. The most significant economic factors, which determine the labour market, include, among other things, the rate of economic growth and investment.
The slowdown in economic activity observed in the first half of 2009 was accompanied by a diminishing demand for labour, bringing about a drop in employment and a rise in unemployment. This led to a significant deceleration in the growth of wages and unit labour costs. The economic slowdown also resulted in raising general government sector imbalance.
Despite improved economic climate in the second half of 2009, the unfavourable situation persisted in the labour market, whereas a further rise in unemployment rate was observed. The past few months, however, have brought some signs of a gradual deceleration of negative tendencies. Specifically, the third quarter of 2009 showed a deceleration in the reduction in the number of working hours and the fourth quarter brought a stabilisation of employment in the enterprise sector. At the same time, following a decline started in 2008 Q4, the growth rate of nominal and real wages in the economy stabilised in 2009 Q3 and Q4. The rise in labour productivity growth, however, led to a further decline in the growth of unit labour costs.
Despite an anticipated slight recovery in economic activity in 2010 the demand for labour is expected to remain low due to, among other things, delayed response of the labour market to changes in output.
Impact on trade balance
Export of products and services has been another important factor of economic growth in the years 2007-2008. The stable impact of export on the economic growth was maintained until the third quarter of 2008.
In the last quarter of 2008, its impact on the economic growth was slightly negative. Indeed, as a consequence of the recession on markets of Poland's trade partner (mainly Germany and the rest of Eurozone), the external imbalance of Polish economy increased, with the net exports negatively affecting GDP growth. However, as a result of the dramatic decrease in domestic demand in the first quarter of 2009, imports dropped significantly and hence net export recorded a positive effect on GDP. After that, since 2009 Q2, Polish exports have been gradually growing as the global economic climate has been improving. The increase in the growth rate of Polish exports was supported by a continued recovery in the export sector of the euro-area as well as a slower pace of inventory reduction in this economy. At the same time, the volume of imports increased in 2009 Q3, driven by a recovery in Polish exports that are characterised by relatively high import intensity and the appreciation of the zloty since March 2009
Since the beginning of the decade, Polish exports had been prompted up by the increasing competitiveness of products, mainly resulting from real unit labour cost reduction. In 2008, the downward trend of unit labour costs reversed and it is estimated that the costs increased by 3.5%.
In addition, the breakdown in domestic demand on major EU markets, which took place in the fourth quarter of 2008, negatively affected Polish commodity exchange in the last 2 months of 2008, as well as in the subsequent months of 2009. While in the 1st - 3rd quarter of 2008 Polish exports (in EUR) rose by 19.8%, i.e. by 4 p.p. faster than in 2007 and by 3 p.p. faster than the average rate in 2001-2007, in the 4th quarter of 2008 it fell by 1.2%, which resulted from exports breakdown in November and December 2008. Consequently, the average yearly exports growth rate in 2008 slowed down to 14.1%, i.e. it was by 1.7 p.p. lower than in 2007.
Further to the severe fall in exports of the first two months of 2009, the next months of 2009 saw some stabilisation, and even a slowdown in the exports fall rate.
The fall in exports was followed by a fall in imports, sharper with every subsequent month. After a relatively dynamic growth in the first three quarters of 2008 (growth in EUR reached nearly 23.8%, and was faster by 4 p.p. than in exports), a slowdown to 3.7% was recorded in the 4th quarter. As a result, the average imports growth rate in 2008 decreased to 18.3%, i.e. remained 4 p.p. higher than in exports. However, as predicted by the Ministry of Economy, from the beginning of 2009, the imports fall rate started to outdistance that of exports. When the trend to higher imports growth rate, which lasted for three years, was reversed, the fall of imports in the 1st quarter of 2009 (by 26.8%) was almost 7 p.p. deeper than of exports. The disproportion became even bigger in April and May 2009.
The import slowdown is of relatively long-lasting character, and it is strongly connected with the crisis, e.g. through the fall in world prices of raw materials (especially energy resources), the decrease in FDI and cost shock in imports caused by deep zloty depreciation, especially in the situation of more difficult access to bank loans.
Apart from the different negative implications for Polish economy and foreign trade conditions, the crisis brought about a significant reduction of an exceptionally high and dynamically growing commodity trade deficit of the last few years.
The commodity trade deficit, which, after 3 years of dynamic growth, reached an unprecedentedly high level of EUR 26.2 billion at the end of 2008, was reduced during 5 months of 2009 to almost EUR 3.3 billion. It means that the average monthly level of deficit was reduced from EUR 2.2 billion in 2008 to EUR 0.7 billion in 5 months of 2009, i.e. 3.1 times.
Following a considerable improvement in the current account balance in 2009 Q1, mainly connected with a strong reduction in imports of goods, subsequent quarters saw a deepening of the current account deficit. On the other hand, according to preliminary estimates the current account deficit (in terms of four quarters) decreased to 1.6% of GDP at the end of 2009 (as compared to 5.1% at the end of 2008), while a small surplus of 0.1% of GDP was observed in the total current and capital account (as compared to a deficit of 4.0% of GDP at the end of 2008).
Apart from the unit labour costs, foreign currency prices and currency exchange rate also determine the competitiveness on foreign markets by affecting transaction prices in exports and imports.
Since the beginning of 2007 until the summer of 2008, PLN appreciated against EUR, which had a negative effect in the competitiveness of Polish products on foreign markets. In the second half of 2008, PLN depreciated by ca. 30%, with further depreciation in the first months of 2009.
The decrease in foreign currency prices in exports by 12.4% in the first quarter of 2009, as compared to the third quarter of 2008, was more than compensated to exporters by a relatively sudden and deep depreciation of PLN, which occurred after the crisis reached Poland. Transaction prices for exports increased in the first quarter of 2009 by 21.4% as compared to the third quarter of 2008, i.e. the period before the crisis. Such a significant rise in transaction prices, despite a quite significant fall in foreign currency prices, caused by the crisis, was possible due to a deep depreciation of PLN in relation to the main foreign currencies - also as a direct consequence of the crisis.
Consequently, the fall of PLN was a very favourable buffer, which mitigated negative effects of the bad economic situation and of the fall in foreign currency prices on the financial situation of many exporters, in particular SMEs.
At the same time, a significant and rapid depreciation of PLN resulted in a serious price shock in imports, in particular in imports for the domestic market and in supply imports meant for production for exports with a relatively long production cycle. Despite the fall in currency prices in imports (by over 9% in the 4th quarter of 2008 and by 7.9% in the 1st quarter of 2009), transaction prices in imports in the 4th quarter of 2008 and in the 1st quarter of 2009 rose by 6% and 9.3% respectively. This reduced the effect of global economic slowdown on export, and significantly limited the growth rate of import.
Depreciation of the zloty continued until February 2009, when the exchange rate appreciated significantly, though the scale of the appreciation was smaller than the earlier depreciation.
Impact on inflation
A revival both in consumer and investment demand, and the increase in global food and fuel prices, initiated the acceleration of prices towards the end of 2007.
The average annual inflation, as measured by Consumer Price Index (CPI) growth rate, in 2008, which amounted to 4.2%, was higher than expected and assumed in the Budget Act, but also than that observed in the previous year (2.5%). Its growth was mainly driven by high prices of energy resources and food on global markets, and as well as by the increase in domestic demand and wage pressure. The increases in interest rates in 2007 were continued also in the first half of 2008, and consequently brought a decrease in inflation. In the first half of 2008, a gradual acceleration in the annual growth of consumer prices was observed - from 4.0% in January 2008 to 4.8% in July and August. The rise in prices in December 2008, as compared to previous December, was lower than in the previous year (3.3%).
In the first half of 2009, despite some easing of the demand pressure in the economy -inflation was close to the upper limit for deviations from the NBP's inflation target, set at 3.5%. This was primarily the result of a significant increase in administered prices, including energy prices, and a rise in excise tax rates as well as rising prices depending on the exchange rate of the zloty. The inflationary effect of those factors was not fully offset by the reduction of the demand pressure connected with the economic slowdown.
Following a decline in October 2009 to 3.1% y/y, inflation rose gradually, reaching (according to preliminary data) 3.6% y/y in January 2010. The growth of annual inflation in 2009 was driven by the positive base effect connected with a strong decline in fuel prices a year before. Heightened annual inflation was also driven, to a large extent, by past increases in administered prices and by the earlier excise tax hikes. Inflation remained at an elevated level also because of the rapid, albeit weakening, growth in prices deriving from earlier depreciation of the zloty.
In 2009, inflation recorded a 3.5% rate, while expectations for 2010 are for a further decrease at 1.8% (see Picture 4). The year 2010 is expected to observe a decline in inflation due to persisting low demand pressure, limited wage increase and fading out of inflationary effects of the growth in administered prices and the depreciation of the zloty observed in the second half of 2008 and at the beginning of 2009.
To sum up
The dynamics of economic growth recorded in 2008 were lower than in the previous year. The GDP increased by 4.9% compared to 6.8% in 2007. The situation of State Budget was better than assumed in the Budget Act, while the situation in balance of payments deteriorated. The relation of current account deficit to GDP increased from 4.7% in 2007 to 5.5% in 2008. 2008 was also a subsequent year in a row when the deficit in Polish foreign trade increased.
While analyzing the demand factors of the economic growth, it should be noted that the economic growth in the first half a year of 2008 was balanced. It was based on private consumption, investment capital, as well as on exports (despite the unfavourable PLN appreciation). In the second half of the year, the two latter factors decreased, with the consumer demand remaining the primary economic driver. The decrease in investment demand and PLN depreciation contributed to the reduction of the growth rate of import
IMF projects a mild recession in 2009 and a slow recovery in 2010. Domestic demand is likely to contract further, as private investment retrenches, consumption wakens, unemployment rises, and credit and wage growth recede. Consequently, the mission projects GDP to decline by about ½ percent in 2009 and to only recover modestly by about 1 percent in 2010. With imports declining faster than exports, we expect a significant decline in the current account deficit. Inflation is expected to continue to ease.
Authorities response to crisis: fiscal and monetary policies
· Monetary policy
The Monetary Policy Council (MPC) is the body of the NBP in charge of setting every year the bases of monetary policy by establishing, among the others, the level of interest rates. The main goal set forth in the last years' Monetary Policy Guidelines is to keep inflation near the permanent mid-term inflation target of 2.5% with a symmetrical tolerance range for deviations of ± 1% point
In October 2008, taking into account the world markets situation, the NBP adopted a Confidence package, containing a number of measures aimed at:
- making possible for banks to acquire national currency for more than one day,
- making possible for banks to acquire foreign currency,
- increasing the possibility of acquiring liquidity in PLN by banks through extending collaterals for transactions with the NBP.
The NBP started to supply the banking sector with domestic liquidity through repo transactions with up to 3 months maturity, and continued issuing 7-day money bills as the basic instrument for absorbing over liquidity. At the same time, the NBP extended the range of assets which could constitute collateral for refinancing operations with the NBP, and made it possible for the banks to obtain currency liquidity in currency swap transactions.
· Instruments of monetary policy implementation
The short-term interest rate was the main instrument used by the National Bank of Poland in 2008 to implement the Direct Inflation Target Strategy. In order to achieve the inflation target, the MPC changed the NBP interest rates six times. The interest rates were raised four times (by 100 base points in total) until November, when the MPC decided to reduce twice (also by 100 base points in total). Consequently, the main NBP interest rates reached the same level as in the previous year: the reference rate 5.00%, the Lombard rate 6.50%, the deposit rate 3.50%, and the rediscount rate 5.25%. In the first half of 2009, central bank further lowered its key policy rate by 25 basis points, to 3.5% reference rate in June (see Picture 5).
In the situation of growing uncertainty and lack of confidence on the inter-bank market, the banks - due to caution - left high surpluses on their own accounts, which led to a decrease in overnight currency price. Furthermore, the monetary policy was tightened also to address the high level of inflation related, inter alia, to a significant growth in the dynamics of food and fuel prices, as well as due to forecasts that wage and inflation pressure will continue.
According to Goldman Sachs analysts, the central bank of Poland will be the first in eastern European countries to raise interest rates this year, but without rushing. Poland's repo rate will probably stay at 3.5 percent until the second half of the year 2010, when policy makers might raise it to 4 percent in two steps.
Open market operations
Open market operations are the main instruments enabling to keep short-term interest rates at a level in line with the inflation target set by the MPC. The NBP may apply basic, fine-tuning and structural operations.
In 2008, as part of its basic open market operations, the NBP issued once a week money bills with maturity date of 7 days. The measures related to implementing the Confidence package also included fine-tuning operations, such as repo transactions, providing liquidity to the banking sector. In 2008, six repo transactions were conducted. In average yearly terms, the level of repo transactions amounted to PLN 2.1 billion. At the end of 2008, the banking sector received PLN 15.3 billion from repo transactions.
The NBP also issued additional money bills for shorter periods than the maturity date of basic operations. Initially, only 13 most active banks had access to fine-tuning operations, but since November all banks which fulfilled the conditions necessary for participating in basic operations had access to them. There was no need to change the long-term liquidity structure of the banking sector, and the NBP did not conduct any structural open market operations.
In 2008, the reserve rates were not changed and amounted to 3.5% of total liabilities, except for the reserve ration for funds received from repo transactions was 0%. The level of required reserve as at 31December 2008 amounted to PLN 21 billion and, as compared to the state as at 31 December 2007, it grew by PLN 4 billion (24.3%). The growth in reserve requirement was largely determined by the growth, by 23.4%, of the deposits constituting the basis for its calculation.
Standing facilities are aimed to prevent fluctuations of the interbank interest rates. These operations include the deposit facility and the lombard facility. These operations are initiated by commercial banks and they are a source for a short-term supplementation of the banking sector liquidity, and also allow banks to make overnight deposits of heir surplus liquidity with the NBP. The total amount of overnight deposits placed by the banks in the NBP equalled PLN 520.1 billion and was 2.5 times higher than in 2007. The average overnight level of deposit at the end of the day amounted to PLN 1.4 billion, as compared to PLN 0.5 billion in the previous year.
The total amount of lombard facility used per year amounted to PLN 5.2 billion as compared to PLN 6.7 billion in 2007. The average overnight level of the facility used amounted to PLN 14.3 million as compared to PLN 18.5 million in 2007.
In 2009 the NBP also carried on with its activities (initiated in October 2008) to support the stability of the financial sector, while simultaneously preventing an excessive reduction in lending and, consequently, the curbing of domestic demand. In 2009 these activities included, among others, buying back its own bonds before their maturity, further broadening of the range of assets acceptable as collateral for the NBP refinancing operations and the extension of the maturity of repo operations to 6 months.
· Fiscal Policy
As to fiscal policy, the room for manoeuvre has been limited, because policies were pro-cyclical before the crisis and when crisis began fiscal conditions were not favourable.
After leaving the first excessive deficit procedure on 8 July 2008, at the end of 2008 the share of general government deficit in GDP once again exceeded the reference threshold of 3%, reaching 3.9%, while the general government debt-to-GDP criterion remained substantially below the acceptable threshold (60%), i.e. at 47.1%. Consequently, on 24 June 2009 the EC initiated another excessive deficit procedure against Poland, setting 2012 as the current deadline for correction. According to the Commission's economic May forecasts, this deficit in Poland will rise to 6.6% of GDP in 2009, and 2010 deficit will exceed 7%.
Thus, the extent to which the deficit can be allowed to increase as the economy weakens depends on the credibility of the medium-term consolidation plan, which is designed to allow the country to meet the Stability and Growth Pact fiscal reference values.
Deficit growth, which will largely be the effect of automatic stabilisers, can create the risk of public debt exceeding subsequent prudential thresholds. To reconcile short-term cyclical needs and medium-term sustainability considerations, it would be advisable to take steps to strengthen confidence in commitments to medium-term targets, such as a revised more-realistic euro-adoption timetable or measures aimed at reducing deficit in subsequent years. Possible options to reduce deficit could be reforms in the area of social spending, to better target child deductions in the personal income tax, disability contributions, and pension indexation, which recently drove up fiscal costs.
So far however, no fiscal consolidation measures have been announced for 2010 by the authorities.
· Employment policy
A major step taken to sustain job market recovery has been represented by the adoption in 2009 Q3 of the new employment regulations, which are expected to allow by the end of 2011for more flexible working time arrangements, hence supporting enterprises affected by the crisis.
Specifically, the proposed tightening of early retirement requirements will help Poland overcome its very low labor participation; at the same time, regulations which allow for receiving pension benefits while remaining employed are expected to contribute to growth in labour participation of the elderly.
Low demand for labour, combined with growth in economic activity, should be conducive to limiting wage growth, and, as a result, inflationary pressure. Despite low demand for labour, the upward trend in the number of the economically active is likely to continue also in 2010. This will be driven mainly by the persistent growth in the number of working-age persons and the diminishing scale of economic migration of Poles.
a.Explaining Poland's good performance
Poland macroeconomic performance has been quite good in recent years. Growth has averaged about 6 percent from 2006 to 2008, as membership of the EU bolstered business confidence and spurred investment, while private consumption kept growing strongly. Unlike many other countries in central and eastern Europe, Poland managed to relatively limit its dependence on international trade, while also keeping external debt stable at about 40-50 percent of GDP.
Basically, Poland entered the crisis with small internal and external imbalances. This was partly linked to the reform agenda carried on in relation to the recent EU membership, and partly explained by the solidity of its financial system, unleveraged private sector.
In addition to the country good macroeconomic conditions pre-existing the crisis, the Polish authorities' response to the crisis has been very effective.
Particularly successful has been the monetary policy conducted by the NBP, facilitated by a long-standing and effective inflation-targeting regime and a freely floating exchange rate. Thanks to its determined anti-inflationary focus, during the global crisis, Poland had leeway to stimulate its economy and the central bank was quick to embark on an easing monetary policy.
As to fiscal policy, the authorities decided to sacrifize their committment to the country's euro-adoption process by allowing deficit to grow. Indeed, an increase in deficit appeared unavoidable as the economy and tax revenues slowed sharply and help was needed to offset the sudden slump in demand due to external shocks.
Nonetheless, Poland did not escape the global financial crisis. Specifically, the country has been hit both through the export channel, as most of Poland's trading partners went into deep recession, and through the financial channel, which caused a significant slowdown in credit growth, hence hindering consumption and investment growth.
However, the mix between monetary easing, accommodating fiscal measures and exchange rate depreciation, strongly contributed to counteract the negative effects of global recession on Poland and keeping positive its growth rate.
 The MPC inflation target is measured by the Consumer Price Index (CPI), calculated as a change in consumer prices in a given month compared to the same month of the previous year.
 19/01/2010- Bloomberg “Poland Will Lead East Europe in Monetary Tightening (Update1)”
 The deficit-to-GDP ratio measured in market prices should not exceed 3% in the year preceding the evaluation whether the criterion has been met. The public debt-to-GDP ratio should not exceed 60% in the year preceding the evaluation.