of the banking system
President, National Bank of Poland
OverviewPoland's membership of the OECD marks the completion of the first stage of systemic transformation in our country. When it started, the macroeconomic structures were unbalanced, the monetisation of our economy was poor, and inflation continued to grow. Economic reform and restored external and internal credibility were considered to be the preconditions of long-term growth. As a result of the radical economic reforms started by Leszek Balcerowicz and continued by subsequent Governments, GDP has risen to record levels.
The Polish banking system played a significant role in restoring the country's capacity to develop. It pressed for the financial discipline of businesses during the transition period, thus attempting to make the economy more market-oriented. Banks fully participated in the process of transforming our economy from a centrally planned to a market one. They restructured their bad loans, became privatised and successfully prevented their new assets from lying idle.
The role and function of the banking system expanded, with the Stock Exchange, the central bank and commercial banks being its main components. The new institutional and microeconomic infrastructure contributed to a more extensive use of production factors. The Polish zloty became convertible in all current account and in most of capital account transactions and there is a good chance that it will be fully convertible in the next few years. In this way, the basic short- and medium-term objectives set by the Polish reformers in the autumn of 1989 were met.
A different pathPoland, which has good reason to be called the tiger of Central Europe, has not followed the same path as the newly industrialised countries of Asia. We have implemented a policy of being open and integrated with Western structures in all fields: military - NATO; economic - the European Union; and intellectual - the OECD. 1997 is expected to witness the full development of this policy. Therefore, our economic and financial prospects will be more closely related to the economic conditions in Germany and in the markets. Increased interest rates in the US may reduce the pressure upon zloty.
The major internal problems to face in 1997 include a relatively low level of savings and the need for an increased share of investment in GDP. With old age and disability pensions now representing 15 per cent of GDP, the scope for decisions concerning economic and monetary policy is likely to be limited. On the one hand, monetary policy in 1997 must curb inflation by means of money supply control and, on the other, stimulate high GDP growth. These aims are not contradictory in the long run, but the correlation between interest rate and exchange rate policy is likely to be difficult.
A slow rate of growth leads to higher social costs of transition and to impaired socio-political conditions for implementing the central bank's monetary policy. Slow privatisation of state-owned companies and attempts to protect domestic agriculture from foreign competition may slow down the pace of economic growth, thus increasing the conflicts over allocation of the costs of adjusting our economy to the requirements of the unified European market.
In 1996, inflation reached the level of 18.5 per cent that exceeded slightly the projected 17 per cent. If the projected value turns out to be equal to the actual one, in 1997 we can assume 13 per cent inflation as measured by the Consumer Price Index from December to December. It should be borne in mind, however, that in Poland any reduction of inflation is determined predominantly by food prices and changes. The close proximity of huge, disturbed food markets in the East poses a real threat to the projected reduction in food prices.
Monetary policyIn 1997 the scale and complexity of the problems monetary policy faces will be greater than before. They will be caused mainly by the forthcoming parliamentary elections and by the so-called political cycle in the economy, which slackens the financial discipline of the state and family budgets under pressure from populist politicians eager to win votes. On the other hand, future confrontation between policy and pre-election promises may result in major initiatives:
Apart from external and internal factors affecting the planning and implementation of the monetary policy, there are also other considerations resulting from the present condition of the banking system which make macroeconomic policy objectives more difficult to establish.
Rate of growth of GDP, inflation and money supply, 1992-96 (%)
The data presented in the above table shows that the Ministry of Finance, which is responsible for the preparation and performance of the national budget, tends to underestimate inflation. Therefore, because tax rates are dependent upon inflation projections, the projected budget deficit is not exceeded.
At the same time, the Ministry of Finance is interested in lowering the costs of internal debt servicing by means of a gradual reduction of the real profitability of the securities issued by the Treasury. Since they are purchased by credit institutions, the actual profits generated by banks may be significantly reduced as compared to the projected ones. As a result, the smooth functioning of financial institutions may be disturbed.
The central bank must prevent sudden drops in interest rates in the interbank money market because they can lead to negative real interest rates on deposits and a resultant outflow of bank deposits. In this way, the tendency to keep deposits with credit institutions may disappear and the system of financial settlements within the economic system may be disturbed.
The conflict of interest between the short-term objectives of the Ministry of Finance and the National Bank is quite natural and is present in any open market economy. According to the World Bank, Poland belongs to the group of countries in transition whose economic systems are most liberalised. Under the present circumstances we cannot use authoritarian methods to impose the upper limits of interest rates on deposits and loans. The intervention of the central bank must meet market economy requirements. The central bank should also consider the increasing share of foreign capital in the Polish banking system. An uncontrolled inflow or outflow of foreign capital may adversely affect the stability of the banking system. That is why, in 1997, the policy of granting licences will continue. It encourages foreign capital to enter the Polish market. Instead of branches of foreign banks being opened in Poland, capital is invested in the existing Polish banks. We are going to watch the development of services rendered by overseas banks in Poland very carefully.
It is difficult to combine the liberalisation of the capital market and money market with the growing convertibility of the domestic currency. We remember the conflicts and tensions within the banking systems of Chile and Mexico. Fully aware of these difficulties, we have decided to lower both the base rates and the level of required reserves kept by commercial banks. This policy has been criticised by exporters who are not interested in lower costs or improving the quality of their products. We are fully convinced that only a wider use of market mechanisms in implementing the central bank's monetary policy will ease these difficulties and contribute to well-balanced growth.