Poland must pursue proper fiscal reforms rather
than banking on privatization proceeds to plug the gaping
public deficit, Leszek Balcerowicz, a founding father of the
Polish market reform, has said.
His comments come as the countrys finance minister has
told Emerging Markets that proceeds of higher growth
and sale of state assets will bridge the budget gap.
Privatization should not be a substitute for proper
fiscal reforms because we need to cut spending to GDP
levels, Balcerowicz, the former Polish central bank
governor, said in a telephone interview yesterday.
Although Poland is the only country in eastern Europe that
will avoid a recession this year, revenues have plunged as
exports have collapsed. The general government deficit may
increase to 5.5% of GDP this year and 6.3% in 2010, according
to ratings agency Fitch.
Analysts say banking on the proceeds of higher growth and
privatization sales to plug the budget gap is risky, given the
fragility of global markets.
But Polands finance minister Jacek Rostowski in a
recent interview with Emerging Markets said the
very positive performance of global stockmarkets
gave him confidence that foreign investors would
snap up Polish state assets.
If this strategy fails, the Polish government may break the
constitutional limit that caps the ratio of government debt to
GDP at 55%.
Rostowski said the government was absolutely
committed to ensure this limit would not breached. He
argued that a projected central government deficit next year of
52 billion zloty would be covered primarily by privatization of
key assets that should generate up to 36.7 billion zloty by the
end of 2010.
However, the minister ruled out a removal of tax cuts
a stance that will increase the structural deficit. Wage
increases for teachers and infrastructure spending are also on
the cards. He added that belt-tightening measures would kick in
Balcerowicz, who in the 1990s led the countrys
trail-blazing economic liberalization (shock
therapy), said privatization was a good thing to
increase productivity. However, he said the government
needed to enact structural fiscal reforms to address the
expansionary fiscal policies took place between 2005 and
2007 as well as pursue labour market reforms.
In other comments, Balcerowicz, the only central and eastern
European member of the Group of Thirty, called for better
macro-prudential regulation of the banking sector to
ensure credit to GDP growth does not grow too fast.
Poland has been spared the brunt of the global banking
volatility due to imposition of curbs on credit growth and bank
capital and liquidity levels during his tenure at the central
bank, he said. To my knowledge we were the only ones in
the region to impose such strong macro-prudential
In the bull run, policymakers were hesitant to curb credit
expansion, as this would undermine economic growth. However,
much of central and eastern Europe, in particular, is suffering
the ill effects of global deleveraging as the regions
growth was primarily driven by credit-fuelled domestic
consumption by Western banks.
To avoid a further global crisis, monetary policy needs to
consider potential asset bubbles as well as fiscal prudence,
Balcerowicz said. It is no accident that countries
that have suffered the worst effect of the crisis had
expansionary fiscal policies.