Market Analysis

"Poland faces significant fiscal challenges amidst rising expenditure demands for infrastructure, climate resilience, and security costs linked to the Ukraine conflict, according to a senior International Monetary Fund (IMF) official.

Under Prime Minister Donald Tusk's pro-European Union administration, public sector wages, social benefits, and the minimum wage were substantially increased this year to rebuild voter trust following eight years under the nationalist Law and Justice party (PiS).

The European Commission projects Poland's budget deficit to reach 5.4% of gross domestic product (GDP) this year, one of the highest in the European Union, with expectations it will exceed the EU's 3% GDP threshold next year.

Geoff Gottlieb, the IMF's Senior Regional Representative for Central, Eastern and South-Eastern Europe, emphasized the need for Poland to reduce its current fiscal deficit over time to prevent further increases in public debt and to comply with new EU fiscal regulations. He highlighted that a strengthening economy and higher-than-targeted inflation would argue for earlier rather than later fiscal tightening.

Poland, which allocated nearly 4% of GDP to defense spending last year, double NATO's guideline of 2%, recently announced a 10 billion zloty ($2.49 billion) initiative to fortify its eastern border due to perceived security threats from Russia and Belarus.

Economists at ING noted a significant rise in borrowing requirements this year, driven not only by expansive fiscal policies but also by record debt repayments and subdued demand for Polish government bonds (POLGBs). They foresee potential for additional Eurobond issuances beyond previous estimates of just under $16 billion.

Warsaw is seeking exemptions from EU deficit regulations, citing high spending needs that have hindered the implementation of Prime Minister Tusk's costly election promise to raise the income tax-free allowance, estimated to cost 1.3% of GDP.

Despite winning narrowly against the Law and Justice party in the recent European Parliament elections, Tusk's Civic Coalition faces another critical electoral test with a presidential ballot scheduled by late 2025.

IMF's Gottlieb stressed the importance of stringent fiscal discipline in light of Poland's growing expenditure obligations, suggesting that further discretionary spending increases should be approached cautiously to avoid exacerbating fiscal challenges elsewhere. He welcomed Poland's efforts to revise its fiscal rules, seeing it as a crucial step in anchoring future public finance decisions.

Poland's finance ministry forecasts that general government debt will climb to 60.6% of GDP by 2026 and 63.2% by 2027, surpassing the constitutional limit of 60%. Finance Minister Andrzej Domanski has pledged measures to enhance transparency in public finances, including the establishment of a fiscal council to oversee government policies."

Paraphrasing text from "Reuters" all rights reserved by the original author.