Poland: Bright Spot in Recession-Hit Europe

• Author: Delia Velculescu
• Position: IMF European Department

The IMF is projecting a small contraction of about ¾ percent for 2009, based on a weak outlook for global trade and further expected declines in domestic investment, credit, and wage growth. In its regular review of the Polish economy, the IMF expects a modest recovery of about 1½ percent in 2010, although that is predicated on a recovery in the global economy.

The global economic crisis has hit Europe with full force. With trade and financial markets collapsing late last year, and consumer and business sentiment plunging, most economies contracted in the last quarter of 2008 and first quarter of 2009. This year, growth is expected to decline by close to 5 percent in the euro area, and countries such as Bulgaria, Romania, and the Baltics are likely to experience particularly sharp recessions.

While Poland has not emerged unscathed from the crisis, it has fared much better than its neighbors (see Chart 1). Following the demise of U.S. investment bank Lehman Brothers, the Polish interbank market froze, as happened elsewhere. Credit default swap (CDS) spreads rose, and the zloty quickly lost close to a third of its value.

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But Poland's growth remained slightly positive in the last quarter of 2008 and first quarter of 2009, helped by resilient consumption growth and the economy's limited exposure to the decline in world trade-Poland's domestic economy is large and relatively closed compared to other similar countries, with exports playing a much smaller role.

Reaping the benefits of sound policies

Why is Poland different? To be sure, its flexible exchange rate regime has served it well by facilitating the economy's adjustment to the external shock. Also, the approval of an IMF credit line for Poland earlier this year-a new instrument known as the Flexible Credit Line-helped calm markets. The zloty stabilized at its new lower level, CDS spreads declined, and the government-which, throughout the crisis, had maintained access to international markets-saw a decline in the interest rate it was paying on its bonds.

But, most importantly, Poland's resilience owes much to sound economic policies that have helped the country avoid the buildup of large external and internal imbalances seen elsewhere in central and eastern Europe (see Chart 2). Because Poland entered the crisis...