Optimistic growth outlook amidst worries over public finances

Poland’s public finances have deteriorated since 2019 but should remain manageable until 2025. Strong economic growth supported fiscal consolidation in 2014 to 2019 despite a moderately lax fiscal policy stance at the time. Fiscal deficits were low and public debt fell from 56% of GDP in 2013 to 46% in 2019. A huge fiscal stimulus program against the backdrop of the Covid-19-induced recession reversed that trend in 2020. The government posted a fiscal deficit of -6.9% of GDP and public debt rose back to 57% of GDP. The economic rebound in 2021 and high inflation in 2022, which raised nominal GDP, lowered the debt-to-GDP ratio back to 49%. In 2023, increased spending on defense, public sector wages and social benefits as well as some pre-election stimulus widened the fiscal deficit to -5.1% of GDP. With the new government likely to be more cooperative with the EU than its predecessor, it may embark on some fiscal consolidation to comply with the EU fiscal rules. This provides the opportunity to unlock EU funds of up to 14% of GDP until 2027, which will boost investment and economic activity and thus lower the fiscal deficit and public debt to GDP ratios to some extent. We forecast that the annual fiscal deficit will narrow gradually to approximately -3% of GDP by 2028 and public debt will stabilize at about 56% of GDP.

Poland’s external finances improved in 2023 after they had deteriorated in the previous three years. The current account balance posted manageable annual deficits of -1.2% and -2.4% of GDP in 2021 and 2022, respectively, mainly driven by surging energy import prices. The moderation of these prices in 2023 combined with faltering imports in the wake of subdued domestic demand moved the current account back into a surplus of +1.5% of GDP in 2023. We forecast a continued but smaller surplus in 2025 as imports are expected to recover somewhat stronger than exports, but see deficits again widening from 2026 onwards. On another positive note, foreign exchange (FX) reserves have steadily recovered as well after they declined from mid-2021 to end-2022, largely due to the financing of the external deficit during that period. Current reserves cover almost five months of imports and, in other terms, more than all external debt payments falling due in the next 12 months – both of which are comfortable ratios. Meanwhile, the gross external debt to GDP ratio has fallen to 51%, down from 63% in 2020, and is expected to fall further; it is already now one of the lowest ratios compared to peers in Central and Eastern Europe.