The worst is over but the recovery will be mild

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 around -7% 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 an estimated -5% of GDP. Looking ahead, the deficit is unlikely to narrow much in 2024 owing to the large spending pledges of the new government. However, the latter is likely to be more cooperative with the EU than the previous government and may also embark on some fiscal consolidation after 2024, to comply with the EU fiscal rules. This provides the opportunity to unlock EU funds of up to 14% of GDP over 2024-2027, which will boost investment and economic activity and thus lower the fiscal deficit and public debt to GDP ratios beyond 2024. We forecast that the annual fiscal deficit will narrow gradually to approximately -3% of GDP by 2028 and public debt will stabilize at about 52% of GDP.

Poland’s external finances improved in 2023 after they deteriorated in the previous three years. The current account balance posted manageable annual deficits of -1.4% and -3% of GDP in 2021 and 2022, respectively, driven by surging energy import prices. The moderation of these prices in 2023 combined with faltering imports in the wake of subdued domestic demand has moved the current account back into an estimated surplus of around +1% of GDP. We forecast continued but smaller surpluses in 2024-2025 as imports are expected to recover more strongly than exports. On another positive note, foreign exchange (FX) reserves have recovered as well after they declined from mid-2021 to end-2022, 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 just below 50%, down from 63% in 2020 and is now one of the lowest ratios compared to peers in Central and Eastern Europe.