NATIONAL LAW UNIVERSITY JODHPUR

COURSE: FMRS
SEMESTER: 2ND LL.M.; STREAM: BANKING & FINANCE

PROJECT TITLE: Critical analysis of Economy of Poland during Financial Crisis

SUBMITTED TO:
DR. RITUPARNA DAS
SUBMITTED BYUJJWAL KUMAR

TABLE OF CONTENT

Serial Number

Chapter
Introduction

Page Number
3

1.
2

8
CHAPTER 1
POLISH
RESPONSE
FINANCIAL CRISIS

TO

10
1.1 INFLATION

11
1.2 FISCAL POLICY and DEFICIT
SPENDING
3

12
Chapter 2
Polands exceptional
performance during the world
economic
crisis:
New
growth
accounting evidence

Chapter 3

16

Foreign trade of Poland during the

global financial crisis
3.1 The situation on the current

17

account of the balance of payments in

the first years after Polands accession
to the European Union
3.2 The foreign trade in 2008 the

19

year of the outbreak of the global

financial crisis
3.3 Recent developments in Polands

21

foreign trade
Chapter 4

22

The Polish banking system during the

6
7

crisis
Conclusion
Bibliography

24
26

INTRODUCTION
The global economic crisis has had a profound effect on the public finances of many countries,
especially those in Europe. Unlike the majority of European countries, Poland has actually faired
very well in the face of this recession. Yet, despite optimistic remarks by the ruling politicians,
Poland is not immune to the effects of the crisis, and that includes its public finances. Like all
other EU countries in the last two years, Polands public debt has increased to dangerous levels
and the budget deficit remains high. This article provides some reflections through a closer look
at Poland and its response to the global financial crisis, with a special emphasis on the situation
concerning public sector finances. The author discusses the situation in Poland leading up to the
crisis and examines the situation faced by the Polish government after the onset of the crisis. This
article outlines various measures that were taken or are currently being taken to stem any further
effects of the crisis, such as raising the national value-added tax, the consolidation of public
finances at the sub-national levels, and efforts to reform the pension system. It concludes with
remarks regarding the implications of these measures and what the future may hold for Polands
public finances.
The Polish economy is the sixth-largest in the EU, and the largest among the ex-communist
members of the European Union. Before the late-2000s recession its economy grew a yearly
growth rate of over 6.0%. According to the Central Statistical Office of Poland, in 2010 the
Polish economic growth rate was 3.9%, which was one of the best results in Europe. In Q1 2014
its economy grew by 3.4% and is expected to grow by 3.4% in 2014, 3.7% in 2015 and 3.9% in
2016.
Since the global recession of 2009, Poland's GDP continued to grow. In 2009, at the high point of
the crisis, the GDP for the European Union as a whole dropped by 4.5% while Polish GDP
increased by 1.6%. As of November 2013, the size of EU's economy remains below the pre-crisis
level, while Poland's economy increased by a cumulative 16%. The major reasons for its success
appear to be a large internal market (in terms of population is sixth in EU) and a business
friendly political climate. The economic reforms implemented after the fall of communism in the
1990s have also played a role; between 1989 and 2007 Poland's economy grew by 177%, faster
than other countries in Eastern and Central Europe, while at the same time millions were left
without work.
3

Another factor which allowed the Polish economy to avoid the financial crisis was its low level
of public debt, at about 50% of GDP, below the EU average (around 90%). Strict financial
regulation also helped to keep household and corporate debt low. Furthermore, unlike many
other European countries, Poland did not implement austerity but rather boosted domestic
demand through Keynesian policy of tax cut, and foreign-assistance funded public spending. An
additional reason for its success lay in the fact that Poland is outside the Euro zone. The
depreciation of the currency, the zoty, increased international competitiveness and boosted the
value of Poland's exports.
However, the economic fluctuations of the business cycle did have an impact on
Poland's unemployment rate, which by early 2013 reached almost 11%. This level was still
below European average and has begun falling subsequently. A of February 2014, Poland's
unemployment rate stood at 14% according to Polish Central Statistics Office and 9.7%
according to Eurostat which stated European average is 10.6% (and 11.9% for the EU18).
Unemployment remains a permanent and one of the most important problems of Poland and has
been growing since years and Polish unemployment remains one of the highest in EU Warsaw
Business Journal remarked that the fact that despite the growing GDP Polish unemployment
remained "stubbornly high" casts shadow over claims of economic success; in 2012 the
unemployment rate in Poland was 13.3 percent, higher than it was in 1991 (12.2 )after capitalist
reforms were initiated Entrenched structural unemployment is especially problematic in Poland,
with 46% of the jobless being long term unemployed Lack of employment opportunities, low
wages and poverty have led to flight of over 2 million Poles to Western EU in search of better
life since 2004; with most being in the young demographic and not intending to return to Poland,
this is expected to cause long term problems in Polish economy according to professor Gavin
Rae from Kozminski University most of Polish recent economic growth was based on ability to
leverage funding from EU1.
As the European Union fell into the global recession that began in 2008, only one nation in the
region kept growing while its neighbors saw their economies fall. That title belongs to Poland,
1 "EUROPP After years of above-average growth, Poland now faces the spectre of recession". Blogs.lse.ac.uk.
2013-07-09. Retrieved 2015-03-01.

which made it through the period without experiencing a single year of falling gross domestic
product. Growth slowed down, but even at the lowest point, Polands economy continued to
expand slightly, and Polish officials remain bearish.
Poland is the only country that was not negatively impacted by the recession. We have been
calculating that from 2008 until now, we have almost 16 percent growth, Under-Secretary of
State Beata Stelmach said in Warsaw last week. Its very difficult to predict economic growth
for the next five years. However, at our worst, in 2009, our growth was still 1.6 percent. We were
green and everybody else was red.
According to the CIA World Factbook, Poland experienced 4.8 percent, 1.7 percent, 3.8 percent
and 4.4 percent growth in 2008, 2009, 2010 and 2011, respectively. The same source shows
that the EU as a whole experienced 0.8 percent, negative 4 percent, 1.8 percent and 1.6 percent
growth in the same years.
Polands enduring economic health is beyond dispute, as Ernst & Young noted in its 2012
European Attractiveness Survey, claiming that although many countries remain in economic
difficulty, Poland, by contrast, is enjoying dynamic growth."
Its future is not as certain, as an external assessment of Poland's economic situation compiled by
the Australian Department of Foreign Affairs and Trade points out: "The OECD predicts growth
will slow to around 3 per cent over the next two years, due to a combination of weaker external
demand, Euro zone uncertainty, ongoing fiscal consolidation, the deceleration of public
investment following the 2012 soccer championships, and the leveling off of EU funds in 2013."
The department did add, however, that "Poland is one of the few emerging economies to still
enjoy stable credit ratings."
Looking back over the past several years, its not yet clear exactly what enabled Poland to be an
exception in a world brought to its knees by financial crisis.
Polish business leaders and officials including Stelmach offer a range of explanations, which
they believe combined to create an environment conducive to growth in a number of sectors of
Polands maturing market economy.

Rafal Szajewski, team lead for the services section at Poland's Foreign Investment Department,
described three key factors that he believes helped the nation weather the economic storm.
The first is the huge amount of European Union funds that have been spent on improving
infrastructure and completing other projects in Poland since the nation joined the EU in May
2004.
All the benefits and funds we got when we joined the EU have helped a lot to improve the
business environment and drive change, Szajewski said at an outsourcing discussion held last
week in Warsaw.
Stelmach also cited the infusion of E.U. funds as one of the big drivers of Polands recent
prosperity and economic flowering. Look at other countries, some of them dont have ideas
about what to do with the money," she said. "So infrastructure is another sector that has boosted
our economic growth.
some outside experts do not see quite as positive a future for Poland. Tatha Ghose, senior
emerging markets economist at Commerzbank in London, cites extensive research in analyzing
the nation's economic health moving forward:
"Poland itself now has a burst construction bubble after a hectic level of building leading up to
the Euro 2012 soccer tournament; construction bankruptcies have reached a peak, and this sector
is going into recession," Ghose said via e-mail. "Hence, Poland's capacity to absorb extra
workers is low at this time and will probably worsen, resulting in rising unemployment. This is
why we expect Polish growth to under perform over the coming year (we forecast c. 2% growth
next year, even in a much better environment than post-Lehman 2009, when Polish GDP had
increased by 1.7%)."
One solution would be to look more extensively abroad to find new opportunities for growth.
Some Polish companies are already beginning to do so, as evidenced by one mega-deal that took
place in December, when Polish mining giant KGHM Polska Miedz S.A. (Warsaw: KGH),
Europe's biggest copper miner, completed its $3 billion acquisition of Canada's Quadra FNX.

Today if you look at our numbers, 80 percent of Polands foreign trade is done with other
European countries. So today is the time for bigger expansion, and some of the companies are
doing big expansion in further away countries, said Stelmach. If you look at where our
economic growth comes from, a large portion of that growth is from exports, so if our
[European] partners economies slow down, then we will need to turn to new markets.

CHAPTER 1
POLISH RESPONSE TO FINANCIAL CRISIS
The fact that Poland experienced such a high investment and growth immediately prior to the
crisis may help explain some of the reason why Polands economy weathered most of the storm
felt across the rest of Europe starting at the end of 2008. The growth that Poland experienced
prior to 2008, however, was significantly stalled once the banking crisis hit in the United States
and later followed in Europe. By midto late-2008, the significant deterioration in the global
economy impacted Polish growth and witnessed a reduction of most measures of business
activity in Poland with a significant decrease in production power. At the same time, as the Euro
zone recession began, together with increasing uncertainty about prospects for the Polish
economy, investment activity of Polish enterprises diminished considerably. (National Bank of
Poland, 2010, p. 19). Despite an economy that stayed above the red, Poland, like all other
nations, prepared to deal with the crisis, considerably worried about the direct effect on public
financing. In immediate response to the crisis, Poland released the Stability and Development
Plan - Strengthening the Polish economy in the time of the world financial crisis2.
On November 30, 2008. The plan called for action and legislation amounting to 91.3 billion zloty
in activities to stimulate investment in the Polish economy as well as support consumer
conditions. Primary activities that were outlined in the plan included:
Maintaining the stability of public finances;
Maintaining the stability of the financial system implementing a Trust Package by the
National Bank of Poland to increase the liquidity of the banking system.
The plan also called on Polish public finances to reduce the cost of debt servicing, which
especially was critical considering the scope of the crisis and the credit situation. The plan noted
2 Bartyzel, Dorota (October 26, 2010). Poland May Keep Rates at Record Low as Belka
Outweighs Inflation Concern. http://www.bloomberg.com/news/2010-10-26/poland-may-keeprates-at-recordlow-as-belka-outweighs-inflation-concern.html 29 Jan 2015.
8

that any decision to increase the budget deficit may lead to the abrupt decline in valuation of its
debt, which would be counterproductive. The plan also delineated a reduction in general budget
spending by 1.7 billion zloty to allow flexibility in the movement of resources 3. In addition, the
National Bank of Poland complemented the Stability and Development Plan with anti-crisis
measures such as:1) Mitigating economic downturn for workers and entrepreneurs,
2) Providing assistance in the repayment of housing loans to people who lost their jobs,
3) Support medium and large enterprises, implementing projects important for the Polish
economy (with the use of loans and guarantees from the Industry Restructuring Agency).
The recession in the Euro area economies affected Poland mostly in regard to the decrease in
demand for Polish products. Considering that our European neighbours are Polands largest
trading partners there was a natural decline in Polish exports. The primary threat to Polands
economic growth was the development of the situation in the worlds largest economies, such as
the United States, France, Germany, and the United Kingdom. A considerable portion of Polands
economic health depends on the efficiency of those countries stimulus, internal domestic
policies, and the speed of recovery abroad. This key fact demonstrates Polands place in the
global economy4.
Considering the prospects for slow economic recovery, Poland, like so many other nations, has
significant ongoing challenges in its public sector. Some of these challenges exist despite the
crisis; others are confounded by it. Nevertheless, it is viable to note that Polands public sector
activity in the past few years has two sides one is the ongoing reforms necessary to continue to
advance Poland from being an emerging economy despite the recession; and on the other side are

3 Bojanowski, M. (Jan 2011). Emerytalny wycig z czasem. Zmiany wejd w ycie od

kwietnia? Gazeta Wyborcza. 31 Jan 2015.
4
http://wyborcza.biz/biznes/1,100896,8906205,Emerytalny_wyscig_z_czasem__Zmiany_wejda_
w_zycie_ od.html. Accessed 30 Jan 2015.
9

the measures that have taken place in the public sector to prevent further damage by the
economic downturn5.
In the context of the ongoing global financial crisis, Polands response in the public sector
revolves around five central themes:

Inflation (including an analysis of raising the Value Added Tax by 1% in 2011);

Fiscal policy and deficit spending;
Public employment and pension reform;
Reliance on EU funding to supplement budget cuts;
Fiscal consolidation and public finance at the local level;

The delicate balance between economic stimulus and austerity will prove difficult in the coming
year or two. Lowering the scale of financial imbalances in the medium term is needed in order to
curb the rise in public debt and the obligations imposed on Poland under its deficit. The state of
Polands public sector finances will largely depend upon how Poland addresses these challenges
in the coming years6.
1.1 INFLATION
Like all emerging economies, inflation continues to be a concern for Poland. Fortunately, the
consumer price index (as a measure for inflation) has steadily decreased in the last few years
from an annual rate of 4.2% increase in the consumer price index in 2008 to 2.58% increase in
2010 (Tradingeconomics.com; forsa.pl), which compares to the EU average of 3.3%, 1.4%, and
2.2%, respectively7. These rates, while hopeful for an emerging economy, especially in an
economic downturn, are still high enough to cause concern. In response to the mixed news of the
5 Cielak, R. and Wojciechowski, Z. (Dec 2010). Zblia si termin likwidacji gospodarstw
pomocniczych i czci zakadw budetowych. Gazeta Samorzdu i Administracji.
6 European Central Bank (2010). Annual report 2009. Eurpean Central Bank. Pp 23-88; 118120. http:// www.ecb.int/pub/pdf/annrep/ar2009en.pdf Accessed Jan 24, 2015.
7 Eurostat (December 2009). Euro area annual inflation up to 0.9% ; EU up to 1.4%.
http://epp.eurostat.

ec.europa.eu/cache/ITY_PUBLIC/2-15012010-AP/EN/2-15012010-AP-

EN.PDF Accessed 24 Jan 2015.

10

CPI, the monetary policy of Poland has been to keep interest rates down. In relation to inflation,
the International Monetary Fund reported in October 2010 that considerable uncertainty
surrounds the outlook for inflation, especially with regard to labour supply and the impact of
capital inflows on the exchange rate. Yet, on top of this concern is an increase in Polands
national Value Added Tax (VAT) rate, which went into effect 1 January 2011. The law rose taxes
by one percentage point to 23% on most consumer goods, including food, electrical appliances,
and cosmetics. The tax increase is meant to be only temporary, for a period of three years ending
December 31, 2013. According to research by the Economic Institute of the National Bank of
Poland, the short-term effects of the VAT increase on inflation should not be significant, and
should not exceed 0.3 percent; while the longer-term influence on the Consumer Price Index
should be neutral. Raising taxes in the middle of an economic downturn sounds
counterproductive. An increase of taxes on consumer goods will obviously inhibit consumer
demand, impact inflation, and force Polish consumers to tighten their spending on goods and
services and thus could have a negative effect on the economy. On the other hand, raising the
VAT by 1% for a defined period of time may aid the public sector finances, at least provide some
assistance to keep public funding commitments, rather than cut programs indiscriminately, and
provides an alternative to brutal austerity programs. The increase in taxes and the budget revenue
that it will provide may also aid in Polands efforts to minimize deficit spending and control
public debt. Projections aside, there is risk on behalf of the Polish government by the modest tax
increase. Its impact and additional burden to the CPI versus its slight benefit to the public sector
finances (by adding an estimated 5 bln zloty8 a year) remains to be seen9.
1.2 FISCAL POLICY and DEFICIT SPENDING
The global economic downturn has led to a decline in general government revenues. Polands
fiscal situation continues to be a concern, with the global economic crisis only exacerbating this
concern. Given the high share of fixed expenditures in the budget and increased debt servicing
costs, the public sector deficit will be further magnified - which increases the level of public debt
8 Currency of Poland.
9 Eurostat (2010). GDP per inhabitant in the Member States varied between 41% and 268% of
the EU27 average. Eurostat Press Office
11

in relation to GDP. Despite high economic growth, as mentioned above, in the period prior to the
economic crisis, public spending grew much faster than GDP. According to the European Central
Bank, between 2006 and 2009 Poland maintained deficit spending above 3% of its GDP.
The current economic slowdown has exposed some structural weaknesses in public finances.
During recovery, the economic burden has been reduced by the government, which consequently
increased the structural deficit in public sector finances. The significant weakening of GDP
growth (while still growing) in 2009 contributed to a slump in tax revenues. Loss of revenue in
conjunction with the rigid structure of public expenditures consequently led to a strong increase
in public sector deficits. Already in 2008 there was a significant increase in the public deficit to a
level of 3.6% of GDP.
The increase in the Polish VAT by 1% is expected to alleviate some of the deficit burden by
adding an estimated 5 billion zloty a year for the next three years to the public treasury (Sionko,
04 Aug 2010). Whats more, the International Monetary Fund (IMF) in October 2010, upon
reviewing Polands financial credibility especially in light of the VAT increased, announced that
it expected to see the deficit-to-GDP ratio to fall below five percent of the GDP in 2013 indeed
some welcomed news for the public sector10.

10 Gazeta Prawna (Jan 9 2011). Gra: rzd doprowadzi do redukcji zatrudnienia w

administracji.

29

Jan

2015.

http://praca.gazetaprawna.pl/artykuly/476732,gras_rzad_doprowadzi_do_redukcji_
zatrudnienia_w_administracji.html
12

Chapter 2
Polands exceptional performance during the world economic crisis:
New growth accounting evidence
Using a growth accounting exercise based on new estimates of flows of capital and labor
services in the Polish economy during the period 1995-2013, we study the consequences of the
recent global economic crisis for the observed pace and structure of economic growth in Poland
a converging open economy which itself did not contribute to the breakout of the crisis. We
thus provide a supply-side explanation why Poland fared so well during the world economic
crisis. According to our results, the exceptional performance of the Polish economy in 2008-10
was an effect of several favorable circumstances. In particular, and unlike other European
countries, it recorded both a marked increase in capital deepening and an improvement in
workforce composition. We also find that the recent recession has not exerted any significant
impact on the efficiency with which economic resources are used for production in Poland11.
The world economic crisis, which broke out in 2007-08, turned out to be deeper and last longer
than any other post-war recession. It originated in the financial system of the US economy and
immediately affected the level of economic activity worldwide. However, after the initial
common response, the economic routes of many countries diverged12. Some of them grew
relatively quickly out of the recession, whereas in some others (notably several European
countries) the underlying structural weaknesses were revealed, increasing the length and depth of
the recession. Poland was among the countries that suffered least from the world economic crisis,
and it was even often mentioned as an exception among its European peers in particular, the
11 Gazeta Wyborcza. (Jan 10 2011). Miao by mniej urzdnikw, a jest ich wicej o 30 tys. 10
Jan

2011.

http://wiadomosci.gazeta.pl/Wiadomosci/1,80273,8923987,Mialo_byc_mniej_urzednikow__a_je
st_ ich_wiecej_o_30.html. Accessed online 31 Jan 2015.
12 International Monetary Fund (2010). PolandConcluding Statement of the 2010 Staff Visit.
Warsaw, January 29, 2015.
13

only one which recorded positive GDP growth in 2009. The objective of this paper is to provide
a supply-side explanation for Polands exceptional performance during the world economic
crisis. Its consequences for the pace and structure of economic growth in Poland are studied with
the help of a standard growth accounting framework but using a new, arguably more precise
calculation of flows of capital and labor services. Based on these new estimates, we also
construct an empirical measure of output adjusted for capacity utilization (henceforth, CUadjusted output)13.
To understand the cross-country differences in the impact of the crisis, it is important to fi rst
look at the cyclical positions of the CEE 14 countries and the closely related macroeconomic
imbalances existing when the financial crisis intensified in September 2008. In fact, the CEE
countries were in very different cyclical positions when the financial crisis began. In the years
preceding the crisis, a number of them, in particular the Baltic countries grew rapidly, often at
unsustainable rates, which led to a widening of the positive output gap and fostered the
emergence of internal and external imbalances. Owing to strong capital inflows and credit
growth the latter fuelled by very low and in some cases even negative real interest rates
several CEE countries experienced strong rises in asset prices, in particular house prices. Wealth
effects, in turn, further stoked excess demand pressures. In a number of countries, especially
Bulgaria, the Baltic States and Romania, substantial wage increases, in some cases accompanied
by rapid public wage growth, led to strong increases in unit labour costs. Expansionary fiscal
policies also boosted GDP growth ahead of the crisis and led to significant structural budget
deficits in 2007 in several countries, in particular the Czech Republic, Hungary, Latvia,
Lithuania, Poland and Romania.
The final dominant theme relating to Poland, its public finances, and the financial crisis is a
recent law in Poland on fiscal consolidation at the local level. The law on public finances, passed
August 27 2009, introduced significant changes in both the systematic and institutional forms of

13 Jones, Gareth. Polish debt wont top 55 pct of GDP in 2011 Forex Yard.
http://www.forexyard.com/en/news/Polish-debt-wont-top-55-pct-of-GDP-in-2011-FinMin-201012- 17T180455Z-UPDATE-1. Accessed 27 Feb 2015.
14 Centrtal and Eastern Europe.
14

public financing at the sub-national level. The primary objective of this legislation is to
consolidate the public finance system and add more transparency into the way tax money is
spent. The central provisions of this new legislation revolve around budgeting at the local level,
including more standardized and transparent ways to demonstrate local level revenue and
expenditures especially by forcing local governments to consolidate their budgetary units. This
is extremely challenging to local agencies in Poland15. For example, in 2007 there were more
than 600 auxiliary units of local government budget and over 2,000 local government budgetary
establishments, of which a significant (although difficult to quantify) part is subject to complete
liquidation. This law also shifts budgeting and reporting responsibility in a given jurisdiction to
the local agency, since the responsibility for carrying out public tasks lie with the local
government. This means that even if certain services are provided by private companies or Nongovernment Organizations, the budgeting responsibility ultimately lies with the governmental
entity. These structural changes that take place as a result of the consolidation law should
outright add more transparency to local level financing, however may add extreme difficulties to
the local jurisdictions to comply with these changes. These fundamental changes are indeed a
necessary process to create a modern local government environment. However, the challenges
that go along with this consolidation program are only compounded considering the current
situation in which government revenues are falling, public debt increases, and the overall
economic downturn that is playing out on the global stage. The further significance of this law is
the change that relates to the fundamental understanding and measuring of the financial situation
in the public sector.

15 Minstry of Finance (2010). 2010 rok udany dla polskich finansw. Press Release by the
Polish

Ministry

of

Finance:

12

Dec

2010.

http://www.mf.gov.pl/dokument.php?

const=1&dzial=153&id=232699&typ= news Accessed Jan 31, 2015.

15

Chapter 3
Foreign trade of Poland during the global financial
crisis
The global financial crisis turned to be less severe for the Polish economy and financial system
than in many others countries in Europe or even in the world. Poland was the only one country in
the European Union which in 2009 recorded, small but positive rate of economic growth.
Particularly important for such situations were: the growth of domestic household spending and a
situation in the Polands foreign trade. The objective of this paper is to present the situation in
Polands foreign trade in conditions of the global financial crisis during 2008-2009 and to show
the positive and negative phenomena in exports and imports. To achieve this objective first of all
the Polands foreign trade statistics are analysed. The results show that the situation in Polands
foreign trade was among others influenced by: a less economic openness, a strong depreciation
of the domestic currency, a greater export diversification and a stronger decline in imports than
exports16.
The financial crisis, which since September 2008 had started to spread globally, very quickly
ceased to be only the crisis of the global financial system and became the economic crisis. The
crisis affected the activity of many different actors from both the financial and the real sphere.
It influenced, not only the decisions and plans of the financial institutions, governments, central
banks, financial supervisory authorities, international financial organizations, but also the
enterprises and households in many countries all over the world. The uncertainty about global
economic growth prospects was one of the consequences of the crisis. During 2008-2009 the
economic activity decreased (especially in the manufacturing sector), which entailed, among
others the largest decline in the world trade since World War II. The growth rate of the global
economy dropped from 5.2% in 2007 to about 3.2% in 2008 and to -0.5 in 2009. The volume of
world trade decreased from 7.2% in 2007, to 2.8% the following year and to -10.7% in 2009.
This was caused among others by a strong decline in demand (especially consumption and

16 National Bank of Poland (2008). Plan stabilnoci i rozwoju wzmocnienie gospodarki polski
wobec wiatowego kryzysu finansowego. Narodowy Bank Polski. Pp 5-11.
16

investment demand), a strong reduction of inventories, a fall of prices in international

commodity markets and a weak lending activity17.
The global financial and economic crisis, did not remain without an impact on the Polands
economy. But the impact was not so negative as in the case of other countries and Poland was the
only member of the European Union whose economy did not fall into recession during the global
crisis. Poland remained the green island in the European landscape. The strength of the Polish
economy during the crisis was, among others, the situation in foreign trade. The aim of this paper
is to present the situation in Polands foreign trade during the global financial crisis in 2008-2009
and to show the positive and negative phenomena in exports and imports18.
3.1 The situation on the current account of the balance of payments in the first years after
Polands accession to the European Union
Polands accession to the European Union had changed the conditions of foreign trade. The
adoption of the common European principles, notably the principle of free movement of goods
and the common customs tariff, contributed to the elimination of tariff and non-tariff barriers in
trade, as well as to minimization the existing physical, technical or tax barriers within the
Community. Polish accession to the European Union had a significant impact on all the variables
that determine the balance of payments, including the determinants of the balance on current
account. A noticeable trend was the increasing deficit on current account, which steadily declined
in previous years. According to the Urzd Komitetu Integracji Europejskiej (The Office of the
Committee for European Integration) (2008) a similar phenomenon could had been observed in
some other countries, which like Poland joined the EU in 2004.

17 Polish Ministry of Economy (2010). A study of Polands economic performance in the period
of I-IX 2010. http://www.mg.gov.pl/files/upload/9142/3q2010_eng.pdf Accessed 27 Feb 2015.
18 Polska Agencja Prasowa (Jan 7 2011). Bank of America, Merrill Lynch: W Polsce wzronie
inflacja

stopy

procentowe.http://forsal.pl/artykuly/476661,bank_of_america_merrill_lynch_w_polsce_wzrosni
e_inflacja_i_stopy_procentowe.html Accessed 29 Jan 2015.
17

Despite this, it should be stressed that the Polish accession to the European Union had a positive
effect on export growth, especially in the first two years when export volume rose by 45%
compared with 2003. After the accession the average monthly level of exports was by 11%
higher than before and in the case of imports by 5%. There was also a strong growth in exports to
the new EU member states. It should be noted that the increase in exports occurred despite an
increase in domestic demand and an unfavourable foreign exchange conditions. Though certainly
those two negative factors reduced the beneficial impact of the EU membership on the dynamics
of exports19.
In the fourth quarter of 2006, merchandise trade growth in imports (especially the import of
intermediate goods) occurred to be greater than the increase in exports. And there was also a
further deepening of the negative balance of income on the current account. The tendency of the
faster growth in imports than exports remained also in 2007, which resulted in a deepening of the
trade deficit in goods and, consequently, the deficit on current account. These negative trends
also maintained in 2008 the year of the outbreak of the global financial crisis.
3.2 The foreign trade in 2008 the year of the outbreak of the global financial crisis
In the first three quarters of 2008 the trade deficit deepened. The growth in exports (21.3%)
slightly exceeded the growth rate of imports in the first quarter (21.1%) of 2008, but in
subsequent quarters there was a return to the negative trend - imports grew faster than exports.
Significant impact on the changes in Polish foreign trade had the production networks developed
by the transnational corporations. The growth of exports in the branches of foreign enterprises in
the first three quarters of 2008, was influenced by the high demand growth in developing
countries. The increase in exports during this period was also influenced by the new investment
projects (particularly in the electronics sector). It is estimated however, that the strong
appreciation of the Polish zloty during that period had rather a small effect on the changes in
exports. The increase in imports, in turn, was affected by such factors as: high domestic demand
19 Sionko, Pawel (Aug 04 2010). Government announces temporary VAT rise to cope with
fiscal

pressures.

PMR

Publications.

Accessed

online:

http://www.polishmarket.com/90150/Government-announcestemporary-VAT-rise-to-cope-withfiscal-pressures.shtml 2 March 2015.

18

(both consumption and investment), as well as the demand of the export sector for intermediate
goods, the strong appreciation of domestic currency and an increase in prices of raw materials
(e.g. crude oil) - the effect of which was weakened a bit by the strong zloty. The outbreak and
spread of the global financial crisis from September 2008 caused a weakening of economic
activity and a deep drop of the demand on the global scale, so the last quarter of 2008 was
marked by a distinct fall in exports and imports and the ratio of current account balance to the
GDP dropped to -5.2%.
The decline in the external demand particularly negatively influenced the export of intermediate
goods, as well as the group of goods classified as raw material (for example, the sale of copper in
the fourth quarter of 2008 decreased by almost 20% and in the first quarter of 2009 - by 40%
compared with the previous year). In this case, besides the drop in demand, the export
performance was significantly affected by the decline in commodity prices in the international
markets. Regarding the export of unprocessed products, in this case the lower external demand
was not so severe. For instance in case of the agricultural products - the value of exports
increased in the last quarter of 2008 by 5.8%. There were also no decrease in the export of
chemical industry products (mostly the pharmaceuticals). The financial crisis very quickly
started to negatively affect the automotive industry in the world. This tendency was confirmed by
the decline of Polish exports when it comes to diesel engines, cars, car parts and accessories. It
should be noted however, that the decline in export of passenger cars in case of Poland (in the
fourth quarter of 2008 the value of cars sold was reduced by 9.6%) was not as severe as in other
European countries. Mainly due to the introduction to production (several years ago) - small and
cheap cars, which were more competitive in the European market. In the case of imports it
should be noted that at the end of 2008 declines were recorded in almost all commodity groups
(especially base metals, mineral products and transport equipment). But there was increase in
import of consumer goods by almost 10% in the fourth quarter. It reflected the highest growth in
Polish households expenditures in the whole EU - by 5.3% during that period. It should be
mention that Poland is distinguished by the relatively large internal market this fact also
helped during the crisis. Regarding the geographic structure of foreign trade in that period, the
reduction in exports to countries outside the EU was smaller (although in the case of Ukraine,
experiencing severe economic problems, one could speak of a collapse in exports). The recession
and internal problems caused by the financial crisis brought about a sharp decline in exports to
19

the new EU member states (especially the Baltic countries and Hungary); this trend also
persisted in 200920.

20 Zesp Szk Ekonomiczno-Administracyjnych w Bydgoszczy. (2009). PKB w Unii

Europejskiej w latach 2000 2008. http://zsea.bydgoszcz.pl/joomla/pliki/Tygiel/realny
%20pkb.pdf Accessed Jan 31 2015.
20

3.3 Recent developments in Polands foreign trade

The year 2010 was a period of recovery from the recession all over the world. The situation in
Polands foreign trade should be assessed positively at that time. Exports in 2010 reached 117.4
billion EUR and the same was 19.5% higher than in the crisis year 2009, when it fell by 15.5%,
but at the same time about 1% higher than in pre-crisis year 2008. This means that in early 2010
the restoration of pre-crisis level of exports had come much faster than had been expected. The
imports in 2010 reached 130.9 billion EUR, but the growth (21.7%) did not offset the deep
decline (by 24.5%) in the previous year. The result was that the level of imports turned to be by
8.1% (by 11.6 billion EUR) lower than in pre-crisis year. As a result, trade deficit, despite
deepening to 13.5 billion EUR, was nearly a half lower than the one recorded before the crisis
(26.2 billion EUR). Among the main reasons for the improvement in the situation in the Polish
foreign trade in 2010 was: - improving overall economic situation in the main markets,
especially in Germany; - rationalization of stocks and intermediate imports for export
production; - relatively strong standing of the Polish banking sector, providing the necessary
financing for exporters; - maintaining a relatively high price and cost competitiveness of Polish
exports. In 2011 however the external environment of that Polands economy is unstable and
very fragile. The problems in the Eurozone and the situation in the USA are among phenomena
which can threaten the economic growth all over the world and affect Polands economy,
therefore also the foreign trade21.

21 Tradingeconomics.com (2010). Data and tables concerning Polands inflation rate. Available
online:

http://www.tradingeconomics.com/Economics/Inflation-CPI.aspx?Symbol=PLN

accessed 31st Jan 2015.

21

Chapter 4
The Polish banking system during the crisis
Along with the rest of the economy and thanks to strict supervision, the Polish banking system is
showing resilience and has avoided serious problems in 2009. Although Polish financial
institutions were not involved in the purchase of "toxic" international assets, the high incidence
of foreign ownership made them vulnerable to the outbreak of the global financial crisis, which
has mostly affected Poland via the capital markets and the collapse of world trade. The first three
quarters of 2009 were characterised by a decrease in confidence on the interbank market1 , by a
threefold jump in loan-loss provisions and write-downs compared to 2008 and by the outbreak of
a fierce battle for household savings. Bank profits dropped to around 50% of 2008 results and the
return on equity tumbled from 27.4% in June 2008 to 11.8% in September 2009. At the same
time, while being exposed to the global downturn, regional uncertainties and declining asset
quality, the Polish banking sector may still be considered to be a promising growth market. As
much as 44% of Poles still do not own a bank account; over 1.3 million current accounts were
opened in 2009 alone and more are expected to be opened in the next few years. Demand for
credit remains surprisingly strong and most Polish banks entered the financial crisis with
relatively healthy fundamentals.
In 2009, the landscape of banking in Poland was characterised by 51 banks, 18 branches of
foreign banks, a branch network of 578 cooperative banks and 1800 small credit unions 22.
Foreign owners had majority stakes in 37 commercial banks, which accounted for about 72% of
the sector's assets.
In contrast to the trend in previous years, 2009 was a year of consolidation. Inter alia, GE Money
Bank merged with BPH, Fortis Bank Poland was consolidated with Dominet and integrated in
the BNP Paribas Group, and finally the AIG Bank Polska sale was closed by an equity swap with
Santander Consumer Bank Polska23.

22 Under the current legislation the SKOKs are not considered to be banks and hence are not
regulated by the Polish Financial Services Authority.
22

Polish banks are predominantly domestic players and as such they have been partly insulated
from the turmoil on foreign financial markets. The creditworthiness of the system is strengthened
by the long term commitments of foreign shareholders, who view their Polish investments as
strategic4 and continue to share know-how, improve the infrastructure and diversify the banking
product lines. With a concentration ratio CR of 44%, competitive pressure in the Polish banking
sector is still relatively low by Western standards and fees and commission revenue remains
high. According to Eurostat, over 44% of Poles still do not own a bank account. In the EU, only
Latvia scores worse with 48% of the population "excluded" from financial services. Since fees
and commissions on basic banking operations (account and loan-related fees, brokerage services)
were generating satisfactory profits, most banks and credit unions focused on expanding their
infrastructure and on offering standard banking services rather than looking for more
sophisticated and often riskier products. And since the Ministry of Finance envisages, within four
years, sending 90% of pensions, grants, scholarships and other social benefits directly to payees'
bank accounts, banks will continue growing their infrastructure in order to reach. Five million
"bankless" new clients. This focus on infrastructure and on low-risk domestic operations partly
explains the good shape of the financial sector in Poland in the first few months after the
outbreak of the financial crisis.
A clear weakening of the macroeconomic situation, deterioration in consumer and business
sentiment, as well as continuing uncertainty on financial markets, have resulted in a severe
contraction in banking activities. The year 2009 was much worse than 2008 or 2007. According
to the Polish Central Bank (NBP) the projected end of year profitability of the sector was about
45% lower than in 2008 and roughly equal to profits in 2005. Since the outbreak of the financial
crisis Polish banks have been focusing their efforts on redefining business models to the new
low-growth market conditions. This means stricter cost control policies and a more cautious
approach towards lending on the interbank market as well as towards corporate and retail clients.
An important change has also occurred in the investment preferences of Polish bankers, who

23 The last two transactions are a direct result of the financial crisis: Dominet Bank was linked to
the Fortis group whereas the sale of AIG Bank to Santander was motivated by the new strategy
of the American insurer to focus on domestic activities.
23

along with the rise in risk aversion expanded their portfolios of treasury securities from the
Polish government24.

In the short run, the interest income of the Polish banks, traditionally their main revenue source,
will remain under pressure as a result of relatively high deposits rates and decreasing interest
rates charged on existing loan portfolios25. Furthermore, fees and commissions income, the
second most important source of revenue of the Polish banking industry, is not likely to
contribute significantly to revenues due to sluggish sales of new loans. On the cost side, the still
expanding infrastructure of branches and agencies, which has further risen from some 14700 at
the end of 2008 to over 14900 units in September 2009, will make it difficult for the sector to
avoid an increase in its operating expenses. This is likely to be the case although, for the first
time in many years, the workforce employed by the banking sector diminished from 181
thousand in 2008 to 176.5 thousand in September 2009.
Polish banks benefit from operating in a country showing economic resilience, which did not
enter into recession in 2009. Overall, the Polish banking system has weathered the crisis well so
far. Capitalization in the system is at a healthy 13.1% level and the rate of earnings retention was
close to 100% in 2008 after the Polish Financial Services Authority convinced the financial
industry to withhold its 2008 profits in order to strengthen balance sheets. Nonetheless, banks'
fundamentals have deteriorated in the worsening economic environment. Notably asset quality
has suffered a blow and earnings generation has seen a severe contraction. This rather mixed
health of the sector is echoed by rating agencies such as Standard & Poor's, which considers the
Polish banking industry to be an "average risk", placing it in group 5 out of the 10 groups in its
Banking Industry Country Risk Assessment26. The medium-term outlook for Polish banks will
largely depend on developments in the job market and on the prospects for the corporate sector.
These factors will impact directly payment delinquencies. The medium-term agenda of Polish
24 Income from stocks and shares, FOREX gains and other financial operations.
25 From PLN 593 billion in December 2008 to PLN 627 billion at the end of September 2009.
To account for the extremely high volatility on the foreign exchange market these data on the
increase of loans to the non-financial sector are being provided both in Polish zloty and in euro.
24

bankers and regulators alike will continue to be dominated by the quality of assets as well as by
liquidity and risk management considerations.

26 The Polish banking sector has therefore a lower risk than the corresponding sector in other
Central and Eastern European countries, but a higher risk than in Western European countries,
which generally rank in Groups 1 to 3.
25

CONCLUSION
Exploitation of the crisis topic by media during last four years and the own respondents
experience in that matter caused that it is nearly impossible to be not aware of crises existence.
The great majorities of respondents are aware of global economic crisis and perceive it mainly
through consumers material status aggravation. Respondents are rather pessimistic and consider
that economic crisis is perceptible in Poland and it will take a long time before it ends. More than
a half respondent dont expect changes in their household financial situation in the next 12 month
and nearly every third anticipates deterioration. In spite of creating Poland as a green island by
Polish media, respondents feel, sometimes painfully, the economic crisis consequences in their
households: available funds are sufficient only for current expenses in the case of 43% and for
every tenth funds are insufficient even for current expenses. In the case of financial difficulties
respondents are forced to use their savings, drastically reduce their expenditures, ask relatives for
help or take extra work.
The significant reallocation of consumption expenditures is visible. Respondents spend more
especially on foodstuffs and such expenses as i.e. fuel. Increase of expenditures is mainly caused
by higher prices. Contrary smaller consumption of some goods (alcoholic beverages, cigarettes,
books, recreation, services, clothes and shoes) is connected with the attempt of expenditures
limitation. Expenditures limitation in households caused by economic crisis forces a change
(sometimes serious) in respondents lifestyle. They spend less on their pleasures such as holiday
trips, entertainment, meals outside home, services associated with caring for body and beauty.
Every fifth respondent chooses public transport instead of car, reduces consumption of
electricity, gas and water and limits paid services associated with the house and its surroundings
in order to save some money. Respondents are rather cautious and they do not believe in the
lucrative possibilities on the present work market. They think that it is difficult to find a job in
the times of crisis and it is too risky to change the job. The best forms of safe money investing in
times of economic crisis in respondents opinion are Real estate and gold and jewelry. The crisis
negatively affects the respondents mood and their perception of future: high concern dominates
and pessimistic attitudes are noticeable: sometimes even panic and depression.

26

The economic downturn has played a significant role in public sector financing in Poland.
Arguably, Poland has faired much better than its European neighbours as being one of the only
nations in the EU not to face a recession in 2009. Nevertheless, Polands economy is still
described as emerging which subjects it to additional factors that could quickly weaken or further
slow down its economic growth. To prevent the economic crisis from further damaging public
sector financing Poland enacted specific policies and changes with the goal of fiscal stabilization
and restoration of public sector finances. Polands response to the crisis can be viewed through
the lens of five dominant themes: inflation; fiscal policy and deficit spending; public
employment and pension reform; reliance on EU funding to supplement budget cuts; and fiscal
consolidation and public finance at the local level.
The goal of legislative and regulatory activity within these themes is clearly stabilization. The
implications, however, of any policies remain somewhat indeterminate. Raising taxes in the
middle of a downturn, while at the same time cutting a large number of public sector employees
can just as easily backfire, considering the damage it may have on consumer activity;
compounded by the external economic situation. Managing public debt and budget deficits is one
of the foremost objectives of Poland. Still altering the pension system to increase, on paper,
revenues will not, in reality, reduce the public debt. In most likelihood it is the Polish citizenry
that will face the consequences. To what extent may never be known.

27

BIBLIOGRAPHY
Websites
1) http://ec.europa.eu/economy_finance/publications/countryfocus_en.htm.
2) https://www.cia.gov/library/publications/the-world-factbook/geos/pl.html
3) http://www.ekf.vsb.cz/export/sites/ekf/frpfi/cs/prispevky/prispevky_plne_verze/Nistelroj
_Krystyna_Mitrega-Niestroj.uprav.
4) http://www.hippocampus.si/ISBN/978-961-6832-32-8/papers/jasiulewicz.
5) http://www.imf.org/external/pubs/ft/scr/2013/cr13221.

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