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POLAND Country Strategy Paper

December 6, 1992

Central Europe Department Europe and Central Asia Region

CONFIDENTIAL

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POLAND

COUNTRY STRATEGY PAPER

TABLE OF CONTENTS

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

I. ECONOMIC AND POLIDCAL BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. THE ECONOMIC AGENDA AND THE REFORM PRIORITIES FOR POLAND . . . . 3 A. Strengthening the Reforms to Resume Sustainable Growth . . . . . . . . . . . . . . . . . 3

Key Reform Priorities For Poland . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 The Government's Action Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

B. The Base Case Scenario: Return to Sustained Growth . . . . . . . . . . . . . . . . . . . . 8 C. Downside Risk Scenarios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

III. BANK GROUP ASSISTANCE STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 A. Role to Date and Lessons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 B. Proposed Assistance Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

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Executive Summary

i. The Economic Program. After two very difficult years, economic conditions in Poland have improved in 1992. Overall output is now likely to be

- ___ on the same level as in 1991, despite the effects of the worst drought in the postwar period. Progress in reducing inflation from the hyperinflationary levels of 1989 has continued steadily. An expansion of exports and a further contraction of imports has led to a positive current balance, and to a strengthening of the reserve position, currently at about 5 months of imports.

ii. Much progress is still required to fulfill the reform agenda that Poland has set for itself. First, the government must continue to maintain a stable macroeconomic environment. Second, the movement of resources away from old, low-productivity activities into new growth sectors must be accelerated. To this end, the reform of ownership and governance of enterprises and banks must be intensified, thereby speeding up enterprise and bank restructuring and privatization. Third, social spending programs must be rationalized, ensuring adequate benefits to the unemployed and social assistance for the poor while cutting abuses in the pension and disability systems. The mobilization of public support for such a reform is perhaps the greatest single political challenge for Prime Minister Suchocka. Fourth, public administration reform, involving control of expenditure programs, decentralization, tax administration overhaul, and administrative reform, must replace cash management as a tool of deficit containment.

Ill. After a period of political uncertainty, which led to a slowdown in the pace of reform in late 1991, the new government of Mrs. Suchocka mustered sufficient support over the last few months to steer tough budget measures through parliament. It has taken the initiative to generate support from social partners for its program. of enterprise restructuring and privatization. On the basis of its 1993 budget, the

government recently initialled a Letter of Intent with the IMF for a 14-month Stand-by replacing the inoperative EFF.

iv. Base Case Scenario. Our base case scenario assumes good progress in implementing the policy agenda just discussed. GDP growth would resume in 1993, and average about 5 percent per year by the end of the decade. Reform of public finances would reduce reliance on domestic financing of the deficit, which in tum would allow greater credit expansion for private sector activities. Fixed capital formation, after picking up in 1992 and 1993, would gradually decline as a share of GDP (with faster private sector investment and public investment in infrastructure more than offset by lower capital outlays of the remaining SOEs), allowing for a sustainable increase in consumption. On the external financing side, the completion of the second phase of the Paris Club agreement and of a DDSR agreement with the commercial bank creditors would allow Poland to finance a modest current account deficit through small but increasing flows of foreign direct investment, and through a reasonable build-up of new lending, mostly from bilateral and IFI sources. Such a base case would not constitute a dramatic success story in terms of growth and increases in living standards, but it would put Poland on a sustainable growth path in the latter part of the decade and would make it into one of the first few countries of the Region that would enter the next century as a full-fledged Western style market economy.

v. Risks. While there are good reasons to believe that the base case reflects the most likely scenario, important risks should also be factored into our strategy. Poland's recovery has hinged on rapid growth of exports to EC markets, which might not be sustained in the future if Europe were to fall into prolonged recession. Domestically, macroeconomic stability might be compromised if the government were

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not able to pursue fundamental fiscal reform, particularly in the difficult areas of social spending. Increased economic instability due to either cause would no doubt deal a set-back to the economic transformation process and the resumption of growth.

vi. The Bank's Future Role. Poland is the largest country in Central Europe, and it led the way in the reform movement toward a democratic society and a market economy throughout the region. The results achieved in 1992 and the recent agreement with the IMF give Poland a chance to recapture the leadership it achieved in 1990 and lost in 1991. The Bank's strategy in support of Poland's ambitious agenda must be viewed in this light. Over FY93-95, we intend to continue to support the reform effort with a combination of donor leadership, very practical and policy-oriented economic work, and a substantial lending program. The lending strategy will support four main objectives. First, adjustment programs that complement the IMF program by strengthening broad sectoral policies and sectoral performance that would lead from stabilization to self-sustained growth. Second, programs in areas of economic activity that will remain the domain of the state, and where reform and institutional build-up are necessary conditions for success of the economic program. Third, support to investment in rehabilitation of infrastructure with private sector participation. Fourth, specific support for enterprise restructuring and privatization in some important sub-sectors.

vii. Over FY93-95, and contingent on an overall stable macroeconomic environment and substantial progress in individual policy reforms, we expect that our lending would be in the range of US$700-l,100 million per year. If a satisfactory debt and debt service reduction agreement were reached between Poland and the London Club, we propose to provide up to US$400 million in a free standing loan (in addition to the programmed lending) and up to US$200 million in set-asides. Projections of key debt indicators indicate that World Bank exposure ratios would be well within guideline limits through the end of the decade.

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vm. If difficulties in the execution of macroeconomic policies were to make it impossible for Poland to adhere to the program agreed with the IMF, adjustment lending would of course not be possible. We would :have -a repeat of the last two years with on­again, off-again IMF negotiations, leaving us to manage a highly uncertain lending program. To prepare for such a possibility; we are trying to build a pipeline that includes some major investment projects that could have high returns and also relieve public sector fmance through private sector priva,tization (for example, cogeneration privatization and Telecom II), and that could go ahead even if IMF programs suffer interruptions.

ix. Finally, if economic and political conditions were to deteriorate to the point that ~e economic agenda outlined above would unravel, leading to a loss of control over macroeconomic conditions, our lending program would be drastically reduced to a limited core, mostly concentrated in the social sectors. Under this scenario, and depending on the precise circumstances, lending could decline the US$200 to 300 million range a year on average, reflecting one or two operations in infrastructure and human resources.

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POLAND Country Strategy Paper

1. Poland rejoined the Bank in 1986. Since lending to Poland was opened in early 1990, the Bank has committed loans for a total of US$2.6 billion. As part of this support, the Bank also opened a Resident Mission in Warsaw in mid-1990.

2. The first Country Strategy Paper (CSP) was reviewed by the President's Council in November 1987. It outlined a strategy for the initiation of Bank lending, which was calibrated to the timing and strength of the Government's reform program and to its progress in restoring creditworthiness. This strategy was reaffirmed in the Country Strategy Note reviewed by the OPNSV just prior to the Annual Meetings in 1989. A second CSP was drafted last year, but was not submitted for review by senior management due to the fast-changing political and economic situation at the time. Poland's Economic Transformation Program and its effects on the economy in the first two years of implementation were extensively analyzed in the CEM "Poland - Economic Transformation at a Crossroads", circulated to the Board on May 29, 1992.

I. ECONOMIC AND POLITICAL BACKGROUND:'

3. After two very difficult years, economic conditions in Poland have improved in 1992. In the first ten months of the year, industrial production rose by some 13 percent over the December 1991 level, driven in part by a healthy expansion of exports. Construction activity has also been strong, on account of private sector activity. Were it not for the effects of the serious drought which has affected all of Central Europe (and which has led to crop losses of as high as 25 percent), and for cutbacks in some public services, 1992 would have been the first year of recovery for Poland. But even the stabilization of output now

11 This is part is used extensively in part I of the President's Report for the Enterprise and Financial Sector Adjustment Loan (EFSAL), dated December 6, 1992.

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expected for 1992 sharply contrasts with the output losses of 12 and 7 percent, respectively, in 1990 and 1991. At the same time, important progress has been made in steering the economy away from the hyperinflation of the late eighties. Average annual inflation has gradually declined from almost 600 percent in 1990 to 70 percent in 1991, down to the current 45 percent. After incurring important reserve losses in 1991, Poland's external perfoniiance has improved considerably since the beginning of 1992. In the first ten months of the year, a trade surplus of over US$1 billion allowed the country to strengthen its reserve position, currently at about 5 months of imports.

4. These signs of recovery are encouraging and augur well for prospects of more sustained growth in 1993 and beyond. But they do mask a sharp differential in the performance of the private and State­Owned Enterprise (SOE) sectors. While the private sector took advantage of the considerable opportunities created by the opening of the economy and invested in emerging growth sectors, the SOE sector inherited a legacy of overmanned facilities, outdated capital, and unclear governance that hampered its ability to respond to the new economic environment.

5. Taking advantage of the more stable external environment experienced since the beginning of 1992, private sector activity has provided the main engine of transformation and growth in the economy. First concentrated in trade and commerce, private sector activity has more recently extended to industry and construction. Private sector traders now account for a majority of foreign trade. This constitutes a positive response to the changes in the incentive environment, and is an indication of the potential for growth that still remains to be unleashed in the Polish economy.

6. By contrast, the SOE sector, which still produces three quarters of value added in industry, has had great difficulties in adjusting to the new economic conditions. External shocks (notably the demise of the USSR and of the CMEA trading arrangements), as well as the effects of the abolition of the complex system of subsidies, particularly on energy, played an important role in depressing industrial production in

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1990 and 1991. This contributed significantly to the fall in output during that period. The effects of the recession, however, were compounded by internal management problems in the SOEs, whose performance (as evidenced by unit labor costs, productivity and profitability) deteriorated substantially in these two years. The financial position of the SOE sector has remained very weak in 1992 as well. Many enterprises are severely constrained by the burden of the debt accumulated in the past two years as a result of the lack of restructuring and adjustment to new market conditions. Some of them are probably not economically viable, but have been allowed to continue to operate for lack of a viable exit mechanism. It should be emphasized, however, that within the SOE sector, the bulk of difficulties originate from the large enterprises. The smaller SOEs have been able to adjust to the new economic conditions and show signs of growth not dissimilar from the newly emerging private sector. The unsatisfactory performance of large SOEs is also at the core of the troubles experienced both in public finance and in the banking sector, since these SOEs are the largest taxpayers and the largest borrowers from the banking system.

7. Directly related to the SOE crisis, the ongoing public finance crisis is perhaps the single most worrying feature of the current economic situation in Poland. The crisis is structural in nature. On the expenditure side, increasing outlays originate mainly from the growth of social programs--on account of inadequate design and of increasing claims due to the recession. On the revenue side, expectations of improved tax revenues have been repeatedly frustrated, as the SOE tax base shrinks and as the government is unable to mobilize sufficient resources from the expanding private sector. The result has been a steady increase in the general government deficit and its demands on bank and non-bank financing. The public sector, which registered a surplus in 1990, was forced to rely on domestic borrowing in 1991 to fmance a deficit that amounted to over 6 percent of GDP. For 1992, the Government adopted a deficit target of 5 percent of GDP, which was considered compatible with increased progress on the economic stabilization front. Despite the recovery in industrial output, however, revenues continue to lag behind expectations,

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and expenditures are projected to increase by some 2 percentage points of GDP in 1992. As a result, the deficit for the year is now expected to reach 7 percent of GDP (despite the corrective measures approved in late 1992). The larger deficit has not yet substantially affected inflation only because much stricter terms are now applied by the banking sector for credit to the SOEs. This has, in the course of 1992, contributed to freeing domestic resources for the financing of the deficit. Nevertheless, the size of the deficit remains large, and continued recourse to domestic financing on the scale of 1992 would be incompatible with macroeconomic stability. Its reduction must occupy the absolute attention of policy-makers.

· 8. Despite the apparent end of the recession, the social situation remains relatively tense. After rapidly increasing to 12 percent of the labor force through 1990 and 1991, unemployment stabilized somewhat in 1992, largely as a result of the better output performance in industry. It now stands at 13 .5 percent of the labor force. Unemployment could increase substantially over the coming months, however, as a result of the paring down of activity in a number of SOEs that are expected to undergo restructuring. This could lead to increases in the number of the poor as restructuring takes place, and to widening regional differences in the incidence of poverty due to the "one company town" nature of past industrial development, thus making the maintenance of a viable social safety net a crucial priority for the government.

9. Parallel to the signs of economic recovery in 1992, there are encouraging changes on the political front. The beginning of the democratic transition was difficult enough. While Poland was one of the first countries to undertake the transition to democracy, the arrangements that led to the political changes also created an unstable situation. Parliament enjoyed little public support, and the new political class soon began to splinter, sometimes along personal lines. The Mazowiecki and Bielecki governments managed to engineer the courageous reforms of 1990 and to maintain reasonably good overall macroeconomic conditions. Starting from mid-1991, however, the Bielecki government became increasingly unable to

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Poland Country Stralegy Paper

Table 1: Main Economic Indicators

1993-97 1990 19911 19922 average

(Growth Rates) Gross Domestic Product -11.6 -7.6 0.1 4.1

Public Sector Output -19.0 -26.0 -10.0 Private Sector Output :- 7.0 33.0 12.0

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Priv Consumption per Capita-- -16.9 7.5 -3.3 - 4.4 Fixed Capital Formation -10.6 -4.5 4.0 3.7

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Inflation (Average) 585.8 70.3 45.6 14.0- --

Unemployment (eop) 6.3 11.8 13.9

Total Exports XGNFS3 15.1 -13.6 5.3 4.1 Total Imports MGNFS3 -10.2 16.0 -5.0 5.2

Exports, (US$ Bln)4 10.9 12.8 14.1 17.3 Imports, (US$ Bln)4 8.6 12.7 13.1 16.7

Trade Balance (US$ Bln)4 2.2 0.1 1.0 0.6

Real Exchange Rate (89 = 100) 80.8 126.6 136.0 132.9

(percent of GDP) Current Account 1.0 -1.1 0.6 -0.3

Of Which: NICA 6.4 0.8 2.4 1.3

Change in NIR (US$ Bln) -4.4 1.3 -1.1 -0.7 Gross Reserves (Months of M) 6.2 4.7 5.5 5.9

Fiscal Indicators: (percent of GDP) Gen Gvmnt: Tot Revenues 45.8 36.6 35.3 37.2

Tot Expenditures 42.9 40.3 42.3 40.6 Surplus/Deficit(-) 2.9 -3.7 -7.0 -3.4

11 Preliminary 2/ Projected 3/ Volume growth of all Good• and Non-Factor Service trade 4/ Value of transactions' in convertible currencies

introduce and pass through Parliament several important economic and political reforms. Agreement on and execution of policies became even more difficult as a result of the political instability that followed the October 1991 parliamentary elections. Having chosen a purely proportional representation system, without a strong political tradition, Poland found itself with a parliament splintered among 29 parties, with no clear coalition or majority in sight.

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10. It took two governments and several months of virtual political paralysis before a centrist coalition could be formed under the leadership of premier Hanna Suchocka in July 1992, averting the risk of a constitutional crisis. Although the coalition is far from being unified on a number of very important issues, it has so far managed to survive important tests. The most important was the wave of strikes that took place in August. Mrs. Suchocka's government has also endorsed and worked in earnest on several crucial pieces of legislation necessary for the execution of the reform agenda outlined above (particularly the Banking and Enterprise Restructuring Law, the multi-track privatization program, and the interim measures needed to stabilize the budget). The challenges of the economic agenda for Poland discussed in the next section can now be addressed by a government that stands a reasonable chance of providing the needed leadership and continuity of purpose.

II. THE ECONOMIC AGENDA AND THE REFORM PRIORITIES FOR POLAND

A. Strengthening the Reforms to Resume Sustainable Growth

Key Refonn Priorities For Poland

11. In order to capitalize on the emerging signs of growth, the government reform program should be pursued and strengthened on a number of fronts. First, macroeconomic policies must continue to provide a stable economic environment. In particular, the policy targets indicated by the authorities in the recently initialled Letter of Intent with the IMF (including, most importantly, a public sector deficit equivalent to 5.5 percent of GDP) must be complied with. Furthermore, Poland's external position must be strengthened through the completion of an agreement with commercial bank creditors, which is a necessary condition for generating increased flows of Direct Foreign Investment. Second, the government must recognize that the financial strength of the commercial banks is still closely linked to the performance of the large, public enterprises. It should thus move ahead to strengthen the capital position of the banking

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system, now threatened by the stock of non-performing loans to SOEs, as part of an overall effort to support enterprise restructuring and strengthen the supply response in the sector. This implies (a) Stimulating private sector growth by facilitating new entry through the provision of an appropriate economic, legal and regulatory environment; (b) Implementing reforms in the structure of ownership and governance in the SOE sector, through accelerated privatization and a clear definition of enterprise governance for those SOEs unlikely to be privatized in the short term; and (c) Pursuing the restructuring, modernization and eventual privatization of the banking system. Third, social safety net spending should become more effective, better targeted to the poor and vulnerable groups and consistent with budget constraints. Founh, the potential for growth in agriculture must be unleashed through increasing the efficiency of the distribution system and strengthening institutional support for extension and research. Fifth, the investment requirements for the modernization of Poland's infrastructure are high, but public investment is at an all-time low. Overcoming this problem will require, over time, the allocation of increasing amounts of resources for public capital investment, as well as greater involvement of the private sector in areas such as telecommunications, transportation, and water supply.

12. Macroeconomic stabilization. At this juncture, guaranteeing macroeconomic stabilization over the medium-term is a task that requires drastic public finance reform. While important strides have· been made in reducing inflation and in securing a viable external position, public finances have worsened. Short-term cash management, the main tool for budget containment in 1991 and 1992, is not a viable long­term option, and should be replaced by better control over spending and implementation of a modern tax system. On the expenditure side, the first priority lies in the reform of the social safety net and in the funding of social sector expenditures, as discussed below. Only through profound reforms in these expenditure programs will the resources be found to increase public investment to match the infrastructural and human capital requirements of Poland for the rest of the decade. Secondly, public employment must be

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adapted to the needs of a modern market economy. Thirdly, further reform of the state is desirable, involving the decentralization of spending and revenue raising responsibilities. This decentralization must be accompanied by .the adoption of clear rules for intragovemmental transfers, to stimulate fiscal responsibility at the local level. On the revenue side, the main legislative priority is now the passage a properly designed VAT. But it is also of paramount importance to accelerate the reform . of the tax administration. Increasing tax revenues from the new, emerging private sector will not materialize unless the appropriate administrative capacity is created.

13. Removal of the uncertainty regarding the external financing of Poland's program .is critical to achieve a stable macroeconomic environment. The Paris Club Agreement of 1991 stipulates that a comparable treatment should be obtained from commercial bank creditors. Negotiations for a Brady­type Debt and Debt-Service Reduction (DDSR) operation have been stalled for the past year, largely on account of the political instability and the budgetary crisis. The present situation offers a window of opportunity for a comprehensive resolution of the outstanding debt problem. With the major and most complex Latin American deals now solved, Poland represents perhaps the most important remaining case, which the commercial banks appear eager to settle. The resumption of a Stand-by arrangement with the IMF will once again give Poland access to set-asides and enhancement funds from IFis. These are necessary to reach any reasonable deal, in view of the extremely tight budgetary situation of the country.

14. Enabling environment for the development of the private sector. The private sector will continue to be the main engine of growth in the economy in the years to come. Private activity has responded quite positively to the new set of economic incentives. But greater progress can be achieved by removing remaining barriers to entry, and by better defining the regulatory environment in areas such as energy production and distribution, telecommunications, transportation, water supply, etc.

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15. Ownership and Governance Changes in the SOE Sector. Continued progress in these areas is a necessary condition for establishing a clear system of incentives at the enterprise level, and laying the foundation for a strong supply response in the sector. This requires to proceed with a speedy implementation of changes in governance in the SOEs awaiting privatization and to accelerate the implementation of the multi:-track privatization program. Action on the £'fist fiont is not easy, as it involves much more than a· change in corporate structure. Trade unions played a determining role during the 1980s in the transition of Poland to democracy, as did the workers' councils, whose founding was an important milestone in the political struggle against the previous regime. While it is by now recognized that the councils represent an obstacle to accelerated privatization and to efficient management of enterprises, their removal cannot proceed from being a simple administrative act, but must involve the building of a strong consensus among workers and their organizations. The "SOE Pact" now under negotiation between the government and the unions is an attempt to achieve the required transformation in the governance of enterprises while recognizing the historical role of workers' organizations in the Polish context. Incorporating measures for greater workers' participation in the privatization of enterprises, the Pact could provide a substantial stimulus to privatization under the various routes now pursued. Coupled with the setting of clear rules to govern managers' behavior, and clear links of accountability to the Treasury, this process could go a long way toward eliminating the institutional uncertainty in which the SOE sector has continued to function in the past three years.

16. The multi-track approach to privatization now followed by the government is thus likely to accelerate in 1993 and beyond. In addition, for a number of industries (steel, coal, shipbuilding, chemicals), it will be necessary to put into execution the restructuring and downsizing plans that have been formulated in the past few months, and that are prerequisites for attracting private investors. ·

17. Restructuring, Modernization and Privatization of the Banldng System. The banking system, and more

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generally financial markets, represent another crucial area for accelerated and sustained refomi. Two years of recession, coupled with the lack of strong restructuring measures at the enterprise level, have resulted in a complex crisis involving banks, many large and small enterprises, and the Treasury. Some thirty percent of the commercial banks' portfolio is non-performing, but the large number of enterprises that have accumulated arrears with the banks and with the government have continued to operate, further aggravating the situation. Action on litis massive problem has started, with World Bank assistance. Steps taken so far have included the identification of bad loans, the creation of special work-out units in each commercial bank to support conciliatory procedures with SOEs, and the tightening of lending practices (which has resulted in the virtuai cessation of the capitalization of unpaid interest that had occurred in 1991).

18. Reform of Social Safety Net. An effective program of social security and social assistance is a necessary condition for success of the economic reform program, as those affected by the restructuring should be provided with the means to satisfy their basic needs and take advantage of emerging opportunities. Thus far, Poland has made important progress in modernizing its social safety net. At the same time, however, social programs already make up the largest share of government spending, and reforms passed in haste in 1991 and 1992 (particularly under the pension scheme) have inserted potentially explosive elements that need to be redressed. Subsidies from the budget to the social funds have risen from 2 to 8 percent of GDP between 1990 and 1992, accounting for a large fraction of the increased government deficit over the same period. Of most immediate concern are the reform of the financing of health expenditures, a crucial piece of legislation which, if not properly engineered, could result in unsustainable budgetary outlays, as has happened in other former socialist countries. In addition, despite its political contentiousness, a reform of the pension system, particularly that of special pension regimes, should be pursued with determination. The restructuring of social safety net expenditure should eventually ensure adequate assistance to the unemployed for the period

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of transition between jobs, and to the poor, while remaining compatible with a sustainable public finance situation.

19. Reforming and Modernizing Agriculture. Further reform promises a high pay-off in agriculture. Eighty­five percent of Poland's farm land is under private ownership, although farm sizes are less than optimal. The surviving state farms need to be restructured and privatized, where possible. The greatest problems lie in the highly inefficient state monopolies which still supply private farms with most of their inputs. Similarly, agro-processing industries are still in state hands and operate at high costs and low levels of efficiency. Since the products of agro-industries can be imported freely, inefficiencies in that sector are shifted backward to Poland's private farmers, thus contributing directly to depressed rural incomes. In order to tackle these issues, the government is working on a program of privatization in these sectors, coupled with trade and price policies that provide a link with world markets conditions while cushioning against erratic price swings. In addition, extension and research support are inadequate, and institutional reform, already underway, should be accelerated.

20. Infrastructural modernization. The extremely low level at which public investment has fallen in the past three years, as a result of the budgetary crisis, poses a threat to the growth of productive potential. While in the past there was a tendency to devote excessive resources to public investment projects regardless of economic considerations, t!ie current levels of public capital spending, at less than 2 percent of GDP, will result in deterioration of infrastructure, which could in tum severely affect the ability of the private sector to invest on its own. The resources devoted to public investment must therefore increase in the next few years both in real terms as well as in percentage of GDP. Equally important, however, will be the build-up of the government's capacity to evaluate and screen investment projects according to economic criteria, and to adequately budget for their execution in the context of medium-term budget frameworks.

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21. The private sector can also be expected to play an increasing role in investments to modernize Poland's infrastructure, provided that the regulatory and legaj. js_S,!l~- mentioned above are resolved, and that the macroeconomic conditions continue to improve. In this respect~ -a flexible interpretation of the Bank's negative pledge rule might be called for, in selected instances where substantial additional foreign investment could be generated through the earmarking of incremental foreign exchange resources generated by projects for which financing would otherwise not be possible. ·

The Government's Action Plan

22. The government of Mrs. Suchocka has given strong indications that it fully shares· the reform agenda outlined above. It has weathered· a potentially damaging crisis in August, precipitated by a wave of strikes of a magnitude not seen since 1980, without compromising the fundamental objectives of the program. Despite the strikers' strong demands, no bailouts of factories were engineered, and indeed the government has been on the offensive to generate support from social partners for its · program of enterprise restructuring and privatization. Negotiations on a pact with the major unions on SOE restructuring and privatization, as well as on aspects of wage policy, are now quite advanced.

23. Given the state of public finances, the most urgent item on the economic agenda of the government is now the package of measures to strengthen public finances for the remainder of 1992 and for 1993. A deficit-reduction package was approved by Parliament in late October. Consisting of increases in custom surcharges (which the government considers a temporary bridge to the implementation of the VAT) and in indirect taxes, as well as measures to reduce expenditures in the central administration, the package is expected to cut the projected deficit by some 5 percentage points of GDP in annual terms both in the last quarter of 1992 and in 1993.

24. On the basis of this package and of understandings regarding the fiscal targets for 1993,

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the Government initialled a Letter of Intent with the IMF, for a 14-month Stand-by arrangement covering the period to the end of 1993. This has ended a period of impasse. caused by problems in the execution of last year's budget, which led to the de facto suspension, in June 1991, of a 3-year EFF two months after its approval. Satisfactory performance under an IMF­agreed program is a condition for the execution of the second phase of the Paris Club debt reduction agreement.

25. The macroeconomic program for 1993 now envisages an overall output growth of some 2-3 percent, and inflation declining, on a December-to­December basis, to some 33 percent. The current account of the balance of payments would deteriorate somewhat, chiefly on account of the effects of the drought on agricultural exports and of the higher growth on imports. External reserves might decline somewhat, depending on whether a debt reduction agreement with the London Club is consummated before the end of the year.

26. The policies envisaged to attain these objectives revolve around a strong public finance program consisting of expenditure and revenue measures (building on the deficit reduction package discussed above) which would bring the public sector deficit to some Zloty 85 .5 trillion, or about 5 .5 percent of GDP. Given the expected small negative external financing of the budget, recourse to domestic credit would amount to Zl 90 trillion (including placement of Treasury Bills for Zl 15 trillion), which would allow continued growth in credit to the non­government sector, particularly the private sector. In this framework, monetary policy would continue to aim at positive real interest rates. Wage policies are now under discussion between government and unions in the framework of the Pact. The current proposal (envisaging a two-tier system of wage negotiations, and the possibility of making bonus payments out· of after-tax earnings without incurring the penalties of the excess wage tax) is broadly consistent with the overall inflation and growth objectives of the program, and would encourage workers' interest in the financial performance of enterprises. On the exchange rate front, the current crawling peg system would be

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maintained, with the understanding that, depending on wage and budgetary developments, step devaluations of the zloty might be necessary.

27. The Government has also moved forward on a number of legislative measures which are needed to implement many of the reforms outlined above. An important package recently submitted to parliament includes the Banking and Enterprises ResiiUC:turing Law which is required to initiate the process of recapitalization of the banks and restructuring of enterprises, as well as legislation to support the multi­track privatization program, including· the mass privatization program. Passage of the Banking and Enterprise Restructuring Law will allow the establishment of procedures to restructure the enterprises that can demonstrate their viability and the closure of those that cannot (with appropriate safeguards for cases of exceptional social significance). In parallel with the restructuring process, the banks will be recapitalized, and the efforts to privatize them (now concentrated on two of the nine major commercial banks) will be intensified. Steps are also necessary to strengthen the supervisory function of the Central Bank and the regulatory framework for banks, which must be adapted to the needs of modern capital markets. The Bank is supporting this process through extensive assistance in the context of the preparation of the Enterprise and Financial Sector Adjustment Loan (EFSAL).

28. While the policies pursued by the government are in the right direction and address many of the relevant priorities, the ambitious character of the reform agenda should not be underestimated. A key constraint to the success of the program is the institutional weakness of the Polish public sector. Patterned after the requirements of · a command economy, it is now in the midst of a process of reform to make it compatible with the requirements of a democratic, market economy. This process has involved changes in the roles of different layers of government, as well as attempts to create a modern civil service and address the problems of public employment. Yet, with a growing private sector increasingly able to attract the best and brightest civil servants, implementation and institutional capacity in

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the public sector are likely to remain an important issue for years to come. The government recognizes the importance of this problem. Administration reform effoits (including decentralization, civil service reform, control of expenditures, etc.) are now a matter of priority. Coordination has been increased through the creation of a Public Administration Reform Unit in the Council of Ministers, and external technical assistance is being sought in areas in which Polish expertise is missing.

B. The Base Case Scenario: Return to Sustained Growth

29. Growth, Public Finances, and Stabilization . The macroeconomic projections in Annex I, which underlie the proposed assistance strategy for the next five year period, present a scenario characterized by success in stabilization, as well as by resumption of growth. Under this scenario, GDP growth is expected to resume at some 2-3 percent in 1993, and accelerate gradually to reach 5 percent by the end of the decade. Initially, a modest swing in net exports, and an increase in fixed capital formation would provide the spur for higher growth. In subsequent years, private consumption growth would contribute importantly to overall demand, as the economy stabilizes.

30. Stabilization would result from a gradual reduction in the demand for domestic credit by the government, as the deficit-reduction measures--and reform of spending programs--outlined in the preceding section put public finances on a sustainable path. By 1994, the General Government deficit would be reduced to some 3 percent of GDP (from the 7 percent now expected for 1992), which would be financed by about two-thirds through domestic sources. Such a drastic reduction of the deficit would not be feasible without substantial progress in reforming expenditure programs and in restoring the financial viability of the enterprise sector. In tum, reduced reliance on domestic financing would permit an increase in real credit to the non-government sector, which is expected to finance expanding private sector activity. Fixed capital formation, historically very high in Poland in view of the inefficient allocation of

8

resources prevailing under the previous system, would then grow somewhat less fast than GDP after the retooling in 1992-94 (with faster private sector capital formation and public investment in infrastructure more than compensated for by reduction of capital outlays in the remaining SOEs). This would permit a gradual decrease in the national savings rate associated. with a sustainable rise in per-capita consumption.

31. External Financing Requirements. A feasible financing plan for this scenario is shown in Annex I. Increased import requirements due to faster GDP growth, and resumption of full interest payments on the (reduced) Paris Club debt are expected to lead to a somewhat wider current account defidt after 1993. After accounting for desirable accumulation of international reserves, and the reduced amount of amortization of existing debt, external financing needs are expected to decline from 3 percent of GDP in 1992 to some 2.7 percent of GDP in 1994-1997. With direct foreign investment projected to grow only modestly over the period, most of the financing would originate from the May 1991 Paris Club agreement

· and from the envisioned DDSR for the London Club (expected to be on terms equivalent to the Paris Club agreement), which would jointly account for about 44 percent of total financing during 1994-97. A reasonable build-up of new lending from· bilateral and other IFI sources is also assumed, amounting to 1.2 percent of GDP on average during 1994-97, or 44 percent of total financing. Little or no new commercial bank lending is assumed for the rem.a.inder of the decade, a conservative assumption that might be somewhat pessimistic if economic adjustment in Poland proceeds as envisaged. Concerning the former CMEA debt, a 50 percent debt reduction is also assumed, consistent with assumptions made by the government and the Paris Club.

32. The Bank's contribution under this scenario is based on the indicative lending program discussed in the next section, amounting to average disbursements of about $0.8 billion per year (excluding exceptiOnal DDSR financing). Under this scenario, the Bank would contribute about 23 percent of total financing over the remainder of the decade, but a substantially higher portion of new lending (about 45 percent).

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Tab le 2: External Financing

1994-97 (Perco:ntage of GDP) 1991 1992 1993 average

Current Account Deficit" 1.1 -0.6 0.3 1.3 Change in Gross Reserves -1.3 1.4 0.9 0.8 Amortization of Existing Debt 2.0 2.1 o.s 0.6

.. -·-~fl!ln~~gB.equirements 1.8 3.0 1.7 2.7

0

0

--- Sources:

Direct Foreign Investment o.L - 0.2 0.2 New Net Disbursements21 1.4 1.0 2.S

IBRD 0.4 0.3 1.1 11\.IF 0.4 0.2 1.0 EBRO, Em, Others 0.6 0.4 0.4

DDSR31 0.0 0.0 -1.2 Increase in Arrears 2.9 2.7 0.0 Othcr41 -2.7 -0.9 0.1

l/ Bo:? fore Debt and Debt Service Reduction (DDSR) with commercial creditors.

21 Includes DDSR enhancements in 1993.

0.3 1.2 0.6· 0.1 o.s 1.2 0.0 0.0

3/ Assumes completion of the 2nd phase of the Pariii Club agreement and completion of negotiatiom with commercial creditors_ in 1993.

41 Includes credit extended, short term debt, and NEI

Source: Government Authorities and World Banlc Bstimatc11

Other IFI's are also expected to increase their exposure (particularly the EBRD). The IMF no longer extends new purchases starting in the middle of the decade, as recovery and stabilization take hold.

33. The economic performance envisaged under this scenario would go a long way towards making Poland attractive for new lending. On the basis of our projections, total medium- and long-term debt would drop to about US$43 billion by 1994, when the second phase of the Paris Club Agreement is completed. By the year 2000, total debt would then rise slightly, to about US$47 billion. Given Poland's assumed growth path, the debt/GDP ratio is projected to fall from 78 percent in 1990 to 41 percent by 1995 and 30 percent by 2000. Debt service as a share of GDP and exports would likewise stabilize at about 3.0 and 15.2 percent,

9

respectively, by 1995, when full Paris Club servicing takes effect. Preferred creditors would account for a little over 18 percent of total debt by the year 2000 and related payments due would amount to about 5 percent of total export earnings by the same date. Payments to the World Bank would rise from 0.2 percent of exports in 1992 to 2.9 percent in the year 2000, accounting for about one fifth of total payments due. These ratios are fully consistent with existing guidelines for Bank exposure.

C. Downside Risk Scenarios

34. The scenario discussed in the previous paragraphs is one of moderate economic success. However, the political and economic situation in Poland, albeit considerably improved, remains subject to many uncertainties. Some elements of the reform program or of the international environment directly affecting Poland could go awry in the next five years, and the Bank should make appropriat~ contingency plans to deal with the downside risks. Here we discuss two alternative scenarios that could result in serious derailing of the reform program. The first involves a combination of unfavorable external developments; the second a deterioration of public finances and macroeconomic conditions brought about by inadequate domestic policies.

35. Unfavorable External Developments. Export growth to the EC markets has played an important role in helping restart the economy and cushioning the impact· of the restructuring on unemployment. The base case scenario assumed a continuation of moderate growth in the EC (about 2.5 percent per year), together with a slight increase in Poland's market shares, resulting in a projected growth· of exports to the EC of about 5 percent per year. If a European recession followed by a period of slow growth were to follow the recent upheaval in currency markets and the continued restrictive monetary policy pursued by Germany and the increasing political turmoil in Europe, sustaining export growth to the EC might become problematic even for a relatively marginal exporter such as Poland. Continued high interest rates would also depress investment demand and adversely

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affect DFI flows. Under this negative European environment scenario, Poland's exports to the EC would contract over the next two years, before growing again at a very moderate 2.5 percent per year. A European crisis could thus hit the country at a time when the consequences of the restructuring of enterprises on employment might_ be felt the heaviest. Slow growth in the economy because of the lack of buoyancy in exports and weak investment performance, coupled with a rapid erosion of confidence in the Government program, could make the maintenance of stable macroeconomic conditions very difficult.

36. Self-Inflicted Destabilization. A second scenario is that of a self-inflicted deterioration in public finances. At the present time, there appears to be no clear constituency calling for the use of excessively expansionary fiscal policy to stimulate economic activity. The government has in place measures to make the 1993 budget compatible with macroeconomic stabilization and has secured an IMF Stand-by arrangement. However, many of the measures are of short-term natiire, and the state of public finances continues to remain structurally unbalanced due to the potentially explosive growth of social spending programs. It is thus unlikely that in the medium term stability and growth could be secured without addressing the politically sensitive areas of social security and of health financing. While the present government is aware of these problems, it has yet to outlined a clear strategy for reform. Continued lack of resolve could result in the repetition of a cycle of rising expenditures and ad-hoc deep cuts, which could become progressively more difficult to engineer and steer through parliament. Public confidence might thus be severely undermined, and the program could unravel. The effect would be a quick expansion of credit aggregates and a flight from the zloty, which would herald high inflation and unsustainable loss in external reserves.

3 7. Both "crisis" scenarios are possible, although we do not consider them likely. Success of the Polish Economic Transformation Program does depend on economic and political stability in Europe, and on a workable socio-political consensus at ue.

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m. BANK GROUP ASSISTANCE SI'.RATEGY

38. This section first briefly assesses the lessons gained ~om_tll~- first two-and-a~half years of Bank operations following the _ lllUDching of the reforms. Second, it discusses the features of the Bank country assistance program, against_ the backdrop of the government's reform agenda.

A. Role to Date·and Lessons

39. Poland is the largest country in Central Europe and it led the way in the reform movement toward a democratic, market economy throughout' the Region. The results achieved in 1992 and the recent agreement with the IMF give Poland a chance to recapture the leadership that it achieved in 1990 and lost in 1991. The Bank's strategy in support of Poland's reform agenda must be viewed in this light.

40. Policy Advice. In its continued . dialogue on economic issues with the Polish government, the Bank has provided important inputs at crucial times in the elaboration of the economic reforms. In' the areas of privatization and enterprise restructuring, agricultural policies, social sectors reform, and reform of the social safety net, the Bank has contributed practical advice as well as international perspective, helping the government focus its efforts and avoiding pitfalls. This high quality dialogue can and should be maintained to the advantage of Poland. The mix of policy analysis, joint preparation of economic reform, and of financial support together with mobilization of additional donor resources is the recipe that our assistance program must maintain. This entails a continued high commitment of resources on our part, both in human and in financial terms.

41. Past Lending. Responding to the broad-based nature of the Economic Transformation Program, the Bank lending program aimed at achieving five basic objectives: (a) to secure a stable macro-economic framework, and to further strengthen Poland's underlying creditworthiness; (b) to support enterprise reform and restructuring, privatization and the growth

. of the private sector; (c) to upgrade the country's infrastrucmre in ways that would support a market

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economy; (d) to enhance environmental amelioration in all sectors of economic activity; and (e) to support the strengthening of Poland's social safety net in order to help the country sustain the social impact of its systemic transformation.

42. The preparation of this broad lending program has required. a substantial commitment of resources: about 9-10 staff-years ofESW and about 35 staff-years of staff inputs in each of the last two fiscal years. These resource inputs were justified on the basis of Poland's size and its commitment to reform. Also,

. given Poland's symbolic leadership in Eastern Europe's move towards democracy and market economy, and the way in which success with its program would be felt in many other countries, the Bank mounted an intensive support program to offer a maximum chance of success. Substantial Bank presence was achieved in each of the major areas of reform.

43. Lending was initially concentrated. in fast­disbursing or hybrid operations, directly in support of initial reform measures (commitments in this category amounted to US$1.12 billion equivalent, or 43 percent of total), and in financial intermediation lines (US$520 million equivalent, or 20 percent of total). The overall program was relatively intensive in technical assistance (fA), both through up-stream strategy papers (Agriculture, Health, Housing) and significant TA components embodied in the loans. A noteworthy element of the Bank's TA work (executed. under ESMAP Management as part of the Bank's first energy project) were six energy subsector restructuring studies which laid the foundation for restructuring this important sector. The Resident Mission has been a valuable conduit for engaging the government in policy discussions, besides providing important logistical support for the development of the lending program and the ESW.

44. What are the key lessons to be learned? Adjustment loans can be considered relatively successful, in view of the unsettled. overall environment. Undoubtedly, design and negotiation have been, particularly in the course of last year, made difficult by political uncertainty. But in a number of

11

operations (particularly the proposed EFSAL and ASAL) collaboration with the authorities has continued, and proved fruitful, even during difficult , , transitional periods. Non-compliance with policy covenants has been very limited, and the :government on several occasions retroactively complied with conditions that may have been missed, an:.indication of the high degree of ownership of the refo~_programs supported by those operations. The lack of familiarity of the Polish authorities with Bank's requirements and practices has generated a number of pr~blems (both for adjustment and investment lending) which, while currently being addressed, need to be solved with high priority. Operationally, difficulties were ~ncountered, in the case of the SAL, in setting up the required machinery for tranche disbursement, but an intense effort of assistance on our part has resulted in significant progress.

45. Investment loans execution has been somewhat more problematic, and indeed the size of the outstanding undisbursed. amounts (over three quarters of committed funds) is such that high priority must be given to improved project implementation. It should be stressed that disbursement on investment loans are not, however, out of line with Bank profiles. It was rather the expectation of a quick pace of disbursement that has not entirely materialized.. In re(rospect, this should have been foreseen during a phase of build-up of the loan portfolio. Disbursements under Financial Intermediary Loans have fallen short of our estimates; with the exception of those specifically targeting agro­business. There are multiple reasons for the low utilization of outstanding lines. The demand for investment financing has been depressed in view of the recession and macroeconomic uncertainfy. Banking intermediaries are in the process of reorganizing, and did not always meet Bank's requirements. Borrowers have been unwilling to follow Bank procurement guidelines, turning instead to other available credit lines with less stringent requirements. We anticipate, however, a substantial pick-up in disbursements to finance the restructuring operations that will occur under the EFSAL policy framework. Project lending has had a slow start, hampered by lack of institutional ability. This has resulted in difficulties in staffing project implementation units, lack of counterpart

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funds, complicated and changing legal requirements. Nevertheless, in a number of key sectors (telecommunications, transportation, employment services, etc.) project preparation and initial execution have contributed to significant progress in institution building.

46. Role of IFC. IFC launched its first operation in early 1990 and continues to be quite active in the country. Its activities have focused on supporting foreign direct investment; capital markets development; and providing a range of advisory services. IFC has helped structure some large privatizations by supporting joint venture activity. In

· addition to providing financing on its own account, it has helped to mobilize commercial financing for these developments. It has also opened a line of credit for export development, which suffers (like the Bank loans) from the weak investment climate. IFC has also established the Polish Business Advisory Service, to assist small and medium-sized enterprises develop investment projects and secure financing for their implementation. It has provided advice to the Polish authorities on financial sector reforms, and was the match-maker of the twinning arrangement for the commercial banks under the Financial Intermediaries Development Loan (FIDL).

B. Proposed Assistance Strategy

47. Assistance Objectives in FY93-95. Given the experience gained in the first phase of our assistance, the objectives of the Polish reform agenda and our expectation of the Government's ability to meet these objectives, our assistance strategy for FY93-95 will emphasize several complementary and mutually reinforcing objectives.

48. First, we will continue to work for. better implementation of existing projects. This is necessary not only to ensure that committed amounts are utilized efficiently, but also in view of the fact that many of the outstanding loans support ongoing reforms that are key to Poland's agenda.

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49. Second, we will strive to continue to provide donor leadership, and we will use Economic and Sector Work as the intellectual foundation to integrate donors contribution into a coherent country assistance strategy for Poland. ·

SO. Third, our lending program will be based on a four-pronged strategy:

a. First, adjustment programs that complement the IMF programs lJy strengthening broad sectoral policies and sectoral peiformance leading from stabilization to self-sustahled growth. Efforts to implem~nt successfully outstanding loans in support of privatization and enterprise restructuring will be a key element. In addition. lnajor new initiatives will be· launched, particularly in support of banking sector recapitalization and enterprise work-outs (Enterprise and Financial Sector Adjustment Loan, EFSAL), structural adjustment and privatization in agriculture (Agricultural Sector Adjustment Loan, ASAL), public administration adjustment (Public Administration ' Structural Adjustment Loan, PASAL), and in support of a debt and debt service reduction operation (DDSR). Conditions for these loans will be further progress in public finance reform, as well as maintenance of a stable macroeconomic environment. In complementing our fast­disbursing operations, we will seek to engage the government and to finance reforms in the crucial area of the social policy, including unemployment benefits, social security, and social assistance.

b. We will also continue to support reform in those areas of economic activity that will remain the domain of the state, and where reform and institutional build-up are necessary conditions for success of the economic program. We will support the

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Q _Po_w_nd __ c_o_untry ___ s_~_M_e_gy_~_ap __ er-------------------------------------------------------------1~3

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<USS million) FY93 FY94 FY95

1. Consolidation of Stabili7.ation and Supply Side Response ASAL 300 EFSAL 400 PASAL 300

· ·oosR (400) -2. ·Strengthening of Core State Functions

- · -·~~Roaas- 150 Forestry Management Rural Infrastructure

150 100

Education 100 3. Infrastructural Functions with Private Sector Participation

. Cogcneration Privatization 150 Telecom II 150 Railways Environment 11/WS

150 150

4. Enterpme Restructuring and Privatization Industrial Restructuring 250

150 1~n

Power Sector Restructuring f"n1>I ~-tn .. -

Total Proposed Lending <indicative)

government in the areas of roads and rural infrastructure. We will build on our recent operation in the health sector and intensify lending for reform in the social sectors, in particular in education.

c. We will contribute to investment and rehabllitation of infrastructure with private sector participation, recognizing that the primary role the government can play in this area is to establish the appropriate regulatory ·environment, which can then contribute to attracting non-government resources. We will seek ways to mobilize non-budgetary resources through direct involvement of private sector operators, in particular in co generation privatization and in Telecom II.

d. In addition, in specific subsectors such as steel, heavy chemicals, coal, shipyards, and energy,. including the downstream petroleum sector, the Bank has an

850 850 950 <+400)

important role to play as an agent of adjustment through technical assistance in the formulation of enterprise restructuring plans and lending to suppon restructuring and adjustment costs in the process of privatization.

51. The Bank's strategy on the environment is to integrate the environmental dimension in all projects; and to ensure that project design fosters and leads to improved environmental conditions. We favor reduction of ongoing pollution over "clean-up" of the backlog of degradation. To this extent it will give emphasis to the energy and heavy industry sectors that continue to be major sources of ongoing pollution. All these sectors require capacity reductions, modernization of technologies and improved environmental impact. The Bank has already funded restructuring studies in all these mentioned sectors; it would be logical to participate in the implementation stage.

Q _Po_w_,_~_c_o_untry ___ s_~~--egy __ R_ap_e_r ____________________________________________________________ 14

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52. Lending Levels. A detailed three-year lending program cannot be outlined with a great degree of precision in an environment so dependent on continued government commitment through highly uncertain internal and external conditions. In this section we describe three lending scenarios, graduated to respond to the government's ability to fulfill the requirements of its ambitious-and politically difficult-reform agenda.

53. Over FY93-9S, and contingent on an overall stable macroeconomic environment and substantial progress in individual policy reforms, we expect that our lending would be in the range of US$700-l,100 mil I ion per year. If a satisfactory debt and debt service reduction agreement were reached between Poland and the London Club, we propose to provide up to US$400 million in a free standing loan (in addition to the programmed lending) and up to US$200 million in set-asides. Projections of key debt indicators indicate that World Bank exposure ratios would be well within guideline limits through the end of the decade.

54. If difficulties in the execution of. macroeconomic policies were to make it impossible for Poland to adhere to the program agreed with the IMF, adjustment lending would of course not be possible. We would have a repeat of the last two years with on­again, off-again IMF negotiations, leaving us to manage a highly uncertain lending program. To prepare for such a possibility, we are trying to build a pipeline that includes some major investment projects that could have high returns and also relieve public sector finance through private sector privatization (for example, cogeneration privatization and Telecom II), and that could go ahead even if IMF programs suffer interruptions.

55. Finally, if economic and political conditions were to deteriorate to the point that the economic agenda outlined above would unravel, leading to a loss of control over macroeconomic conditions, our lending program would be drastically reduced to a limited core, mostly concentrated in the social sectors. Under this scenario, and depending on the precise circumstances, lending could decline the US$200 to

300 million range a year on average, reflecting one or two operations in infrastructure and human resources.

56. Choice of Lending Instruments. Following an emphasis on adjustment lending in FY93, the composition of the lending program is expected to shift gradually towards investment lending in subsequent years, as Poland's absorptive capacity increases. As discussed, preparation of projects in infrastructure would emphasize collabo~ation with private sector participants and/or other IFis. At the same time, adjustment lending is still slated to play an important role. This is justified on. two grounds. -First, on policy grounds, the Bank is expected to continue to provide support to policy reforms in many of the areas outlined above, in which the reform effort has to extend over a number of years. Second, adjustment lending is also justified on balance-of­payments grounds, as discussed in section 11.B, particularly on account of the expected increase in debt servicing which will follow the normalization of payments with commercial bank. creditOrs and the resumption of full-scale payments to the Paris Club starting mid-1994. By contrast, we do not expect to process further line-of-credit operations in the near future, except possibly in agriculture, where there are likely to be continued problems in the provision of credit through existing financial intermediaries.

57. Economic and Sector Work. A well-targeted ESW remains an important means of conveying policy advice to the Government of Poland; it· is the prime vehicle through which the Bank can contribute to aid coordination-by using the Bank's comparative advantage in strategic (sector and macro) analysis to provide a common framework for all donors; and it also serves to target and support the Bank's lending program. Given these considerations, ESW tasks identified for the next two-three years would concentrate in three areas: (i) structural underpinnings of the medium term macroeconomic framework; (ii) institutional reforms in the public sector; and (iii) assessment of the lessons of the reforms.

58. Medium-term Macroeconomic Framework. Work in this area will aim at: directly supporting the Government in formulating its medium-term growth

o Poland Country Strategy Paper

strategy; improving its effectiveness in a number of economic management tasks; and enhancing the Bank's analytic understanding and monitoring of the economy. Activities here will include technical assistance to the Government in support of a London Club Agreement; macro-economic assessment and modelling. A fourth CEM for Poland (scheduled for FY94) will be used as a vehicle for assessment of the reform strategy at a

____ moment __ in which substantial progress should be - expected in privatization, enterprise and financial

· - - sector restructuring, social security reform and pubiic sector reform. It will propose to the government a medium-term growth strategy thoroughly integrating income distribution and social security reform within a coherent macroeconomic framework. This work will build on the planned Poverty Assessment, which will provide the basis for improved targeting of the social safety net.

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59. Institutional Reforms in the Public Sector. Support for the institutional reform efforts discussed above will be provided though studies and technical assistance. The Public Administration Reform Review will explore options and alternatives for reform of the public administration, assessing the government strategy and providing options based on international experience. A follow-up study on local governments will be targeted at the further decentralization of government activities. It will build on a previous report, which helped shape the reforms in a considerable way, and provide the basis for possible lending at a decentralized level. TA would be provided through an IDF grant to support public administration reform, control of expenditures, and decentralization.

60. Assessment of the Lessons of Reform. A number of studies will be devoted to taking stock of the economic lessons from the first few years of reform, and sharpen the reform agenda at the enterprise and financial sector level. This will include an analysis of Enterprise Behavior, a review of developments in Financial Markets, and a review of trade policy issues.

61. Sector Studies. A number of sector studies are also planned: the Labor Market Update; the Social

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Services Management Study; and the Health and Housing sector updates. These studies will address key issues of management and reform in the social sectors, whose importance has been discussed above. Depending on the strength of the program and the quality of our policy dialogue, we would al~o envisage a Market Logistic:S/Business Infrastructure Study; a review of the Water Sector; and Energy and Environment updates, all potentially leading to lending operations.

62. Many of these studies would be dropped in the hypothesis where the Barik assistance. ·would be reduced to a minimum core in response to unfavorable developments. It is envisaged that in this. case only a core group of macroeconomic monitoring activities and safety-net related studies would be carried out.

63. Portfolio Management. As discussed in the preceding section, substantial resources will be devoted to ensure full utilization and accelerated disbursement of the projects already coi:pmitted. A country implementation reView is scheduled for the third quarter of FY93 to provide a focal pQint for this effort. Specific measures will include targeted supervision efforts, as well as specific assistance in . training in procurement and disbursement procedures. Credit line provisions might be examined, on an individual basis, to evaluate the extent to which flexible arrangements on the Bank's part (for instance, with respect to financing of permanent working capital) might result in progress on this front.

64. Role of JFC/MIGA. IFC could play an important role in the future development of private manufacturing and services in Poland. Many of the large state enterprises/organizations contain activities, which, if restructured and privatized, could be viable. Such deals require a broad range of support-financial, legal, strategic and organizational-which IFC is well placed to provide. This capacity is another reason why we do not anticipate further Bank-financed lines of credit, leaving scope for both IFC equity and lending. MIGA also has important work, as Poland holds significant, unexploited prospects for foreign direct investment, which have been dormant due to political uncertainties.

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65. Relations with other IFl's. A final and important issue is that of our complementarily with other !Fis and with bilateral and multilateral donors. As discussed, the Bank has played a pivotal role in the mobilization of technical assistance resources through the EEC's PHARE program, through the British Know How fund, and other donors. We have to continue to play a leading role with these donors, which still need the Bank for direction and strategy in a number of areas. Relations with the EBRD are also evolving as that institution better specifies its role and its mandate. EBRD began its operations in Poland in April 1990, focussing initially on three main areas: (i) privatization and restructuring of state owned enterprises and banks, and support to private enterprises; (ii)- banking and financial sector, and promotion of financial institutions and retail banking; and (iii) environmental rehabilitation and environmentally-oriented energy programs, and modernization and stabilization of the energy supply. Apart from technical assistance and financial support in the above areas, EBRD also envisages cofinancing with the Bank in the following areas: infrastructure, such as telecommunications, energy and transport, as well as forestry; adjustment operations in agriculture and in the financial and enterprise sector. Over the last 18 months, EBRD has committed roughly US$500 million equivalent in Poland, observing fully its mandate for lending 60 percent of its portfolio to the private sector, and the remainder to the public sector. It is expected that the pace of new commitments will increase, however, with annual commitments exceeding US$500 million. At present, the only restriction on Poland lending is a US$200 million ceiling on any single project in the country.

66. Overall, the Bank and the EBRD have operated in fairly coincident areas. The Bank's greater availability of resources, and the lack of adjustment lending facilities for the EBRD, have contributed to establishing a de facto Bank leadership on the overall reform strategy, on social policy issues and on design of sectoral policy reforms and restructuring. The EBRD has rather concentrated on individual, more detailed transactions, both in terms of lending and in the provision of TA and policy advice. This division

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of roles should be satisfactory for both institutions, and we expect that it will continue in the future.

- -----·-----

!. '- ANNEX I

Page 1 of 1 (}. Key Indicators

,, Base Case P.rojection ----------------------------------~----------------------------------------------------------~----------------------------

-------Actual------·Prelimin.------------------Projected---------------------------.- 1989 1990 1991 1992 1993 1994 1995 1996 2000 o-------------.,.. ---------- -----. -. --.... ----. -. ---··----------- ·-----.. --.. -- ---. ----. --------. -.. -- -,~ ------. -------. -. ---

.<eal Growth Rates: · \ · - ,., Gross Domestic Product 0.3 -11.9 . -7.6 0.1 3.0 4.0 4.5 4.5 5.0 Gross Domestic Income 3.9 -14.2 -9.3 0.1 3.0 4.0 4.6 4.5 5.0

Real per Capita Growth Rates: Gross Domestic Product -0.1 -12.3 ·7.9 -0.2 2.6 3.6 4.1 4.1 4.6 Total Cons~tion -1.8 -15.0 5.4 -3.4 3.0 4.3 4.5 4.2 4.4 Private Cons~tion 0.0. -16.9 7.5 ,-3.3 3.3 4.7 5.0 4.6 4.8

Debt and Debt Service: Total DOD CMln US$) 39540.0 48774.9 47373.8 48449.8 45209.0 42829.4 43973.4 45044.4 47214.8 DOD/GDP, (X) 48.1 78.3 60.7 53.7 47.5 42.9 41.1 38.9 29.6 Debt Service (Mln US$) 6565.0 6889.0 3525.3 4039.4 1852.1 2311.8 2990.7 3331.2 4688.4 Debt Service/Exports 75.7 53.9 23.7 24.8 10.8 12.6 15.2 15.5 15.5 Debt Service/GOP 8.0 11.1 4.5 4.5 1.9 2.3 2.8 2.9 2.9

Interest Burden: Interest Paid (Mln US$) 1066.0 430.0 888.0 1148.2 1600.6 2028.0 2581.3 2696.5 2833.7 Interest/Exports 12.3 3.4 6.0 7.0 9.3 11.1 13.1 12.6 9.4 Interest/GDP 1.3 0.7 1.1 . 1.3 1.7 2.0 2.4 2.3 1.8

Total Investment/GDP 38.5 27.5 21.5 23.1 22.3 21.5 21.2 21.'1 20.7 . Fixed Capital Formation/GDP 16.4 19.6 18.8 20.5 20.6 20.6 20.s 20.4 20.0 Gwit. Fixed Capital Formation/GOP 3.4 3.7 2.2 1.5 2.0 2.5 3.0 3.5 4.2 Non-Gwit·Fixed Capital Formation/GDP 12.9 16.0 16.6 19.0 18.6 18.1 17.S 16.9 15.8

Domestic Savings/GOP 42.7 36.0 21.9 25.4 24.0 22.9 22.5 22.4 22.5 National Savings/GDP 40.3 33.7 20.5 24.4 23.3 21.9 21.2 21.2 21.S ·

Resource Balance/GOP 4.2 8.5 0.4 2.3 1.7 1.4 1.3 1.3 1.8

General Gover1'111E!nt Revenues/GOP 33.8. 45.8 36.6 35.2 36.5 37.7 36.9 37.1 39.5 c==)eneral Gover1'111E!nt Expenditures/GOP 39.6 42.9 40.3 42.3 42.1 40.9 39.7 39.9 42.4

Deficit(·) or Surplus/GDP ·5.8 2.9 -3.7 -7.0 -5.6 -3.2 -2.8 •2.8 -2.9 ~rimary Deficit(·)/Surplus/GOP -4.8 4.7 -2.3 -4.1 -1.7 2.1 · 1.9 1.1 0.7

CPI CX growth rate) 251.1 585.8 70.3 45.6 32.6 20.0 10.0 5.0 5.0 GDP deflator (X growth rate) 3.0 4.7 0.5 0.5 0.3 0.2 0.1 0.0 o.o Real Exchange Rate (1989=100) 100.0 80.8 126.6 136.0 134.1 132.9 132.7 132.7 132.2 Terms of Trade Index (1989=100) 100.0 94.4 92.7 95.6 95.4 95.3 95.2 94.9 93.3

Exports (GNFS) Volune Growth Rate 2.6 15.1 -13.6 5.3 2.6 3.8 4.2 5.0 S.8 Exports (GNFS)/GDP 19.1 27.1 20.3 19.3 19.5 19.6 19.6 19.7 . 20.3

lqJ<>rts (GNFS) Volune Growth Rate · ·s.o -10.2 16.0 -5.0 6.0 5.9 5.0 4.9 5.0 lqJ<>rts (GNFS)/GDP 14.9 18.7 19.9 17.0 17.8 18.2 18.3 18.4 18.5

BOP Current Account Balance (Mln US$) ·1828.4 641.9 -822.4 .515.4 273.2 -248.2 -744.0 -671.0 233.6 BOP Current Account Balance/GDP -2.2 1.0 -1.1 0.6 0.3 -0.2 -0.7 -0.6 0.1 Net Reserves CMln USS) 2289.0 7231.0 6236.0 7544.0 8363.0 9756.0 10706.0 11195.0 13048.7

Gross Reserves (Months MGS) 2.3 6.2 4.7 5.5 5.7 6.1 6.1 5.9 5.1 --------------------------------------------------------------------------------------------------------------------------

... source: Gover1'111E!nt Authorities and ~orld Bank Estimates

. )

.-

0 ..... ,

.til~l~.C..t\. .J.

.!. '- Page 2 of 10

POI.AHO

Creditworthiness and Bank Exposure (US$ 1111l l f on)

~ . . I.

. ' . ~; . G . ,. -----------------------------------------------------------------·-----------·----·-··--------·-------------------------------~

1990 1991 1992 1993 1~4 1995 1996 1991-1995 1996-2000

------------------------------------------------------------------~-------------------------·-------------------------------------DOOHLT 1/ 48774.9 47373.8 48449.8 45209.0 42829.4 43973.4 45044.4 45567.1 46428.5 DOO IBRO 54.0 403.4 672.4 1796.5 2827.6 3561.7 4184.0 1852.3 4986.8 Payments Due IBRD 2.0 17.2 40.3 90 •. 1 168.8 313.4 455.9 126.0 656.2 DOO IMF soo.o 822.0 1030.0 1849.0 2042.0 2192.D 1881.0 1587.Q 1152.1 Payments Due IHF 25.0 49.8 44.6 201.2 427.8 430.5 448.1 230.8 422.6 DOO EIB, EBRO, New Bf lat. 374.0 460.0 860.0 1360.0 1813.3 2455.8 3248.3 1389.8 4858.3 Payments Due EIB, EBRO, New Bilat. 15.7 35.4 35.0 66.6 151.7 213.6 330.3 100.4 600.5

DOOMLT (% of GOP) 78.3 60.7 53.7 47.5 42.9 41.1 38.9 49.2. 34.4 DOOHLT CX of EXPGS) Z/ 3131.9 318.4 297.1 263.1 233.6 223.2 210.1 267.1 183.8 Interest Due/EXPGS 30.8 13.2 13.2 9.3 11.1 13., . 12.6 12.0 11.0 Total Debt Service/EXPGS (due) 53.9 23.7 24.8 10.8 12.6 15.2 15.5 17.4 15.4 Total Debt Service/EXPGS (paid) 5.8 8.3 10.1 10.8 12.6 15.2 15.5 11.4 15.4

Bank Exposure: (X) DOO IBRD/DOOMLT 0.1 0.9 1.4 4.0 6.6 8.1 9.3 4.2 10.7 DOO IBRD/New Debt 5.8 23.9 26.2. 35.9 42.3 43.4 44.9 34.4 45.4 Payments Due IBRO/XGS 0.0 o. 1 0.2 0.5 0.9 1.6 2.1 0.7 2.5 Payments Due IBRD/Total Pmts Due o.o 0.5 1.0 4.9 7.3 10.5 13.7 4.8 16.4

Preferred Creditors: (%) 3/ 0 PREF CRED/DOOMLT 1.4 3.0 4.2 9.3 13.1 15.3 ·16.3 9.0 17.4 )'lllents Due PREF CRfD/XGS 0.3 0.5 0.6 1.9 3.6 4.2 4.8 2.2 5.2

Pamts Due PREF CRED/Total Pmts Due 0.5 2.3 2.5 17.2 28.4 27.7 31.1 15.6 33.5

·-·--------------·-··-------------------------------------------------------------------·-------------------------------------·---

1/ Assunes ·successful COll'plet,ton of debt negotiations. 2/ Exports of Goods and Services Include trade in Convertible eurrency.

All trade made tn convertible currency since 1991. 3/ Includes IBRD, IMF, EBRO, & EIB •.

Source: World Bank Estimates

0

... . )

~ '• .- 18 Dec 1992 POLAND ANNEX .L P_age 3 of 10

0

o·

0

Base Case Projection

1991

Balance of Payments (US$ mi LL ion)

1992 1993 1994 1995 1996 2000

--------------------------------------------------------------------------------------------------Current Acc. Balance -822.4 515.4 273.2 -248.2 -744.0 -6~~·:~. 233.6 (% of GDP) -1.1 0.6 0.3 -0.2 -0.7 \ 0.1

--------------------------------------------------------------------------------------------------Trade Balance 51.0 1079.9 674.8 481.0 . 434.4 . 557.4 1509.6 Exports of Goods 12760.0 14131.8 15035.5 15934.1 17018.9 18477.4 26291.2 Imports of Goods 12709.0 13051.9 14360.7 15453.1 16584.5 17920.0 24781.6

--------------------------------------------------------------------------------------------------Services Balance Exports of Services

Non-Factor Services Factor Services

Imports of Services Non-Factor Services Factor Services

Interest Due 1/

Net Current Transfers

Capital Account

Disbursements Amortization due 1/

Gross debt retired Direct Foreign Invest. Short-term, NEI

-1181.4 -1364.5 -1001.7 2118.0 2177.3 2145.4 1577.0 1677.7 1793.7 541.0 499.6 351.7

3299.4 3541.8 3147.0 1341.0 1384.7 1523.5 1958.4 2157 .1 1623.5 1957.7 2148.2 1600.6

308.0 800.0 600.0

-2784.3 -1847.2 -1354.5

786.0 1567.6

117.0 -2119.7

669.0 1891.2

200.0 -825.0

1624.1 251.·5

2927.0 200.0

-1329.2 -2400.0 1882.6 517.4

3729.2 1664.3 2064.9 2028.0

600.0

1447.4

1531.1 283.7

200.0

-1778.4 2686.1 2030.1 656.0

4464.5 1832.3 2632.2 2581.3

600.0

1514.6

1523.9 409.3

400.0

-1828.4 2960.9 2204.1 756.8

4789.3 2013.9 2775.4 2696.5

600.0

1472.3

1707 .1 634.8

400.0

-1876.0 3959.6 3077.3

882.3 5835.6 2797.0 3038.6 2833.7

60D.O

527.3

1882.0 1854.7

500.0

-------------------------------------------------------------------------------~------------------Overall Balance

Financing: Net Change in Reserves Gross Net IMF (+ incr.)

DDSR Total Cost Capital gain on Buyback

Debt Relief/Resched. Principal Interest

Change in Arrears Interest Amortization

-3606.7 -1331.8 -1081.3

1317.0 995.0 322.0

o.o 0.0 o.o

2289.7 1069.7 1220.0

-1100.0 -1308.0

208.0

0.0 0.0 o.o

2400.0 1000.0 1400.0

0.0 -819.0 819.0

1017.4 2048.9

o.o o.o 0.0

0.0 o.o 0.0

1199.2

-1200.0 -1393.0

193.0

a.a 0.0 o.o o.o 0.0 0.0

770.6

-800.0 -950.0 150.0

o.o 0.0 0.0

0.0 o.o o.o

801.3

-800.0 -489.0 -311.0

. 0.0 0.0 . 0.0

0.0 0.0 0.0

760.9

-800.0 -611. 7 -188.3

0.0 0.0 0.0

0.0 0.0. 0.0

------------------------------------------------------------~-------------------------------------Financing gap

Memo Items:

GDP (Mln USS) Trade Balance (% of GDP) NICA CMln US$)

(% of GDP) Exports GNFS CC Imports GNFS CC DOOMLT (Mln USS) Debt/GDP, (%) DOOMLT (% of EXPGS) Int Due/EXPGS Cint+Amt)/EXPGS (due) (Int+Amt)/EXPGS (paid) Int due/GDP Net Res Level (Months of M)

CMln USS)

0.0

78031~9 0.1

594.3 0.8

14337.0 14050.0 47373.8

60.7 318.4

13.2 23.7 8.3 2.5 4.0

5275.0

31.8

90213.5 1.2

2164. 1 2.4

15809.5 14436.6 48449.8

53.7 297.1

13.2 24.8 10.1 2.4 4.6

6375.0

49.7

95111.7 0.7

1522.1 1.6

16829.2 15884.3 45209.0

47.5 263.1

9.3 10.8 10.8 1.7 4.4

6375.0

1/ Excludes carn.;elled and converted obligations. ,-~-." Source: Governnent Authorities and IJorld Bank Estimate's

r.r.·.

0.8

99938.2 0.5

1262.5 1.3

17816.7 17117.3 42829.4

42.9 233.6 11.1 12.6 12.6 2.0 4.7

7575.0

29.4

107093.5 0.4

1181.4 1.1

19049.0 ""18416.:7 ·43973·~-4

41.1 223.2 13.1 15.2 15.2 2.4 4.8

8375.0

-1.3

115714.0 0.5

1268.7 1.1

20681.5 19933.9

'"45044.4 38.9

210.1 12.6 15.5 15.S 2.3 4.8

9175.0

39.1

159376.3 0.9

2185.0 1.4

29368.5 27578.6 47214.8

29.6 156.1.

9.4 15.S 15.5 1.8 4.9

12375.0

. 1

...

........

0 18 Dec 1992

Base Case Projection

1991 oa

I. Use~ of Funds 4.6 100.0

1. Total Payments Due 3.5 75.8

Of l./hich: Old Debt 1/ 3.4 73.6 (Amortization) 1.6 33.7 (Interest) 1.9 39.9

New Debt 0.1 2.2 (Amortization) o.o o.o (Interest) 0.1 2.2

2. Change in Gross Reserves 2/ -1.0 -21.4

3. Conmercial Creditors DDSR 3/

4. Other 4/ 2.1 45.6

.i~· .. II. Sources of Funds 4 .• 6 100.0

1. New Debt 1.1 23.8 Of l./hich: IBRD 0.3 7.5

IMF 0.3 6.9 EBRO, EIB, and Other 0.4 9.4

2. DFI 0.1 2.5

3. NfCA 1.1 24.4

4. Increase in Arrears 2~3 49.2

5. DDSR Total o.o 0.0 Of \Jhich: Paris Club o.o 0.0 .

London Club o.o . 0.0. CMEA o.o o.o

0 POLAND

External Sector - Sources and Uses of Funds Sl.lllllary Table - Before DDSR 1/

(US$ Bill ion)

1992 (%) 1991-1995 (%) 1996-2000

6.1 100.0 27.0 100.0 30.4

4.0 65.8 18.8 69.7 28.2

3.9 63.8 16.5 61.2 19.7 1.9 30.8 5.0 18.4 6.4 2.0 33.0 11.6 42.7 13.4

0.1 2.0 2.3 8.5 8.4 o.o o.o 1.0 3.6 4.6 0.1 -2.0 1.3 4.9 3.9

1.3 21.3 3.5 12.9 2.3

1.9 7.0

0.8 12.9 2.8 10.5 -0.1

6.1 100.0 27.0 100.0 30.4

0.9 : 14.3 8.6 31.8 8.9 0.3 I 4.4 3.6 13.3 3.6 0.2 3.4 2.5 9.1 0.0 0.4 6.5 2.5 9.4 5.3

0.2 3.3 1.1 4.1 2.3

2.7 43.4 9.3 - 34.4 12.4

2.4 39.1 4.7 17.3 0.0

0.0 0.0 3.4 12.4 6.8 0.0 0.0 0.7 2.4 1.1 0.0 0.0 2.5 9.2 5.1 0.0 o.o 0.2 0.7 0.6

0

(%) 1991-2000 (%)

100.0 57.5 100.0

92.6 47.0 81.8

64.8 36.3 63.1 20.9 11.3 19.7 44.0 24.9 43.4

27.7 10.7 18.7 15.0 5.5 9.6 12.7 5.2 9.1.

7.7 5.8 10.1

1.9 3.3

-0.3 2.8 4.8

100.0 57.5 100.0

29.4 ' 17.5 30.5 12.0 7.2 12.6 0.0 2.5 4.3

17.4 7.8 13.6

7.6 3.4 5.9

40.6 21.7 37.7

0.0 4.7 /' 8.2

22.5 10.2 17.7 3.6 1.8 • 3.0

16.8 7.6 ·l 13.2 2.1 0.8 . 1.5

-------------------------------------------------------------------------------------------------------------------------------------------------1/ Includes ell payments due on ongoing schedules with the Paris Club and CoR111ercial creditors

Assunes completion of the first phase of the Paris Club efreement (May 1991). 2/ Including IMF purchases - - - -3/ Includes the estimated total outflow of the conmercial.DDSR. 4/ Includes credit extended, end capital not elsewhere identified (Capital NEI +gap filler loans)

Source: \Jorld Bank Estimates

·' R~SMPOL6

0 1-h

~ ,._ ANNEX I

18 Dec 1992 POLAND Page :Sof 10

External Sector - Sources and Uses of Funds (Million US$)

---------------------------------------------------------------------------------------------------------------------------0 1991 1992 1993 1994 1995 1996 1997 ' 1998 1999 2aaa --------------------------------------------------------------------------------------~~~~--~~~-~-----------------------

I. Uses of Funds 465a.o 6140.7 5449.0 5474.8 5326.5 5487.5 5564.4 6017.4 6461.4 6916.0

1. Total Payments Due 3525.3 4039.4 2784.3 4a82.6 44a5.9 4997.1 5177.1 5601.8 6a63.9 6343.4

Of \Jhich: ' Old Debt 1/ 3422.9 3918.9 2424.a 333a.1 3442.4 3755 .4 3694.6 3871.3 4095.4 4321.1 (Amortization) 1567.6 1891.2 444.2 525.7 55a.9 919.7 931.0 1179.2 1492.7 1832.7 (Interest) 1855.3 2027.7 1979.8 28a4.4 2891.5 2835.7 2763.6 2692.1 2602.8 2488.4

New Debt 102.4 12a.6 360.3 752.5 963.5 1241.8 1482.5 1730.5 1968.5' 2022.4 (Amortization) o.o o.o 140.0 373.8 447.3 603.3 769.6 950.1 1125.1 1117.2 (Interest) 102.4 120.6 220.3 378.7 516.2 638.5 712.8 780.4 843.4 905.1

2. Change in Gross Reserves 2/ -995.0 1308.0 819.0 1393.0 950.0 489.0 426.0 408.0 4a8.0 611.7

3. Conmercial Creditors DDSR 3/ 1895.5

4. Other 4/ 2119.7 793.2 -49.7 -0.8 -29.4 1.3 -38.7 7.6 -10.5 -39.1 ---------------------------------------------------------------------------------------------------------------------------,,

I I. Sources of Funds 4650.0 6140.7 5449.0 5474.8 5326.5 5487.5 5564.4 6017.4 6461.4 6916.0

1. New Debt 1108.0 877.0 2583.1 2051. 1 1973.9 1707 .1 1666.2 1791. 7 . 1897.0 1882.a Of \Jhich: IBRD 349.4 269.0 1124. 1 1a31.1 823.9 807.1 766.2 691.7 697.0 682.a

IMF 322.0 2a8.0 959.a 52a.a 450.a a.a a.a a.a a.a a.a EBRO, EIB, and Other 436.6 4aa.o 5aa.a 5aa.a 7aa.a 9ao.o 900.0 1100.0 1200.0 12aa.a

2. DFI 117. 0 2ao.o 2aa.a 2aa.a 4aa.o 4ao.o 4ao.o 500.0 5aO.O 5aa.a

3. NICA 1135.3 2663.7 1873.7 1779.9 1837.4 2025.5 2189.0 2381.7 2698.2 3a67.3

4. Increase in Arrears 2289.7 2400.0 0.0 o.o 0.0 0.0 o.a

0 DDSR Total 0.0 o.o 792.2 1443.8 1115.2 1354.9 1309.2 1344.0 1366.2 1466.7 Of \Jhich: Paris Club o.a o.o o.a 471.4 181.4 181.4 199.1 224.7 24a.1 254.6

London Club 0.0 0.0 733.5 902.8 864.7 1a91. 7 1038.9 991.7 944.5 1037.9 CMEA a.a a.a 58.7 69.6 69.1 81.9 71.2 127.7 181.7 174.2

---------------------------------------------------------------------------------------------------------------------------Statistical Discrepancy o.a 0.0 0.0 0.0 a.o 0.0 0.0 0.0 a.o o.a

78031.9 90213.5 95111.7 99938.2 1a7093.5 115714.0 125221.3 135492.0 147094.5 159376.3 1/ Includes all payments due on ongoing schedules with the Paris Club and Conmercial creditors

Ass1..111es completion of the first phase of the Paris Club afreement (May 1991). 2/ Including IMF purchases 3/ Includes the estimated total outflow of the co111Tiercial DDSR. 4/ Includes credit extended, and capital not elsewhere identified (Capital NEI + gap filler loans)

source: \Jorld Bank Estimates

0 RMSMPOL6

.... ~

'.&. f..t.

18 Dec 1992

.. Base Case Projection

POLAND

External Sector - Sources and Uses of Funds (Percentages)

ANNEX I Page 6 of 10

---------------------------------------------------------------------------------------------------------------------------0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

------------------------------------------.. -----------.. --------------------------------~ -------... "."- _ .. _ .. -----.. -----.. ---------' -\ '·

I. Uses of Funds 1aa.a 1aa.a 1aa.a 1aa.a 1aa.a ·1aa.o 1aa.a 1aa.a 1aa.a 10a.a

1. Total Payments Due

Of Which: Old Debt 1/ (Amortization) (Interest)

New Debt (Amortization) (Interest)

2. Change in Gross Reserves 2/

3. Comnercial Creditors DDSR 3/

4. Other 4/

75.8

73.6 33.7 39.9

2.2 o.a 2.2

-21.4

45.6

65.8

63.8 30.8 33.a

2.0 a.a 2.0

21.3

12.9

51.1

44.5 8.2

36.3

6.6 2.6 4.0

15.a

34.8

-0.9

74.6

6a.8 9.6

51.2

13.7 6.8 6.9

25.4

0.0

82.7

64.6 1a.3

'54.3

18.1 8.4 9.7

17.8

-0.6

91.1

68.4 16.8 51. 7

22.6 11.a 11.6

8.9

0.0

93.a

66.4 16.7 49.7

26.6 13.8 12.8

7.7

-a.1

93.1

64.3 19.6 44.7

28.8 15.8 13.0

6.8

a.1

93.8

63.4 23.1 40.3

3a.5' 17.4 13.1

6.3

-0.2

91.7

62.5 26.5 36.0

29.2 16.2 13.1

8.8

-0.6 -----------------------------~r--------------------------------------------·-----------------------------------------------

II. Sources of Funds

1. New Debt Of Which: IBRD

IMF EBRO, EIB, and Other

2. DFI

3. NICA

4. Arrears (Comnercial Creditors)

0 DDSR Total Of Which: Paris Club

London Club CMEA

1aa.o

23.8 7.5 6.9 9.4

2.5

24.4

49.2

0.0 0.0 0.0 o.a

100.a

14.3 4.4 3.4 6.5

3.3

43.4

39.1

o.a o.o 0.0 a.o

1oa.o

47.4 20.6 17.6 9.2

3.7

34.4

a.o

14.5 a.a

13.5 1.1

1oa.o

37.5 18.8 9.5 9.1

3.7

32.5

a.a

26.4 8.6

16.5 1.3

100.0

. 37.1 15~5 8.4

13.1

7.5

34.5

0.0

20.9 3.4

16.2 1.3

100.0

31.1 14.7 a.a

16.4

7.3

36.9

o.o

24.7 3.3

19.9 1.5

100.0

29.9 13.8 a.o

16.2

7.2

39.3

23.5 3.6

18.7 1.3

1/ Includes all payments due on ongoing schedules with the Paris Club and Conmercial creditors Assunes completion of the first phase of the Paris Club afreement (May 1991).

2/ Including IMF purchases 3/ Includes the estimated total outflow of the conmercial DDSR. 4/ Includes credit extended, and capital not elsewhere identified (Capital NEI + gap filler loans)

'. ~~ -~l~~

0 RMSMPOL6

100.0.

29.8 11.5 o.a

18.3

8.3

39.6

22.3 3.7

16.5 2.1

100.0

29.4 10.8 o.a

18.6

7.7

41.8

21.1 3.7

14.6 .· 2.8

100.0

27.2 9.9 a.o

17.4

7.2

44.4

0.0

21.2 3.7

15.0 2.5

....

.........

I

'

0 18 Dec 1992

Base Case Projection

1991 (%)

I. Uses of Funds 4.6 100.0 \if

1. Total Payments Due 11 3.5 75.8

Old Debt: (Of Which) 3.4 73.6 Paris Club 0.5 11.2 London Club 2.2 47.9 CHEA 0.3 5.9 Other 2/ 0.4 8.6

New Debt: (Of Which) 0.1 2.2 New Bilateral Loans 0.0 0.8 . IBRD 0.0 0.4 IMF o.o 1.1 Other (gapfiler loans int) o.o o.o

2. Change in Gross Reserves 3/ -1.0 -21.4

3. Comnercial Creditors DDSR 4/ ..:::i. ...

4. Oth~r 5/ 2.1 45.6

0 POLAND

External Sector - Sources and Uses of Funds Slll'lllllry Table · After DDSR 1/

(US$ Billion)

1992 (%) 1991-95 (%) 1996-2000

6.1 100.0 23.7 100.0 23.6

4.0 65.8 15.5 65.4 21.3

3.9 63.8 13.2 55.7 12.9 0.6 9.7 4.0 16.8 8.3 2.4 38.4 6.0 25.2 2.3 0.4 6.8 1.1 4.8 1.1 0.5 8.9 2.1 8.8 1.1

0.1 2.0 2.3 9.7 8.4 o.o 0.6 0.5 2.1 3.0 0.0 0.7 0.6 2.7 3.3 0.0 0.7 1.2 4.9 2.1 0.0 0.0 0.0 0.1 o.o 1.3 21.3 3.5 14.7 2.3

1.9 8.0

0.8 12.9 2.8 12.0 -0.1

0

(%) 1991-2000 (%)

100.0 47.3 100.0

90.4 36.8 77.9

54.6 26.1 55.2 35.3 12.3 26.0 9.9 8.3 17.6 4.8 2.3 4.8 4.7 3.2 6.8

35.8 10.7 22.7 12.7 3.5 7.4 13.9 3.9 8.3 9.0 3.3 6.9 0.2 0.1 0.1

9.9 5.8 12.3

1.9 4.0

-0.3 2.8 5.8 ---------------------------------------------------------------------------------------------------------------------------------------------------II. Sources of Funds 4.6 100.0 6.1 100.0 23.7 100.0 23.6 100.0 47.3 100.0

1. New Debt 1.1 23.8 0.9 14.3 8~6 36.3 8.9 37.9 17.5 37.1 Of l.lhich: IBRD 0.3 7.5 0.3 4.4 3.6 15.2 3.6 15.4 7.2. 15.3

IMF 0.3 6.9 0.2 3.4 2.5 10.4 0.0 0.0 2.5 5.2 -, .. , EBRO, EIB, and Other 0.4 9.4 0.4 9.4 2.5 10.7 5.3 22.5 7.8 16.6

2. DFi 0.1 2.5 0.2 3.3 1.1 4.7 2.3 9.7 ~.4 7.2 A ,

3. NICA 1.1 24.4• 2.7 43.4 9.3 39.2 12.4 52.4 21.7 45.8

4. Arrears (Comnercial Creditors) 2.3 49.2 2.4 39.1 4.7 19.8 o.o o.o 4.7 :1;" .. 9.9 --------------------------------------·-----------------------------------------------------------------------------------------------------~------

1/ Includes all payments due on ongoing schedules with the Paris Club and Conmercial creditors AsslJlles completion of the first phase of the Paris Club afreement (Hay 1991).

2/ Including IMF ·purchases 3/ Includes the estimated total outflow of the conmercial DDSR. 4/ Includes credit extended, and capital not elsewhere identified (Capital NEI +gap filler loans)

Source: World Bank Estimates ~

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g C\ " ANNEX I

18 Dec 1992 POLAND Page 8 of 10

IBRD - Lending Program S> (US$ Million) Base Case Projection -----------------------------------------------------------------------------------------------------------------n 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000

I /-----------------------------------------------------------------------------------------------~--~------------

'~-Pol icy Based Lending - \ - - ·~ -------------------------Coomitments ,, 300.0 300.0 300.0 800.0 300.0 200.0 200.0· 100.0 0.0 0.0 0.0 DOD 28.4 299.4 359.0 1230.0 1848.0 2069.0 2219.0 2294.0 2202.3 203S.7 1852.3 Disbursements 1/ 28.4 271.0 S9.6 871.0 618.0 246.0 200.0 150.0 so.a Amortization 0.0 0.0 0.0 0.0 0.0 25.0 so.a 75.0 141.7 166.7 183.3 Interest 1. 1 12.3 24.7 S8.0 112.3 137.1 150.1 153.4 152.9 144.1 132.2

Investment Lending -------------------------Coomitments 777.4 840.0 190.0 400.0 750.0 800.0 600.0 600.0 700.0 700.0 700.0 DOD 25.6 104.0 313.4 566.5 979.6 1492.7 1965.0 2430.6 2888.4 3338.9 3707.8 Disbursements 25.6 78.4 209.4 253.1 413.1 577.9 607.1 616.2 641.7 697.0 682.0 Amortization 0.0 0.0 0.0 0.0 o.o 64.8 134.8 150.6 184.0 246.S 313.1 Interest 1.0 4.9 15.7 32.1 56.4 86.S 121.0 149.5 180.8 211. 7 239.6

Total Program -------------------------Coomitments 1077.4 1140.0 490.0 1200.0 1050.0 1000.0 800.0 700.0 700.0 700.0 700.0 000 54:0 403.4 672.4 1796.5 2827.6 3561.7 4184.0 4724.6 5090.7 5374.6 5560.1 Disbursements 54.0 349.4 269.0 1124.1 1031.1 823.9 807.1 766.2 691.7 697.0 682.0 Amortization o.o 0.0 0.0 0.0 0.0 89.8 184.8 225.6 325.6 413.1 496.5 Interest 2.0 17.2 40.3 90.1 168.8 223.6 271.1 302.9 333.7 355.8 371.8

Memo item: -------------------------Total DDSR support 550.0

Fiscal Year Conmitments 1240.0 390.0 850.0 1250.0 950.0 800.0 800.0 750.0 700.0 700.0 700.0 Of Which:

Policy Based 600.0 o.o 700.0 700.0 o.o 200.0 200.0 100.0 o.o 0.0 0.0 Inv Lending 640.0 390.0 150.0 550.0 950.0 600.0 600.0 650.0 700.0 700.0 700.0

~;--:~::~::·::::·:~~:::·---------------------------------------------------------------------------------------

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Page 9 of· 10

POLAND

Balance of Payments (US$ mil lion)

Low Case Projection --- --- ----------- .. --- -- .. ----- --- ----------- ----- .. -------- .. ------------ --- .. ----~.-,- .- --.. --·~ .. ~ ~ .. -- --.. -- -.... --- ------

. 1990 1991 1992 1993 1994 . 1995 1996 2000 ' ----------------------------------------------------------------------------------~----------------------------

Current Acc. Balance ex of GDP)

641.9 1.0

-822.4 -1.1

406.4 0.4

-93.8 -928.4 -1013.4 -1311.7 -535.6 -0.1 -1.0 -1.1 -1.3 -0.4

---------------------------------------------------------------------------------------------------------------Trade Balance 2213.4 51.0 957.7 391.8 407.2 430.8 136.9 754.5 Exports of Goods 10862.7 12760.0 14065.1 14745.6 15326.3 16212.3 17434.1 24109.0 l11f>Orts of Goods 8649.3 12709.0 13107.4 "14353.8 14919.1 15781.S 17297.2 23354.5

----------------------------------------------------------------------------------------------------------------Services Balance -3504.0 -1181.4 -1351.4 -1085.6 -1935.6 -2044.2 -2048.6 -1890.1

Exports of Services 1908.0 2118.0 2173.6 2343.9 2441.4 2587.9 2763~3 3715.5 Non-Factor Services 1327.0 1577.0 1677.7 1793.7 1882.6 2030.1 2204.1 3077.3 Factor Services 5.81.0 541.0 495.9 550.2 558.8 557.8 559.2 638.3

Illf>Orts of Services 5412.0 3299.4 3524.9 3429.5 4377.1 4632.1 4811.9 5605.7 Non-Factor Services 1477.0 1341.0 1370.7 1394.3 1433.6 1495.9 1590.0 2000.2 Factor Services 3935.0 1958.4 2154.3 2035.2 '2943.5 3136.2 3221.9 3605.5

Interest Due 1/ 3935 .o 1957.7 2145.4 2012.3 2906.6 3085.3 3157.0 3470.6

Net Current Transfers 1932.5 308.0 800.0 600.0 600.0 600.0 600.0 600.0

---------------------~-----------------------------------------------------------------------------------------Capital Account -2261.9 -2784.3 -1958.2 471.9 398. 1 271.2 -298.3 -1420.0

---------------------~-----------------------------------------------------------------------------------------Disbursements 428.0 786.0 558.0 716.1 770.6 769.4 701.1 500.0 Amorti~ation due 1/ 2892.0 1567.6 1891.2 444.2 572.5 698.2 ·1199;4 2320.0

Gross debt retired o.o Direct Foreign Invest. 10.0 117.0 200.0 200.0 200.0 .. 200.0 200.0 400.0 Short-term, NE! 192.1 -2119.7 -825.0

' ' ---------------------------------------------------------------------------------------------------------------Overall Balance -1620.0 -3606.8 -1551.9 378. 1 -530.3 -742.2 -1610.0 -1955.6

---------------------------------------------------------------------------------------------------------------Financing: Net Change in Reserves -4442.0 1317.0 .-1000.0 -400.0 -300.0 -300.0 -300.0 -300.0

Gross -4942.0 995.0 -1208.0 -260.0 27.0 0.0 -37.0 -300.0 Net IMF e+ incr.) 500.0 322.0 208.0 -140.0 -327.0 -300.0 -263.0 0.0

Escrow + Prin. Coll. 0.0 Capital gain on Buyback 0.0

Debt Relief /Resch ed. 4941.0 o.o o.o 0.0 0.0 0.0 0.0 o.o Principal 2446.0 o.o 0.0 o.o 0.0 0.0 0.0 0.0 Interest 2495.0 0.0 0.0 0.0 o.o o.o 0.0 o.o

Change in Arrears 1183.0 2289.8 2400.0 ·Interest 198.0 1069.8 1000.0 Amortization 985.0 1220.0 1400.0

---------------------------------------------------------------------------------------------------------------Financing gap -62.0 o.o 151.9 21.9 830.3 1042.2 1910.0 2255.6

---------------------------------------------------------------------------------------------------------------Memo Items: --------------------------------GDP eMln USS) 62265.0 78031.9 90938.3 91406.5 92277.4 95152.5 100020.1 123254.3 Trade Balance CX of GDP) 3.6 0.1 1.1 0.4 . -0.4 0.5 0.1 0.6 NICA eMln US$) 3995.9 594.3 2055.9 1368.3 .. ,.1419,.4 .. 1514.2 1286.1 2296.7

ex of GDP) 6.4 0.8 2.3 1.5 1.5 1.6 1.3 1.9 Exports GI.IFS CC 12189.7 14337.0 15742.9 16539.3 17208.9 18242.4 19638.2 27186.3 Imports GNFS CC 10126.3 14050.0 14478.1 15748. 1 16352.7 17277.4 18887.2 25354.7

'DODMLT (Mln US$) 48774.9 47373.7 46192.3 46486.2 47514.6 48628.0 50039.7 53685•!3 Debt/GDP, CX) 78.3 60.7 so.a 50.9 51.5 51.1 50.0 43.6 DOOMLT ex of EXPGS) 381.9 318.4 284.5 272.0 267.4 258.7 247.8 192.9 Int Due/EXPGS 30.8 13.2 13.2 11.8 16.4 16.4 15.6 12.5 (Int+Amt)/EXPGS (due) 53.S 23.7 24.9 14.4 19.6 20.1 21.6 20.8 Cint+Amt)/EXPGS (paid) 5.8 8.3 10. 1 14.4 19.6 20., 21.6 20.8 Int due/GDP 6.3 2.5 2.4 2.2 3.1 3.2 3.2 2.8 Res Level (Months·~"'Of M) 5.6 4.0 ~l:4.5 4.5 4.3 4.3 4.1 3.6

(Mln US$) 6592.0 5275.0 6275.0 6675.0 6975.0 7275.0 7575.0 8m.o . --------------------------------------------------------------------------------~-------------------------------1/ Excludes cancelled and converted obligations. . ~ .. ,. Source: Governnent Authorities and ~orld Bank Estimates

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Low Cas~ Projection

POLAND

Creditworthiness and Bank Exposure (US$ million)

--------------------------------------------~---------------------------------------------------------·---------------------------------1990 1991 1992 1993 1994 1995 1996 2000 1991-1995 1996-2000

~~~t~---;~----------------------------~;;;~:;·-~;;:;·-~~~;;:;·-~~~;~:;·-~;;~~~~--~~~;~~~--;~~;;~;-·;;~~;~;------~;;;;~~---·-·;;;;;~~-DOD IBRD 54.0 403.4 661.4 1177.5 1748. 1 2227.7 2544.0 2863.8 . 1243.6 2767.6 Payments Due IDRD 2.0 17 .2. 39.9 67. 1 106.8 228. 9 351.8 486.8 92.0 425.6 DOD IMF 500.0 82.2.0 1030.0 890.0 563.0 263.0 0.0 0.0 713.6 0.0 Payments Due IMF 25.o 49.8 66.9 211.0 3ao.s 330.6 272.7 o.o 207.8 54.5 DOD El3, EBRO, New Bi lat. Payments Due EIB, EBRO, New Bilat.

DODMLT CX of GDP) DOOMLT CX of EXPGS) 2/ Inte.rest Due/EXPGS Total Debt Service/EXPGS (due) Total Debt Service/EXPGS (paid)

~' .. ·~·

Bank Exposure: (%) DOD IBRD/DODMLT DOD !BRO/New Debt Payments Due IBRD/XGS . Payments Due !BRO/Total Pmts Pue

Preferred Creditors: CX> 3/ DOD PREF CRED/DODHLT Payments Due PREF CRED/XGS Pamts Due PREF CRED/Total Pmts Due

374.0 15.7

78.3 381.9 30.8 53.5 5.8

0.1 5.8 o.o o.o

1.4 0.3 0.5

460.0 35.4

60.7 318.4 13.2 23.7 8.3

0.9 23.9 0.1 0.5

3.0 0.5 2.3

760.0 54.3

50.8 284.5 13.2 24.9 10.1

1.4 2.7.0 0.2. 1.0

-4.3 I

o.8 3~·2

960.0 76.5

50.9 272.0 11.8 14.4 14.4

2.5 38.9 0.4 2..7

5.3 1.8

12.6

1113.3 139.0

51.5 267.4 16.4 19.6 19.6

3.7 51.0 0.6 3.1

5.8 3.1

15.6

1255.8 162.9

51.1 258.7 16.4 20.1 20.1

4.6 59.5 1.2 6.1

6.2. 3.3

16.5

1360.8 211.4

50.0 247.8 15.6 21.6 21.6

5.1 65.2 1.7 8.1

6.2 3.5

"16.3

1530.8 331.0

43.6 192.9 12.5 20.8 20.8

5.3 65.2. 1.7 8.4

6.5 2.2.

10.7

909.8 93.6

53.0 280.2 14.2. 20.5 14.5

2.6, 40.1 0.5 2.7

4.9 1.9

10.0

1470.8 2.73.4

47 .1 221.4 14.1 20.9 2.0.9

5.3 65.3 1.8 8.5

6.4 2.5 ./

----·········-······----·-····--·-················------·---~~-----·····---------------------------·-·----------------------------------

1/ Assunes successful COfll>letion.of debt negotiations. 2/ Exports of Goods and Services include trade in Convertible Currency.

All trade.made· in convertible currency since 1991. 3/ Includes IBRD, IMF, EBRO, & EIB.

Source: Yorld Bank Estimates

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