Poland grows but struggles with debt

WARSAW, Poland — Poland's economy expanded last year by an unexpectedly strong 3.8 percent, making it one of the fastest growing countries in the European Union.

This year promises to be more difficult.

Poland's lucky streak has ended as it grapples with rising public debt and a stubbornly high budget deficit — while continuing to borrow money abroad.

It first managed to narrowly dodge the global economic crisis in 2009, thanks in large part to earlier tax cuts that left money in the pockets of consumers, who continued to spend despite the troubled economic environment. That year, Poland was the only European Union country not to fall into recession — growing by 1.7 percent.

Last year Germany's economic revival pulled in imports from Polish factories, which have become become part of the German supply chain because of Poland's high productivity and low wages — a Polish factory worker still makes about a fifth that of his German counterpart for essentially the same work.

“The links to Germany are enormously important to us,” said Jakub Farys, head of the Polish Automotive Industry Association. In the first 10 months of last year, Poland exported $18.5 billion in cars and parts, a 9 percent increase over the same period a year earlier, with almost a quarter of that total heading to Germany.

Polish consumers have also stuck to their spendthrift ways, with retailers taken aback at the strong results for the holiday season. Sales in December were 12 percent higher than for the same period a year earlier.

Real estate prices have settled down. The average price of apartments dropped by about 10 percent in 2009, a reaction to the collapse of real estate markets in western Europe and to the fact that average prices for a square meter of living space had soared above $3,000, putting housing out of reach for many average earners. However, since then the price falls have stopped, and buyers are beginning to return, helped by a government program aimed at helping poorer families buy their first apartment.

“We're starting to see some life come back into the market. The crisis is definitely over for the sector,” said Kazimierz Kirejczyk, head of the Reas property consultancy.

As a result, the economy continued to grow in 2010, with the central bank even moving in January of this year to raise interest rates by a quarter point to 3.75 percent, its first increase since June 2009 because inflation in December came in at 3.1 percent, above the bank's target of 2.5 percent. The economy is expected to grow by about 4 percent in 2011.

The government has seized on the growing economy as a good news story to sell to the rest of the world. The finance ministry has added together growth from 2009 and 2010 — which comes to 5.5 percent — proclaiming that Poland is the only EU country to show any economic expansion over that two-year period.

The good growth news is intended to deflect attention from the clouds looming over the Polish economy caused by the country's fast-growing debt.

Poland's public debt — that is debt accumulated by the central government as well as regional governments — is within a whisker of 55 percent of GDP. If that level is crossed, Polish law calls for painful spending cuts.

Paradoxically, part of the debt comes from the enormous flow of funds from the EU to Poland that are being used to upgrade Poland's ramshackle roads, railways and water infrastructure. The $87 billion pouring into Poland from 2007-2013 has to be partly matched by Polish spending, meaning the government often has to kick in from 15 to 50 percent of a project, with Brussels paying for the rest. As well, the Polish side often has to first spend the money, and then wait for the EU to refund its share, which worsens Poland's debt numbers.

As well, the reformed pension system has become increasingly expensive.

The budget deficit is also soaring, coming it at about 8 percent in 2010, although the government promises to reduce that to 3 percent of GDP by 2013.

“Poland's public finances are on an unsustainable trend,” warns a recent advisory from Fitch, the ratings agency.

In response, the government is promising to restrain spending and has undone some of its pension reforms, allowing more money to flow into the public part of the pension system and restricting the amount going to privately run pension funds.

But the government is proceeding cautiously on further-reaching economic reforms such as raising the retirement age to 67 from 65 and equalizing the retirement age of men and women — women currently retire five years earlier. The main reason is that parliamentary elections are due this fall, and the ruling Civic Platform party wants to win a second term in office — something no party has accomplished since the end of communism in 1989.

Government officials insist that more courageous reforms will begin next year, but the number of skeptics is growing.

“I really don't see this government's desire to undertake difficult reforms. We were fooled,” said Henryka Bochniarz, head of the Polish employers confederation.