| BUSINESSWEEK ONLINE : JULY 24, 2000 ISSUE | ||||||||
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| INTERNATIONAL -- EUROPEAN BUSINESS
Q&A with Poland's Jarolsaw Bauc The new Finance Minister hopes his budget will keep the economy and the government intact Poland's new Finance Minister, Jaroslaw Bauc, has just drawn up a tight budget that he is trying to sell to Cabinet colleagues, members of Parliament, and the financial markets. By reducing the fiscal deficit from 2.7% this year to 1.7% next, he hopes to rein in Poland's huge current-account deficit. That's necessary, he says, if Poland is to curb inflation (currently 9%), keep the exchange rate stable, maintain high economic growth (6% in the first quarter of 2000), and please foreign investors. But persuading his fellow politicians to back the proposals won't be easy. Bauc recently discussed his budget with Business Week's European Economics Correspondent David Fairlamb. Here are edited excerpts of their conversation: Q: Poland's fiscal deficit will be just 2.7% this year. So why do you need to squeeze the budget further? A: Our current account deficit is too big, and the best way to reduce it is by cutting the budget deficit. Q: But don't you expect to have a large current-account deficit at this stage of Poland's economic transformation? Surely it is a by-product of restructuring of the economy. A: That's true. It also encourages fast economic growth. But there are limits. Ours has risen from just 1% of gross domestic product in 1996 to more than 7% now. It was temporarily above 8% in March. That's too high and if it rises further it could lead to a loss of confidence in the economy. Foreign investors might withdraw liquid funds leading to a large depreciation of the zloty. That would have very negative effects for the real sector. Q: Such as? A: It would make it harder for Polish companies to repay foreign loans because those loans would have become much more expensive in local currency terms. And it might lead the National Bank of Poland to raise interest rates. At the end of the day, it could lead to a dramatic economic slowdown, which would be devastating for the transformation process. Q: Do you mean you'd end up with the sort of financial crisis they had in Mexico and Thailand? A: Definitely not. That's not a possibility because neither the public nor the private sectors in Poland are anywhere near as heavily indebted as they were in those countries. Q: But the current account deficit was created by the private, rather than the public, sector. So how does limiting state spending affect it? Wouldn't it be more effective to tighten monetary policy instead? A: No. The monetization of the Polish economy is very low and the volume of bank loans in the economy is very low. That means that it is difficult to control demand with interest rates. You'd need to raise them to a very high level to have any effect. The better solution is to curb the budget deficit and to limit the demand created by the public sector. Q: Are you sure that will work? A: It already is working. Until 1999 our fiscal deficit was above 3% and the current account deficit kept rising. But this year we've started reducing the fiscal deficit and we've seen a reduction in the current account over the past couple of months. Q: Saying you want to cut the budget deficit is one thing, getting your proposals accepted by your government colleagues and by Parliament is quite another. Do you think your Cabinet colleagues will support you? A: I had many consultations with ministers before finalizing the plans and I don't see any major obstacles. I'm reassured that the document will be approved by the government. Q: What about Parliament? You're a minority government without a majority in the Sejm. A: We'll have to wait and see how Parliament reacts. But the big issue isn't whether politicians want this budget or not, it's whether they want a general election or not. If the budget fails to pass then the constitution says we have to have an election. If politicians want an election I don't think any budget will be accepted [regardless of how] it is structured. Q: Your budget has sparked controversy because you're using some of the proceeds from next year's sale of third-generation mobile phone licences as if they were ordinary revenues. Your critics say that if they weren't included the fiscal deficit you're planning would be more than half a percent higher. A: I'm treating them in the same way as privatization receipts to fund the deficit. So even if we don't get as much as we're expecting from the mobile licences the budget's macro framework will not be affected. The deficit will be no different. Q: Let's assume you get the budget through unchanged. Do you think the central bank will reduce interest rates as a result? A: I don't expect the National Bank to reduce this year. But I expect inflation to fall in the second half of this year and to continue falling next. So if nothing negative happens we can expect interest-rate cuts in the second quarter of next year. Q: You're on record as saying you'd like to abolish the remaining restrictions on capital movements next January. Is this really a good time to do that? A: We originally agreed with the International Monetary Fund and the Organization for Economic Cooperation & Development that we would do that at the end of 1999. But with the Asia crisis everything changed and we decided not to go ahead, again after discussions with the OECD and IMF. But capital flows are already more or less liberalized. There are just a few restrictions -n mainly on moving funds from Poland to abroad. But there are so many sophisticated financial instruments and markets now that big companies aren't really restricted so keeping the controls discriminates against small companies, which we don't want to do. Still, I have to discuss this with the National Bank before making a decision. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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