Strategy for Poland
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DOCUMENT OF THE EUROPEAN BANK FOR RECONSTRUCTION AND DEVELOPMENT STRATEGY FOR POLAND Attached as approved by the Board of Directors at its meeting on 25 April 2006 TABLE OF CONTENTS ABBREVIATIONS ....................................................................................................................................... 4 EXECUTIVE SUMMARY ........................................................................................................................... 5 1. THE BANK’S PORTFOLIO.................................................................................................................... 8 1.1 Overview of activities to date ............................................................................................................. 8 1.2 Implementation of the previous country strategy .......................................................................... 10 1.3 Transition Impact of the Bank’s Portfolio and Lessons Learned................................................. 11 1.3.1 Financial Sector........................................................................................................................ 11 1.3.2 Enterprise Sector...................................................................................................................... 12 1.3.3 Infrastructure and Environment............................................................................................ 13 1.3.4 Overall assessment ................................................................................................................... 14 1.4 Financial performance of the existing portfolio ............................................................................. 14 1.5 Mobilisation of co-financing............................................................................................................. 14 2. OPERATIONAL ENVIRONMENT...................................................................................................... 15 2.1 The General Reform Environment.................................................................................................. 15 2.1.1 Political background ................................................................................................................ 15 2.1.2 Legal Environment .................................................................................................................. 15 2.1.3 Environmental Issues............................................................................................................... 16 2.2 Progress in Transition and the Economy’s Response .................................................................... 16 2.2.1 Macroeconomic conditions relevant for Bank operations.................................................... 16 2.2.2 Transition Success and Transition Challenges...................................................................... 17 2.3 Access to Capital................................................................................................................................ 23 3. STRATEGIC ORIENTATIONS............................................................................................................ 24 3.1 Bank’s Priorities for the Strategy Period........................................................................................ 24 3.2 Sectoral Challenges and Bank Objectives....................................................................................... 25 3.2.1 Financial Sector........................................................................................................................ 25 3.2.2 Enterprise Sector...................................................................................................................... 25 3.2.3 Infrastructure and Environment............................................................................................ 26 4. CO-OPERATION WITH OTHER IFI’S............................................................................................... 27 ANNEX 1: NET CUMMULATIVE BUSINESS VOLUME BY INDUSTRY ........................................ 30 ANNEX 2: COMMITTED PROJECTS PER YEAR ............................................................................... 31 ANNEX 3: SELECTED ECONOMIC INDICATORS............................................................................. 39 ANNEX 4: RATINGS FROM THE 2005 ASSESMENT OF TRANSITION CHALLENGES............. 40 2 ANNEX 5: COMPARATIVE STRUCTURAL CHANGE INDICATORS ............................................ 42 ANNEX 6: POLITICAL AND SOCIAL ASSESSMENT......................................................................... 43 ANNEX 7: ENVIRONMENT..................................................................................................................... 48 ANNEX 8: OVERVIEW OF THE EBRD TC FUND AND OFFICIAL CO-FINANCING................... 54 Appendix 1 Breakdown of TC Projects................................................................................................. 55 Appendix 2 Breakdown of TAM Projects............................................................................................. 60 Appendix 3 Breakdown of Official Co-financing Projects .................................................................. 65 ANNEX 9: ASSESSMENT OF THE POLAND’S COMMERCIAL LAWS .......................................... 67 3 ABBREVIATIONS EC European Commission EIB European Investment Bank EMU European Monetary Union ESCO Energy Saving Company EU European Union FDI Foreign Direct Investment FI Financial Institutions GDP Gross Domestic Product IAIS International Association of Insurance Supervisors IFC International Finance Corporation IFI International Financial Institutions IMF International Monetary Fund IOSCO International Organisation of Securities Commissions ISPA Instrument for Structural Policies for Pre-Accession MEI Municipal and Environmental Infrastructure MSME Micro, Small and Medium Enterprises NATO North Atlantic Treaty Organisation NBFI Non Bank Financial Institution NBP National Bank of Poland OECD Organization for Economic Co-operation and Development PLN Polish zloty PPP Public Private Partnership SME Small and Medium Enterprises TC Technical Cooperation UNCITRAL United Nations Commission on International Trade Law USD United States Dollar WSE Warsaw Stock Exchange 4 EXECUTIVE SUMMARY Poland continues to meet the conditions specified in Article 1 of the Agreement Establishing the Bank. Over the last 15 years Poland has made considerable progress in the transition process. With about 75 per cent of economic activity generated by the private sector, a large degree of price liberalisation, an open foreign trade regime and fairly liberal foreign investment conditions the country is one of the most advanced transition economies. The accession of Poland to the EU in May 2004 has positively influenced output growth, trade, agricultural incomes and infrastructure investment. Economic growth reached 5.3 per cent in 2004 and 3.2 per cent in 2005. The growth has been mainly driven by a net increase in exports, though investment and consumption demand picked up in the fourth quarter of 2005. General government deficit according to ESA’95 methodology (with open pension funds classified inside the general government sector) fell to an estimated 2.5 per cent of GDP in 2005, after reaching 3.9 per cent of GDP in 2004. Public debt is just above 50 per cent of GDP according to the Polish methodology (or around 42.5% of GDP according to ESA’95 methodology). At the end of 2005 inflation declined below 1 per cent and as a result the Monetary Policy Council reduced the policy rate to 4 per cent, a historical low. Strong export growth and a significant increase in net transfers helped bring the current account deficit down to around 1.5 per cent of GDP in 2005. However, continued fiscal reforms remain essential to maintain macroeconomic stability and allow adoption of the Euro in the medium term. The highest unemployment in the EU of about 18 per cent and strong regional disparities remain possibly Poland’s greatest challenges. The five poorest regions of the EU are located in the country. Competitiveness, business climate and job creation should therefore be on top of the political and economic agenda. With respect to structural and institutional reforms, some progress has been achieved in privatisation and restructuring of state-owned enterprises. In the last two years the most visible transactions were the sales of minority stakes in PKO BP, the largest Polish bank, LOTOS, the oil group and PGNiG, the gas company. Restructuring of the steel industry has been almost completed, after the sector became profitable in 2004 following years of losses and difficulties. A number of large state-owned companies, including PZU and PKN Orlen, have also initiated major restructuring and labour retrenchment plans to adapt to increasingly competitive economic conditions. Numerous new listings on the Warsaw Stock Exchange contributed to some deepening of financial markets. There has been further improvement in the quality of the banks’ loan portfolio. Consumer regulation and protection have also gained momentum as the Banking Arbiter became fully operational. Looking forward, the country still faces a number of challenges: • Structural measures need to be implemented to reduce fiscal deficit and public expenditures, including in the healthcare and social benefits, whilst maintaining adequate levels of social protection. • A reduction in administrative barriers, improvements