Abstract
The aim of this paper is to examine the economic policy response to the COVID-19 crisis in Poland. The paper investigates the rationale for the economic policy tools implemented, their costs, and potential consequences for the Polish economy. The analysis concentrates on the initial phase of the crisis (March–April 2020). The study proves that the scope of economic policy adjustments in Poland might be viewed as relatively wide. Monetary policy tools and fiscal packages implemented induce profound consequences for the Polish economy. The total new financing needed by the government for anti-crisis measures results in a significant increase in the public debt ratio, from 44% in 2019 to 51.5% in 2020, and in a state budget deficit of 7.6% of GDP in 2020. Although the projected debt ratio is still below the 55% alert threshold prescribed by the Polish legislation, policy makers should consider risk factors. First, under an extended lockdown scenario financing needs might be larger than initially estimated. Second, if the Polish zloty depreciates due to external pressures, the debt ratio increases even more as 30% of the Polish public debt is denominated in foreign currencies. Financing the fiscal packages is not possible without the support of the central bank (NBP). The scope of the quantitative easing policy required is comparable in relative terms to programmes implemented in the United States after 2009. Therefore, economic agents should expect an unprecedented increase in the NBP balance sheet and money in circulation. This should have an impact on price levels in Poland, at least in the long term. The worst-case scenario is stagflation, characterised by sluggish economic growth and rising inflation.
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Notes
- 1.
Significant slumps in stock markets were observed also in developed countries. Andersen et al. (2020) indicate that stock market indices in Sweden and Denmark followed almost the same trajectory throughout the crisis, decreasing by 25% and 30%, respectively (comparing the mid of March 2020 with the year beginning). Many other asset classes behaved similarly to equity in the initial phase of the crisis. However, Demir et al. (2020) show that cryptocurrencies started to become a hedge against the crisis as the effect of COVID-19 deepened (as a positive relationship with the number of reported COVID-19 cases and deaths started to prevail).
- 2.
Zaremba et al. (2020) indicate that in the period January–April 2020 stock market volatility across the globe increased significantly as a result of government interventions (such as information campaigns and public event cancellations).
- 3.
The literature indicates both unidirectional and bidirectional causality between development of stock market and economic growth (see Pradhan 2018).
- 4.
Tourism is one of the most affected industries across the globe by the COVID-19 pandemic, amongst other due to travel bans and border closures. Negative effects of pandemics for tourism industry were observed by Karabulut et al. (2020) for pandemics occurring in the period of 1996–2018. They indicate that pandemics decrease tourist arrivals, but this effect exists only for low-income economies.
- 5.
However, there are economists expecting the opposite (see Loayza and Pennings 2020).
- 6.
The NBP forecasts a recession of −5.4% for 2020 (NBP 2020).
- 7.
Similarly, governments and central banks around the world have implemented unprecedented fiscal and monetary packages to counteract the COVID-19 economic crisis (see Reuters 2020). Elgin et al. (2020) show correlations of population age, health sector and economic characteristics with stimulus packages announced by governments. They specifically indicate that the extent of the stimulus is more pronounced in countries where the median age is higher, the number of hospital beds per-capita is lower and GDP per-capita is higher.
- 8.
Effectiveness of monetary policy and interest rate pass-through in emerging countries have been highly debated in the literature. For instance, Avci and Yucel (2017) indicate that policy-led rate changes are fully transmitted to market rates in Turkey within eight months. They also stress that the interest rate pass-through effect depends on several factors, including competition in the banking sector, exchange rate flexibility, inflation, regulatory quality, GDP growth, monetary growth, industrial growth, and capital inflows.
- 9.
The decision on the level of interest rate in Poland is restricted for the Monetary Policy Council, a body of the National Bank of Poland.
- 10.
Broll et al. (2018) prove that imposing a more stringent capital requirement to the bank has the desired effect that limits the bank’s incentive to take on excessive risk, given that the bank’s smooth ambiguity preferences exhibit non-increasing absolute ambiguity aversion.
- 11.
Public infrastructural investment is widely considered effective in increasing economic growth. Bayraktar (2019) proves that the impact of public investment on economic growth is much larger for middle- and high-income countries than for poorer economies. She also indicates that a higher volatility of public investment might, however, lower growth rates significantly.
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Appendix
Appendix
Public debt and public budget balance in Poland in the years 2016–2020 (% of GDP). (Source: Own compilation based on CEIC data (ISI Emerging Markets). Other remarks: The figure depicts public debt (left scale) and public budget balance (right scale) as % of GDP. Forecasts (own compilation) for 2020, realised data for 2016–2019)
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Sobanski, K. (2021). Economic Policy Response to the COVID-19 Crisis: The Case of Poland. In: Bilgin, M.H., Danis, H., Demir, E. (eds) Eurasian Business and Economics Perspectives. Eurasian Studies in Business and Economics, vol 18. Springer, Cham. https://doi.org/10.1007/978-3-030-71869-5_7
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