Independence of Polish Central Bank Becomes EU Issue

Independence of Polish Central Bank Becomes EU
Issue

Poland’s government has been calling on the central bank to
lower interest rates, and now various parliamentary parties are
proposing legislation to limit the bank’s independence.

KATOWICE, Poland – Poland’s central bank
slashed half a point off base interest rates on 29 May but
immediately found itself under pressure from all sides for yet more
radical cuts to boost Poland’s flagging economic
performance.

“‘Disappointment’ is the right
word,” commented Prime Minister Leszek Miller, who in recent months
has been challenging the approach of the bank’s governor,
Leszek Balcerowicz, who served as finance minister during
Poland’s economic “shock therapy” in the
1990s.

Widespread political demands for faster, tougher
action to stoke Poland’s now slow-growing economy have turned
into threats to deprive the bank of its independence.

Government spokesman Michal Tober indicated that
the latest decision by the Monetary Policy Board (RPP) meant that
there was “now not only a dispute between the government and
the RPP, but a dispute between the central bank and representatives
of the Polish economy.” This followed an open letter by a group of
entrepreneurs from both state-owned and private companies on 29 May
in which they expressed their concern about the “current economical
situation resulting from high interest rates and the zloty’s
strength against other currencies.”

The government is pushing the central bank to
lower rates, thereby reducing the attractiveness of the zloty to
investors and reducing the zloty’s value in order to boost
Polish exports. However, the RPP is adamant in its refusal to
intervene in the market. After the latest meeting with government
officials last week, Balcerowicz said that “the RPP has analyzed
the government’s proposals and unanimously concluded that
maintaining the current exchange rate for the zloty is in the
interests of the country.”

Finance Minister Marek Belka indicated that
there would be more meetings with the central bank as part of the
government’s campaign to lower the value of the zloty against
the euro in order to make the economy more competitive before
Poland joins the EU in 2004.

The government has been criticized in the
Western press for its pressure on the central bank. Miller
countered those charges–along with claims that his government was
responsible for the economy’s slowdown and 18 percent
unemployment rate–in an interview for the London-based Financial
Times on 30 May. In the interview, Miller asked, “From Western
Europe’s point of view, which Poland is better? The one with GDP
growth of 7 per cent annually or the one with GDP growth of just 1
percent?” Polish GDP is expected to rise by 1 percent in 2002; in
the fourth quarter of 2001 grew by 0.3 percent.

But the EU currently seems less concerned with
Polish GDP than with the independence of Poland’s central bank. On
25 May, Ernst Welteke, head of the Bundesbank and a member of the
European Central Bank’s supervisory board, warned that “if Poland
wants to be in the EU, its central bank must be independent.” The
EBC is currently assessing whether the Polish central bank can
truly be considered independent at the moment–and Gazeta Wyborcza
quoted Welteke as saying that, if the EBC were to raise doubts,
Poland would find it hard to convince the EU that it should be a
member as the “independence of the central bank is a basic
precondition for entering the European Economical and Monetary
Union.”

The central bank currently finds itself under
pressure from two directions. A group of parliamentarians from the
Polish Peasants Party and Labor Union have proposed a bill that
would limit the independence of the bank by increasing t he number
of members from 10 to 16, with the new members being elected by the
lower house (the Sejm), the Senate, and the president. Meanwhile,
the government’s main parliamentary supporter, the Social
Democratic Left Alliance (SLD), is calling for even more radical
changes, under which the government would set monetary policy, with
the RPP merely offering its advice.

Belka said on 28 May that the government would
not back either proposal, saying both were unconstitutional. He
indicated that the government has its own proposal, which would,
however, meet the requirements of the EU.

A former head of the National Bank of Poland,
Hanna Gronkiewicz-Waltz, who currently serves as deputy head of the
EBRD, appeared to come out in support of more government
involvement in monetary policy-making when, on 31 May, she said
that the government and the National Bank should both be involved
in determining exchange-rate policy.

In all, the central bank has cut interest rates
nine times in the past two and a half years. However, business
activity remains sluggish. Rzeczpospolita, one of the
country’s leading dailies, this week suggested that high
taxes, bureaucracy, and corruption may be negating the lower
interest rates, or that the cuts will only feed through into the
economy in another nine to 12 months, or that, as critics argue,
the RPP needed to wield a sharper knife. “The answer is still
uncertain,” wrote commentator Anna Slojewska. “The RPP
must therefore act by trial and error. What is clear is that it
prefers its possible errors to cause the economy to slow down than
to lead to the return of high inflation.”

According to Finance Ministry estimates,
consumer prices rose by an average of 2.2 percent year on year in
May, a record low, and seem set to be well below the RPP’s
year-end target of 4 to 6 percent.

To read more about the candidate countries,
please visit

Transitions Online.