According to a recent report by the EBRD, the region’s transition economies have typically run into balance of payments trouble when the gap between the current account deficit and FDI inflows exceeds 5 percent of GDP. In Poland the gap between the external deficit and FDI inflows stands at 3.9 percent of GDP. Much of the FDI has been generated by proceeds from privatization, however, which is set to wind down in 2001, leaving the economy vulnerable to a severe correction unless the external balance improves.

The larger than expected rise in inflation in July to a two-year high of 11.6 percent (up from 10.2 percent in June) was fuelled by high world oil prices and rising food costs caused by poor weather-related agricultural performance. Given these conditions, the government’s failure to tighten fiscal policy threatens economic stability.

Poland’s largely unprofitable farms are protected by subsidies and tax exemptions, but many farmers feel disenfranchised. Government delays in purchasing grain to bolster prices have fuelled farmer protests. The real problem is one of overproduction and a lack of alternative sources of employment for Poland’s many family farmers. Poland’s jobless rate rose to 11.8 percent in July, boosted by registrations from new graduates and lay-offs in industries hit by declining exports. Miners, teachers, and healthcare workers are disgruntled, making it all the more likely that the government will relax fiscal stringency as it tries to forestall protests.

Poland’s public sector is overstaffed, mismanaged, and ineffective, according to economists of the independent think tank Market Economy Research Institute. Public sector employment exceeds 3 million, or about 30 percent of the country’s workforce.

Public sector income—chiefly from taxes and mandatory fees—accounts for 47.3 percent of GDP, while spending stands at 48.7 percent of GDP. Public debt is 55 percent of GDP, and debt servicing costs incurred by the Treasury, communes, state-run special funds, government agencies, state-run higher learning institutions, and state and municipal institutions account for 7.7 percent of public revenue.

Under these circumstances, the only effective way to deal with the economic imbalance is through tightening fiscal policy. However, the political difficulties of recent months combined with the presidential election in October and the prospect of a general election next year are making the budget process unusually awkward. The process has become particularly difficult since Leszek Balcerowicz, of the Freedom Union party, a strong advocate of strict financial discipline, resigned as Finance Minister. His successor, Jaroslaw Bauc, faces a highly sensitive task.

The government recently announced an additional duty-free quota of cereal imports to counter agricultural inflation, and it will soon decide whether to lift tariffs on petroleum and fuel oil imports. Many observers note that the government is unwilling to take decisive but unpopular action and that it is particularly averse to reforms that would alienate the large and influential agricultural constituency.

Despite these problems, Poland’s government remains optimistic about the future. For 2001 it projects that GDP will grow 5.7 percent, the current account deficit will be reduced from 7.7 percent in 2000 to 7.1 percent, and average annual inflation will decline three percentage points to 6.1 percent.