The World Bank In Poland

COUNTRY CONTEXT

The well-diversified Polish economy is among Europe’s least affected by the COVID-19 pandemic. Nevertheless, GDP declined by 2.7 percent in 2020, the first output contraction in over 20 years. Before the pandemic, prudent macroeconomic policies, effective absorption of European Union (EU) investment funds, a sound financial sector, and better access to long-term credit fed into inclusive growth and poverty reduction. Real wage growth and a range of demographically targeted social programs led to robust consumption growth until early 2020. With an improving business environment, Poland integrated well into regional value chains. 

A key challenge over the short term is to continue supporting the sectors most affected by the pandemic while ensuring public debt sustainability. The unprecedented policy response to the COVID crisis has narrowed the available fiscal space. Increased spending efficiency is needed to rebuild fiscal buffers for future countercyclical policies and to prepare for the growing fiscal burden arising from the increase in the number of elderly people. 

Over the medium term, a key challenge to sustained growth is a tightening labor supply that has been made more acute by the aging population. Achieving decarbonization commitments is another challenge. Strengthening institutions at both the national and subnational levels is a necessary ingredient to sustained and inclusive growth and the narrowing of regional disparities. 

Last Updated: Apr 14, 2021

Strategy

Since the 1990s, the World Bank has been one of the most prominent development institutions in Poland, providing a total of US$16 billion in loans and helping introduce a number of key policy reforms.

Poland’s relationship with the Bank is based on the recognition that the Bank’s presence in the country continues to generate value-added for both sides: for Poland through access to financial and knowledge services in critical areas, and for the World Bank through a strengthened relationship with a high-income country that can bring development lessons to other countries around the world.

The World Bank Group’s current Country Partnership Framework for Poland concentrates the Group’s engagement on key remaining development concerns, including environmental threats, the health care system, and regional convergence.

KEY ENGAGEMENT

Despite significant efforts to reduce harmful air emissions, during and after the economic transition in the 1990s, Poland remains home to many of the most polluted cities in the EU. Tens of thousands of people die prematurely every year because of smog. The economic costs associated with disease and premature death from exposure to ambient, small particulate matter (PM2.5) could be as high as US$40 billion a year. 

Aware of these problems, as well as of the growing pressure from civil society, the Polish Government has begun taking steps to improve air quality. The World Bank has been supporting these efforts and advising Poland in the implementation of financial mechanisms to launch a national program for anti-smog and energy efficiency. The already established Clean Air Program will reach roughly 3 million single-family buildings that are now primarily responsible for the smog and that need to replace their heating sources and carry out a thermal retrofitting.  

After two years of advisory help provided to Poland, and upon the request of the Polish Government, the World Bank is now preparing a Program-for-Results operation to further support reforms in that critical area. 

In addition to the expected improvement in health outcomes in society, the Clean Air Program may also become a driving force for the Polish economy, especially as the immediate COVID-19 crisis subsides, due to the sheer magnitude of the huge financial resources needed for its implementation and the associated creation of jobs related to insulating buildings and replacing heating systems. 

Last Updated: Apr 14, 2021

Recent Economic Developments

The economy recorded its first contraction since 1991 amid the pandemic, with output contracting 2.7 percent in 2020. The Government swiftly implemented exceptional stimulus and accommodative monetary policy to mitigate the health and social impact and to prevent economic scarring.

The COVID crisis, heightened uncertainty, and effects from negative confidence dampened private consumption (-3.1 percent) and total investment, (-8.4 percent). Government spending to cushion the pandemic’s impacts and a higher public wage bill contributed to the 3.2 percent increase in public consumption, while public investment remained stable. The current account surplus rose to 3.5 percent of GDP. 

The stimulus packages have been effective in preventing a sharper increase in unemployment and earnings losses by subsidizing salaries and supporting domestic enterprises via non-returnable transfers, loans, and tax relief and deferrals, among other measures. The increase in the unemployment rate was contained to 1 percentage point year-on-year by January 2021, rising to 6.5 percent.

The large fiscal stimulus and the decline in economic activity caused the fiscal deficit to widen to an estimated 8.5 percent of GDP in 2020. Inflation reached 3.4 percent in 2020, primarily due to lower international fuel prices and food prices. Higher electricity tariffs and a record low reference interest rate prevented a sharper decline in inflation. 

Economic Outlook

Trade recovery in the euro area, combined with improved confidence and a rebound in private consumption and investment, is expected to support a moderate recovery of around 3.3 percent in 2021. The outlook incorporates the uncertainty arising from the new strains of COVID-19 and the current pace of the vaccination campaigns throughout Europe. Exceptional policy accommodation in Poland and in the EU more broadly is expected to continue throughout 2021, including near-zero policy interest rates. This baseline assumes that the pandemic is contained, with a vaccine effectively rolled out in 2021.

The persistence of the crisis is expected to put a continued financial strain on poor working households that are more vulnerable to reductions in work hours and job losses. Therefore, the share of the population at risk of poverty could remain elevated through 2021 before gradually recovering in 2022. 

Pent-up domestic demand, especially for capital and durable goods, and stronger demand for Poland’s exports from key EU trading partners will support a recovery in the industrial sector and exports. 

The fiscal deficit is expected to narrow starting in 2021, as the economy recovers and as support measures are targeted to the most affected sectors and vulnerable groups.

Last Updated: Apr 14, 2021

PROJECT SPOTLIGHT

Odra-Vistula Flood Management Project

The World Bank has been partnering with Poland to strengthen the national flood protection system and secure the lives, health, and property of citizens since 1997, when the devastating “Millennium Floods” struck the country. 

This natural disaster reminded Poland of its intrinsic vulnerability to flooding caused by the mountainous and hilly landscape and by decades of neglect. 

In 20 years, thanks to World Bank support, a considerable stretch of the Odra River has been secured, while Wroclaw, one-third of which was flooded in 1997, today is a vibrant European city. 

After significant investments along the Odra River, the Government shifted its attention to Poland’s longest river, the Vistula, where the needs are still high. In 2015, the Government launched the Odra-Vistula Flood Management Project. Its development objective is to increase access to flood protection for people living in selected areas of the Odra and the Upper Vistula river basins and to strengthen the institutional capacity of the Government to mitigate flood events more effectively. 

The total project costs are US$1.317 million, with World Bank financing amounting to US$504 million. The project implementation period is eight years. Subsequent contracts for civil works and technical assistance are being signed and are currently under implementation.