World Bank: NBP’s response – swift, large and effective in limiting the economic scarring effects of the pandemic

The policy response of Narodowy Bank Polski has been swift and large and effective in limiting the economic scarring effects of the pandemic – adequate liquidity provision remains critical in the short-term. The anti-crisis measures of the Polish government are also adequate, says Asli Demirgüç-Kunt, the chief economist for the Europe and Central Asia region at the World Bank.
World Bank: NBP’s response - swift, large and effective in limiting the economic scarring effects of the pandemic

Asli Demirgüç-Kunt, World Bank (©World Bank)

Obserwator Finansowy: What are the economic prospects of the emerging economies in Europe and Central Asia?

Asli Demirgüç-Kunt: Economic activity in Europe and Central Asia is estimated to have contracted 2.9 percent in 2020 in the wake of disruptions related to the COVID-19 pandemic. The pandemic is expected to erase at least five years of per capita income gains in about a fifth of the region’s economies and raise the poverty headcount. Economies with strong trade or financial linkages to the euro area and those heavily dependent on services and tourism have been hardest hit. Due to a resurgence of COVID-19, the pace of recovery in 2021 is projected to be slower than originally anticipated, at 3.3 percent. The outlook remains highly uncertain, however, and growth could be weaker than envisioned if the pandemic takes longer than expected to fade, external financing conditions tighten, or geopolitical tensions escalate again.

How does the Central Europe region look economically when compared to other subregions of Europe and Central Asia?

Growth in Central Europe is envisioned to firm up in 2021, to 3.6 percent, supported by trade recovery as activity rebounds in the euro area. The outlook has been downgraded, however, amid the recent surge in COVID-19 cases. Exceptional policy accommodation is expected to continue throughout 2021, including near-zero policy interest rates in Hungary and Poland. Among the ECA subregions, fiscal support packages have been largest in Central Europe, at 9.4 percent of GDP, reflecting sizable discretionary measures and loan guarantees, and other credit measures. The European Union (EU) structural fund package to Central Europe as part of its COVID-19 response could help support medium-term growth. Policies that increase the absorption of EU structural funds could also boost regional investment.

Exceptional policy accommodation is expected to continue throughout 2021, including near-zero policy interest rates in Hungary and Poland.

What is the World Bank’s assessment of Poland’s anti-crisis response, including the unprecedented fiscal and monetary stimulus?

The fiscal policy response to the first wave of the pandemic was sizeable and very timely, estimated at 4 percent of GDP in 2020, and 1.5 percent of GDP this year. New credit guarantees and micro-loans for entrepreneurs estimated at PLN 74 billion (3.3 percent of GDP) were also approved. Additionally, as of December 2020, the Polish Development Fund has disbursed PLN close to 71 billion (3.1 percent of GDP) of its liquidity program benefitting more than 340,000 micro, small and medium enterprises.

These programs had a strong positive impact on the Polish economy. Economic growth accelerated in the last quarter of 2020, unemployment rates remained relatively low and stable throughout 2020, and poverty rates have not increased significantly. We expect the poverty rates to resume their decline once the Polish economy returns to a positive growth path in 2021 and 2022.

However, the success of economic recovery in Poland depends on implementing a wide range of reforms. A comprehensive policy effort is needed to rekindle robust, sustainable, and equitable growth. A package of reforms to increase investment in human and physical capital and raise labour force participation, including female labour force participation, could help avert the expected impact of the pandemic on growth in Poland over the next decade. Poland should also use this opportunity to invest in green infrastructure, and fostering the widespread adoption of environmentally sustainable technologies can support faster growth in the long run while contributing to climate change mitigation.

What is the role of central banks in different countries in the fight against the pandemic, and how do you assess their impact in overcoming the pandemic crisis? Is Poland on the right track in this context thanks to the policy of Narodowy Bank Polski?

Central banks in ECA have responded to the economic and financial market shocks induced by the COVID-19 pandemic with broad-based cuts in short-term policy rates, which in many economies are now at, or close to, their effective lower bounds. One-third of advanced economy central banks have reduced their short-term policy rates to 0% or lower, while around 90 percent have lowered them below 1% as in Poland. The policy response of Narodowy Bank Polski has been swift and large and effective in limiting the economic scarring effects of the pandemic. Adequate liquidity provision remains critical in the short-term given the second wave of the pandemic.

The policy response of Narodowy Bank Polski has been swift and large and effective in limiting the economic scarring effects of the pandemic. Adequate liquidity provision remains critical in the short-term given the second wave of the pandemic.

To stabilize financial markets and support activity, many central banks in ECA countries have employed asset purchase programs-often for the first time in the case of EMDEs. Along with spillovers from accommodative monetary policies in advanced economies, these programs appear to have contributed to financial market stability, including in Poland. For example, in Poland, NBP balance sheets have expanded by more than asset purchases on account of increased liquidity provision to banks. Domestic banks have in turn increased their holdings of government debt in some economies. The large asset purchase program in Poland resulted in a 30-point decline in long-term bond yield.

The governing framework, scale, and duration of these programs in emerging economies and developing countries have generally been less transparent than in advanced economies, and the effects on inflation and output in EMDEs are more uncertain. Continued clear policy communication and commitment to central bank mandates are critical for the effectiveness of these interventions and avoiding risks to inflation expectations.

How important is the country’s and the central bank’s cybersecurity, especially when it comes to ensuring uninterrupted access to money and cash?

There are clear indications of a global worsening of the cyber threat environment. The COVID-19 crisis has given rise to additional cyber risks resulting from greater reliance on remote working and mobile banking. The number of cyber-attacks has increased significantly, and according to the IMF, for example, financial services continue to be the most targeted industry. Cybersecurity is increasingly seen as a threat to financial stability as central banks and other financial institutions become increasingly reliant on digital services, such as cloud technologies and application programming interfaces (APIs).

The WB, IMF and other IFIs implemented programs for the development and testing of national and cross-border response protocols, which would significantly improve financial institutions’ ability to respond to cyber incidents successfully. There are also extensive capacity-building programs in the areas of financial cybersecurity offered by the WB and IMF. Building skills, resources, and operational capacity in all countries is very important and would have a global impact.

What are your latest predictions for the Polish economy in 2021 and beyond? Can the labor market remain stable and can conditions be created for strong economic growth?

Our latest GEP report (Global Economic Prospects) estimates that the Polish economy shrank by 3.4 percent in 2020. The Polish economy is expected to grow at a rate of 3.5 percent in 2021 and 4.3 percent in 2022, thus returning to its long-term growth trajectory. There are also encouraging changes in the Polish economy on a micro-level. The latest round of the Poland Business Pulse survey conducted by the WB and the Polish Agency for Enterprise Development (PARP), indicates that during the fall of 2020, 97 percent of companies were continuing to operate, compared to only 91 percent in summer 2020. 82 per cent of companies have received public assistance since the start of the COVID-19 pandemic compared to 66 percent in the summer. However, the impact of COVID-19 on sales is still significant – 52 percent of companies experienced drops in sales, and 72 percent of companies have to deal with a drop in revenue coupled with higher/unchanged costs.

The Polish labour market demonstrates resilience to the pandemic. The country entered 2020 with 5.5 percent unemployment. Since June 2020 the unemployment rate has been stable at 6.1 percent. This shows the effectiveness of the anti-crisis measures of the Polish government aimed primarily at the protection of jobs and maintaining the financial liquidity of enterprises. However, the concern remains that the protective measures could postpone the negative impacts of the pandemic. There are downside risks of worsening labour market conditions in early 2021, following the second pandemic wave and expected winding down support measures for MSMEs compared with the first wave.

What has the year of fighting the pandemic taught us – what should be done faster or better to make the country’s economy effectively prepared for the future?

The Covid-19 pandemic has been a huge blow to human capital, adversely affecting both education and health. In our Fall 2020 ECA Economic Update, we discussed the importance of government policies to ensure human capital can recover from the pandemic. A focus on the quality of tertiary education and health risk factors of obesity, smoking, and heavy drinking are particularly important for the region. Post-pandemic policy initiatives to improve education and health will need to recognize the challenges posed by increased reliance on remote learning and the importance of being prepared for future pandemics, given the vulnerability of the region’s aging societies and a large number of people with underlying health risks.

Unfortunately, the fight is still not over and most of the countries in the region are operating with restrictions to contain the latest wave of the pandemic. In our recent paper “Opening-up Trajectories and Economic Recovery: Lessons after the first wave of the COVID-19 pandemic”, we also provide evidence on the effects of different reopening trajectories, their timing, and speed of reopening on economic activity, using high-frequency data on electricity consumption. Despite the recent arrival of vaccines and new treatments, the virus will continue to present a severe health threat for quite some time. The experience with reopening after the first wave of the pandemic can provide useful guidance on how to improve the reopening process this time around.

When the countries start to reopen for the second time, we believe that a careful, gradual, and transparent reopening process is likely to be optimal in both minimizing the health costs of the pandemic and increasing the chances of a faster recovery. We see that governance, particularly trust in government institutions, is an essential determinant of economic recovery. Specifically, our analyses show that a higher level of trust in government is associated with a faster recovery among countries that carried out a gradual reopening process. There is also suggestive evidence that providing people with objective information and data about the status of the pandemic could be an effective policy instrument in promoting faster recovery, even though causality is difficult to establish. These are issues we will be discussing in depth in our 2021 Spring ECA Economic Update.

interview by Maciej Danielewicz


Asli Demirgüç-Kunt is the Chief Economist of the Europe and Central Asia Region of the World Bank.

Asli Demirgüç-Kunt, World Bank (©World Bank)

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