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Kolodko sees lower zloty pre-euro zone entry

Working Papers



14th November 2002, Skopje, Macedonia
By Wojciech Moskwa

Polish Finance Minister Grzegorz Kolodko said on Thursday his country needed fast economic growth to propel it to a speedy euro-zone entry.
He also tried to stem the recent rise in the zloty by saying it was likely to be much lower against the euro when its rate versus the single currency was locked prior to Polish euro zone entry.
"We will see how the zloty rate will be until its last days (Poland adopting the euro currency), but it will surely be weaker, much weaker than now," he told reporters on the sidelines of a conference in the Macedonian capital Skopje.
Kolodko said fast economic growth over the next few years would allow budget reform in Poland without boosting the state deficit. This would make it possible to hit Poland's euro accession target date of 2006 or 2007.
Poland is expected to join the EU in 2004 along with nine other mostly east European states. It must rein in its budget gap and keep a lid on inflation to qualify for the euro.
Kolodko said that according to EU standards, Poland's budget deficit stood at 4.4 percent of GDP in 2002 and was projected to fall to 3.9 percent next year.
But in 2004 Poland's budget will be burdened by an extra three billion euros, or 1.5 percent of GDP, in EU-related costs, making the belt-tightening needed to meet the euro's three percent budget deficit ceiling "next to impossible", he said.
"We are facing a big budget problem in 2004. We can meet our target and fulfil the Maastricht (euro) entry criteria in 2005 only if the economy is flying," Kolodko said.
Kolodko said further improvement of Poland's policy mix, mainly lower interest rates, would help the country recover from its worst economic slump in a decade -- which has raised unemployment to nearly 18 percent.
"Domestic demand is finally growing, in a non-inflationary way," he said, adding annual price growth would drop to around one percent in October before rising slightly.

Kolodko again moved to talk down the zloty, saying the unit would not hold recent gains. But he failed to convince market players who continued to buy the unit, betting on successful EU entry and its support to the economy.
Such hopes have already boosted the zloty 2.5 percent against the euro and 5.8 percent versus the dollar over the last month.
"A strong zloty is not a long term trend, it's an artificially inflated exchange rate which hurts the competitiveness of Poland's economy," Kolodko said, referring to portfolio capital inflows.
The government wants to weaken the zloty to help exporters, but the central bank is reluctant to intervene on the market, given the huge flow of portfolio capital drawn in by a still large difference between Polish and EU rates.
Kolodko also said it was in the EU's long-term interest to have a vibrant Polish economy, signaling that locking in the zloty at too strong a rate against the euro would keep the formerly communist state uncompetitive for years.
The finance ministry and the central bank have said that they would seek to join the euro at a "market rate from a specified period" but have given no details.