In its 2006 annual update on Monetary Policy Transparency in Poland, Oxford Analytica (OA) concluded that Poland's overall score of "Compliance in Progress" remains unchanged from 2005. The National Bank of Poland (NBP) is still widely respected as an independent institution with high professional standards. The OA report states the NBP operates as a fully independent entity, although there are valid concerns that the NBP may be prone to political pressures, specifically from the Polish Congress. Efforts to rewrite the NBP Act to make the Monetary Policy Council more responsive to government economic priorities have raised further alarm regarding NBP independence. The NBP's practice of publishing inflation projections has become a transparent and effective mechanism to communicate the NBP's stance. Also, the NBP's 2005 revisions to the macroeconomic modeling framework have boosted the link between the projections and MPC decisions. Regardless of recent political maneuverings by members of the government, it appears unlikely that the NBP's independence will be compromised, given the increasingly clear and formal framework in which monetary policy is conducted.

General Overview

In December 2006, Oxford Analytica (OA) published its yearly update on Monetary Policy Transparency in Poland. It noted that the National Bank of Poland (NBP) had continued its commitment to monetary transparency. OA attributes this success to a series of legislative amendments in the wake of Poland's accession into the European Union (EU) that have made Poland broadly compliant with best practices of monetary transparency. For instance, the NBP conforms to European Central Bank (ECB) regulations on central bank independence and, overall, the NBP works with the ECB to ensure full convergence with best international standards. The NBP Act was updated upon EU membership to ensure full compliance with EU and international standards. As a result, the National Bank of Poland has grown in prestige, and is now widely lauded as an independent institution with high standards of professionalism.

Nevertheless, the OA report points out that the NBP has been widely criticized for its lack of continuity in policymaking and for coming under increased threat of political interference. Critics point to efforts to amend the NBP Act in 2004, which was designed to make the Monetary Policy Council more reflective of government economic priorities. According to OA report, this has lead to concerns about NBP independence, since the appointment of MPC members is subject to some political influence. Plus, a new Commission for Financial Supervision (CFS) was established in September 2006 to replace the Polish Securities and Exchange Commission (PSEC) and the Insurance and Pensions Supervisory Commission (IPSC). Critics point out that the new body might be more prone to political interference. In practice, however, the OA report states that the NBP's decision-making process is highly rules-based, and the lack of institutional continuity does not appear to have had a significant impact on monetary policy.

The OA report states that the NBP's publications and tradition of free information dissemination will continue its critical role in shaping the economic policy debate in Poland. This contribution may be augmented, according to the OA report, as the Polish government's commitment to fiscal consolidation is tested. Poland's next phase of Euro accession will require the use of strong fiscal discipline. The OA report predicts that the NBP, through its ongoing work with the Polish government, will play an important role in fostering this, whether for the purpose of facilitating Poland's euro adoption or for improving the economic conditions facing the country.

According to the 2006 Article IV consultations with the International Monetary Fund (IMF), Poland enjoys strong, well-balanced growth, with only limited pressures on core inflation and the current account deficit so far. Nevertheless, the consultation also notes that "a better anchoring of inflation expectations at the central target is a challenge for the MPC" (pp. 14). Concerned that past MPC statements could be interpreted as signifying a greater MPC emphasis on avoiding overshooting, rather than undershooting, inflation targets, the IMF encouraged the MPC to consistently communicate with the public, perhaps through the publication of MPC minutes, that the MPC targets the central rate with symmetric risks around it. The IMF consultation also notes that, in contrast with recent years, the NBP accumulated large foreign exchange reserves in 2005. The NBP attributes this primarily to receipts of EU transfers. Unlike in 2004, payments to the EU budget were done in zlotys not euros, so these contributions did not offset inflows of EU funds. The NBP is committed to tackling this problem as part of its efforts to meet reserve needs for ERM2 (the European Exchange Rate Mechanism 2) and eventual euro adoption.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

FC

The 2006 OA Report on Monetary Policy Transparency in Poland rates Poland's compliance with this principle as "Full Compliance." The Polish Constitution of 1997 and the Act of the National Bank of Poland (NBP) determines the roles, responsibilities, and objectives of the central bank. The NBP Act was updated in December 2003 to ensure full compliance with EU standards, even though some issues remain unresolved. According to the Polish Constitution, the NBP, specifically the NBP's MPC, has the "exclusive right to formulate and implement monetary policy" (p. 306) The MPC is headed by the NBP president, two vice presidents and seven others, all of whom are appointed in equal parts by the President of Poland, the Senate, and the Sejm (Polish lower house of parliament) for a term of six-years (only the NBP president may serve up to two consecutive six-year terms). MPC members cannot be removed from office, except under strict legal criteria.

The NBP Act mandates price stability as the main goal of Polish monetary policy, adding that the central bank "shall at the same time act in support of government economic policies, insofar as this does not constraint pursuit of the basic objective of the NBP" (p. 306). Only the central bank may issue currency and determine monetary policy. According to the OA report, while there have been power struggles over setting monetary policy between the NBP and the Polish government in the past, the NBP has mostly had its way. The NBP has freely floated the Polish zloty since 2000 and has no plans to intervene, even though it holds the right to do so if it is convinced that exchange rate developments may undermine its main policy objective to ensure price stability. According to OA, since Poland joined the EU in 2004, the NBP has adhered to European Central Bank regulations on central bank independence. The only exception to this is the requirement to set the exchange rate regime jointly with the Council of Ministers.

The OA report also warns that the Polish practice of simultaneously appointing nine external MPC members - the Senate, the Sejm, and the Polish President each appoint three - creates room for political influence. In other words, the fact that MPC members are appointed by Poland's two parliamentary chambers inevitably politicizes the selection process. The Polish government has no plans to change this appointment process. Nonetheless, OA notes that Poland's monetary policy standards have been consistently high, and over the long term, the central bank's policy has matched the expectations of analysts and observers. For instance, the NBP Act stipulates that all Council members be specialists in the field of finance and that they are not permitted membership in any political party or union during their tenure.

In terms of operational autonomy, according to the OA report, the NBP has adopted a collaborative and non-confrontational relationship with the Ministry of Finance. This has led to the forming of the Public Debt Management Committee, which meets monthly and includes representatives from both institutions. Also, regarding the institutional relationship between monetary and fiscal operations, the NBP is constitutionally forbidden to do any lending to the government to cover any part of the budget deficit. However, without undermining its basic price stability mandate, the NBP is permitted to support government economic policies through its monetary policy-making efforts. For instance, the NBP is permitted to buy and sell treasury securities in open market operations, invariably using its own securities. Also, the NBP discloses the balance of government debt held by the NBP on its balance sheet. Information on the maturity of government securities is not listed.

The OA report states that, under the NBP Act, the NBP is required to keep the accounts of banks, the National Saving and Credit Cooperative, the Bank Guarantee Fund, the state budget and other bodies approved by the central bank president. Through its involvement in Poland's Commission for Banking Supervision (CBS), which is led by the NBP president, the NBP is also tasked with operating the country's banking system and managing the various activities of the financial sector. By the end of 2007, the responsibilities of the CBS were transferred to the newly created Commission for Financial Supervision (CFS).

Regarding central bank involvement in the economy, the NBP Act requires the central bank to critique the government's budget bill and to comment on indices like fiscal sustainability, budget balance, and the government's macroeconomic growth assumptions. This opinion is then submitted to parliament. The NBP Act also stipulates that the central bank may act as a financial agent to the government by servicing Poland's foreign debt and by concluding loan agreements. However, the NBP does not incur any of the liabilities of the Treasury under these circumstances.

Open process for formulating and reporting monetary policy decisions.

CP

The 2006 OA Report on Monetary Policy Transparency in Poland rates Poland's compliance with this principle as "Compliance in Progress." Having essentially completed the dis-inflationary process, the NBP has embarked on an inflation-targeting regime since September 1998 in the run-up to adopting the euro. In terms of framework and monetary targets, the OA report states that even against the backdrop of strong zloty appreciation, the NBP has consistently maintained its commitment to exchange rate flexibility but retains the right to operate a dirty float, if need be. Changes to the floating exchange rate regime are currently viewed as unlikely before ERM2 membership. Poland's fiscal consolidation plan foresees a public sector deficit of less than 3% of GDP by 2009. The government has a policy of not setting a target date for euro accession to avoid losing credibility if it has to be changed later.

According to the OA report, the NBP primarily uses interest rates as a tool to install Poland's inflation-targeting regime. It conducts open-market operations, using seven-day money market bills, to ensure compatibility of short-term interest rates with the inflation target. During unexpected short-term changes in liquidity, the central bank conducts bill issues and repo operations. The NBP buys securities and issues long-term bonds to change longer-term liquidity levels. In terms of standing facilities, the NBP issues overnight (Lombard) credit and end-of-day deposits. The MPC is responsible for setting Poland's monetary policy and objectives. The OA report states that, even though the Polish president is largely impartial in terms of appointments, the parliament has been influenced by political pressures. Nevertheless, according the OA report, MPC appointment debates have been highly professional, and thus any press criticism may be discontinued.

The MPC is responsible for setting the NBP reserve ratio, the base interest rates, and the annual monetary policy guidelines. Information on all MPC members and their voting records is publicly available on the NBP website. The OA report states that, among EU nations, Poland is unique in appointing all external MPC members at the same time. In November 2004, the European Central Bank (ECB) ruled that Poland fell short of ECB recommendations, adding that "it would enhance the long-term independence of the decision-making body if vacancies in the Monetary Council are not filled 'en bloc.'" Rather, the ECB preferred that members be appointed and their terms of office expire at different times. This would allow "sufficient interim periods between subsequent appointments" and "ensure that membership of the decision-making body is not determined by political cycles" (p. 310).

Regarding public statements on monetary policy, the NBP produces several publications (all published on its website), including the Annual Report (containing such information as overall economic conditions and financial sector developments), the quarterly Inflation Report, and three journals that are published at least monthly. The NBP website includes daily updates on interest rates, exchange rates, and other financial sector data. The NBP also began publishing its inflation projections in September 2004, and it has been released quarterly since. The OA report states the NBP is notably forthcoming with its macroeconomic modeling methods detailed extensively in NBP's publications. Regarding public hearings, the OA report lauds the NBP for holding press conferences after all MPC meetings and for circulating press releases with explanations of monetary policy decisions. On the negative side, the OA report notes that MPC meeting minutes are not publicized. But MPC members are free to opine publicly, despite the short-time volatility that such comments sometimes cause.

Regarding regulations on data reporting by financial institutions, the NBP gathers information from banks and other institutions monthly. These data are then used to draft Poland's monetary policy before being publicly disclosed in regular brief and reports, according to the OA report. The CBS conducts all banking supervision. By the end of 2007, the CBS will be shut down and its responsibilities transferred to the CFS. The OA report notes the IMF has expressed concern that the reform will weaken banking supervision. However, according to the OA report, while the new body may become more vulnerable to political interference, banking supervision is not a core central bank activity and that banking sector supervision could even strengthen NBP independence.

Public availability of information on monetary policy.

FC

The 2006 OA Report on Monetary Policy Transparency in Poland rates Poland's compliance with this principle as "Full Compliance." According to the report, "Poland subscribes to the International Monetary Fund's Special Data Dissemination Standard (SDDS), and fulfills its specifications for the coverage, periodicity, and timeliness of monetary data" (p. 313). The NBP publishes and releases online its analytical accounts monthly, including the NBP's balance sheet and details of reserve money and net foreign assets going back to 1999.

The lone shortcoming in Polish monetary statistics, according to the OA report, is the paucity of data on inter-bank positions and the difficulty in identifying government gross and net standings. In this regard, the OA report states that the NBP is consulting with the ECB to ensure full adherence to best international standards. According to the OA report, many observers have criticized the regularity of Poland's balance-of-payment data, and the way EU funds are accounted for. Nevertheless, the NBP Act mandates the central bank to "draw up an account of the national balance of payments for reporting purposes, along with balances of the foreign assets and liabilities of the central government" (p. 313). The OA report finds that the NBP possesses sufficient resources to adequately collect, process and deliver data. Regarding the release of central bank data, the NBP publishes an advance release calendar on its website. The NBP also publishes a consolidated balance sheet, including a breakdown of the NBP's assets and liabilities, in the monthly Information Bulletin. An annual balance sheet and an income statement are both published in the NBP Annual Report, which includes full descriptions on movements in assets and liabilities and changes in their structure. As part of its mandate to ensure the stability of the financial system, the NBP is permitted to act as a lender of last resort (all last-resort lending is fully collateralized). The NBP then publishes the aggregate amount it provides as emergency financial assistance in its Annual Report. According to the OA report, the NBP has one of the most thorough public information services in Europe.

Accountability and assurances of integrity by the central bank.

CP

The 2006 OA Report on Monetary Policy Transparency in Poland rates Poland's compliance with this principle as "Compliance in Progress." The NBP Act mandates the central bank to report its financial results and its Annual Report of Monetary Policy to the Sejm (Polish lower house of parliament). The NBP president is also required to submit quarterly data on balance of payments and annual data on Poland's assets and liabilities to the Sejm. The OA report notes, however, that few legal avenues exist to criticizes or demand changes in the NBP reports. Since 2004, the NBP's dealings have been subject to independent audits by an external auditor to be selected by the MPC. That external auditor was Ernst & Young in 2006. The NBP's Internal Audit Department prepares an internal audit plan that focuses on areas of the greatest perceived risk. The auditor's recommendations are then publicly announced with an implementation timetable and deadline. The Supreme Chamber of Control is mandated to audit the NBP, specifically regarding the management of the state budget accounts and the performance of such key NBP tasks like setting monetary policy and the management of reserves.