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  POLAND

REPUBLICAN REFERENCE

Area (sq.km)
304,500

Population
38,633,912

Capital
Warsaw

Currency
Zloty

President
Aleksander Kwasniewski

Private sector
% of GDP

70% 

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Background:
Poland regained its independence in 1918 only to be overrun by Germany and the Soviet Union in World War II. It became a Soviet satellite country following the war, but one that was comparatively tolerant and progressive. Labour turmoil in 1980 led to the formation of the independent trade union "Solidarity" that over time became a political force and by 1990 had swept parliamentary elections and the presidency. A "shock therapy" program during the early 1990s enabled the country to transform its economy into one of the most robust in Central Europe, boosting hopes for acceptance to the EU. Poland joined the NATO alliance in 1999.

Update No: 060 - (18/04/02)

The economy in Poland has ground to a halt, GDP is growing at 0.3% per year as of the last quarter of 2001. The opposition and not a few in government are convinced that the central bank is to blame. There is a new government of ex-communists in Poland lead by Leszek Miler, that routed a Solidarity-led coalition last year. Solidarity, a relic of the anti-communist struggle, is no longer even in parliament, failing to pass the 5% of the vote base.

Independence of the Central bank
The Central bank is independent in Poland, a fact extolled by the IMF and other international bodies. But this carries with it an obsession to curb inflation before all else. Hence high interest-rates and low growth.
The incumbent central bank chief is a particularly hard-line monetarist, Leszek Balcerowicz, a veteran reformer largely responsible for the launch of Poland on its transition to capitalism as finance minister in the early 1990s. He is the last man to want to be cast as soft on inflation. The annual rate of inflation is 3.5%, as of February, the last month for which figures are available.
There are voices in opposition and government arguing for cancellation of central bank independence. They are not likely to be heeded so long as the government wants Poland to join the EU.

The EU beckons
The most important project of all is entry into the EU, which is on course for 2004, or perhaps a year or two later. A majority is in favour, according to opinion polls, but there are difficulties.
The small farmers (two million of them) and the miners fear being put out of a job, while Poles generally are very wary of the idea that foreigners should be allowed to buy up land, as EU regulations require. They have a long memory and dread their country suffering the fate of dismemberment that befell it in the partitions of 1772-95, which saw it lose its independence.
Then again the obligation to join the Euro is an ambivalent affair. For it means surrendering control of monetary policy, not just to an independent central bank, which is still Polish in composition, but to foreign central bankers. The Poles are in two minds about that idea.

The Polish vision of Europe
The immediate prospects are none too good, with Europe's whole economy and especially giant Germany's economy next door in depression. But Poland is becoming seen as a major player in Europe and its voice is certainly heeded in France and Germany, whose leaders have annual meetings with the Polish president, a more than ceremonial figure. Aleksander Kwasniewski, the president, has called for 'a Europe of Fatherlands,' a very Polish vision, given the Poles' fierce patriotism, nurtured in the long nights of several occupations. The president told Poland in the Convention, a group of leaders from parliaments and governments that: "Polish experience…… speaks in favour of respect for the national factor, for building a Europe of fatherlands, for appealing to the fundamental values from which our civilisation arises." Scepticism about a 'superstate' and a vision of 'Europe des patries' were of course hallmarks of De Gaulle's policy towards the EU, or Common Market as it was then known. De Gaulle is a big figure for the Poles because he fought with them in 1920 with Weygand in defeating a Soviet invasion.
The president, speaking on February 18th, made it clear that as the natural leader of the accession states it expects to have a role in the unfolding future of Europe. It intends to form an 'eastern dimension' similar to Finland's 'northern dimension' for the Baltic states. Poland's views should carry weight in EU policy towards Russia, Ukraine, the Baltics and the whole region of Central Europe.
This, indeed is a new role for a country long marginalised in European history, justifying the president's claim that the debate was "one of the most important in Polish history." Poland will be the sixth largest EU state, but strategically so placed as to 'punch above its weight.' The president's remarks were addressed to the whole nation, not just its leaders, and were clearly designed to win the people over to the European idea, on which he has staked his career. The new former communist government is also deeply committed to it and its advent last year was welcomed in Brussels. One in five seats in the lower house went to anti-EU parties. But 71% of Poles intending to vote in a coming 2003 referendum are pro-EU, even if only 56% of all voters are.
Poland's place as a key European state, the natural gateway to the east across its flat plains north of the Carpathians, looks assured. Those plains carried Napoleon's and Hitler's armies into Russia. Now they carry natural gas and commodities from Russia in exchange for goods. Foreign investors are taking advantage of its excellent location and incentives to investment, with low wages and a well-educated multi-lingual work force, to come to town; over US$40bn has already been invested. More can certainly be expected. The Poles are on the map again.

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AVIATION

Polish airlines signs agreement with international airline alliance

Polish Airlines LOT on 4th April signed a preliminary agreement on stepping into an alliance with Star Alliance which is headed by Lufthansa, LOT said in a press release, PAP News Agency has reported.
LOT will become a full fledged member of the alliance in several weeks time. Earlier, all the fifteen members of the alliance have to express their approval.
An interest to include LOT Polish national carrier into aviation alliance has been also displayed by British Airways leading OneWorld alliance.
LOT has been seeking a strategic partner since the collapse of Qualiflyier which came as a result of the bankruptcy of Swissair Group, LOT's strategic investor.

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BANKING

State to retain control of PKO BP for 5 years

Savings giant Powszechna Kasa Oszczednosci Bank Polski (PKO BP) will remain under state control for another five years at least, while a consortium led by pan-European insurer Eureko will assume control of Powszechny Zaklad Ubezpieczen (PZU). However, the latter decision will come into effect, only under "different conditions," Treasury Minister Wieslaw Kaczmarek stated recently. "At the end of 2003, there will be a public offering (IPO) of PKO BP on the Warsaw Stock Exchange," Kaczmarek told the Warsaw Business Journal. "But privatisation will be leverage for development of the bank, not for the sake of privatisation itself."
Kaczmarek also noted that minority stakes would be sold following a review of the bank's "medium and long-term missions and strategy." The minister would not provide specifics on the size of the IPO. Although Kaczmarek's vision for sectors across the economy is fundamental to the country's development, this vision has irked governments, opposition parties and foreign investors with plans for a variety of Poland's most valuable assets still emerging.
In the case of PKO BP, Kaczmarek has failed to outline a definite plan. However, analysts expect that 30 to 40 per cent of Poland's largest bank by assets will succeed in attracting considerable interest. "Over the long term, PKO BP will have to be part of the global financial group, and the strategy of keeping it independent isn't sustainable," explained Grzegorz Zawada, banking analyst at Erste Securities Polska.
Kaczmarek is adamant that the Eureko-BIG Bank Gdanski consortium can still control PZU, Poland's top insurance group. "It can happen, but under quite different conditions," the minister said, refusing to specify what those terms would be. He added that rejection of a Treasury-backed compromise to the Eureko affair led to the dismissal of Zygmunt Kostkiewicz as PZU president, along with two members of the insurer's management board.

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ENERGY

Poland pumps crude oil to Germany via Russian pipeline

The Friendship oil pipe exploitation firm has sent the first 10,000 tonnes of crude oil from deposits in Debno near Zielona Gora to the German, Mider, refiner in Spergau, the company spokesman Tomasz Zakrzewski told PAP News Agency on 25th March. He added that the firm planned to export about 0.5m tonnes of oil annually.
Polish oil can be sent from Debno to Spergau after deposits were connected to the western part of the Friendship pipeline which delivers Russian oil to Germany.
Oil and earth gas deposits were discovered in Debno in 1993 with exploitation launched in 2000.

Poland considers pulling out of Norwegian gas agreement

In an interview with Poland's Gazeta Wybocza recently, Polish Economy Minister Jacek Piechota announced that Poland is considering pulling out of an agreement with Norway to buy natural gas worth 100bn Norwegian crowns. The reason is that Poland does not require as much as gas initially estimated, The Norway Post reported. 
Norway entered into an agreement - the contract was signed in September 2001 by the Labour government which was then in power - with Poland to deliver gas during from 2008 to 2024.

Polish businesses enjoy new contracts and sales

Swedish power company, Sydkraft has acquired a 51 per cent stake in district heating company, Energyetyka Cieplna for a total of 95 million Swedish crowns. Energetyka Cieplna, owned by the northern Polish city of Slupsk, sells around 300 gigawatt hours of district heating per year, New Europe reported quoting Sydkraft, who also noted further plans to expand in the Polish district heating sector. Meanwhile, French engineering company, Alstom, has been awarded a contract amounting to some 125m Euros for the upgrading of the country's Elektrownia Turow power plant, the Warsaw Business Journal reported.
The plant is the major supplier of electricity in southwest Poland and, together with an adjacent mine, one of the area's major employers. The consortium leader for the supply of the steam turbine plant will be Alstom Switzerland, while the major components will be produced by Alstom companies in Poland. 
In other recent business developments, the Polish State Railways (PKP) informed hat it has signed a loan agreement with the European Bank for Reconstruction and Development (EBRD) amounting to 470m zlotys (US$12m). The loan funds will be used to pay PKP's debts.
In an interesting turn of events, the Association of Polish Engineers and Technicians in Germany (BPITD) stated that Polish businesses could label their products "Made in Germnay" even though the whole production process took place on Polish territory.

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EU ACCESSION

Poland set to reach deal on key part of EU talks

Poland and the European Union were on 21st March set to close long-running negotiations on a key part of Poland's planned accession to the EU, the Financial Times reported.
Following agreement on a compromise over the sale of Polish land to foreigners, the two sides are expected to conclude their talk on the free movement of capital, as well as a separate chapter on indirect taxation regulations.
However, a surprise intervention on 20th March by the Netherlands over Poland's respect for foreign investors threatened to complicate what is an already- tortuous negotiation process.
Before signing up to the deal, the Netherlands insisted that the European Commission monitor the way Poland handles the privatisation of formerly state-run enterprises. The commission pledged to present a report on the issue by the end of May.
"For the moment, we think that with the Commission's declaration and assurances from the Polish side, we have enough to close the chapter," said a Dutch diplomat.
"We trust the Polish side to honour the commitments they've made. But nothing is settled until everything is settled."
Dutch officials have expressed concern over Poland's treatment of Euroko, a Dutch-based insurance group, which with a Polish partner owns 30 per cent of Powszechny Zaklad Ubezpieczen, Poland's largest insurer.
Eureko was promised 51 per cent control of PZU through an initial public offer under an agreement with Poland's former government signed last year.
But Leszek Miller's left-wing cabinet says it is unwilling to cede majority control of the company, which it deems of strategic importance, to a foreign investor. PZU controls 60 per cent of Poland's insurance market and manages assets worth 26bn zlotys (US$6.3bn).
Eureko has lobbied the Dutch and Polish governments and the European Commission over the dispute. The pan-European company's interventions in Brussels have infuriated some Polish government officials, who claim Eureko's legal claim to the majority stake is shaky and are angry at its attempt to link the dispute to Poland's EU membership talks.
The compromise on land sales, which follows months of tense talks, bans farmland and forest sales to foreigners for 12 years after membership as Poland fears land speculation and is sensitive about the issue because of its history of foreign domination.
Poland lags behind most other first-wave candidates in the number of negotiating chapters closed and, like other candidates, faces a year-end deadline if it hopes to join in 2004.

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FOREIGN INVESTMENT

Poland wants to boost investments in Lithuania

Poland wants to intensify promotion of exports to Lithuania, encouraging businessmen to invest in that country, PAP News Agency has reported. In 2001 Polish-Lithuanian trade turnover reached a record high value of US$1.03bn, the Economy Ministry said on 28th March.
Trade exchange has been on the rise since 2000, with its value (in 2000) growing by more than 31 per cent in relation to the previous year. The value of Polish exports rose by 29 per cent compared to 1999 and exports of ready food products remained at the 1999 level.
Lithuania is Poland's 13th export market and 26th import partner. Poland exports to Lithuania chemistry products, electronics and machines, and plastics, and imports mineral products, wood, wooden and chemistry products.
Poland is Lithuania's fifth export market and third import market.
There are 735 firms with Polish capital in Lithuania (mainly packaging, service-rendering and trading companies). Polish firms invested over US$51m in Lithuania, with Warta Glassworks, Telewizja Polsat, ComputerLand, Energopol Trade being the biggest investors.

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FOREIGN LOANS

New EBRD Poland strategy to help promote growth

The EBRD will concentrate its future activities in Poland on sectors that can best promote growth and help the country's eventual accession into the European Union. In its new strategy, published on www.ebrd.com on 18th March, the Bank describes an increasing focus on investments in municipal infrastructure, banking and non-banking institutions, small businesses, large-scale industries and agribusiness. Alain Pilloux, Business Group Director for Central Europe, said these are the areas in which the EBRD is best placed to make a difference.
The Bank also expects to sign one of its largest ever loans in Poland on March 19th to Polskie Koleje Paristwowe SA.A. (PKP), the national railway, to support its ongoing restructuring and development. The €130m loan, together with over €2m which has been provided in technical cooperation funds by the EU, will help PKP undertake financial restructuring to support its new subsidiaries. This builds on a €100m loan from the EBRD in 2000, which helped finance the company's labour restructuring scheme to boost productivity. The PKP loan illustrates the Bank's new strategy to support the country's ongoing development.
Having invested over €2.5bn in Poland - including €588m last year alone - and mobilised an additional €8.6bn, the EBRD has played a pivotal role in promoting Poland's reform over the past decade. The Bank will also continue to help marshal grants from donors to strengthen legal, regulatory and other institutions, and to support intense policy dialogue. The strategy puts the Bank in a stronger supporting role, pinpointing activities that could have the most impact, and should ultimately help attract additional foreign investment, which is critical to ensure future dynamic growth.
The strategy stresses that a key priority for the recently elected coalition government will be to accelerate structural reform so as to achieve robust growth and increase productivity and competitiveness in the economy. There is a need to accelerate investment in infrastructure, at both the national and local levels, attract foreign investment, support the development of new businesses, improve the value-added of Polish output and facilitate trade to more diverse markets. Moreover, the strategy says the authorities must restructure and privatise public utilities and complete the modernisation of non-competitive state-owned banks and industrial companies that continue to strain the central budget. 
The EBRD will aim to help address these key areas. In particular, the Bank will boost investments in infrastructure - such as through the forthcoming PIP loan - and in environmental projects in municipalities. The Bank will attempt wherever possible, to make these loans without relying on a sovereign guarantee. Late last year, for example, a €16.7m non-sovereign Bank loan helped the city of Rybnik make waste-water collection more efficient, reduce public health hazards and cut pollution levels in local rivers. The EBRD has already invested €158m in municipal projects across Poland.
Likewise, the EBRD will stand ready to assist the process of modernising existing large-scale industries to improve efficiency and promote competition. At the same time it will develop new projects to promote regional growth and provide employment opportunities.
In the financial sector, the Bank will support non-bank financial institutions, including those that provide pensions, insurance and mortgage finance, and also aim to strengthen the banking sector through modernisation and some consolidation. The EBRD will continue to work with local intermediaries and other institutions to strengthen small and medium-sized enterprises. Recently, the EBRD, working with the EU, provided loans to two Polish banks to on-lend to small businesses across the region. In Poland alone, the Bank has to date provided over €100m to support SMEs.
Another key challenge for the authorities is the development of Poland's agribusiness sector. The EBRD's strategy highlights where the bank could play a role; by improving competition, providing finance to develop businesses and improving production standards of locally produced food products. The Bank will also continue to work with other government and multilateral institutions. In 2000, for example, a €32m facility was set up by the EBRD with the EU to provide finance to local banks to support Poland's dairy sector.
The EBRD is aware of the challenges of the region, and, working with the local authorities, revises its country strategies every two years, with the aim of making the fullest impact on the countries as they develop towards a market economy.
For further information contact Jazz Sing, EBRD, tel: +44 20 7338 7931; e-mail singhja@ebrd.com.

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INDUSTRY

Amica to sell LG goods in west European markets

Amica, Poland's biggest home appliance manufacturer, has entered into an agreement with LG Electronics for the sale of its goods on West European markets bearing the LG logo. This is similar to an agreement with Samsung, europemedia.net reported. "I can confirm we have begun cooperation with LG," said Amica CEO Wojciech Kaszynski. 
The firm plans to sell about one million shares to LG, a figure mounting to more than 11 per cent of its total share capital. The sale of shares is due to be completed by mid-2002, and an agreement will shortly be signed on a public reissuing of one million shares on the WSE. "We have already chosen the financial institution to run this operation," Kaszynski noted.

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INFORMATION TECHNOLOGY

Portals add services so as to increase revenue

In the hope of bridging the revenue gap brought on by a drop in Poland's online advertising market, the country's four major Web portals are introducing new paid-for services. Onet, Wirtualana Polska, Interia and Gazeta.pl have noted plans to remain focused on providing content, online shopping and advertising in order to make some money. While Gazeta still expects to generate about 75 per cent of its revenue from ads, the portals are increasingly turning to extra services, Europe-media.net reported.
Online advertisers spent some 24 million zlotys (6.6m Euros) in 2001. This year, analysts expect spending to amount to about 30m zlotys (8.3m Euros). Both Interia and Wirtualna Polska have begun offering paid-for services for mobile phone subscribers to download ring tones and logos. Also, Wirtualna Polska is looking at mobile Internet and iTV services in efforts to turn profitable, while Gazeta is considering premium newspaper content. However, critics say commissions and fees from Internet transactions is not enough to pull Poland's portals out of the red. 
Furthermore, the revenue crunch is causing some portals to turn away from consumer services. Hoga recently decided to close its portal and concentrate of IT solutions for SMEs.

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TELECOMMUNICATIONS

KGHM seeks investor to bail out ailing TL unit

KGHM Polska Miedz, owner of Wroclaw-based Telefonia Lokalna (TL), is not likely to pump more funds into its loss-making telecom unit this year. However, it is still hopeful of finding an investor willing to do so, the KGHM office noted recently, New Europe has reported.
Wojciecj Marcinak, KGHM's director of investor relations, said the firm did not intend to pay any part of the 200m zlotys funding it promised to give TL by March 31st 2002. KGHM has instead postponed the investment commitment to the end of the year, even though actual payment is "doubtful," Marcinak stated, quoted by the Warsaw Business Journal.
"We are looking more carefully at the investment programme at TL and we ourselves also have a quite a different situation," the director noted, adding, "We are an indebted company with some financial problems."
The copper and silver giant suffered a loss of 190m zlotys last year, mostly a result of TL's own loss of 413m zlotys over the same period. KGHM is the sole owner of TL, Poland's second biggest alternative telecom operating under the brand name Dialog.
While KGHM continues to search for an investor, a process started over a year ago, chances of finding a company interested in developing TL are slim due to protracted negative sentiment toward telecom enterprises and TL's losses and debt load, analysts have stated.

Two consortia declare interest in Elektrim's ET sale

BRE Bank and Eastbridge have reached agreement regarding the joint purchase of 49 per cent of the shares in Elektrim Telekomunikacja (ET), currently owned by Elektrim, New Europe has reported.
The ultimate goal is to consolidate all stakes in ET in a single company by coordinating moves with the Citigroup consortium, also due to buy a 49 per cent stake in ET from Vivendi Universal within the next two months. Eastbridge belongs to both consortia, Eurpemedia.net reported.
BRE Bank's board has not commented on the amount it expects to pay for the Elektrim shares. Company President Wojciech Kostrzewa, refused to divulge whether arbitration proceedings in Vienna involving Elektrim (preventing it from disposing of the ET packet) would pose an obstacle to the transaction. BRE plans to withdraw from the investment within two to three years. 
The BRE-Citigroup investment renders the two per cent of ET shares remaining with Vivendi irrelevant as the latter loses its role as the party with the casting vote. The BRE Bank-Eastbridge-Elektrim consortium has yet to submit a formal proposal and has elected to inform the public of its intentions first. Elektrim has little room for manoeuvre given that BRE and Eastbridge have allied themselves with the buyers of the other major stake.

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TRANSPORT

Metro needs long-term financing plan

Warsaw officials and state legislators are calling for a long-term financial solution for construction of the capital's metro system, which received zl.100m (US$23.8m) in mid-March in national subsidies after heavy pressure from senators and MPs, the Warsaw Business Journal has reported.
"City authorities should stop lobbying Parliament," said Genowefa Maria Ferenc, vice chairman of the Senate's economy and finance committee. "They should instead name specific instruments to finance the metro and agree to them with the Finance Ministry."
Construction on the metro system's first and only line began 20 years ago but is far from completion, as its seven remaining stations exist only on paper. The city plans to open the Dworzec Gdanski station by the end of 2003 and the Plac Wilsona station in 2004. To finance their construction, the city needs zl.850m (US$202m) in 2002-2004, zl.270m (US$64m) this year, according to Warsaw Vice Mayor, Jacek Zdrojewski, who is responsible for the project.
"I know of no city in the world that could finance more than 40% of the costs to build a metro from its own funds," Zdrojewski said. "The decision to build the metro was made by the government and the state committed itself to participate in the project."
But due to budget constraints, the city was to receive just zl.55m (US$13m) this year as part of a regional investment plan.
After the Sejm OK'd an amendment to the state budget bill freeing up the zl.100m, Zdrojewski said the subsidy would allow the city to stick to its construction timetable this year, while the remaining zl.1115m (US$27m) would have to come from loans and city funds.
According to the Civic Platform's (PO) Edwadr Maniura, who sits on the Sejm's transportation subcommittee, the government should co-finance the metro from the central budget because, as the capital city, Warsaw serves the entire country.
A perennial hot potato, the metro could again spark fierce debate in the Sejm this autumn as Warsaw needs another zl.350m (US$83m) in 2003 to keep to its construction schedule, according to Zdrojewski.

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