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poland

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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: 065 - (26/09/02)

Poland is the key player in EU entry negotiations for Central Europe. Its sheer size accounts for this, with a population of nearly 40 million and an economy that has attracted by far the most foreign direct investment (FDI) at nearly US$40bn, of any ex-communist state.

The backlog of history
The history of Poland accounts for many of the difficulties arising from adhesion to the EU. Poles are immensely sensitive to any infringement of their sovereignty, which is after all involved in EU entry. Dismembered by is neighbours in the three Partitions of Poland from 1772 to 1795, it lost its very national independence and mostly became a vassal of Russia. After a brief spell of independence between the wars it was divided up again between the USSR and Germany in 1939.
The long communist period was a time of much frustration, through which the Poles were sustained by their staunch Roman Catholic faith. The emergence of Pope John Paul II in 1978 was a crucial turning-point. His visit to Poland the next year was a major event, the people themselves organising his week-long itinerary around the country, the 'Peoples Republic' becoming a reality for a change. Solidarity was born shortly afterwards.
Stalin made a famous remark when he said that communism fitted Poland like a saddle fitted a cow. He, nevertheless, duly did the saddling. The imposition of military rule in 1989 was the tacit acknowledgement of this. In 1989 Poland led the way to the collapse of communism by having the first non-communist government in the Warsaw Pact.

Anomalies remain
Stalin did make one concession to Polish exceptionalism. He allowed the small farmers to remain outside the state and collective farm system, unlike in Ukraine and Russia, whose kulaks were dispossessed and mostly destroyed. Poland's small peasant farmers eked out a meagre living for all that, deprived of proper equipment to farm their usually small plots of land. Today, they are not in much better shape.
Coalmining was another traditional industry that has entered a long decline. The EU is demanding compliance with the rules of the Common Agricultural Policy (CAP). But it is insisting on Poland having subsidies of only a quarter the EU level for a decade or more and low quotas for many products. Ruin and extinction face many small Polish farmers. Coalmining will also not receive the full subsidies of existing EU members.
Foreigners are due to be allowed to buy Polish land within a few years, arousing atavistic fears. Many Poles, not just the farmers, want there to be a delay here for twelve years, or at least as long as full CAP subsidies and quotas are being denied them.
The new government of ex-communists under Premier Leszek Miller is pressing Brussels to relent. The relevant chapters of the Acquis Communautaire have yet to be concluded by Poland. In this it is sticking up for small farmers and coalminers throughout the bloc of new entrants.
The Pope made a plea to the Poles on his recent visit home to remain steadfast in its course to join the EU. It is, indeed, virtually unthinkable that this should not prevail. But there are hard negotiations to come.

Economy picking up
Although Poland is still very poor by EU standards, its economy is doing well in many respects. A slowdown of growth to 1-1.5 per cent this year is not unexpected in the context of slow EU-wide growth. It has had the advantage of bringing inflation right down to just over 2% per annum this year from an expected 4.6% figure. A disadvantage, however, is that the national debt has risen from 41% to 50% of GDP.
Still these figures make Poland a possible candidate for entry into Euroland, which requires inflation of under 3%, the same for the budget deficit as a percentage of GDP and a national debt: GDP ratio of under 60%, all manageable by Poland. It just needs a return of growth and that depends largely on German and EU policies broadly outside its control.
What is more or less in its power is fiscal policy. Monetary policy is in the hands of its independent national bank, run by the architect of Polish reform as finance minister in the early 1990s, Leszek Balcerowicz. He is hawkish on interest rates and there is likely to be little relaxation of them on his watch unless inflation is squeezed right out. 

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AGRICULTURE

Poland to export 0.5m tonnes of grain 

Poland will export half a million tonnes of grain in the coming few weeks, including countries of the EU, Agriculture Minister Jaroslaw Kalinowski told reporters on 31st August in Jawor, southwest Poland, PAP News Agency has reported.
Kalinowski, in Jawor for its Bread Fair, said the grain deal was purely the result of a shifting market. "This is not a government project or organized by any agency, but purely commercial. Until recently our grain prices were comparable to world markets but the recent sinking of intervention prices and raised subsidies have made it cheaper than both US and EU, and this opened up a chance for our exporters," Kalinowski explained.
Kalinowski also announced changes in the grain market regulation system.

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AUTOMOBILES

IGA keen to continue with foreign facilities


Despite a slump in European auto car sales, Inter Groclin Auto (IGA) President, Zbigniew Drzymala, is confident of continuing the runaway success of his car components factory. IGA invested 43m zlotys in technology in 2001, but now Drzymala plans to halt Polish expansion and rather take advantage of the tax breaks and relatively low labour costs in Ukraine, to which end the construction of a new factory has already begun. The 10m Euro car sea and seat cover plant is being built in the Uzgoros special economic zone and is slated for completion next year, Warsaw Business Journal has reported.
Referring to the Ukrainian factory project, Drzymala explained: "In the next few years we intend to increase our capacity and to raise our investment in improving the quality of our production facilities."

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BANKING

Pekao loses points on lowered asset quality

Fitch has downgraded the financial strength rating of Poland's top listed bank, Pekao, from C to C/D on lowered asset quality. Pekao, a unit of Unicredito Italiano, "has experienced significant deterioration in asset quality, with a strong increase in irregular loans, especially in the 'lost' category," Fitch explained. "Furthermore, the reserve, coverage of lost loans fell to 65% at end-June 2000," Fitch added, Bluebull reports. 
The agency predicts additional loan loss provisioning and also believes that the operating environment will keep restraining revenue growth and increase the impact of provisioning costs. Long-term, short-term and support ratings have been affirmed at BBB+, F2 and 2, respectively. Fitch noted that the bank's long- and short- term ratings at the sovereign ceiling for Poland benefit from the support of strategic shareholder UniCredito Italiano (rated AA-, AA minus).

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ENERGY

German company gets exclusive negotiating rights for Polish power supplier


RWE Plus AG has obtained exclusive rights, from 9th September to 30th September, to negotiate the purchase of a stake in the Warsaw electricity distributor, Stoen, the press office of the State Treasury Ministry announced in a communiqué on 6th September, PAP News Agency has reported.
In July the Treasury announced that it was holding parallel negotiations with three foreign bidders interested in the purchase of a stake in Stoen, EDF International SA, Electrabel International Holdings BV and RWE Plus AG.
The companies placed binding bids to buy Stoen shares in early June.

Polish refinery interested in Russian oil giant offer

PKN Orlen could be ready to pay the price, initially negotiated by a consortium of Rotch Energy and Lukoil, for a 75 per cent stake in Rafineria Gdanska SA, PKN Orlen CEO, Zbigniew Wrobel, said on 6th August, PAP News Agency has reported.
"PKN could be ready to accept the price a Rotch and Lukoil consortium has initially negotiated for Rafineria Gdanska shares," Wrobel said during an Economic Forum in Krynica. Lukoil head, Wagit Alekperov, said in the 'Gazeta Wyborcza' daily that the company is ready to pay US$274m.
"We are not sure if we will pay more as we haven't performed a due diligence on the refinery. We are, however, ready to accept the price as we want to reach the deal as quickly and possible," said Wrobel who has shown interest in the RG stake for a long time.

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FINANCIAL NEWS

National output beats expectations, rises 6%


Industrial output in July went up by 2.9% compared to June. This raised the year-on-year increase to 6%, even higher than the 4% expected by analysts, the Central Statistical Office (GUS) announced recently. However, analysts caution that the result should be met with guarded optimism, as a few more months must pass before being able to speak of recovery. On the up side, results are promising as production went up in 21 out of 29 sectors examined with paper mills recording the best figures. Their output shot up 149% compared to the same month last year, Bluebull reported. Suppliers of office equipment, computers and transport enterprises also reported positive results.

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FOOD & DRINK

Polish reforms threaten Wyborowa brand


Pernod Richard's best-known Polish vodka, Wyborowa, is under threat of serious dilution from a planned Polish law on alcoholic drinks, the Financial Times has reported.
The French drinks company bought the rights to Wyborowa when it acquired control of state-owned distiller Polmos Poznan in a privatisation deal a year ago. It has since invested about 4100m (US$99.6m) in Poland and exports about half the Wyborowa vodka it produces through its international network.
But Pernod says two provisions of the draft law would reduce Wyborowa - which means "select" in Polish - along with its Luksusowa - "luxury" - brand to generic designations, effectively allowing other Polish distillers to use the names. A company official called the proposed measures a "denationalisation," and said Pernod Ricard had lodged protests with French and European commission diplomats, as well as Policy government officials and political parties. "You can't accept €100m and with the other hand take away the rights to a brand," said Yves Flaissier, chairman of Pernod-owned Wyborowa SA. "We are treating this as a legal renationalisation."
The complaint will hit Poland at a sensitive time as it seeks to wrap membership negotiations with the European Union. Administrations have faced allegations in the past of mistreating foreign investors, notably in the financial services sector.
For Pernod, it marks the latest chapter in the company's long-running campaign to assert ownership of Poland's leading vodka brands in an often hazy and conflicting legal environment.
The latest case comes after Polish lawmakers in the lower house's agriculture committee introduced the provisions to the draft law. These require that the two vodka brands be made in Poland from specifically-designated local ingredients. The requirements have support across the political spectrum, especially in rural parties which want to ensure that raw materials for vodka be sourced locally. But Pernod says it sources its ingredients locally anyway, and it pledged to keep the Wyborowa brand in Poland for at least 12 years as part of last year's privatisation agreement. "The fact that Wyborowa is made in Poland is a very strong part of our brand," Mr Flaissier said.
The company claims the draft violated EU and Polish law, and that it will take legal action it if is passed in its current form. The government's own European Integration Committee has warned that the provisions would contravene EU legislation.
The law is expected to reach a vote when MPs return from the summer break.

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FOREIGN INVESTMENT

Foreign investors undeterred by lower SEZ tax breaks under EU regulations

Poland's recent general agreement with the European Commission on the contentious issue of reducing its tax breaks for foreign companies that invest in Special Economic Zones (SEZ) has not put off foreign companies from moving forward with investment projects, major foreign investors said, the Warsaw Business Journal has reported.
When it launched its SEZ programme in 1997, the government promised up to 20 years of public aid in the form of tax breaks at twice the European Union's level for companies investing in economically stifled or underdeveloped areas. Poland originally granted 100% tax breaks to companies investing in SEZs for the firms' initial 10 years and a 50% break for the second 10 years. The EU, whose regulations Poland must adopt to join the bloc in 2004 or 2005, maintains a maximum tax-break ceiling of 50% for most industries, except motor vehicle producers. The generosity of the programme, however, had to be limited in 2000 to satisfy EU competition legislation and its stricter public aid levels.
Automobile producers, which are subject to stricter public aid levels than other manufacturers according to EU law, were among the major foreign investors that received SEZ permits in Poland before the cut-off date on January 1st 2001. Both General Motors Corp. (GM), which invested in a production plant in Gliwice in the Katowice SEZ and Toyota Motor Corp., which invested in a manufacturing plant in the Walbrzych SEZ in southwestern Poland, have been in talks with the government to defend their interests. But according to Przemyslaw Byszewski, GM's spokesman in Poland, his firm is confident it will reach a compromise on the issue.
The latest progress in talks sees the motor industry receiving a 30% maximum public aid level, in contrast to 15-18% in EU member countries.
"A 30% level is something we talked about and are willing to accept," Byszewski said. "It's definitely a good first step and a good signal for solving the problem."
Despite the tax-break reductions, most foreign companies have not been discouraged from further investment in SEZs. Toyota announced last March that it would boost its investment in the Walbrzych SEZ to include an engine production plant. The enlargement, slated for the end of 2004 would create 700 new jobs in the area, a company spokesperson said.
Other industry officials agree that despite Poland having to change its SEZ tax-break limits to conform to EU standards, its negotiations with the bloc in this area have been a major achievement.
"What the government is offering is the most it could gain from the EU, and the negotiated terms are already major achievements," said Adam Pawlowicz, the former president of the Policy Agency for Foreign Investment (PAIZ). "For most companies it is a trade-off. They lose out on money, but in the near future they will be compensated through Poland's accession, which will mean greater stability, predictability and credibility and a better business environment for investors, which should boost the inflow of FDI. At the end of the day, the deal foreign investors are getting is still much better than in the rest of the EU."
Although Poland's Office for Competition and Consumer Protection (UOKiK), the governmental body overseeing the negotiations, reached a primary consensus with the European commission, the EU's executive arm, on July 26th, the closure of the SEZ issue at the ministerial level is not expected until the end of September.
The EC has bowed to most of Poland's demands, according to Alina Urban, the UOKiK's spokeswoman, although one outstanding issue still remains: What to do with the companies that received permits between January 2000 and January 2001. The EC says these companies acted in bad faith since by 2000 it was clear that the laws on public aid levels would change. The body believes these companies hopped in on a last-chance basis to take advantage of the SEZs' hefty tax breaks. While the UOKiK is still pushing for these companies to be included in the initial batch of companies that received permits before the implementation of EU regulations, it is confident that the issue should not cause any further delays in the closing of Poland's EU negotiations, Urban said. 

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FOREIGN LOANS

EU funds to finance river improvements in eastern Poland

The EU's PHARE [aid to Central Europe] fund will channel considerable sums into water upgrades on the Bug river, in future to form a part of the EU's eastern frontier, PAP News Agency has reported.
A PHARE-supported water protection programme for the Bug will start off soon in Wlodawa, eastern Poland, in cooperation with a German agency. The 3m-euro programme, to be completed until November 2003, will include sewage upgrades and the construction of a 22-km sewage system in Wlodawa.
The Bug protection scheme is Wlodawa's first PHARE-approved project.

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TELECOMMUNICATIONS

Polish telecom operator, Swedish company sign 35m-euro deal

Ericsson has signed an agreement with Telekomunikacja Polska SA to supply and maintain telecommunications equipment for data transmission for 35m euros, Ericsson has said in a communiqué, PAP News Agency has reported.
Ericsson said that its offer will make it possible to build convergent multiservice networks for data, video and voice transmission within a uniform packet network.

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