Many economists spoke of Poland’s debt rising “as in Gierek’s times” during the rule of the Civic Platform (PO) and the Polish People’s Party (PSL). The same accusations are being levelled today at the current government. This is a harsh charge, as the debt incurred in the 1970s was not repaid until the beginning of the political transition, in 2012, after it had been halved by creditors.
However, these were completely different figures and a completely different situation. In 1980, foreign debt in convertible currencies reached USD 24.1 billion (USD 66.3 billion in 2011 prices). In 1989, after debt servicing had been suspended in the early 1980s, foreign debt swelled to USD 42.3 billion (USD 77.4 billion in 2011 prices).
More, but Not Much
Compared to the current numbers, this seems an insignificant amount. According to the latest data from the Ministry of Finance, public debt stood at PLN 1.28 trillion at the end of June 2023, up by PLN 10.9 billion (+0.9 per cent) compared to Q1 2023 and up by PLN 39 billion compared to the end of 2022. Finance sector debt amounted to PLN 1241.6 billion, up by PLN 31.7 billion (+2.6 per cent) in Q2 2023 and up by PLN 32.1 billion (+2.7 per cent) compared with the end of 2022. General government debt (calculated according to the EU methodology), which is a part of the Maastricht fiscal criteria, stood at PLN 1581.2 billion at the end of Q2 2023, an increase of PLN 49.3 billion (+3.2 per cent) in Q2 2023 and of PLN 69.0 billion (+4.6 per cent) compared with the end of 2022.
Rhetorically, the reference to Gierek may seem justified, but even the most critical economists do not compare the current situation with that bygone era. Not only the amounts but also the circumstances are completely different. The debt of the People’s Republic of Poland, in simplest terms, was incurred under the government’s agreements with other governments and banks. Today, the volume of debt covers the entire public finance sector, including local governments with their high degree of financial autonomy. The communist People’s Republic of Poland did not have a presence on the financial markets and the zloty was not a convertible currency. As a result, if the government wanted to pay its debt in dollars, it had to get hard currency by selling something abroad. That was a problem because apart from coal, few Polish goods were in demand in the hard currency economies.
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The Importance of Bonds
Today, as in other countries, public debt results from bond issuances. Most of these are denominated in zlotys, although in foreign markets, some are issued in euros, dollars, and even the Swiss franc or the Japanese yen. Government securities are purchased by foreign and domestic investors, including banks and other financial institutions, as well as ordinary citizens. In August alone, the Ministry of Finance sold retail bonds worth PLN 4.97 billion.
Thus, not only does the debt have a completely different structure, but its servicing is also much more flexible: there is no need to raise money for upcoming instalments at the maturity of a series of bonds, and debt can be rolled over with another issue. Of course, this is possible as long as the country enjoys market confidence and investors do not demand too high a risk premium, which would significantly increase debt servicing costs. Fortunately, Poland still enjoys market confidence and there is no indication that it will end.
Relatively Little
More important than the nominal level of debt, which is steadily rising, is the ability to service the debt. One simple indicator is the ratio of debt to GDP. Here, Poland is looking much better. According to the Ministry of Finance’s quarterly report on the public finance sector debt, published on 11 September, general government debt amounted to 48.4 per cent of GDP at the end of Q2. This is significantly less than the EU average. Most EU countries currently have higher debt: 6 have debt exceeding 100 per cent of GDP, and as many as 13 countries have debt of more than 60 per cent, which is the upper limit under the Maastricht criteria. In Poland, the threshold is enshrined in the constitution.
Poland’s score looks particularly good given the economic turbulences of recent years. Debt to GDP rose to 57.2 per cent in 2020 from 45.7 per cent the year before. This was primarily the result of the pandemic, the price of which was paid for with a massive economic slowdown, while debt-financed spending including a range of subsidies increased.
The situation is under control and there is no cause for alarm, but it is good to remain vigilant. Debt will grow in the coming years, if only because of existing and expected arms contracts and the cost of investment in the energy transition.
According to the government forecast included in the recent Strategy for Managing the Public Finance Sector Debt in the Years 2024-2027, the public debt ratio in EU terms is expected to remain below 60 per cent of GDP threshold. While respective debt interest will grow as well, the increase will be marginal. The Strategy predicts an increase in the cost of public debt from 1.8 per cent of GDP in 2023 to 1.9-2.0 per cent of GDP by 2026-2027. At the same time, there are many indications that the economy will soon return to a trajectory of rapid growth, which will increase public revenues, reduce borrowing needs, and make it easier to pay existing debt.