Prior to the latest crisis, the Suchocka government had made considerable progress in ensuring a stable macroeconomic framework and in pursuing structural reforms. Against baseline projections that pointed to a 1993 deficit in excess of 10 percent of GDP, the government steered through parliament a budget that incorporates revenue increases and measures to reduce expenditures expected to cut the fiscal imbalance to zloty 81 trillion, or 5 percent of projected GDP. After a long and sometimes contentious parliamentary discussion, the budget was approved, with only minor modifications, by Sejm in mid-February, and represents the basis for this year’s macroeconomie policies.

The macroeconomic program for 1993 envisages overall output growth of some 3 to 4 percent, and inflation declining, on a December-to-December basis, to some 33 percent. The current account of the balance of payments would deteriorate, chiefly on account of the effects of the drought on agricultural exports and higher growth in imports. In turn, external reserves are expected to decline somewhat, also depending on how soon a debt reduction agreement with the London Club is consummated.

The policies envisaged to attain these objectives revolve around a strong public finance program. Given the expected small negative external financing of the budget, recourse to domestic credit would amount to zloty 90 trillion, (including placement of treasury bills for zloty 15 trillion), which would allow continued growth in credit to the non-government sector, particularly the private sector. Monetary policy would continue to aim at positive real interest rates. On the exchange rate front, the crawling peg system would be maintained, with the understanding that, depending on wage and budgetary developments, step devaluation’s of the zloty might be necessary.

The government has also moved forward on legislative measures needed to implement its reform agenda. These included the Banking and Enterprises Restructuring Law, which enables re capitalization of the banks and restructuring of enterprises, and legislation to support the multi-track privatization program, including the Mass Privatization Program.

The government has assigned considerable importance to resolving external debt reduction negotiations with its commercial creditors. After the appointment of a negotiator, a number of meetings with the London Club steering committee have been held, and the parties are working on a possible solution, which would clear the way for the second phase of the Paris Club debt reduction agreement, scheduled for 1994.

While the policies pursued by the government are in the right direction and address many of the relevant priorities, the ambitious character of the reform agenda should not be underestimated. Political uncertainty will take some time to resolve, and the government emerging from the election will require time to reassess the reform strategy.

A key constraint to the success of the program is the institutional weakness of the Polish public sector. Patterned after the requirements of a command economy, it is now in the midst of a process of reform to make it compatible with the requirements of a market economy. This process has involved changes in the roles of different layers of government, as well as attempts to create a modern civil service and address problems of public employment. Yet, with a growing private sector increasingly able to attract the best and brightest civil servants, implementation and institutional capacity in the public sector are likely to remain an important issue for years to come.