Poland’s Political Storm Whirls Round Central Bank Independence

By Monika Rozlal

July 13 (Bloomberg) -- The row between Poland’s top two politicians over the central bank deepened yesterday when Piotr Kownacki, head of President Lech Kaczynski’s office, said a government plan to make the bank help the state budget violates the constitution.

Slawomir Nowak, chief political adviser to Prime Minister Donald Tusk, on July 10 warned the government may change the law to make the bank pay its profit to the budget instead of setting it aside to cover currency risks. Kownacki said yesterday such a change would “require the central bank to put Poland’s currency reserves and zloty stability at risk.”

Kaczynski and Tusk are at odds over monetary and fiscal policies before the 2010 presidential election, in which Tusk will challenge Kaczynski. Tusk wants early euro adoption, which the president opposes, and central bank Governor Slawomir Skrzypek, appointed by the previous Cabinet, has supported Kaczynski. Tusk’s proposal harms Poland’s image, analysts say.

“Such intervention by the government would be very controversial and could impair Poland’s image as it would be interpreted as an attack on the central bank’s independence,” said Stanislaw Gomulka, a former deputy finance minister and chief economist at Warsaw’s Business Center Club. “I can’t understand why the government has come up with such an idea.”

Tusk may use tomorrow’s press conference following the government’s weekly meeting to comment on Kownacki’s statement.

Tusk’s Plan

The premier discussed on July 9 with Kaczynski the plan to narrow the 2010 budget deficit by using an estimated central bank profit of more than 10 billion zloty ($3.19 billion). The premier argued this proposal would help avoid tax increases.

The bank responded with a forecast of zero profit this year. Still, Skrzypek later said if any profit is generated, the bank will pay 95 percent to the budget in line with the law.

“There is a risk that in a year or five quarters the zloty price will change and then the central bank must have reserves,” Kownacki said today. Without reserves, the bank “couldn’t fulfill its duties and be a European central bank.”

Jakub Borowski, chief economist at Invest Bank in Warsaw, agreed with that view.

“It would be a bad idea to change the law to keep the bank from boosting the reserves for currency risk just for the sake of helping the state budget, especially when the zloty is likely to strengthen and these reserves will be needed,” he said. “The government should in this case take seriously what the central bank projects about this year’s profit instead of threatening a change in the law.”

Avoiding Payments

The argument is unlikely to be smoothed over any time soon.

Zbigniew Chlebowski, head of Tusk’s party’s parliamentary group said yesterday the central bank is creating currency risk reserves solely to avoid making payments to the budget.

“If the central bank has at its disposal a $20 billion loan from the International Monetary Fund for stabilizing the zloty, why should it use its own capital for creating reserves on the balance sheet?” he said on Radio Zet. “It’s making it only for the sake of keeping this money from payment to the state budget.”

The government last week raised this year’s budget deficit target by 48 percent to 27.2 billion zloty, saying the economic slowdown is hurting revenue. At the same time, the government downgraded its forecast for 2009 economic growth to 0.2 percent from 1.7 percent. It estimates growth next year at 0.5 percent.

To contact the reporter on this story: Monika Rozlal in Warsaw at mrozlal@bloomberg.net