Fiscal fears send zloty to new lows

Troubles are mounting for Prime Minister Miller

The zloty has hit an all-time low against the euro amid fears that the Polish Government could be heading for financial crisis.

Prime Minister Leszek Miller is backing an austere 2004 budget, which helps the government towards its target of 32bn zlotys (£4.8bn; $8bn) in savings by 2007.

But the budget still leaves Poland with a deficit equivalent to 5% of gross domestic product (GDP), way above the threshold the country must meet as it joins the European Union, and eventually adopts the euro.

And many observers fear that the government lacks the muscle to push through the necessary reforms.

Leszek Balcerowicz, head of the National Bank of Poland, has warned that Poland faces slowing economic growth unless it makes more vigorous attempts to reform public finances.

Political problems

The zloty is now trading at almost 4.66 to the euro, its lowest level since the launch of the European single currency.

The euro rate is crucial for Poland, because the eurozone is its most important trading partner by far, and because it will have to demonstrate monetary stability as it integrates within the EU next year.

Mr Miller, whose left-of-centre government is staffed by former communists, now finds himself caught between the demands of the markets and the natural conservatism of many Polish politicians.

Tough reforms - notably more rapid privatisations and sharp cuts in state spending - are unpopular among Mr Miller's left-wing supporters, as well as among many of the nationalist and agrarian opposition parties.

Since being swept to power two years ago, Mr Miller's Democratic Left party has plunged in the polls, battered by a string of corruption scandals.

Poland's political scene is highly fragmented, and the precarious alliances set up between disparate parties tend to result in short-lived governments.

Growth gives up

Poland's public finances, although long reliant on heavy international borrowing, were not a problem until recently.

During the 1990s, economic growth was very strong, usually at more than 5% a year, and foreign investment poured in, allowing governments more fiscal leeway.

But annual growth has fallen to just 1% over the past two years, and there are fears that the official 3% target may not be met this year.

At the same time, unemployment is around 20%, and public debt is now tipped to approach 60% of GDP in 2004.

The government insists it will persist with a planned tax-cutting programme, and has been circumspect about reducing some of the most politically sensitive forms of spending - notably the overburdened welfare system.

As a result, market confidence has been eroded, and some investors now question whether Poland will be able to adopt the euro at the same time as Hungary and the Czech Republic.