GO
Loading...

Poland PM Signals Austerity as Growth Slumps

WPA Pool | Getty Images News | Getty Images

Poland's Prime Minister Donald Tusk said his country would have to tighten spending because revenues had been lower than expected after eastern Europe's bellwether economy reported its slowest growth rate since 2001 in the first quarter.

Tusk's comments came after the European Commission gave the country two more years last week to bring its budget deficit to GDP ratio of 3.9 percent to under 3 percent, as per EU rules.

(Read More: Poland No Longer the Darling of Investors)

"The fact that the European Commission granted Poland two additional years to get to the 3 percent level of the deficit, will greatly facilitate our getting to that level in a balanced way," Tusk told CNBC in Warsaw. "The problem with the deficit is however that budgetary revenues are lower than we assumed and this will require a further tightening of the fiscal system."

"From that point of view increasing revenues, without raising taxes, just through tightening of the fiscal system, as there are significant reserves there, is an optimum thing in my opinion," he added.

(Read More: Poland to Grow Ireland-Style as Crisis Heads East)

Poland's gross domestic product (GDP) grew just 0.4 percent in the first quarter, compared to a year ago. On Wednesday, the central bank cut interest rates for a second consecutive month to a new record low of 2.75 percent from 3 percent previously.

Declining growth has pushed the unemployment rate to 14 percent. The International Monetary Fund forecast that Poland will grow by just 1.3 percent in 2013, down from 2 percent last year. In 2010, the economy grew by 3.9 percent and in 2011 it grew by 4.4 percent.

(Read More: Poland, Austria Exchange Tie-Up Nearing Solution)

But Tusk defended his economic record, saying Poland was way ahead of European neighbors in implementing structural reform and that it would recover from the growth slump.

"In 2013 although growth is going to be worse than expected, it's not going to be recession or stagnation. I still believe the growth in 2013 will go above 1 percent of [gross domestic product]."

Nicholas Spiro, head of Spiro Sovereign Strategy, told CNBC that Poland was suffering because of a broader sell-off in emerging market stocks. Still, he pointed out, the country had the deepest and most liquid capital market in eastern Europe and government borrowing costs were at very low levels.

"The downturn belies Poland's strong underlying fundamentals, particularly its well capitalized and profitable banking sector and generally strong macro economic position," he added.