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The Warsaw Voice » Business » September 3, 2008
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Exporters Happy with Weaker Zloty
September 3, 2008 By Andrzej Ratajczyk   
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The latest weakening of the Polish currency has improved the mood among exporters and organizations benefiting from European Union co-financing.

For over a year the zloty kept gaining against key foreign currencies. At the end of July, it traded at 3.20 against the euro and at 2.02 against the dollar. That record appreciation was largely due to Western investors who came in droves to buy the Polish currency lured by Poland's high interest rates and faster economic growth than in other EU countries and the United States. The zloty was additionally bolstered by domestic investors.

But the trend reversed in August and the euro and the dollar began to regain ground. By the end of the month, the euro cost zl.3.34 and the dollar fetched zl.2.27. Some analysts say the zloty may weaken further, yet the depreciation should not be significant.

According to the Polish Chamber of Commerce (KIG), the zloty is still too strong, posing a major threat to Polish businesses. "The problem of a strong zloty is often underestimated," says KIG head Andrzej Arendarski. "It's true that exports are doing well on the whole, but this is only part of the picture. While large foreign corporations and multinationals are coping with the strong zloty, small and medium-sized businesses are having great problems."

A strong zloty is a problem not only for exporters but also organizations involved in projects co-funded by the EU. If the zloty continues to be strong, Poland may lose much of the EU assistance set aside for the years 2007-2013, analysts say. Over the past 12 months, the value of this assistance has diminished by around zl.40 billion. Poland has the right to spend 67 billion euros from EU funds in 2007-2013. Last year, this amount was equivalent to zl.257 billion; now it is down to zl.216 billion. Additionally, if the costs of construction projects continue to increase Poland may use up the available EU money earlier than planned. It is quite likely that this money will run out by 2011. Some companies that signed contracts for EU-funded projects a year or two ago are now on the verge of bankruptcy because their projects ceased to be profitable after market conditions changed. A strong zloty may also force some local governments to give up their investment projects, experts note.

KIG says Poland needs serious debate on the appreciation of the zloty and ways to counteract the negative implications of this trend. The government should take steps to improve the position of exporters, KIG experts say. One possible measure would be to increase public assistance as part of EU operational programs carried out in Poland. The authorities could also consider changing the country's monetary policy, KIG says, adding that the policy pursued by the National Bank of Poland and the Monetary Policy Council differs too much from the policy of the European Central Bank and other large central banks, for example the Bank of England, which have been keeping interest rates at a relatively low level. This is why KIG wants a debate on the extent to which Polish monetary policy should be brought in line with the policies of other central banks in the EU.

Adam Szejnfeld, Poland's deputy economy minister, says the appreciating zloty has had no adverse impact on overall exports or the country's economic growth. "Exports have been growing at a fast pace," Szejnfeld said. "Last year, the value of Poland's exports reached a record level and in the first few months of this year a further increase was noted. However, one has to admit that a strong zloty undermines the profitability and competitiveness of companies, especially small and medium-sized businesses."

Meanwhile, the appreciation of the zloty has also had some positive effects. For example, it has led to lower prices of imported goods, such as fuels, thus easing inflationary pressure in the country.

Experts and businesspeople agree that Poland's entry to the euro zone would be the best way to solve the problem of a strong zloty. "Meeting the Maastricht criteria alone would be beneficial for the Polish economy, irrespective of when Poland adopts the single currency," Szejnfeld says. "Reducing public debt, balancing the budget and keeping inflation low will contribute to fast economic growth." According to Szejnfeld, entrepreneurs will also benefit from Poland's entry to the euro zone because they will no longer have to bear currency exchange costs and incur exchange risk. Moreover, Polish entrepreneurs will gain access to huge reserves of European savings and find it easier to obtain money for investment projects and expansion.
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