This corresponds to a deficit of 4.4% of GDP with the pension funds classified outside the general government sector, which will be the binding methodology from next year onwards and which is therefore the relevant methodology for assessing Poland’s future compliance with the European fiscal rules. This implies that Poland is 1.4 percentage points away from meeting the Maastricht fiscal criteria. It is not a demanding medium-term consolidation target for an economy with an expected real GDP growth of close to 5 percent, providing a very good environment to reduce the ratio of public spending to GDP. It is worth noting that Germany may achieve consolidation of this magnitude over the 2006-2008 period, without such a favorable growth environment. However, the Convergence Programme 15 presented by the government in January of this year, does not foresee fulfilment of the deficit criterion in the programme horizon; in 2008 the deficit is to stand at 3.7% of GDP. Such a slow pace of deficit reduction has been criticized by the Council of the European Union 16 , which pointed out that Poland would be failing to comply with the required annual fiscal adjustment of 0.5 percentage points of GDP in cyclically adjusted terms. NBP projections confirm that the deficit path is not an ambitious one.
The remaining risk is due primarily to foreign banks’ króna deposits and the old banks’ deposits. However, before the controls on these deposits can be lifted in full, it is necessary to channel as much of this capital as possible into long-term investments and structure the winding-up of the old banks so as not to jeopardise exchange rate stability. Although conditions in the global financial markets are still difficult, they are better overall than they were a year ago, not to mention two years ago. But the fiscal problems faced by Greece, Ireland, Portugal, and Spain have contributed to investor flight to the relative safety of low-yielding markets. The Icelandic Government is faced with the intricate task of demonstrating that Iceland is a better target for investment than other indebted European countries. The progress made under the IMF programme is gradually laying the foundation for enhanced confidence, but the programme will only be successful if we adhere to its objectives. Funds lying in wait in the shelter of low-yielding markets will eventually seek more bountiful shores. When the flight to safety begins to subside and investors begin to seek out better returns, the Icelandic authorities must be ready to direct their attention to Iceland. BIS Review 138/2010  3  The existence of capital controls and their proposed removal represents a problem for both the Monetary Policy Committee and those who trade in the bond market.