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					                                                                                19749
                                     Poland                               August 25, 1999
                            Country Assistance Strategy
                                 Progress Report
                                 EXCUTIVESUMRY


       In the past decade Poland has been one of the most successful transition countries.
Income has risen well beyond 1990 levels and rapid growth has gone hand-in-hand with
stabilization,bringinginflationdownto single-digits. Lastyear's Russian crisis had a significant
impacton the manufacturingand trade sectors, yet growth was still in the positive range,foreign
direct investmentcontinuedto flow in, and premiums on Polish borrowing in the international
markets quicklyreturned to pre-crisis levels. None of the rating agencies have lowered their
ratings for Poland.

      In ten years Poland has been transformed. Democracy,free media and the role of civil
society is entrenched and irreversible; indeed the recent extension of decentralized local
governmentis anothermajor step awayfrom the centralizedsystemof control and administration
inheritedfrom the old regime.    A large new middle-classhas emerged over the past decade,
with automobileownershipgrowingvery rapidly, and with increasing numbers taking holidays
abroad, buyingdurableconsumergoods and upgradingtheir flats or houses. Polandis knocking
on the doorof the EuropeanUnion,with membershipnow projectedearly in the next decade.

       A greatdeal has been writtenaboutwhy Poland is succeeding. The consensusseemsto be
that the early reforms providedthe basis for the rapid growthof small and medium enterprise in
the manufacturingand services sectors. The prospect of this growing domestic market,
combined with an educated labour force, an ideal location between East and West, adequate
infrastructure and political and social stability, have been a magnet for foreign investors.
Political and social stability have in turn been enhanced by growth in the tax base sufficient to
maintaina socialsafety net for those who have not benefiteddirectly from expandingGDP. For
reasons that are less clear, Poland has also avoidedthe kind of concentrationof economicpower
which has occurredin other countriesand which can subvertcompetition.

       Poland's transformationis by no meanscomplete as yet. Several more years are needed to
work through the rest of the enterprise restructuring and privatization agenda. Tax and tax
administration reform, including improving the resource base for local government has been
initiated, but is an on-going process. Public administrationneeds to be fwurther  reorganizedand
strengthenedif it is to have the humanand financialresourcesrequired to effectivelymanage the
implementationof complex reforms and EU rules and regulations,as well as absorb EU funds.
Public administrationreform is also critical to the fight againstcorruption, an issue which while
not .as serious as in other countries is receiving increased attention in governmentand in the
media. While the benefits of economic growth have been widespread there are significant
groups which have not shared in the economic improvementsand some pockets of hard core
poverty are developing. The social and economic situation in the countryside is particularly
worrying, as farm incomeshavebeen decliningand havefallen sharply over the past year, mainly
as a result of the loss of markets in Russia and inroads from subsidized imports from the EU.
Narrowing these differences and helping orchestrate the transformation of the agriculture and
rural sectorwill remain major challengesfor Poland in the yearsahead.

     The 1997 CAS was written at a point where the Bank's role in Poland had changed
fundamentally. Rather than lending,we had become a providerof analysis and technical support

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to the Polish Government. In FY97 the Bank's lendingin Poland fell to a low ofjust one project       K
for $67 million. While a substantial increase in this level was expected,it was evident that our
main contributionlay in our non-lending products such as our pioneering Country Economic
Memorandumon the preparationfor EU accession; our analysis of agriculturalcompetitiveness
and our support for the (then) faltering privatization program and the build-up of regulatory
frameworksin the infrastructuresub-sectors.

       A new Governmentin late-1997 took the view that continued progresswasnot a given and
that Poland could not coast on the proposition that nothing could deter domestic and foreign
investors. Its priority was to press forward on the macro-front, to bring down the budget deficit
and therefore inflation and interest rates. This meant that Poland would need to take on the
restructuringof some of the 'traditional' sectors - steel, coal, agriculture, railways,health care
and pensions - which were already a drain on government finance and potentiallydestabilizing
in the absence of action. It also required a substantial improvement in the efficiencyof public
sectoroperations. More broadlythe Government's programwas gearedto continuingthe build-
up to a modernsociety which could be effectivelyintegratedinto Europe. This requiredmeeting
specific mandates of the acquis communautaire, but also going beyond this to promote the
developmentof its human resourcesthrough improvedhealth and educationand through further
decentralization local governments. Another element of European integrationis to find the
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large amountand right mix of public and private resources needed to acceleratethe development
and modernizationof Poland's infrastructure,which is increasinglystressed by the rapid growth
of the recentpast and couldbe a major bottleneckin the years to come.

       Againstthis backgroundthe Governmenthas sought a deeper role for the Bank in certain
key restructuring programs related in particularto EU accession. In this context, the Bank is
concentratingon lending for coal sector restructuring and rural development,while providing
technical advice (and possible future lending) for railways, pensions, health care and various
aspectsof public sector reform. We have carried out important analyticalworkon the alignment
of Poland's tax system and its environmentalprograms with EU accession criteria. Selected
investment loans are supporting infrastructure development in environment and transport,
although the emphasis here is again very much on technical work.          In order to achieve
selectivityand focus the Bank has, with the Government'sagreement scaledback its work in the
area of private sector development,with IFC taking over the main responsibilityfor the Bank
Group's supportto the private sector.

      The timing of the decentralizationof the Bank's Country Unit for Polandand the Baltics to
Warsaw in September 1997 was fortunate in providing the new Governmentwith the quicker
responsetimes and on-hand responsecapacity of an enlarged local presence,includinga doubling
of national officers with specialized skills and experience. New facilities have enabled co-
locationwith IFC and video-conferencingand simultaneous translation capacitieshave allowed
us to bring groups of Government officials into contact with the formidable knowledge and
experiencewhich Washington-basedBank experts or internationalconsultants can bring to bear
on areas where Poland seeks advice. The decentralizationhas also enabled us to leverage a
decliningbudget as Bank resourcesare shiftedto less successful transition countries.

      In sum, Poland continues to move steadily towards integration with the EU and better
living standards and quality of life for all its people. The continued role of the Bank in
supporting this process is important not only for its direct contribution, but also to build the
understandingof transition neededfor supportingcountries at an earlier stage of the process.
                                     I. Introduction

1. The last Country Assistance Strategy (CAS) was discussed by the Board in early May 1997.
This Progress Report provides an update on political and economic developmentsand reviews
CAS implementationand strategies. The Progress Report has been preparedby IBRD and IFC
and discussedwith the Governmentof Poland.


                  II. Political and EconomicDevelopmentssince the CAS

2. Overview. Poland continues to make good progress in pursuing its political and economic
transition agenda.      Overall economic performance remains strong. Preparation and
implementationof additionalstructural reforms, as well as the legal and policy changesneeded
for EU membership,continuesto move forward. The country's democraticpolitical framework
is functioning well and has recently been strengthened with the introductionof new elected
councilsat the regionallevel.

3. Political Developments. Poland's governing coalition-made up of the Election Action
Solidarity or AWS (the political arm of the Solidarity trade union plus other small right wing
parties) and the considerablysmaller, more liberal FreedomUnion (UW)-has been in office for
almost two years. Its principalgoals are to speed up remainingstructuralreformsand prepare for
EU accession,whilemaintaininga stable economyand sound macro-economic           management. It
has succeededin doingthis, pushing aheadwith complex reforms in the social sectors, enterprise
restructuring, regional administration and other areas, starting negotiations with the EU, and
fiurtherbringing down inflation and the fiscal deficit. However, implementationof the reforms
has proven to be politicallycostly, owing in part to the unpopular nature of some of the changes,
but also, in some areas, to ineffective or poorly planned arrangementsfor implementation.
Government public information efforts have also been insufficient, often leaving the public
unsure of what to do and inadequatelyinformedof the costs and benefitsof the reforms.

4. As a result, public support for the Govermment its reform efforts has declined over the
                                                     and
past four to five months. Indeed, its popularity, as measured in recent public opinion polls, has
fallen below the main opposition party, the post-communistSocial DemocraticAlliance (SLD).
The Governmenthas also been hurt by a wave of social protests-by farmers,miners,doctors and
nurses, and defenseindustryworkers-which have had a negative impact on its authority and its
image as a Governmentcapable of solving social problems and using public funds effectively.
Although the coalition has not been trouble free during its first two years in office, the two
parties have so far managedto overcome intra-coalitionconflicts. Howeverthe problems with
implementationof the reforms and the continuing social protests are taking their toll.   Current
expectationsare that the Goverrnmentwill see out its four year term, but furtherchanges in the
make up of the cabinetand govemment cannot be ruled out.

5. Economic developments. Poland's economy continues to perform well. Key outcomes for
1997 and 1998were broadly in line with base case CAS projections (Annex 1). However,the
economyhas evolvedmorecyclically than in the pre-CASperiod. The very rapid growth of past
years (averaging 6 percent per annum during 1994-96)has slowed somewhat,but remains high
by regional standards,and is set to rebound in 2000. Other key trends include steadily falling
inflation, a gradually rising current account deficit, and satisfactory progress on structural
reforms. While macroeconomic management remains solid, the deflationary impact of the
Russian crisis, coupledwith the cost of implementingkey reforms (such as coal and pensions), is
putting pressureon the budgetfor 1999.
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6. The period sincethe CAS can be dividedinto three sub-phases. Thefirst, coveringmost of
1997, saw a domestic demand-driveneconomicboom. Thesecond, starting in late 1997was
characterized by an attempt to limit demand growth. The third reflects the impact of the
Russian crisis starting in August 1998.

*   Real GDP grew by 6.8 percent in 1997,with demand growth driven by the household and
    enterprise sectors, since fiscal policy was modestly tightenedduring that period. Consumer
    demandwas supportedby rapid real wage growth, and investmentdemand by domesticcredit
    growth. With demand growingfasterthan output, the currentaccount deficit increasedfrom
    1 percent of GDPin 1996to 3 percentin 1997.

*   Concerned about overheating, the Government attempted to limit demand growth through
    restrictive policiesstarting in mid-1997. As fiscal tighteningwas initially limited, the burden
    first fell on monetary policy. Even though inflationarypressure was easing, the National
    Bank of Poland (NBP) increasedreserverequirementsand interest rates. At the same time,
    the impact of the Asian crisis on the EU economy, which accounts for around two-thirds of
    Poland's exports,cut the growthof externaldemand.

*   The Russian crisis had a greater impacton the economythan initially expectedas exports to
    Russia and Ukraine collapsed. Sincethe bulk of these exports were agricultural based, the
    rural sector was particularly hard hit. The deflationary effect of this sharp worsening of
    Poland's external environmentaddedto the impact of domestictightening. As a result, the
    ezonomicslowdownaccelerated,with growthfor 1998slowingto 4.8 percent, and industrial
    output falling during the last quarter of 1998 and the first quarter of 1999. The growth of
    domestic demand,while still important,was more moderatethan in 1997. Slower real wage
    growth and a rebound in (previouslyfalling) unemploymentworked to cut consumption
    growthfrom 6.9 percent in 1997 to less than 5 percent in 1998. Investment demand grew
    by 14.5 percent, down from 21.7 percent in 1997. The decrease in food prices after the
    collapse of exports to Russia and Ukraine,falling commodityprices, real appreciationof the
    zloty and slowerreal wage growth,all contributedto the fall in inflationfrom 13.2 percent in
    1997to 8.6 percent in 1998.

7. RecentDevelopmentsin Fiscal andMonetaryPolicy. Substantialsavings in debt servicing
due to a reduction in interest rates and an unexpectedly strong zloty (see below) helped to
modestly cut the consolidatedpublic sector deficit from 2.9 percent in 1997 to 2.6 percent in
 1998 This fiscal tightening, combinedwith slower growth of output, real wages and credit,
prompted a needed shift in the balancebetween monetary and fiscal policy. Over the course of
 1998 and early 1999, NBP successivelylowered its reference interest rates. However, falling
inflation kept real interest rates high. During this period, NBP also took steps towards a more
flexible exchange rate regime. The trading band of the zloty was gradually widened to +1-15
percent and the monthly rate of crawl of the central parity gradually reduced from 1 to 0.3
percent. These decisions,together with good external perceptionsof the Polish economy, led to
real appreciation of the zloty during 1997 to mid-1999 (despite turbulence in international
financial markets). Free floatationof the zloty is being consideredby the NBP.

8. External Sector Developments. A slowdown in export growth, coupled with continued
growth of imports,contributedto a rapid increase of the trade deficit in the last months of 1998.
For 1998 as a whole, exports and imports(GNFS)grew by 9 percent and 14 percent respectively,
leading to a further increase in the currentaccount deficit from 3 percent in 1997 of GDP to 4.3
percent in 1998. This increase appearsto have been driven mainly by rising private investnents
and falling private savings. In 1998,foreigndirect investments(FDI) financed around 75 percent
of the current account gap. High volumesof FDI (totaling$10 billion during 1996-98),combined
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with sustained debt-creatinginflowsattracted by high real interest rates, increasedgross official
foreignreserves to over 7 monthsof imports of goodsand services.

9. Projected 0utcomesfor 1999. Real GDP growth is expected to slow furtherto around 3.5
percent in 1999. As the 1999budget assumes real growthof 5.1 percent (as well as an inflation
rate somewhat above that which is now expected), tax revenue targets will be undershot. The
unexpectedly high costs of implementingkey reformns     (health care, pension system and local
government), combined with pressure for higher social security payments coming from rising
unemployment,work to raise expenditures. Together,these factors will hamper achievement of
the consolidatedbudgetdeficit target of 2.4 percent of GDP. The central governmentdeficit for
the first half of 1999had alreadyreachednearly 90% of the planned annual figure. At the sarne
time, there are already some signs of a rebound in economicactivity. Industrialsales began to
rise in the second quarterof 1999. Due to a more favorableexternal enviromnent,especially the
recovery in EU countries, and improving structural strength of the Polish economy, real GDP
growth is likely to strengthenmoderatelyto around4.5 percent in 2000.

10. Medium-term external environment.           Althoughexport growth rates will remain higher
than imports over the medium-term,three     factors will work to keep the current account deficit
around 6 percent of GDP. These are: a) the lower absolute value of exports;b) an expected
decline in the surplusfrom bordertrade with Belarusand Ukraine,and through them with Russia;
and, c) a gradually increasingdeficit on capital income as income from past net capital inflows
accumulates to non-residents. Poland also faces its first large principal repaymentson Paris and
London Club debts starting in 2000. There are also a number of factors, however,which argue
for the manageabilityof this level of current account deficit. First, Poland differs from many of
its neighbors, and from most countrieswhich recently experiencedfinancial crises, in having a
flexible exchange rate which allows continuous accommodationto external events, as well as
changes in the real sector and macro-economic    policy. For instance,while capital inflows have
led to a long-term appreciationof the currency, the flexibleexchangerate regimehas allowed the
currencyto slide by over 10percentsince August 1998to accommodateextemalevents. Second,
even under conservativeassumptions,Poland is expectedto continue havingaccess to plenty of
non-debt creating sources of foreignfinancing. FDI inflows are expectedto remain at present
levels, driven by the sale of large enterprisesto foreigninvestors, and greenfieldinvestments in
the run up to EU accession.In addition, pre-accessionfinancing from the EU will represent a
significant new source of capital inflows. Third, the majority of Poland's foreign loans remain
long-term and Poland's commercialbanks have not developed an excessive reliance on short-
term financing. Although these factors indicate that the current account deficit should be
manageable, the Bank will continue to work with the Authorities and the IMF to monitor
 potential sourcesof macro-economic   vulnerability.

I1. Structural reforms. Poland has made substantial progress in implementing structural
reforms over the last decade,but the pace of reforms slowed during the mid-nineties, leaving a
large unfinished agenda. The present govemment has embarkedon this agenda with a sense of
urgency to target three inter-relatedobjectives: lay the basis for EU accession,underpin fiscal
stability in the medium-term,and set the stage for continuedrapid growth. Someof these reforms
are mandated by the formal requirements of EU accession in areas such as environmental
standards, or by the likely impact of opening the Polish market in sectors such as agricultural
products, steel and coal. Othersare requiredto reduce the growingbudgetaryimpact of subsidies
to chronic loss-makingpublic enterprises such as again those in coal and steel, but also the
railways. Key reforms in the social sectors, particularlythe pension reforn are also directed at
long-term fiscal sustainability. Perhaps most importantlyfurther structural reforms and new
 investments are needed to lay the basis for long-termgrowth. The Polish authoritieshave been
 very clear that their goal is not just to enter the EU, but to become a successfulmember of the
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EU. This in turn requires major improvements in both social and physical infrastructure.
Poland's education and health servicesneed modernizing and quality improvements. Its roads,
ports, railways, air transport, energy, heating and water treatment need expansion to deal with
potential capacity bottlenecks, modernization to meet EU environmental standards and
rationalizationto improvetheir efficiency.

 12. This is a very large agendaand needs careful phasing and management. First and foremost,
the Polish authorities understandthat they cannot put the macro-programat risk and that the
structural reforms need to be implementedwithin a tight budget constraint. This puts a high
premium on those reforms- pensions,coal, steel, railways, agriculture- where the fiscal burden
is most serious. Second, implementationcapacity remains limited and the upgrading of public
administrationis a high priority- one prominentlynoted by the EU during its negotiationswith
Poland. Third, manyof these structuralreforms involve a very delicate political balancebetween
the demands of trade unions (who are strongly represented in the governing coalition) and the
need to reduce the over-employmentin some sectors, while keeping public sector wage and
salaryincreaseswithinmanageablefiscal limits.

 13. Against this background, the achievements of the past two years are considerable.
Enterpriserestructuring andprivatization has been accelerated. A comprehensivehard coal
restructuring program was launched last year (supported by the recently approved Hard Coal
SECAL),and the Governmenthas recentlyrestarted efforts to privatizePoland's two largest steel
mills, with the appointmentof external privatization advisors. Satisfactory progress is also
being made in privatizingother enterprisesand banks. All major Polish banks, except PKO-BP
(the savings and housing bank) and BGZ (the agricultural bank) are now majority privately-
owned. The sale of PolishTelecomhas beeninitiated with a partialsale of stock. The country's
largest insurance companyis also in the process of being partially sold to a strategic investor.
Privatizationof the powersector has also started(with three transactionsto date), but has moved
slowly, in part becausethe energy regulatoryagency is not yet fullyoperational, but also because
the Government has been slow to set the rules and open the sector up to potential investors.
While the time consumingand low revenue-yieldingsale of smaller enterprises, many of which
face financial problemsexacerbated by a loss of market position,has been less successful, the
general outlook for privatizationremains positive. In the period 1998-2001,the State Treasury
expects to raise 75 billion zloty by selling companies from the heavy industry, chemicals and
energy sectors, the national air carrier, and remaining minority stakes in already privatized
companies such as the banks and Polish Telecom. Continued privatizationwill work to further
raisethe private sector's share in GDP above the 70 percent estimatedfor 1998.

 14. The Governmentcompleted work on the legal and institutionalframework for pension
reformand put the new system into effect startingJanuary 1999. This reform,which was actively
supportedby WorldBank technical assistanceand analysis and one IFC-funded advisoryproject,
constitutes an evolutionfrom a pay-as-yougo scheme to a partiallyfunded system. This includes
a modified public pension program (first pillar), a mandatory, privately managed
employee/employer funded (second pillar) and a privately managed voluntary scheme for
employees (third pillar). As the income of the social security agency (ZUS) during the early
transition to the new system will not suffice to cover payments to current pensioners,
privatization revenues will help bridge the gap between existing obligations and workers'
contributionsto the fully-fundedscheme.

15. A fundamentalregional administrativereform was put into effect at the beginningof 1999.
This reform aims at putting virtually all decisionmaking and financingresponsibility for regional
and local public services and investments in the hands of regional and local authorities and
essentially completes the decentralization reforms first initiated in 1990. The number of
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voivodships (provinces)was reducedfrom 49 to 16, an entirelynew layer of county government
(powiats) was added, and new electedpowiat and provincialcouncils were created. This new
structure is now in place, but more work is needed to develop local revenue capacity and
complete the legal and administrative changes required to make the new structure fully
operational.

 16. A third major reform launched in January 1999 was a restructuring of health care
financing, namely the establishmentof regional insurance funds as the main channel for
 managing public health funding The Government sees this reform as a vehicle for pushing
 forward other elements of the health care agenda, including decentralization,developing an
 appropriate public/privatemix and beginning to reduce costs and lay a basis for eventually
 improving the current low quality of public health care. However,much more fundamental
 restructuring of the sectorwill be needed to achievethese goals. Similarlythe insurance reform
 itself is likely to require modification as its implementationdetails were not worked out in
 advance and are only now beingput in place. It is too early to judge whetherthe Government's
 approach to reformwill succeedover the longer term, or whetherthis initial reform will have to
 be accompaniedby a more comprehensive      restructuringof the sector,with the reform details and
 implementationarrangements    workedout morefully in advance.

 17. A fourth reform, with implementationto start in September 1999, is restructuring of the
education system. This reformreduces primary school from eight to six years and adds a new
three year middle school level. The hope is that this structurewill encouragestudentsto remain
in school for nine years, withthe new middle schoolsalso helping rural studentsto catch up. By
itself this reform will have a limitedimpact on improvingeducationoutcomesand may well add
to the sector's financing problems in the short term, as the number of schools will increase.
Ultimately the success of educationreform will dependon effectiveimplementationof on-going
curriculum reforms, ensuring adequate local and central government financing, and making
certain that the sector is able to attract, keep and train qualifiedand motivatedteachers. Like
health care reform,the reformsin educationremain reformsin process.

18. Recent changesin the regulatoryframework     havebeen shapedby Poland's obligations as a
member of the OECD. In 1998,a new Foreign CurrencyLaw liberalizedlong-termcapital flows.
A repeal of restrictions on short-term transactions is expected in 2000-2001,but some safety
provisions are likely to be maintained. Other regulatory reforms have been spurred by the
process of EU accession. Theseinclude liberalizingmarket entry (telecommunication,   insurance)
and pricing rules (energysector),as well as harmonizationof the indirecttax regime and banking
regulations. The governmenthas also set out a medium-termstrategyof tax reform, including a
lowering of corporate and personal income taxes and a simplificationof the rules on income
taxation.

 19. EU accessionmPolandsubmitted its applicationfor EU membershipin 1994. In December
1997, it was invited along with Cyprus, the Czech Republic, Estonia, Hungaryand Slovenia, to
begin membership negotiations. The relationshipbetweenPoland and the EU is now defined by
the Europe (Association)Agreementsigned in 1991,by regular monitoringof its implementation,
and by several agreementsand processes signed or commenced in 1998. The latter (often
defining concretepriorities,stepsand timetables) includethe AccessionPartnership,the National
Program for the adoption of the acquis communautaire,and the screening for compliance with
the acquis.

 20. Negotiations, which commenced in March 1998, encompass31 areas, phased such that
 those expected to be the leastcontroversialcan be tackledfirst. As of mid-1999,negotiationshad
 preliminarily been completedin 7 areas and Poland had prepared a total of 22 position papers.
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As in other applicant countries,areas involving particularly extensivereform and harmonization
agendas,or requiring difficultchoicesand/or careful phasing, includeagricultural policy (e.g. the
level and form of benefits from the Common Agricultural Policy and structural funds),
harmnonization with environmental and market liberalization directives, upgrading of
infrastructure,and labormobility. Since the EU is also introducingits own significant changes
as part of its "Agenda2000", the negotiationsmust also take into accountprogress in completing
and implementing the EU's change agenda. Other major challenges include: improving
economic efficiency, particularly in agriculture and some utilities; a general strengtheningof
institutional and administrativecapacity,both at central and sub-nationallevels; developing the
frameworkand institutionsto support an effectiveabsorption of large pre-accessionfunding and
structural funds; and developing mechanisms for controlling state assistance. Minor
disagreements have arisen in some areas such as restructuring the steel sector (including
privatizationstrategyand tariff protection). Theagenda is increasingly shifting from formal legal
harnonization to the moredifficulttask of implementingand enforcingadopted legal acts.


                            m. Progressin CAS Implementation

21. The 1997 CAS identifiedfour areas of World Bank/lFC support: sustaining private sector
 growth; managing the transformationof the state in support of the market economy; achieving
environmental sustainability;and enhancing the social sustainabilityof reforms. The Bank's
programremains consistentwith these objectives,but programcontenthas evolved substantially
 in light of the reforms being pursued by the current Government. The program is now much
more sharply focused on the structuralreform agenda, especiallyas it relates to some of the key
reformns  which are neededfor EU accession. Within this agenda,the Government has identified
the comparative advantageof the Bank in two areas: first, in multi-sectoralprograms where we
can help the Governmentbring different ministries and constituenciesto work more effectively
together in meeting the challenges of reform; and second, where our expertise and capacity to
respondquickly can providevaluableadvice for the design and implementationof key programs.
In both these categories, priority has been given by the Governmentto our involvement in
activities which create a basis for Polandto make effective use of pre-accessionfunding from the
EU. While much of the financial support provided by the Bank during the next three years is
concentrated on one sector-coal-this does not reflect the balance of the Bank's efforts on a
range of structural reformns,most of which relate directly to EU accession,but others supporting
key social programs which will be critical to the sustainability of reform and to the continuation
of Poland's rapid growth,once it is a member of the EuropeanUnion.

A. The Roles of the Bankand IFCin supportingPrivate SectorDevelopment

22. This is perhaps the area where the changefrom the approvedCAS is most striking. Given
the rapid growth of Poland's financial sector, and a substantialflow of foreign financing into
private sector activities,there is no longer any need to providefinancing to the private sector
with Bank lending using sovereign guarantees. In this situation, the main vehicle for direct
support to the private sector is IFC, with Bank support to the private sector concentrating on
providing technical assistanceto help get the regulatory frameworkcompleted and operational,
developing options for increased private sector financing of infrastructure investment, and
providingtargeted technical assistanceto completefinancial sectorrestructuring. The Bank's
principal on-going support activities for private sector developmentare outlined below. IFC's
program is describedin paragraph23.

       a) EstablishingRegulatory Instrumentsand Institutionsfor a Market Economy. Bank
assistance in this area has concentrated on the energy sector,but support has been provided to
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reviewdraftlegislationfor Poland's new telecommunications      regulatory fr-amework we have
                                                                                    and
prepared a note on pending issues in banking supervision. Our      policy dialogue in the energy
sector supportsGovermment     effortsto manage the sector during the transitionfrom a controlled
market to a deregulated,  competitivemarket, with on-going Bank technical assistance focusing
on strengtheningthe operational capacity of the Energy Regulatory Authority (ERA). This
agency was established about two years ago under the new Energy Law and plays a key role in
setting the rules of the game for private participationin the energy sector. Buildingon earlier
ESMAPfinancedsupportto draftthe Energy Law and help with the initial establishmentof ERA,
a follow-upESMAP funded technical support program for ERA has recently been approved. It
will help formulaterules for tariff setting and approvalunder the market oriented regime,provide
technical advice on electricity markets and regulatory risks and their impact on power sector
privatization,and provide for training of key ERA staff. It will also help the Polish Oil and Gas
 Companydevelopa gas tariff modelthat properlyreflectsthe costs of services.

       b) FinancialSector Development. Poland's.financial   sector has grownsubstantiallyand
is vastly more sophisticated than it was even a few years ago, both in terms of capital market
developmentand in terms of banking services. Total assets of the banking system as a
proportionof GDP are still only a fraction of those in more advanced economies,but good
economicgrowth, private pensionfund development,and continued strong interest of foreign
investorsin the sector,all pointtowards continueddynamic growth. Given these developments,
Bank lendingfor financial servicesdevelopmentis no longerjustified and the lendingenvisaged
in the 1997 CAS to support development of new services and financial instrumentshas been
dropped. Lendingis planned,however, to support SME and micro credit schemeswithin the
context of the proposed Rural DevelopmentProject. There is also a possibilitythat the Bank's
on-goingsupportto PKO-BP (a state owned savings and housing bank) to help in formulatinga
privatizationstrategy, could lead to a follow-up technical assistance request. Any additional
non-lendingassistancein the bankingand financialsector,if requested,would haveto be targeted
on specificissues,such as capitalmarket development or non-bankingfinancialinstitutions.

      c) FacilitatingPrivate Sector Investment in Infrastructure. The 1997CAS envisaged
possible use of the Bank's guaranteefacility to supportprivate investmentand the privatization
process in transportand energy. This has not materialized. Privatization in the energysector is
moving slowly, in part because energy market and price regulation issues are still not yet fully
resolved. While the potential for Bank assistanceas a catalyst to jump start privatizationin the
energy sector remains, it most likely will not be needed. The most difficult private investment
issue for the Government has been the motorway program. The Government's original
assumptionthat it could be financed almost entirely with private money proved unworkableas
the economicsof the program are not robust enough during the initial years of operationto attract
substantialprivate funding. The Governmentis thereforeworking out a new approachwhich will
combinesignificant public financingor guaranteeswith private financing. The Bank has been
active in advising the Governmenton policy options and the overall economicsof the motorway
programand we will continue to do so. Direct Bank lending or use of the Bank's guaranteeto
supportthe motorwayprogramis still an option, but appearsunlikely at this point.

23. IFC support for private sectordevelopmentcomplementsBank activitiesin the same three
areas:
       a) To further develop Poland's regulatory institutions, IFC has executed two technical
assistanceprojects. One aimed at improving the regulatory framework for the leasing industry.
The second supported development of the regulatory framework for private pension fund
managementcompaniesbeingestablished as part of Poland's pension reformscheme.
                                                8


       b) In the financialsector, IFC has focusedon activitiespromotingdeepeningof the sector
and improving accessto funding for SMEs. Specificactivities include investmentin a regional
SME-oriented commercialbank and a regional venture capital fund working in central Poland.
IFC has also recently signedagreementsfor an equityinvestmentin a major centraland southem
European SME-orientedventure capital fund whose activities include Poland. Possible new
investment projects in specializedfinancial services,includingmortgage banking, leasing, and a
rating agency, are under development.

       c) Power and infrastructureremain importantpotential areas for IFC involvement, but
the private sector's role in this sectors has so far been quite limited. IFC support for private
investment in infrastructurehas included one energy efficiency project in the district heating
sector, as other vehicles for private investment in basic infrastructuredo not yet exist. In
addition to the investmentsin the energy sector,IFC is also preparedto consider investments in
district heating, water and sewage at the municipal level, once appropriate regulatory and
ownership changesare in place.

24. Given the growingavailabilityof long-termfinance in Poland from commercialbanks and
equity investors, IFC has become increasinglyselectivein identifyingthe projects it will support.
IFC's role in financing projects with multinationalpartnershas also become less important, as
IFC will support such projectsonly when there is real value added fromIFC's involvement(such
as long maturities and high mobilization,facilitatingpartnershipswith local companies, complex
structuring of investments involving the transfer of skills to local banks, and support for
privatization in cases where sponsors are medium-sized foreign companies with limited
experience in the region or remain concerned with country risk). IFC's main focus is on
providing financing for: i) locally-ownedand managed companies;and ii) investments which,
while commercially sound, either lack major sponsors, or have significant investment
requirements that are too complex and -exceedlocal bank capacity for longer-termfunding, or
cases where IFC's contributionof equity or quasi equity is a condition for making the project
viable.

25. The high level of investorconfidencein Poland,is also reflected in very limited interest in
MIGA guarantees. MIGA currently has only one guarantee in Poland for total exposure of
US$2.3 million, with several additional applicationsfor small investmentsunder consideration.
It is also exploringthe possibilityof Poland making use of MIGA servicesfor Polish investments
in other countries in the region.

B.   Managing the transformationof the State:

26. At the heart of Poland's transition, are the fundamentalchangeswhich it is implementingto
reshape the structure of government,its roles and functionsand the way in which it is financed in
order to match the needs of the market economy and the country's democratic framework.
These changes fall into three broad groups. The first relates to the need to redefine the scope of
the public sector by restructuringand privatizing lossmakingpublic enterprises. Second,there is
a group of major reforms in social security, health and educationwhich are intended to combine
fiscal sustainability with adequate benefit levels and upgrading the quality of service delivery.
Third there is a set of reforms intended to improve the way in which the public sector itself is
managed. These include changesin the structureof local and regional governmentto increase the
responsivenessto local concerns,efforts to upgradethe capacityof the public administration,and
establish sound public finances, and measures to reduce red tape and bureaucratic regulations
and combat corruption.
                                              9

27. SOE restructuringand privatization initiativeshave long been a focus for both the Bank
and IFC in Poland, since they are so essential to the transformationof the public sector. The
Bank is currently concentrating on two of the most socially and politically sensitive sectors,
namely hard coal and railways. In both areas,the Governmentis relying on the Bankto provide
technical inputsto helpdevelop restructuringplans and once the programis underwayto provide
external support for monitoring and reinforcing implementation, and to the extent needed
financing.

      a) The Hard CoalRestructuringProgram: Restructuringof the hard coal sector is one of
      the Government'shighest priorities since the high level of losses are unsustainablefor the
      budget and for the economy. The objectiveof the on-going restructuringprogram is to
      stop the heavy drain on the budget and turn the seven money-losingmining companies
       into profitable ones by closing unprofitablemines, reducing employment, restructuring
       companyfinances, and improvingmanagement. The ultimategoal is to have a profitable,
       competitive and privatized coal sector. To achieve this, the Government's program
       (estimated to cost the equivalent of US$2.0 billion) finances mine closures and a
       significantpackage of social support measuresto encouragework force reduction. To
       supportthis restructuring(includinga focuson environmentalissues and social mitigation
       steps) the Bank approveda US$300millionSECALin June 1999to help financethe social
       packagesfor miners. We havealso indicatedto the Govermment the Bank is prepared
                                                                       that
       to consideradditional SECALSand investmentoperations,providedthe programstays on
       track and the mining companies can meet the program's financialand physicaltargets. If
       neededand justified, total Bank supportforcoal restructuringcouldreach US$1.0 billion.

       b) RailwayRestructuring:Polish Railwaylosseshave escalatedover the past year and the
       company is essentially bankrupt. The Government is therefore pushing through new
       legislation to support railway reform and putting increased pressure on the railways to
       develop a viable restructuring plan, includingreaching agreementwith railway unions and
       workerson how to carry out and finance the substantialreduction in the work force which
       is required. Building on earlier assistanceunder the First TransportProject, the Bank is
       providing technical inputs to help develop the restructuring program.            Once a
       satisfactory restructuring program    is agreed with all parties concerned, including the
       railway unions, the Bank may be asked to help finance social packages for railway
       workers.

28. The Bank is also financing a variety of other technical assistance activities to support
restructuring and privatizationunder the on-goingPrivatizationand RestructuringProject (Loan
3342-POL approved in June 1991). This operation still has financing available for technical
assistance to carry out studies on industry restructuring,pre-privatizationanalyses, and other
activities aimed at supporting privatizationand restructuringof the State sector. Use of the loan
has increased substantially over the past year given the Government's increased emphasis on
privatization and restructuring activities. Technicalassistance for the Hard Coal Restructuring
Program is also beingfinanced from this loan.

29. IFC has been actively monitoring restructuring and privatization initiatives in heavy
industry, especiallythose sectors where the Governmenthas indicatedan interest in having IFC
involved in financing post-privatization modernization investments. These would include
possible investments in power and steel, as well as in refining and basic chemical production.
IFC has been in contactwith Poland's two largeststeel mills (HutaKatowiceand HTS), as well
as the Ministry of the State Treasury,and has jointly offered, with EBRD, to participate in post-
privatization modernization of the mills alongside a strategic partner. IFC is also following
progress in implementation of the hard coal restructuring program and would be prepared to
                                              10


supporta model privatizationof one of the mines. Partial privatizationof the nationalrailway
company,contemplatedfor 2001,couldalso be another opportunityfor IFC involvement.

30. Supportfor Social Sector Reforms. Because of their importanceas well as their weight in
the overall fiscal picture, the Bank Grouphas placed high priority on assisting the major reforms
in the areas of pensions,health and educationwhich the Governmenthas moved forwardwith in
the course of the past year. Becausethese are not directly part of the acquis communautaire
Poland does not expectto get significantsupport from the EU and other sources for its efforts in
these areas.

      a) Social Security Reform. Poland can take pride in the fact that it is one of a limited
      number of countrieswhich has successfullylaunched a completerestructuring of its social
      security system. The Bank together with other donors providedtechnical advice during
      the preparationphase of the reform, including support for seminars and workshops to
      discussreformoptions and gain public support. The Bank also provided an IDF grant to
      fund key studiesand consultantsupportfor the pension reformpreparationteam and, at the
      requestof the Government,agreed to second a Bank staff member to head the technical
      team preparing the reform. The 1997 CAS envisaged possible Bank lending to help
      finance the budget costs of transitionto the new system. This has not proved necessary.
      However, the Bank is currently helping the Social Security Agency (ZUS) to prepare
      several studies (with financial support from a PHRD grant) which will determine
      additionalZUS restructuringneeds and could result in a requestfor Bank financialsupport.

      b) Health Care Reform. Bank support of health care reform has involved two main
      types of activities. First, we have provided technical commentson elementsof the new
      system, including the health insurancereform, with a view to improving its effectiveness
      and minimizing implementationproblems experienced by other countries implementing
     similar reforms.      Second,we have been providing support for introducingthe family
     doctor concept and improvingthe health care system under the on-going Health Services
     DevelopmentProject (LoanNo. 3466 approvedin 1992). The health project has recently
     been restructuredand the closingdate extended to enablethe project to use uncommitted
     funds to supportimplementationof the reforms. The Bank is prepared to considera follow
     up health project assuming satisfactory progress in implementing the remaining
     componentsof the existingloan.

     IFC is also becoming more active in health care, reflectingan increase in private sector
     activities in this area. In additionto IFC's first private health care investmentin Poland (a
     managed-care company), IFC, with support of Dutch trust funds, is contributing to
     occupational health reforms by helping its private sector partners finance training of
     physiciansand nurses, educate its employers,and work with health authoritiesto establish
     an appropriate regulatory framework. At the request of Government, and in close
     coordinationwith the Bank, IFC has recently implementeda technical assistanceproject
     that will help developa policyon the role of the private sectorin health care. IFC may also
     be requestedto provide adviceon developinga model hospitalprivatization scheme.

     c) EducationReform. The Bank has been actively engagedin policy discussionsin the
     education sector, in particular in helping encourage a dialogue on education financing
     issues between the Ministries of Finance and Education and helping both to reconcile
     divergent interests on financing matters. The Bank co-sponsoredworkshops on human
     capital, higher educationfinance,and financing general education in 1998and 1999. We
     are also contributing to discussions between the Ministry of Education and Poland's
     teacher unions. At this point in time, proposed lending for education is limited to the
                                             11

      educationcomponentof the Rural DevelopmentProject, but we continueto explore other
      lending options,includinga free standingrural education project and more general support
      for educationreform.

31. Strengthening State Administration. The fundamental structuralreforms which Poland is
completingall go in the right direction. Howeverthe magnitude of the changes being put in
place in such a short time is putting increased strain on public administration,which does not
have sufficient human and financial resources to adequately manage the introduction and
implementationof the reforms. Similarly,these constraints on public administration are also
beginningto underminethe ability of the state to implement EU rules and regulations and absorb
EU fundseffectively. Withinthis context,an importantemerging issue for Poland is the question
of how to upgrade the quality, efficiency and effectiveness of state administration. Such an
effort requires actions to inter alia, improve salaries and working conditions (so that the
administration can attract, train and keep qualified and experienced personnel), streamline
ministerial functions, procedures and the decision making process, and reduce unnecessary
controlsand regulations.

32. Our assistancein the broad area of public sector managementhas been very selective given
Poland's size and also giventhe substantialeffortsof the European Union, its member states and
other donorsin these areas. It has perhapsbeen less than it could have been given the reluctance
of the Polish authoritiesto borrow for "soft" programsof this kind. Our assistance has focused
first on areas where the Govermmentwanted a view encompassing broader international
experiencethan the EU provides. We have prepared impact analysesof EU accession in areas
such as environrnent,transport and taxation, which have been very well received. Broader
analysis of public expenditure management is planned for the year ahead.            Second, the
governmenthas lookedto us for support for still tentative efforts to tackle deregulation and to
develop an anti-corruptionprogram. Studies are now in progressin this area and we expect to
                                         on
presentour first set of recommendations dealing with corruption shortly. Third, the Bank has
been involvedin variousaspectsof the regionalreform, advisingon the financialmechanism,and
trainingneeds. Our involvementin the rural developmentprogramhas provideda suitable entry
point for us to work on these problems in a more long-term strategic way. We hope to bring
these various forms of support together through a tax administrationreform and municipal tax
developmentprojectwhich is tentativelyprogrammedfor FY01.


C. The Transformation the Rural Sectorand the Social Sustainability Reforms
                     of                                            of

33. A majority of Poles are better off as a result of the reforms and strong economic
performance. Indeed,Poland has perhapsbeen more successful than any other transition country
in avoidingconcentrationsof wealth and economicpower and ensuring a wide distribution of the
benefitsof growth. Inevitably,however, there are groups which have not shared these benefits
to the same degree. The factors which deternine poverty in Poland are very similar to those of
other transition countries-the unemployed,large families, families with only one breadwinner,
low levels of education,and so on. End-1996data suggests that rural locationwas not in and of
itself a factor contributingto poverty, but there is a larger concentration in the rural areas of
familiesthat have the characteristicsdescribed above. The situation may well have changed in
the past three years, however, since farm incomeshave been declining as a result of depressed
producerprices and havefallen sharply over the past year mainly as a resultof the loss of markets
in Russia and increasinginroads made by subsidizedimports from the EU. The potential impact
on rural incomes from competitionfrom EU producers post-accession,is a major concem of the
Government.
                                               12

34. With about 40% of Poland's pop'ulationliving in rural areas, it is not possible to tackle
povertyand inequalityissues withoutfocusingmore on the rural economy,especially agriculture,
which still provides 25% of total employment,but accountsfor less than 10% of GDP. A key
challenge is to improve agriculture productivity and competitiveness, including shifting
production to those agriculture products and market niches where Poland can be competitive,
especially within the EU. This requires,inter alia, improvementsin the way land markets
function so that farmsize can be optimized, the developmentof private wholesalemarkets and
marketing cooperatives,and investmentsin basic infrastructurein rural areas. Farm labor will
have to be rationalizedand a host of new off-farrmjobs createdto absorb excess labor and new
entrantsto the job market in rural areas.

35. Rural Development Program. Since the creation of off-farmemployment is critical to
rural sector transformation,and essentialif rural poverty is to be tackled, the Governmentasked
the Bank to help it prepare a comprehensiveprogram to facilitate private investment and the
creation of new jobs in poor rural areas. The program is targeted initially on eightvoivodships
selected on the basis of criteria such as high unemploymentrates, low GDP per capita, poor
education attainmentand over-employmentin agriculture. Preparationof this program is well
advanced, with assistance in three main areas:           i) rural infrastructure (such as roads,
telecommunications,and water supply and wastewater systems); ii) human capital development
(such as upgrading rural education, providing employment services, and strengthening local
administration capacity); and iii) private sector development (support for developing
entrepreneurshipand new businesses, including micro-credit and business incubator schemes).
The program is demand driven, with local governments responsible for preparing and
implementingtheirown projects from the menu of activities to be supportedunder the program.

36. The Program will be supportedwith a series of operationscarried out over a 6 to 8 year
period. An initial loan'of about US$100 million is plannedto supportthe first phase of the
Program. Preparationof this operation is well advanced, with appraisaland negotiationsplanned
to be completed by early fall 1999. RDP will be supportedwith EU pre-accession funding
under the SAPARDprogram. Total funding from the Bank during the period of the program
could be on the order of US$500million.

37. Identifying Bottlenecks to Rural Transformation.            The Government's emphasis on
creating off-farm employment is in large part a recognitionboth of the need for agricultureto
restructure and also of the ineffectivenessof past programs to increase agricultural productivity
and income through agriculturalproductionsubsidies. Becauseagricultureis such a largepart of
rural income, employment and the rural poverty complex, it is importantto understand why
markets have not led to higher productivity, consolidation of farm units and a much more
extensive developmentof processingand other agriculture activities,than has turned out to be the
case. In order to understand these issues better, the Bank will undertake a major analytical
exercise starting this fall. It is designed to examine how rural marketsare working in Poland,
with integrated studies of markets for land, labour, capital equipment,finance, goods and other
services. We expect this analysis to enable us and the Goverrunentto identify a new set of
policies and interventions for agricultural development in Poland and to agree with the
Government on possible areas of Bank support which can be reflected in revisions to the Bank
program.

38. Other Programs: In addition to the direct programs supportingrural development,the
Bank is involved in several otherareas which also addresssocial supportissues. These include:

      a   Supportfor Fiscal Decentralization. Having moved quickly to put in place the new
          regional administrative structure, the Government is still working on how to make it
                                             13


         function effectively. One importantelement-which is also essential for the rural
         development program, is developing the rules and regulations and administrative
         structurefor handlingthe flow of fundsfrom the centralto local government. A well
         defined system of intergovernmental transfers, coupled with improved revenue
         collection at the local level, is needed essential to ensure the adequate provision of
         public services,including funding for social protection and other initiatives to address
         poverty and equality concerns. An important aspect of Bank technical assistance in
         this area has been on defining performanceindicators to improvebudgetary allocation
         at the sub-nationalgovernmentlevel.

     •   Efficiency of Public Expenditures on Social Programs. Given the limited budget
         funds available, govermnentnot only has to have good mechanismsto get the money
         out to where it is needed, but it also has to make sure that the social programs being
         financed get good value for the money spent. Before deternining what social
         programs need to be adjusted or dropped and what needs to be improved and/or
         expanded, the Government has asked to Bank to work with it in assessing the
         budgetary impactof social programs in education,health and social protection. The
         idea is to look at their effectiveness,incidenceand value to the population. The Bank
         team will workjointly with the Polish officials and researchersto identify programs
          that have poorcost/benefitcharacteristicsand what should be done to improveor drop
          them. It willalso identify what is workingwell and what shouldbe expanded.

     * MonitoringImplementationof Social Support Programsfor Hard Coal Restructuring.
       As part of Bank support for the Hard Coal Restructuring Program, we -are closely
       monitoring implementationof active labor programs aimed at providing training and
       support forthe establishmentof new businessesby minerswho have been laid off.

     *   ImprovingEducationQuality and Efficiency. The Bank is also supporting Ministry
         of Educationefforts to prepare and implement educationreforms aimed at improving
         the quality and efficiency of education, including ensuring equal access to quality
         education.The Bank's assistance concentrates on building support and understanding
         for the reforms among teachers, union officials and educators, through conferences
         and seminars, visits of experiencededucators and teacher union officials, and studies
         of selected issues, including education finance. Lending to support rural education
         improvementsis proposed as part of the Rural Development Project and further
          lendingto support educationreform is under consideration.

     *   DevelopingPrograms to Meet the Special Needs of Children. One particular pocket
         of poverty which has emerged in the past decade is made up of former state farm
         workers in Northem Poland. The Bank is working with the Youth and Children
         Foundationto develop a program which will address the special needs of children in
         these areasand try to prevent them from falling victim to the cycle of unemployment,
         alcoholismand abuse which is endemicto many of these households.

                         Sustainability
D. Achieving Environmental

39. Since the early 1990s,Poland has made significantprogressin improving the quality of the
environment, as markedby substantial declines in air pollution, improvement in the quality of
surfacewater, and markedincreases in the level of investment by both the public and private in
meeting environmental goals. Nevertheless significant additional investrnent is still needed,
especially in the areasof wastewatertreatment and air pollution. Institutional development to
strengthen environmentalmanagement is also required over the medium and longer term to
                                               14

enable Poland to meet its own environmentaltargets and EU directives. The Bank's program
continues to give high priority to environmental objectives. Three recent activities can to be
highlighted.

      First, we have carried out an in depth analysis of the costs of complying with EU
environmentaldirectives. The study focuses on investmentneeds for the public sector and for
householdsand analyzespotential approachesfor reducing the costs.

      Second, Bank support of the Hard Coal Sector Restructuring Program emphasizes
environmental concerns in the mines and supports Govenment efforts to make sure that
environmental risks are identified and dealt with properly. Carryingout of an Environmental
Assessmentof all of the mines is one of the conditions in the coal SECAL.

       Third, we are preparing four innovativeenvironmentalprojectswhich deal with:

        *   Promoting environmentallysensitive farming practices, including tackling pollution
            from farmwaste,
        *   promotinguse of environmentally friendly geothermalenergyfor heating,
        *   assistingwith the establishment an energy savingcompanyto promote and finance,
                                          of
            on a performance guaranteed basis, insulation and other energy efficiency
            investmentsin buildingsto reduceheating costs, and
        *   reducingurban air pollution.


40. Environmentalobjectives are also supported by severalGEFfinancedactivities managedby
the Bank. Theseinclude an on-goingCoalto Gas Conversionproject to convertcoal fired boilers
to more environmentallyfriendlygas fired ones and a project to facilitatethe phase out of ozone
depleting substances. GEF fundingwill also support operationsaimed at developing geothermal
cnergy and improvingon-farm envirommental  practices.


                                  TV. Bank Group Assistance


The Bank's Programand ComparativeAdvantage.

41. In the past two years, the evolution of the Bank's programhas been driven by the strong
sense of our main counterparts in the Governmentof Poland as to where the Bank's comparative
advantages lie vis-a-vis their development objectives They have identified three types of
activities:

     First, we have been asked to play a leading role in the preparationand implementationof
 complex multi-sectoralprograms which include social mitigation aspects. The Bank's extensive
 involvementin coal sector restructuring,developing a comprehensive    programto create off-farm
jobs in rural areas, and our possible involvementin railwayrestructuringall fall in this category.
 In addition to our analytical work and contribution to the design of these programs, the Bank is
 well placed to help build a consensusamong the diverse group of stakeholderswho must make
 decisions on these programs. We are also able to provide for cross-ministerialmonitoring,since
 this kind of monitoring is often difficult for any one ministry or Governmentagency to carry
out.
                                             15


    Second, the Governmenthas turned to the Bank more frequently than in the past for our
advice and recommendationson both specific public sector reformns well as on EU accession
                                                                   as
related issues. This has involvedthe Bank in providingadvice,for example,on reforms in public
finance, implementation issues connected with the regional government reform, power sector
consolidationand privatization,developing an approachfor assessingthe impactof EU accession
on key sectors, and most recently in assessing the cost-effectivenessof social programs in
education, health and social protection. Here it has been our ability to respond quickly and
access worldwide expertise which carries a high premium for the Government,as well as the
recognitionof the objectivityof our advice.

    Third, we continue to work on a number of sector specificreforms and developmentissues.
These include the projects in the enviromnent described above, (improving on-farm
environmental management, use of geothermal energy, and promoting energy saving
investments), continuing support for reforms in the social sectors and facilitating private
investment in infrastructure,including support for restructuring of the transport and energy
sectors. Here the focus has been on the developmentof innovativeprograms which leverage
concessionalfunding from the internationalcommunityor from private investors.

42. The 1997 CAS did not include specific lendingtargets,but assumed lendingbetween $200
to 400 million per year in the base case, dependinglargelyon the pace of progressin key reforn
areas and Government interest in borrowing. Actual lendingover the past two FYs has in fact
been in the higher range, totaling US$522 million in FY98 and US$327 million in FY99,
includingassistance becauseof the July 1997floods and the substantialsupport provided for the
Hard Coal RestructuringProgram. Continued lendingat this level is predicatedon maintenance
of a macroeconomicfiameworkthat is satisfactory to the Bank, as well as satisfactoryprogress
on the sectoral reforms underpinningthe Hard Coal RestructuringProgram that would enable the
Bank to provide furtherfinancialsupport to this sector.

Non-LendingServices

43. Non-lending servicesconstitutea significantpartof our work programand we expect this to
continue over the next several years. Most of the Bank's advice and recommendationsare
providedin the form of informaltechnical notes and papersand through workshopsand seminars.
The Bank's new office location in Warsaw has excellent conference facilities, including
equipment for simultaneoustranslation and video conferences. This gives us addedflexibility in
bringing together government officials and bank staff and outside experts and enables us to
respondmore quickly to requests for advice on specificpolicyand institutionalconcerns.

44. Workshops and Seminars. Over the past two years the Bank has sponsoredor actively
participated in a large numberof seminars or workshopsaimed mainly at exchanginginformation
on key development concerns and discussing options for Poland in the light of the Bank's
experience and work in other countries. These have included, inter alia, conferences and
seminars on: altemative transport policies, bringing together environmentalNGOs and the
Ministry of Transport; human capital development; experiences of Health Consortia; the
utilizationof EU Funds in the context of Sub-nationalGovernmentreform; regionalpolicy issues;
Northern Poland Regional Development; the Y2K problem; the impact of complyingwith EU
EnvironmentalDirectives;and compliance with EU taxationdirectives.

45. Analytical Work on Selected Development Issues. The Bank's EconomicSector Work
(ESW)over the coming yearresponds directly to Government      requests and focuseson three main
areas. The first is work on anti-corruption, with initial efforts concentratingon identifyingthe
most important sources of corruption. The second focuses on agriculture and identifying
                                                16

constraints on restructuringof the farming sector, especially constraints affecting the smooth
functioning of labor,land and financialmarkets (see also para. 37.) The third is an analysis of
the budgetary impactand effectivenessof programsin health, educationand social protectionas
a first step in helping the Governmentidentify programs which offer good value for money and
those which have poor cost/benefit characteristics. All of this work is being done in close
collaboration with Polish counterparts and will be in the form of short analytical pieces and
focused policy notes, which can be used as a backgroundfor workshopsand seminars to discuss
key points and exchangeviews on policyrecommendationswith policy makers.


Portfolio Management

46. Since lending started in 1990, the Bank has committed close to US$5.0 billion to Poland
(US$4.0 billion net of cancellations),of which US$2.9 billion has been disbursed and US$675
million repaid. Of the 37 loans made to Poland(to finance 30 operations),18 loans have closed.
With the exceptionof 6 projects (EmploymentServices, Roads, Health Services Development,
Privatizationand Restructuring,and two district heat projects involving loans to five cities) all of
the operations approved during the first four years of lending have been completed, with
completion reports either already prepared or in the process of being finalized. In terms of
implementation performance,the credit line operations approved during the early years of the
program all ran into serious implementationproblems (lack of demand and high liquidity in the
banking system) and had to be canceled or partially cancelled and restructured. Other than the
credit lines,overall performanceof the portfoliohas been satisfactoryand continues to be so.

47. The portfolio currentlyunder irnplementationconsists of 19 loans, including the recently
approved Hard Coal SectorAdjustmentloan. Of these loans, five have recently closed or will
be closed by the end of the calendaryear, leaving an active portfolioof 14 loans. Of the older
loans still in the activeportfolio,the Health ServicesDevelopmentLoan (approvedin mid-1992)
has been the most problematic. It has disbursed very slowly and still had substantial
uncommitted funds as of end June 1999. However, the loan has recently been restructuredand
steps taken to strengthenprojectmanagement,which shouldlead to improvedperformance.

Partnership

48. The Bank's Poland program maintains strong working relationships with all major
development partners, including the EuropeanUnion, EBRD, EIB, bilateral aid agencies, and
NGOs. Both the UK KnowhowFund and USAIDare involvedin providingsupport for the coal
sector and for rural development and strong bilateral support under consultant trust funds has
been provided by Belgium,Canada, the Netherlandsand Sweden. We are working jointly with
EBRD on railway restructuringand EBRD will support coal mine privatization. Over the past
several years we have workedhard to strengthenlinks with NGOs. NGOs are actively involved
in working with the Bank on sector and project development issues. We hold periodic briefing
meetings to update NGOs on the Bank's program and make use of NGO experience and
expertise for both project preparation and imnplementation. Ten small grants were made to
NGOs in FY99 for a total of US$50,000 under the Bank's Small Grants Program, which is now
being managed from the Warsaw Office following the decentralization of small grant
management to field offices.

49. Given the program's focus on helping Poland prepare for EU accession, the level of
cooperationand collaborationwith the EU has increased considerablyover the past severalyears.
Poland, along with other pre-accession countries, will be the recipient of substantial pre-
accession financing from PHARE and specialfacilities such as SAPARD(for rural development)
                                            17


and ISPA (environmentand transport sectors). Both the Govermnent and the European
Commission (EC) expect to use pre-accessionfunding to co-finance projects prepared by the
Bank and other IFIs and collaboration with the EC on project preparation and co-financing
arrangements(such as for the proposedRural DevelopmentProject to be co-financed under the
SAPARD facility) has increased accordingly. To coordinate overall assistance strategies,
including upstreamsupport (such as non-projectbut strategicallyimportant studies and project
preparation) as well as to clarify arrangementsfor co-financingwith PHARE funding, the EC
signed a Memorandumof Understandingwith the Bank, EBRD, and EIB about a year ago.
Consideration is now being given to extending this framework to also cover the ISPA and
SAPARDfacilities.

50. The Bank is also cooperating closely with the EC on a variety of technical assistance
initiatives, which are being financed all or in part by the EC, to help Poland and other pre-
accession countriesto prepare for the EU. For example,an EC/Bankmission visited Poland in
March 1999to preparea joint programof technicalassistanceto help Poland get ready to comply
with EU Directivesfor liberalizingthe electricity and gas markets. The EC has also financed a
Bank organizedstudytour in Spain and Portugalfor Polish and other accession country officials
to learn about the experiencesof these two countries in utilizing EU funding for environmental
projects. Poland,alongwith other pre-accessioncountries, is also benefiting from a number of
regional workshopsand seminarsbeingorganizedby the Bank and financed with help of the EC.
Workshopson agricultureand rural development and on bankingsupervisionhave already taken
place and additionalworkshopsare planned in the areas of publicadministration,property rights
and cadastre development,and electricity and gas market regulations. These activities aim at
facilitating the accessionprocess and increasinglybenefit from the experience of EU member
countries whichhaverecentlyjoined.

Field Based CountryManagement

51. Since July 1997,the CountryDirectorfor Polandand the three Baltic Stateshas been based
in Warsaw. This change, coupled with appointment of new local and headquarters staff, has
enhanced the Bank's ability to respond flexibility and in a timely fashion to requests for Bank
support. The Polish authorities have expressed their appreciationfor these changes,especially
given the increasein requests for Bank policy advice on specific policy issues which has placed
an even greaterpremiumon flexibilityand our responsetime.


IFC's AssistanceProgram

52. No major changein the emphasis of IFC's work in Poland is expected over the next two
years, but as Poland's accessionto the EU approaches,IFC will become increasinglyselective in
identifying projectsthat it will support IFC will continue to look for projects where there is
significant IFC additionality,including support for privatizationof SOEs in heavy industry and
projects which are being developed by locally-ownedand managed companies and which are
commerciallysound,but lack major sponsors. Three specific areas for future developmentcan
be highlighted: i) further support for developing private health care, which is new sector in
Poland and one in which IFC can play an innovativerole--a follow-up investmentoperation and
further advisorywork is in the planningstages; ii) financing for basic infrastructure,especially
in the power sector, energy efficiency, and municipal infrastructure services, which are areas
which would benefit from IFC's experienceand "honest broker" status in structuring complex
contractual arrangements;and iii) continuedsupport for financial markets developmentthrough
investment financingand technical assistance support for specialized financial services such as
 securitization,housingfinance, and leasing.
                                             18



53. Since IFC's investmentactivity in Poland started in 1990, approximately30 projectshave
been approved,includingUS$124 million in equity investmentsand US$239 million in loans for
IFC's account and US$147 million in syndicated loans. The current portfolio consistsof 21
projects with US$140 million disbursed for the account of IFC and participants. With the
exceptionof three projects,overallportfolio quality is satisfactory.

54. Over the past two years, in order to improve client responsiveness and to leveragethe
Washington-basedinvestment staff, IFC has increasingly involved its Warsaw-based staff in
investmentoperationsand portfoliosupervision. The recentco-location with the Bank's Warsaw
Office has facilitatedcollaborationon various projects and initiatives and has improvedaccessto
modern communications. In order to strengthen IFC's country focus, IFC's Central and
Southern Europe Department recently established a new Department structure and designated
experiencedCountry Anchors,who have primary responsibilityfor a few countries each. This
approach enables Country Anchorsto focus on issues and concernsof clients, Government,and
field office presencein the countryconcerned.
                                                                                                                                        AnnexAl
                                                                                                                                        Page I of I


                     Key Economic & Program Indicators - Change from Last CAS
                                               Forecast in Last CAS                  Actual              Current CAS Forecast

Economy (Cl)                           1995a      1996b    1997b      1998b   1996c      1997c 1998a        1999b   2000b       2001b
Growthrates(%)
  GDP                                 7.0        6.0       5.0        5.0     6.0       6.8      4.8        3.5     4.5     5.1
  Exports                             16.7       12.8      12.9       9.6     12.7      7.8      6.5        3.2     7.2     8.2
  Imports                             20.5       25.0      20.1       11.2    22.0      14.2     18.2       2.3     3.3     4.7

Inflation(%)                          27.8       19.9      16.7       12.6    19.9       14.9    9.3        7.6     7.6     6.9

Nationalaccounts(% GDP)
  Currentaccountbalance               4.6        -1.0      -3.1       -3.5    -1.0       -3.0    -4.3       -6.3    -6.4    -6.2
  Grossinvestment                     18.3       19.8      21.1       21.8    20.9       23.6    25.6       26.9    27.6    27.7

Publicfinance(% GDP)
  Fiscalbalanced                      0.0        -1.2      -1.0       -0.8    -1.8       -1.0    -0.1       0.3     0.8     0.9
  Foreignfinancing                    0.3        -0.3      -0.3       0.2     -0.2       -0.5     -0.3      -0.3    -0.5    -0.6

Internationalreserves                                                                    5.6     7.2        7.2     5.7     4.7
(as months of imports)                            ____                        ____                       ____                       _

Program (Bank's FY)                   FY95a      FY96a     FY97b      FY98b FY96C Fy97c          FY98c      FY99c   FyOob       FYOJb
Lending($million)                     45.0       181.5     84.0       484.0   181.5      67.0    522.0      327.0   435.1   500.0
Grossdisbursements                    585.0      492.4     171.4      119.3   492.4      254.1   192.7      139.7   530.0   350.0
($ million)
a.   Estimatedyear
b.   Projectedyear
c.   Actualoutcome
d.   Central governmentincludingcapital revenues




Templatecreatedby the OperationsInformationSystem(OIS)on 8/20/99
                                        Poland at a glance                                                                                               8199


                                                                            Europe &     Upper-
      and
POVERTY SOCIAL                                                                Central    middle-
                                                                 Poland         Asia     Income           Developmnent
                                                                                                                   diamond
1997
         mid-year(millions)
Populabon,                                                         38.7          476         571                              Lifeexpectancy
GNPper captta(Atlasmethod USS)                                    3,800        2,320       4,520
GNP (Aas meto4 USSbillions)                                       14.9         1,106       2,584                                     T
            growth, 1991-97
Averageannual
         (%)
Population                                                          0.2          0.2         1.5
LaborfboreJ%)                                                       0.8          0.5         1.9          GNP                                            Gross
    rent
 Most         estimate (latestyer avaIlable,1991-97)                                                      rapia                                      enrollmrent
         (%
Poverty of populabtion  belownationalpovertyline)                    24
Urbanpopulaton(X of totalpopulation)                                 64           67         73
LUfe  expectancy birth years)
                 at                                                  73           69         70                                      1
infantmortality(per 1,000livebirths)                                 10           25         30
Childrmalnutition (%of children under 5)                                                                                    Access to safe water
Aa essto safe water (f of populabon)                                  ..           ..        79
                         age
lllieracy (, of populavhon 15+)                                       0             .         15
Gross  primary enrollment(7 of school-agepopulation)                 96           92         107                   -Poland
    Male                                                             97                                            -                      group
                                                                                                                         Upper-middleincome
   Female                                                            96

          RATIOSandLONG-TERM
KEYECONOMIC                TRENDS
                                                     1976          1986         1996       1997
                                                                                                          EconomIc
                                                                                                                 rtlcs
GDP(USSbillions)                                            -      71.0        129.8       147.9
GrossdomesticinvesnenttGDP                                         30.1         22.0        24.7
      of
Exports goodsand serviceGDP                                        19.0         24.4        25.7                                    Trade
GrossdomesticsavingsGDP                                            316          20.4        20.4
Grossnational savings/GDP                                                       19.8        20.4
CurrentaccountbalanceJGDP                                          -1.2         -1.1        -2.9          Dofeslic
       paymentslGDP
Interest                                                            1.4          1.1         0.9                                                     Investrmt
Totaldebt/GDP                                                      51.6         30.4        27.9          Savings
Totaldebtserieports                                                13.1          9.1         7.9
Presentvalue of debttGDP                                                                    24.2
Presentvalue of debt/exports                             ..           ..            ..     110.7
                                                                                                                               Indebtedness
                                     197648        1987.97         1996         1997     1998-02
       annualgrowth)
(average
GDP                                          1.7       8.4           6.0          6.8        4.7                    -       Poland
GNPper capita                                0.9      10.7           7.0          6.7        4.5                            Upper-rntddiencome
                                                                                                                                             group
Exports of goods and services                3.7      14.9          12.0         12.2        7.4


STRUCTURE of      theECONOMY
(16of GDP)                                           1976          1986         1996        1997      f   Growthratesofoutputandinvstmaent(%)
Agriculture                                                 ..                    6.5        5.6          30        -
Industry                                                    ..                   37.8       37.5          20
 Manufacturing                                              ..         ..        22.7       22.5          10
Services                                                    ..         ..        55.8        56.9
                                                                                                          .10       ~ 2                  4                    0

Prvate consumption                                          ,.      63.2         63.1       63.5          -20-
      govemnment
General       consumption                                   ..       9.5         16.5        16.1                            -GDI            --      GDP
Imports of goods and services                               ..      17.5         26.0        30.0


                                                   1976-6        1987-97        1996        1997           Growth rates of exports and Imports (#)
/average   annual
               growtlh)
Agriculture                                                          3.5          2.4         0.6         3s
Industry                                                    *-       6.3          6.7        10.8         2
  Manufacturing                         *-            *. ..                         ..

Services                                                                                          ,            t

Privateconsumption                                     0.6             ..                         -       s-
                                                                                                          5t
General govemment consumption                          2.4             ,,                       ,         0
Gross domestic investment                              .0.2          7.9         19.5        20.8         4             2      0       9
                                                                                                                                       U      9s5      e9         7
Imports of goods and services                          -1.4         18.1         28.0        21.4     1                 -ECxct                    0-Imports
Gross national product                                 1.8          11.0          7.1         6.8     |


                            estimates.
Note:1997data are preliminary
'The diamonds show four key indicators in the country (in bold) compared with its income-group average. tf data are missing, the diamond will
  be incomplete.
                                                                                                   CAS AnnexB2
                                                                                               Generated: 8/20/99




                                    Poland - Selected Indicators of
                         Bank Portfolio Performance and Management

Indicator                                                      1996          1997              1998         1999
PortfolioAssessment
Number of Projects under implementation'                          20            17                18          19
Average implementationperiod (yearS)b                           4.14          4.94              4.83        4.63
Percent of problem projects"
      by number                                               20.00           0.00             11.11        5.26
      by amount                                               18.97           0.00              5.15        3.30
Percent of projects at risk" d
      by number                                               25.00           0.00             12.50        0.00
      by amount                                               36.27           0.00              5.89        0.00
Disbursementratio (%)'                                        15.68          22.92             28.69       10.91

Portfolio Management
CPPR during the year (yes/no)
Supervisionresources (total USS)                            1,037.61      1,093.92       1,009.86         970.78
Average Supervision (US$/project)                              51.88         64.35          56.10          51.09

Memorandum item                                           Since FY80        Last five FYs

Projects evaluated by OED
      by number                                                       9                    9
      by amount (US$ millions)                                  1651.00              1651.00
Percent rated U or HU
      by number                                                   22.22               22.22
      by amount                                                    9.69                9.69


a. As shown in the AnnualReportonPortfolioPerformance     (exceptfor currentFY)
b. Average age of projectsin the Bank'scountryportfolio.
c. Percentof projects ratedU or HU on developmentobjectives(DO)and/or implementation     progress(IP).
d. As defined underthe PortfolioImprovement   Program.
e. Ratio of disbursements duringtheyear to the undisbursedbalanceof the Bank's portfolioat the beginningof the
   year: investmentprojectsonly.




Generatedby the OperationsInformation
                                    System(OIS)
                                                                                               CAS AnnexB3


               Poland - Bank Group Program Summary, FY 1999-2001
               ProposedIBDRD/IIABase-CaseLending Program,FY 2000-2001'

                                                                       Strategicreward?      Implementationh
FY            Project                                        US$(M         (HIMIL)            risks (HIMIL)

1999 HARD COALSECAL                                           300.0             H                    H
     WHLSLEMARKETS 1PRJ                                        15.9             L                    L
     WHOLESALEMKT.II                                           11.1             L                    M
              Subtotal                                        327.0

2000 COALSECALII                                              300.0             H                    H
     RURALDEVELOPMENT                                         100.0             H                    H
     RURALENVIRON.PROT.                                         2.5             M                    M
     ZAKOPANEGEOTHERMAL                                        32.6             M                    L
              Subtotal                                        435.1

2001 COALINVESTMENT                                           100.0             H                    M
     COALSECTADJ III                                          300.0             H                    H
     KRAKOWENERGYEFFICIENCY                                    20.0             M                    L
     MUNICIPALTAX                                              20.0             H                    H
     PORTS MOD.II                                              60.0             M                    L
               Subtotal                                       500.0

                         Total, FY 1999-2001                 1,262.1


a. This table presentsthe proposedprogramfor the next two fiscalyears.
                                                                          risks are expectedto be high (H),
b. For each project, indicatewhetherthe strategicrewards and implementation
   moderate(M), or low (L).




Generatedby the OperationsInformationSystem(OIS)on 8/20J99
                                                                                                                         Amex   B6
                                                                                                                        Page 1 of 3



                                    Poland - Key Economic Indicators


                                                     Actual                    Estimate               Projected
                       Indicator         1994      1995     1996      1997      1998      1999      2000     2001        2002

National accounts
(as % GDP at current
 market prices)

Grossdomesticproduct                      100.0     100.0    100.0     100.0     100.0     100.0     100.0      100.0      100.0
 Agriculture'                               6.3       6.1      5.6       4.9       4.7       4.5       4.5        4.3        4.2
 Industry"                                 37.9      34.1    32.8       32.8      32.3      32.5      32.3       31.7       31.1
 Services'                                 44.7      46.8     48.4      49.7      59.1      58.4      58.2       59.2       61.7

TotalConsumption                           83.1      77.8    79.6      79.6       81.3     80.0       79.5       79.4       79.8
Grossdomestic fixed                        16.2      18.7    20.9      23.6       25.6     26.9       27.6       27.7       27.7
investment
  Governmentinvestment                       ..       3.5     3.9       4.2        2.8      3.2        3.4        3.4        3.4
  Privateinvestment                          ..      16.3    18.1      20.5       24.2     24.9       25.4       25.5       25.3
 (includesincreasein
  stocks)
Exports (GNFS)b                            24.0     25.5     24.4      25.7       20.7     20.1       20.5       21.2       21.7
Imports(GNFS)                              23.0     23.2     26.0      30.0       28.9     28.2       28.8       29.5       30.3
Grossdomestic savings                      16.9     22.2     20.4      20.4       18.7     20.0       20.5       20.6       20.2
Grossnational savings                      17.5     20.6     19.8      20.4       22.6     21.9       22.4       22.7       22.9
Memorandum items
Grossdomesticproduct                     92580 126348 142965 143066 157744                169288 182059 196742 214106
(USSmillion at current
prices)
Grossnational productper                  2430      2810     3340      3800      4060      4230      4580       4960       5370
capita(USS, Atlas method)
Realannual growthrates
    calculated from 1990
(%/o,
 prices)
  Grossdomestic productat                 5.1%      7.0%     6.0%      6.8%      4.8%      3.5%      4.5%       5.1%       5.5%
  marketprices
  GrossDomestic Income                    4.8%      9.2%     5.4%      6.4%      1.6%      2.7%      3.2%       4.1%       4.8%
Realannual per capita
growth rates   (0/t,   calculated
from 1990 prices)
 Gross domestic product at                4.90/%    6.90/o   5.90/o    6.7%      4.7%      3.4%      4.3%       4.9%       5.3%
 marketprices
 Total consumption                           ..        ..       ..        ..     5.0%      1.0%      2.1%       3.6%       5.0%
 Private consumption                         ..        ..       ..        ..     4.2%      0.0%/o    1.7%       3.5%       4.9%
                                                                                                        (Continued)
                                                                                                                       Annx   B6
                                                                                                                      Page3 of 3




                                 Poland - Key EconomicIndicators
                                           (Continued)

                                                      Actual                    Estimate              Projected
              IndicMatr                   1994      1995     1996     1997       1998      1999     2000     2001      2002
 Currentaccountsurplus(+)                   -2.0      -1.9     -1.8     -1.0         0.1      0.3      0.8      0.9       1.3
 or deficit (-)
 Capitalexpenditure                          l5        1.3      1.6      1.6         2.8      3.2      3.4      3.4        3.4
 Foreignfinancing                           -1.9       0.3     -0.2     -0.5        -0.3     -0.3     -0.5     -0.6       -0.7

Monetary indicators
 M2/GDP(at currentmarket                    36.7      34.0    35.5      37.6       40.8      40.8     40.8    40.8        40.8
 prices)
 Growthof M2(%)                             38.2      34.9    31.1     29.1        27.5      10.5     10.8     11.1       10.5
 Private sector credit growth/                 ..       ..       ..        ..         ..     91.5    101.5    100.6       92.3
 totalcredit growth(%/o)

Price indices( 1990=100)
 Merchandiseexport price                   102.3     108.0   102.4     105.7       89.1      89.3     91.2    94.0        97.4
 index
 Merchandiseimportprice                     78.0      81.6     88.1     91.1       83.6      85.8     91.2     96.5      101.7
 index
 Merchandisetermsoftrade                   131.1     132.4    116.2    116.0      106.5     104.1    100.1     97.5       95.7
 index
 Realexchangerate                          179.2     193.9   211.0     216.2      197.5     191.7    189.2    188.6      187.5
(USS/LCU)f
Real interest rates
Consumerprice index                       32.1%     27.1%    19.8%    14.9%/o 9.3%          7.6%     7.6%     6.9%       5.5%
(% growth rate)
GDPdeflator                               28.5%     36.1%    18.7%    14.0%       12.0%     6.8%     6.0%     5.7%       4.7%
(% growth rate)


                                                                     this
a. If GDP componentsare estimatedat factor cost, a footnooteindicating fact shouldbe added.
b. "GNFS"denotes "goodsand nonfactorservices."
c. Includesnet unrequitedtransfersexcludingofficialcapital grants.
d. Includesuse of IMF resources.
e. Should indicatethe level of the governmentto whichthe data refer.
£ "LCU"denotes "local currencyunits."An increasein US$/LCUdenotesappreciation.
                                                                                                                                    Amex87
                                                                                                                                   Page 1 of 1




                                Poland - Key Exposure Indicators


                                                   Actual                        Estimate                  Projected
              Indicator                1994      1995 1996         1997           1998 1999              2000 2001         2002

Total debtoutstandingand               42553 44263 43473 39889 48093 57491 58449 67071 77589
disbursed(TDO) (USSm)'

Net disbursements
                (US$m)'                  97       335       982     1944           8204    9397            957    8623 10518

Total debtservice (TDS)                 3102     4147      2680     2562          3036     3777           5045    6968 10132
(USSm)'

Debt and debt serviceindicators

  TDO/XGSb                                 ..        ..       ..       ..         137.5    158.2          146.4   152.0    158.4
  TDO/GDP                               46.0      35.0      30.4    27.9           30.5     34.0          32.1     34.1     36.2
  TDS/XGS                                  ..        ..       ..       ..           8.7     10.4           12.6    15.8     20.7
  Concessional/rDO                      25.4      25.1      23.3    19.3           15.5     12.6           12.0    10.0      8.1

IBRDexposureindicators(%)
 EBRD  DS/publicDS                       3.1       4.1      16.0    17.7           13.6     10.6            7.9     5.5      3.7
 PreferredcreditorDS/public             18.1      47.0      16.0    17.7           13.6     10.6            7.9     5.5    - 3.7
 DS (/6)'
  IBRD DS/XGS                             ..        ..        ..       ..           0.9      1.0            0.9     0.8      0.7
  IBRDTDO (USSm)d                      1818      2067      2175    2078           2096     2099          2046     1956     1840
    Of which presentvalue of
    guarantees(US$m)
  Share of IBRD portfolio (%)              ..       ..        ..       ..             ..       ..

  IDATDO(USSm)d                            0        0         0        0              0        0              0        0       0


IFC (USSm)
 Loans                                   115      181       149      114            98        91
 Equity and quasi-equity /c              25        63        60       57             53       57

MIGA
 MIGA guarantees (USSm)                     ..        ..     46             ..        3             ..




a. Includespublic and publiclyguaranteeddebt, privatenonguaranteed, of IMFcreditsand net short-
                                                                     use
    termcapital.
b. "XGS"denotes exportsof goodsand services,includingworkers'remittances.
c. Preferredcreditorsare definedas IBRD, IDA, the regionalmultilateraldevelopmentbanks,the IMF, and the
   Bankfor InternationalSettlements.
d. Includespresentvalue of guarantees.
e. Includesequity and quasi-equity types of both loanand equityinstruments.
                                                                                                                                                                            CASAnnexBB
                                                                                                                                                                          Generated:
                                                                                                                                                                                  BrOOM


                                                              Status of Bank Group Operations in Poland
                                                                         Operations Portfolio


                                                                                                                                             Difference   Between
                                                                                                                                                    expected
                                                                                              Original   Amount   in US$ Millions                  and actual               Last PSR
              Fiscal                                                                                                                          disbursements a/        Supervision Rating bf
 Protect ID    Year              Borrower                          Purpose
                                                                                             IBRD        IDA       Cancel.     Undisb.         Orig      Frm Rev'd    Dev Obj   Imp Prog


Number of Closed Projects: 15

Active Projects
PL-PE-8582      1991   REPUBLIC OF POLAND               EMPLOYMENT PROMOTION                100.00        0.00        20.00           5.38       25.38         5.38     S          S
                1991   DISTRICT HEATING ENTITY          HEAT SUPPLY RESTRUCT                285.00        0.00        82.50          12.10      149.54        12.04     S          S
PL-PE-8576
                1991   REPUBLIC OF POLAND               PRIVATIZN & RESTRUCT                280.00        0.00        47.28          63.75      111.04        63.76     S          S
PL-PE-8571
                1991   REPUBLIC OF POLAND               HEALTH SECTOR DEVELOP               130.00        0.00        30.00          41.20       39.00        12.00     S          S
PL-PE-8587
PL-PE-8590      1992   REPUBLIC OF POLAND               HOUSING DEVELOPMENT c/              200.00        0.00       180.00           8.30      150.00         5.00     S          S
Pl-PE-8599      1993   REPUBLIC OF POLAND               ROADS                               150.00        0.00         0.00           2.00        2.00         0.00     HS         S
                1994   GOVT. OF POLAND                  FORESTRY DEVELOPMENT                146.00        0.00        42.00           2.46       22.45         2.45     S          S
PL-PE-8610
                1995   KATOWICE DISTRICT HEATING        KATOWICE HEAT SUPPLY                 45.00        0.00         0.00          24.44       23.53         0.00     S          S
PL-PE-8614
                       POLISH POWER GRID CO             POWER TRANSMISSION                  160.00        0.00         0.00          96.93       47.56         0.00     S          S
PL-PE-8604      1996
                       BIELSKO-BIALA AQUA S.A.          BIELSKO-BIALA WATER                  21.50        0.00         0.00          11.79        9.35         0.00     HS         HS
PL-PE-8595      1996
                                                        PORT ACCESS & MGMT.                  67.00        0.00         0.00          50.64        7.49         0.00     HS         s
PL-PE-36061     1997   GOVERNMENT OF POLAND
                                                        FLOOD EMERGENCY                     200.00        0.00         0.00         160.51      102.33         0.00     S          S
PL-PE-53796     1998   GOVT. OF POLAND
                       BISE AND PBK                     MUNICIPAL FINANCE                    22.00        0.00         0.00          19.86       10.16         0.00     S          S
PL-PE-35082     1998
                1998   MINISTRY OF TRANSPORT            ROADS II                            300.00        0.00         0.00         285.63       23.95         0.00     S          S
PL-PE-8593
                       GOVERNMENT OF POLAND             HARD COAL SECAL                     300.00        0.00         0.00         291.13        0.00         0.00     S          S
PL-PE-57957     1999
PL-PE-8616      1999   POMORSKIE HURTOWE CENTRUM        WHLSLE MARKETS PRJ r                 15.90        0.00         0.00           7.17        1.60         0.00     HS         HS
                                                        WHLSLE MKT. II                       11.12        0.00         0.00          10.63        1.60         0.00     S          S
PL-PE-55988     1999   LUBLIN WHOLESALE MARKET

Total                                                                                   2,435.52          0.00       401.78    1,094.42         726.90       100.63



                                      Active Protects       Closed Projects       Total
Total Disbursed (IBRD and IDA):                927.62           1,945.58         2,873.20
      of which has been repaid:                148.20             509.60           657.80
Total now held by IBRD and IDA:              1,763.54           1,582.39         3,345.93
Amount sold                   :            .     0.00               0.00             0.00
   Of which repaid            :0.00                                 0.00             0.00
Total Undisbursed             :             1,094.42               11.73         1,106.15




a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.
b. Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system was introduced (HS - highly Satisfactory, S - satisfactory, U - unsatisfactory,
                                                                                                                                       23, 1994.
   HU - highly unsatisfactory): see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August
c. Project includes two components: il original housing component (completed); and ll) SHE Flood Recovery Component

Note:
   Disbursement data is updated at the end of the first week of the month.




         by                       System(OIS)
Generated the OperationsInformation                                                                                                                                               Page I
                                                               Poland
                                                      STATEMENTOF IFC's
                                                     Held and DisbursedPortfolio
                                                           As of June 1999
                                                       (In US Dollar Millions)

                                                                        IFC Held                        IFC Disbursed

FY Approval Company                                           Loan    Equity   Quasi   Partic   Loan    Equity   Quasi   Partic

1996         Baltic Malt                                       4.97     1.94    0.00     0.00    4.97     1.87    0.00     0.00
1993/97      BONA                                              1.30     0.00    0.00     0.00    1.30     0.00    0.00     0.00
1998         BWP Bank                                          0.00     1.75    0.00     0.00    0.00     1.75    0.00     0.00
1991         CHEMAGEV                                          0.34     0.00    0.00     0.00    0.34     0.00    0.00     0.00
1997         CPF                                               0.00     1.60    0.00     0.00    0.00     0.99    0.00     0.00
1990         EDB-Piotr Ostrowski                               0.05     0.00    0.00     0.00    0.05     0.00    0.00     0.00
1996/97      Gaspol                                            0.00     5.98    0.00     0.00    0.00     5.98    0.00     0.00
1998         Global Hotels                                     0.00     3.60    0.00     0.00    0.00     2.67    0.00     0.00
1995         Globi Retailing                                   0.00    10.00    0.00     0.00    0.00    10.00    0.00     0.00
1993         Huta Warszawa                                    27.58     0.00    4.48     0.00   11.99     0.00    3.75     0.00
1995/97/98 Intercell                                           0.00    11.51    0.00     0.00    0.00    11.51    0.00     0.00
1996         IO Fund for Central and Eastern Europe (R)       10.00     5.00    0.00     0.00    1.70     0.00    0.00     0.00
1999         Medicover (R)                                     5.00     0.00    2.00     0.00    0.00     0.00    0.00     0.00
1995         Nesky                                             0.00     0.50    1.87     0.00    0.00     0.50    1.87     0.00
1997         Norgips                                          10.36     0.00    0.00    19.50   10.36     0.00    0.00    19.50
1996         Pam Bank                                         15.00     0.00    0.00     0.00    5.00     0.00    0.00     0.00
1998         Paroc Polska                                      6.90     2.13    0.00     0.00    0.00     1.93    0.00     0.00
1993         PIF-Poland                                        0.00     2.17    0.00     0.00    0.00     1.67    0.00     0.00
1994/96      Peters                                            5.58     0.00    1.00     0.00    5.58     0.00    0.88     0.00
1992         Philips Poland                                    3.75     0.00    0.00     0.00    3.75     0.00    0.00     0.00
1993         Pilkington Sandoglass                            15.59     0.00    8.27     6.57   15.59     0.00    8.27     6.57
     Total Portfolio:                                        106.42    46.18   17.62    26.07   60.63    38.87   14.77    26.07

                                                       ApprovalsPending Commitments

FY Approval    Company                                        Loan Equity      Quasi   Partic
1997           AmerBank                                        8.00  7.00       0.00     0.00
1998           BWP Bank                                        4.99  0.00       0.00     0.00
1998           Global Hotels                                   3.20  0.00       4.00     0.00
1998           Paroc Polska                                    0.00  0.00       0.00     7.40
      Total    Pending:                                       16.19  7.00       4.00     7.40

(R) - includes regional projects with a major emphasis on Poland