POLAND merchandise imports and services). Capital transactions remain controlled; consequently, a license from the National Bank is required to either grant or receive foreign exchange credits. The National Bank of Poland (the Central Bank) introduced a "crawling peg" exchange rate mechanism beginning in October 1991. The purpose of the new mechanism is to devalue the zloty by small increments (up to 1.8 percent per month) on a daily basis to offset domestic inflation and maintain the competitiveness of Polish exports. According to the current procedure, the zloty's rate of exchange is devalued by nine zlotys per day against a basket of key international currencies. The basket includes the U.S. dollar, German mark, Pound sterling, French franc and Swiss franc. The exchange rate is adjusted to reflect shifts in the values of the currencies in the basket (i.e., to reflect appreciation/depreciation of the dollar against the mark). Prior to introduction of the new system, the zloty had been devalued only once (by 14.4 percent in May 1991) since the government introduced its stabilization program in January 1990. The Government of Poland's exchange rate stabilization policy is supported by a $1.0 billion stabilization fund, which includes a $200 million grant from the U.S. 3. Structural Policies Pricing Policies: Almost all subsidies on consumer goods prices have been eliminated. Subsidies remain, however, on a few items, including plant protection chemicals and fertilizers. Prices on fuels, public transportation and most rents are administratively determined and continue to be set by the government. An anti-monopoly policy is conducted to prevent domestic producers from gaining undue advantage resulting from their monopolistic position. Restriction of price increases for enterprises enjoying a monopolistic position has been applied to dissuade them from enforcing contract clauses convenient for them and dictating prices. Tax Policies: At present, the major source of tax revenue is a corporate income tax which levies a straight-line 40 percent rate on all corporate enterprises. Poland is reformulating its tax collection system. Recently, legislation introduced a new uniform, progressive, comprehensive personal income tax which will take effect in January 1992. The Government also plans to introduce a value added tax (VAT) which will replace the existing system of "turnover" taxes. The new tax will have to be paid by importers at the border but not by exporters. The Finance Ministry has initially proposed a uniform 16 percent rate on sales value, with exemptions for some agricultural products and services. Higher excise taxes will be imposed on alcohol, fuels, jewelry, and other luxuries. The turnover tax currently contributes about 25 percent of total revenues. Parliament has yet to take any action on the draft VAT legislation; consequently, it is now unlikely to come into force before 1993. State sector enterprises, additionally, must pay a "dividend tax" assessed on assets originally The received from the state. POLAND Poland Regulatory Policies: An anti-monopoly law has been passed and certain state monopolies have been or have begun to be eliminated. The government has taken bold steps to establish a transparent, market-based trade regime. has decentralized foreign trade and stripped foreign trade organizations of their monopoly rights. Any individual or firm is able to engage in foreign trade after registering as a business. This has put severe pressure on Poland's outmoded customs service and infrastructure. Controls requiring licensing are in place for trading in arms and radioactive and nuclear materials, as well as sensitive dual-use technology. The second tier for non-proscribed materials relates to trading in hard or soft currencies. There are currently only a small number of import licensing requirements for non-proscribed imports in convertible currencies; these relate to imports of internationally controlled technologies. All clearance relations (trade with CMEA or with other countries based on a clearing or non-convertible account), however, need licenses, but this is now a very small fraction of Poland's foreign trade. For convertible currency exports, licenses are required only where there are quota limits on exports (i.e., textiles, steel and other commodities subject to international quota arrangements) and for a number of strategic goods such as coal, fuels and some basic food products. 4. Debt Management Policies Poland is a heavily indebted country. At the end of 1990, its external debt obligations to western creditors reached $46.6 billion (or 4.3 times annual export earnings). With Poland's hard currency debt to the Soviet Union factored in, total debt at the end of 1990 stood at $49 billion. The debt servicing ratio (to exports) approximated 56 percent in terms of payments due. The ratio of actual payments to exports was a mere 0.6 percent, reflecting the one year moratorium on official payments negotiated under the February 1990 Paris Club rescheduling and the Government's policy of treating other creditors in an equivalent manner. The structure of Poland's hard currency debt is unique by virtue of the high percentage of official debt, i.e., debt owed to western government entities (about $33 billion or more than 2/3 of the total debt stock). The United States accounts for only about 10-12 percent of Poland's official debt. In March 1991, the western government creditors assembled in the Paris Club reached agreement with Poland on an unprecedented reduction in its official debt service obligations, by a minimum of 50 percent in real terms, in two stages. Thirty percent of the debt (net present value basis) will be reduced in the first stage starting in 1991. An additional 20 percent reduction will take place in 1994 if Poland has met certain criteria regarding agreements with the IMF and private creditors. Poland is currently in the process of working out POLAND bilateral implementing agreements with its official creditors. The Paris Club governments have the option of further reducing Polish obligations through additional bilateral relief and voluntary conversion of up to 10 percent of outstanding claims via debt for equity, debt for nature, or other debt swaps. On this basis, the U.S. has agreed to reduce its holdings of Poland's debt by a total of 70 percent, including additional bilateral relief (10 percent) and forgiveness of another 10 percent on the condition that equivalent local currency resources are used to fund a foundation for the environment. Poland has also entered into discussions with the "London Club," regarding the approximately $13 billion owed to its commercial bank creditors. The goal is a debt reduction agreement parallel to that achieved with the Paris Club. 5. Significant Barriers to U.S. Exports Import Licensing: Most hard currency trade is conducted without import licenses, although the government has been under increasing pressure to resume licensing, particularly for food products. Licenses are necessary for military equipment, radioactive and inflammable items, fuel, wine, beer, hard liquor and cigarettes (individual importers are responsible for securing these licenses). Imports of vodka, some high-proof spirits, cars over 10 years old and trucks over six years old are banned. Starting May 1, 1992, transaction-specific licenses will also be required for imports of dairy products. Transaction-specific licenses are required for transactions involving barter/countertrade, leasing and technology licensing. Trade with Poland's ex-CMEA partners required licenses through May 1991, when the Ministry of Foreign Economic Relations terminated issuance of new licenses for transferable ruble trade. This trade had largely evaporated by September 1991. Standards: Requirements for testing, labelling, certification and other standards have not presented significant barriers to U.S. exports. Existing regulations are in the process of revision to better conform with Poland's liberal trade regime and EEC standards. In the meantime, standards enforcement remains an area in need of improvement. The Ministry of Health's Central Inspectorate of Sanitation (SANEPID) inspects and tests food and cosmetics imports to ensure that they meet acceptable health standards. SANEPID has been deluged with food imports in 1990 and 1991, resulting in delayed certifications, as well as entry onto the Polish market of significant quantities of uninspected food products, usually carried by private travelers. New legislation on sanitary requirements is currently being drafted by SANEPID specialists and will likely be on the 1992 legislative agenda. U.S. companies have not encountered serious difficulties getting authorization to sell pharmaceuticals in Poland, provided these products were certified for sale in other developed countries. POLAND Service Barriers: Under the banking law enacted in 1989, foreign banks are permitted to establish a bank in Poland as share corporations, either with the participation of Polish enterprises or with 100 percent foreign ownership. A permit to operate is required from the president of the National Bank of Poland (Central Bank) acting with the advice of the Ministry of Finance. In such cases, a minimum investment of six million dollars is required for foreign banks; two million dollars is required for domestic banks. The law also permits foreign banks to open representative offices in Poland. Sixty-three licenses to establish new banks were issued in 1990. The bulk of these were domestic banks. Of these, private investors held a controlling share in 22 cases; other banks involved state-owned enterprises or, in some cases, government entities. Five banks with foreign capital have begun operation. Most recently, Citibank has established a fully-owned subsidiary, which opened in late 1991. Bankers Trust and several private U.S. companies have taken a stake in another new bank, and American Express has opened a limited services branch. Civil law provisions which restricted the activities of private banks have been repealed, and private banks may now open foreign currency accounts for individuals with National Bank approval. activities depend on the scope of the approved operating permit. The government has also taken steps to end government monopolies in other service trades, including insurance and tourism. A new insurance law enacted in July 1990 opened this sector to private and foreign competition. Polish law separates life insurance from other types of insurance and no company may engage in both. The Ministry of Finance has issued licenses establishing several private and foreign-owned insurance companies, including an American-owned firm. Foreign companies have also been playing a growing role in tourist services for the last several years, particularly in the hotel industry. Private travel agencies have also shown rapid growth, but foreign entry into the sector is still regulated by the Ministry of Industry and Trade. Such Investment Barriers: Poland's investment climate was dramatically altered with the entry into force on July 4, 1991 of a new foreign investment law. The new law was intended to move far beyond its oft revised antecedents in removing bureaucratic impediments to investment in Poland. It seeks to bring treatment of foreign investors up to the standard of "national treatment." It succeeds on many counts. The new law allows foreigners to set up wholly-owned subsidiaries, establish joint ventures with public and private sector firms, register new ventures without permits (in most cases), repatriate all profits freely, bring in foreign management, receive up to three-year tax holidays for investments over two million ECU, make investments below the former $50 thousand minimum level. The new law converted the former Foreign Investment Agency (FIA) into a new "State Agency for Foreign Investment (SAFI)," which is a share corporation reporting directly to the Minister of Privatization. Most of the former FIA's investment screening functions have been dropped, but SAFI will still be required to issue permits for investments in strategic areas such as airports and port facilities, defense POLAND industry, as well as real estate companies, consumer goods wholesaling and legal consultancy. According to the law, a permit can be denied if a proposed investment is deemed to threaten the economic interests of the state and or state security. Beyond SAFI's limited screening role, the organization has been turned into an investment promotion entity. Total foreign investment in Poland amounted to $198 million through the end of 1990. Approximately $85 million in additional foreign investments were announced in the first half of 1991, although some of this was to be applied over a longer term. As of June 30, 1991, 4,286 investment permits had been issued by the FIA under previous foreign investment laws. The bulk went to German investors, with 1,362 permits, followed by U.S. investors with 363 permits. German investments constituted 27 percent of all foreign investment, with U.S. investment equal to 10 percent of the total. With the announcement of additional U. s. investments in the second half of 1991, the U.S. share of total foreign investment will no doubt increase. It is not clear whether the new investment law will succeed in quickly attracting increased foreign investment. Other significant barriers to investment, which are not affected by the new investment law, include inadequate telecommunications and banking facilities, lack of western accounting firms (though this is rapidly improving) and standards, and shortages of business and office space. purchase of land in Poland by foreigners is currently possible. New legislation liberalizing land acquisition requires that a permit to purchase be issued by the Minister of Interior. Periodic reporting by the Ministry to the Parliament is also required. The The Overseas Private Investment Corporation (OPIC) signed an agreement with Poland in 1989 providing for the extension of OPIC credit guarantees and political risk insurance to U.S. investors in Poland. During the visit of Prime Minister Mazowiecki to the United States in March 1990, President Bush and Prime Minister Mazowiecki signed a comprehensive Business and Economic Treaty which includes investment protection guarantees and other assurances. U.S. investors receive assurances in regard to profit repatriation under this treaty, but the Investment Law of July 4, 1991 actually provides investors with more attractive provisions in this area. While both sides have ratified the Treaty, it has not yet entered into force. The Government of Poland is currently in the process of developing implementing legislation to bring Polish laws into alignment with commitments made in the Treaty and its side letters, especially in the area of intellectual property. Government Procurement Practices: As Poland moves toward a western-oriented market economy, improving procedures for government procurement through tendering has been declared a government objective. Current practice is that government procurement projects are normally submitted for tender. Although questions still occur, there has been some improvement in the government's tendering procedures in 1991. The government has also availed itself of OECD and |