VZCZCXYZ0001
RR RUEHWEB

DE RUEHPS #0306/01 1081430
ZNR UUUUU ZZH
R 181430Z APR 07
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC 7269
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS PRISTINA 000306 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/SCE, EUR/ACE, EB/IFD/OIA 
STATE PLEASE PASS TO USAID FOR EE/ECA AND EE/DGSR 
STATE PLEASE ALSO PASS TO TREASURY-E.MEYER 
NSC FOR BRAUN 
 
E.O. 12958: N/A 
TAGS: EAID ECON PGOV YI
SUBJECT: KOSOVO TAKING PROACTIVE APPROACH FOR DONORS 
CONFERENCE PREPARATION 
 
 
Sensitive but unclassified - please protect accordingly. 
 
¶1. (SBU) Summary. In preparation for a donors conference, the 
PISG hopes to complete the draft of the Medium Term 
Expenditure Framework by late April and have a final document 
by late May highlighting Kosovo's development needs and 
priorities.  The PISG started discussions with the IMF on 
April 13 to negotiate a letter of intent, which is crucial 
for establishing the economic and fiscal policies the PISG 
must adhere to in order to receive donor and international 
financial institution assistance.  The Ministry of Finance 
and Economy appears willing to negotiate and compromise with 
the IMF on politically sensitive but budget-busting 
legislation, such as the law on providing benefits to former 
Kosovo Liberation Army (KLA) fighters, and other draft 
legislation dealing with labor, health insurance and social 
welfare.  The political commitment of top Kosovo leaders and 
Kosovo parliamentarians to this belt-tightening, however, is 
less certain, and donors will need to work together to 
impress upon the PISG the necessity of making these changes. 
USOP, along with the other donors, will encourage flexibility 
from the PISG and IMF to ensure that the donors conference 
remains on track.  End Summary. 
 
PISG ON TRACK WITH MTEF PREPARATION 
 
¶2. (SBU) Officials of the Ministry of Finance and Economy 
(MFE), along with assistance from USAID-funded advisers, told 
us recently that a draft Medium Term Expenditure Framework 
(MTEF) would be ready by late April for donor countries and 
agencies and noted that a final product should be complete by 
late May.  These officials believe the MTEF provides a much 
clearer picture of PISG priorities, which include the rule of 
law (judicial reform, development of the public prosecutors 
office and resolution of the case backlog of courts), energy 
sector (construction of distribution and transmission lines, 
Sibovc Southwest mine development, and electricity bill 
collection improvements), transportation (road and highway 
construction), and education (education reform, classroom 
construction for primary and secondary education, hiring more 
teachers and teacher training).  The MTEF estimates that 
almost two billion euros will be needed over six years for 
capital and non-capital expenditures in these areas.  Donors 
are expected to provide half of that amount, which excludes 
debt relief and technical assistance. 
 
LOI WITH IMF CRITICAL TO KEEP DONOR CONFERENCE ON TRACK 
 
¶3. (SBU) MFE officials said that before the official MTEF can 
be presented to donors, the ministry must negotiate a new 
letter of intent (LOI) for economic and fiscal policies with 
the IMF.  MFE officials said this was necessary since the EU 
and World Bank must have a LOI for the donor conference, 
noting this document establishes the economic and fiscal 
policies to which the PISG must adhere in order to receive 
donor assistance.  MFE Minister Haki Shatri started 
discussions with the IMF to negotiate a new LOI on April 13. 
 
MFE HOPING FOR IMF FLEXIBILITY ON SENSITIVE LOI ISSUES 
 
¶4. (SBU) The MFE hopes it can negotiate with the IMF on two 
politically sensitive but expensive budget issues: spending 
for social welfare programs (implementing the law on benefits 
to former Kosovo Liberation Army (KLA) members, and 
redrafting legislation for pensions, labor and health 
insurance benefits) and the 0.5 percent limit on growth in 
recurrent spending in the Kosovo Consolidated Budget (KCB). 
On social welfare issues and in particular the budget-busting 
KLA law, the MFE proposes to tighten the eligibility criteria 
based on financial need and eliminate hard-to-quantify 
provisions of the legislation such as electricity subsidies, 
customs and tax exemptions, purchase of cars for KLA veterans 
by the PISG, academic scholarships, and free room and board 
and textbooks at universities.  MFE officials asserted that 
under the strict criteria proposed by Minister Shatri, the 
cost of the KLA law would be 23 million euros per year 
instead of 80 million euros per year as estimated by senior 
PISG officials.  MFE officials said that to save more money, 
Minister Shatri would propose annulling the health insurance 
legislation recently passed by the Kosovo Assembly, 
redrafting the labor and pension legislation currently under 
review in the Assembly, and replacing them all with more 
modest legislative provisions. 
 
¶5. (SBU) The MFE will ask the IMF to relax the 0.5 percent 
limit on growth in recurring spending, increase the basic 
pension from 40 to 50 euros per month, and hire more teachers 
at higher salary levels.  MFE officials estimate that these 
additional expenditures will total 43 million euro.  The MFE 
believes that the IMF would be willing to relax the 0.5 
percent limit rule for this LOI.  For its part, the MFE 
remains committed to reducing public sector employment by up 
to 10 percent, but advocates a gradual, systematic approach 
to be completed by 2009.  The international community, 
including the World Bank, has urged both the IMF and PISG to 
be flexible in order to complete the LOI in a timely manner. 
European Commission officials have signaled that the European 
Union is willing to consider a flexible approach towards 
relaxing the 0.5 percent limit for recurrent spending. 
 
COMMENT 
 
¶6. (SBU) The commitment of the MFE to maintain the timeline 
for submitting the MTEF to donors is an encouraging sign that 
the PISG understands the importance of this process. 
Nevertheless, there are serious concerns -- including within 
the MFE itself -- that senior-level PISG officials will not 
support some of Minister Shatri's proposals, particularly 
those that deal with the KLA law and social welfare spending. 
 We will need a unified line among the donor community to 
impress upon Kosovo's political leadership and, even more 
difficult, upon its parliamentarians that extravagant social 
spending will endanger donor commitments.  USOP will continue 
to work with the PISG and international community to 
encourage flexibility and compromise to ensure that the 
donors conference takes place in a timely manner and is fully 
integrated with Kosovo's post-transition needs.   End 
Comment. 
 
¶7.  (SBU)  USOP clears this cable in its entirety for release 
to UN Special Envoy Ahtisaari. 
KAIDANOW