VZCZCXRO9998
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHTI #1078/01 3610902
ZNR UUUUU ZZH
P 270902Z DEC 07
FM AMEMBASSY TIRANA
TO RUEHC/SECSTATE WASHDC PRIORITY 6497
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 TIRANA 001078 
 
SIPDIS 
 
SIPDIS 
 
DEPARTMENT FOR EUR/SCE (ERIN KOTHEIMER AND YOULIANA IVANOVA) 
PASS TO TREASURY FOR VIMAL ATUKORALA 
 
E.O. 12958:N/A 
TAGS: ECON EAID PGOV AL
SUBJECT: GOA'S 2008 BUDGET INCREASES INFRASTRUCTURE AND SOCIAL 
SPENDING 
 
Summary 
------- 
 
¶1.  The GOA's 2008 budget increases both spending and borrowing as 
the government looks toward national elections in 2009.  Further tax 
reductions and a dramatic increase in spending on infrastructure 
projects as well as social and defense programs to meet NATO 
accession criteria will be financed by projected increases in 
revenue and debt financing.  The opposition has criticized the new 
budget for running up the country's national debt.  However, the 
real challenge for the government will be the successful 
implementation of the budget.  Prior public investment performance 
has been poor.  End Summary. 
 
Budget Based on Continuing 
Growth and Low Inflation 
-------------------------- 
 
¶2.  The Albanian Parliament approved the final version of the 2008 
national budget on November 26; the budget was approved on time for 
the second year in a row.  The vote in Parliament fell along 
predictable party lines, 66 votes in favor and 34 against.  The $4.1 
billion budget is marked by higher revenues compared to last year 
and increased borrowing is expected to enlarge the budget deficit to 
7.9% of GDP.  The new budget anticipates a real growth rate of at 
least 6% in 2008 and an inflation rate within a range of 3-4%.  It 
also foresees a modest reduction of unemployment to around 13% (from 
about 14% currently) and an improving trade deficit.  Both outcomes 
would continue slow but steadily improving trend lines regarding 
unemployment and the country's trade imbalance over the last few 
years. 
 
Revenue Growth Accelerates 
-------------------------- 
 
¶3.  The new budget forecasts total revenues to be $3.15 billion 
(26.4% of GDP).  Revenues are expected to grow by 7.5% over 2007's 
projected revenues and 24% over revenue generated in 2006.  These 
anticipated revenue targets, in both absolute and relative terms, 
would be the highest amount collected during the last decade.  If 
achieved, they would occur as new tax policies reduce domestic tax 
rates by 50% and a flat tax of 10% for both corporate and personal 
tax rates is adopted.  (Note: The new tax rates will give Albania 
among the lowest tax burdens in the region.)  According to Finance 
Minister Bode, tax reduction will save the business community up to 
$133 million or 1.1% of GDP. 
 
¶4.  This projected revenue growth is based mainly on estimated 
higher revenues collected from the tax and customs agencies as well 
as from local governments.  The further modernization of the fiscal 
system, based on the implementation of tax reform policies (and a 
Millennium Challenge Account project), and efforts to reduce the 
informal sector (gray economy) are also factors driving higher 
revenue collection.  Tax collections will account for almost 92% of 
total government revenues.  Tax and customs revenues in 2008 are 
forecast to reach $2.16 billion - 12 percent more than expected 2007 
results - representing 18.2% of GDP. 
 
Capital Spending Jumps 
---------------------- 
 
¶5.  The 2008 budget increases spending significantly, especially for 
capital projects.  The government's goal is to reach an optimal 
level of spending in public investments consistent with other 
rapidly developing countries.  The 2008 budget will total $4.1 
billion, representing 34.3% of GDP, marking an increase of almost 3% 
in terms of GDP and a 20% increase in straight dollar terms compared 
to 2007 projections.  Although the increased spending is supported 
by higher revenues, substantial increased borrowing is also part of 
the GOA's fiscal planning.  In total, debt financing will jump to 
$740 million, more than triple the amount borrowed in 2007. 
 
¶6.  Capital expenditures get the lion's share of this boost and are 
forecast to hit $1.16 billion (9.8% of GDP), 50% higher than in the 
2007 budget and triple what was spent in 2006.  In 2008, capital 
spending will be one-third of the total budget, up from one-seventh 
two years ago.  The increased expenditures aim to boost important 
infrastructure projects and support economic reforms in the 
framework of NATO and EU integration. The Ministry of Transportation 
and Public Works will be the main recipient of public money:  $810 
million, 95% of which will go for capital investments, roads, water 
supply projects, sewage treatment and housing.  Road infrastructure 
projects alone are expected to receive $650 million, although more 
than half of this amount ($353 million) will go to the high-profile 
road project connecting Durres to Kosovo, the major portion of which 
is being constructed by a U.S./Turkish consortium led by Bechtel 
Corporation.  Several other nationwide road projects will also start 
in 2008. 
 
 
TIRANA 00001078  002 OF 002 
 
 
¶7.  The defense sector will receive $241 million or 2% of GDP, which 
is in line with NATO accession requirements two years ahead of the 
GOA's self-imposed 2010 deadline.  (Note:  Additional funding 
channeled to the Ministry of Defense through the Ministry of 
Finance, earmarked for payment of pensions to retired officers 
raises this total to 2.07% of GDP, exceeding Albania's NATO 
requirements.)  Total spending for the defense sector will have 
doubled over the last four years, a sign of the GOA's determination 
to join NATO. 
 
¶8.  As in previous years, health and education will remain priority 
sectors.  The education sector will receive $475 million, or 4% of 
GDP compared to 3.4% in 2006.  Spending for education will grow by 
17% compared to 2007.  The health sector will receive $345 million 
or 2.9% of GDP, up from 2.1 percent in 2006.  The 2008 budget also 
provides for significant increases in pensions and certain public 
sector salaries, building on past increases that aim to double them 
by 2009.  The agriculture sector, an important contributor to GDP, 
still suffers from government inattention; total spending is 0.55% 
of GDP or $65 million. 
 
Growing Debt, Poor Public Administration 
Worry Critics 
---------------------------------------- 
 
¶9.  The GOA plans to borrow $730 million to support the expansion of 
public investment next year.  At the end of 2007, total debt 
amounted at 531.4 billion lek ($5.9 billion) or 54% of GDP.  In 
2005, the ratio to GDP was 57%. Higher borrowing will translate into 
a higher budget deficit, which is forecast to reach 7.9% in 2008, 
reversing a positive trend experienced during the last year when the 
budget deficit was under 4%. 
 
¶10.  The GOA's decision to sharply increase borrowing has been a 
major issue for the opposition Socialist Party.  The Socialists 
claim that over-inflated public spending will create a serious 
threat to the macroeconomic stability Albania has achieved since the 
economic chaos of the late 1990s and could grow into a fiscal burden 
for future generations.  The opposition has also criticized the 
Democratic Party-led majority for the government's lack of capacity 
to implement public investments and points to the GOA's 
unsatisfactory budgetary track record since it came to power in 
¶2005.  Specifically, the opposition - and other critics, as well - 
contend that the government's inability to efficiently spend public 
money and the concentration of spending during the last month of the 
fiscal year contribute to inflation and threaten the country's 
financial health. 
 
Comment 
------- 
 
¶11.  The 2008 budget reflects the determination of the government to 
expand public investments to foster economic growth.  However, 
politics is the main factor driving GOA budget priorities as Prime 
Minister Berisha prepares to lead his government into national 
elections in 2009.  Albania, which has enjoyed impressive 
macroeconomic stability in recent years, requires rapid improvement 
of its dilapidated infrastructure if it is to build on the economic 
growth of the past decade.  Improving public administration 
performance and keeping debt pressures manageable will remain 
pressing challenges for the government.  End Comment. 
CRISTINA