VZCZCXRO4370
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHTI #0102/01 0420629
ZNR UUUUU ZZH
P 110629Z FEB 08
FM AMEMBASSY TIRANA
TO RUEHC/SECSTATE WASHDC PRIORITY 6658
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 TIRANA 000102 
 
SIPDIS 
 
SENSITIVE 
 
SIPDIS 
 
DEPARTMENT FOR EUR/SCE (ERIN KOTHEIMER AND YOULIANA IVANOVA) 
 
PASS TO TREASURY FOR VIMAL ATUKORALA 
 
E.O. 12958:N/A 
TAGS: ECON PGOV AL
SUBJECT:  FOOD PRICES SKYROCKET AS GOA PINES FOR NATO 
 
REF: A) TIRANA 21  B) 07 TIRANA 1089 
 
Summary 
------- 
 
¶1.  (SBU)  Fears that 2008 will bring rising inflation grew as local 
media extensively reported on price increases for basic food items. 
Prices for food products, which represent the largest share in the 
government's basket of consumer goods for measuring inflation, have 
increased in recent years.  This trend had gone unheralded until 
recently when a drastic price increase for bread, a sensitive item 
with average daily consumption per capita of 200 grams a day, stoked 
public ire.  The opposition, which had previously ignored inflation 
as an issue, has seized on the food price increases while the media 
echoes growing public frustration.  Both suggest that Prime Minister 
Berisha and his government have spent more time looking abroad than 
seeing to the needs of everyday citizens.  End Summary. 
 
¶2.  (U)  Throughout 2007, while the Berisha Government took credit 
for Albania's continuing economic stability and growth, independent 
sources warned of upcoming economic strain, driven by both imported 
and domestic inflation.  Following a 33 percent increase in bread 
prices last year, another 25 percent increase occurred in early 
February.  Bread producers have warned that additional increases are 
coming and that the price of bread could go as high as 120 leke per 
kilogram, a 100 percent increase from 2006.  In the last two years, 
other food items have seen increases ranging from 25-100 percent. 
The price of cooking oil increased by 45 percent compared to 2006, 
while the price of milk grew by approximately 25 percent.  Prices 
for fruits and vegetables also increased substantially.  Newspapers 
have speculated that the price of cooking oil might reach 400 leke 
per liter, an increase of 250 percent compared to 2006.  Experts 
estimate that Albanians will pay approximately 100 million euros 
more for bread and cooking oil alone in 2008.  (Note:  In 2007, 
Albania's estimated Gross Domestic Product was just over USD 10 
billion.) 
 
¶3.  (U)  The prevailing suspicion is that price fixing by cartels is 
the main cause for the disproportionate price increases.  Albania 
imports over half of its grain supply and data from international 
wheat markets show that the global price of wheat has increased by 
only 5 percent in recent months, giving some credence to the claim 
that price increases in the domestic market are speculative. 
Although inflation overall in 2008 has been forecast by both the 
Central Bank and the IMF to remain at a modest 3 percent (Ref A), it 
is widely believed that food price increases are not adequately 
reflected in official data.  (Note: INSTAT, the GOA's statistics 
agency, is regularly criticized by outside experts, including the 
IMF, for the unreliability of its data.) 
 
Electricity and Fuel Prices Add to the Crisis 
--------------------------------------------- 
 
¶4.  (SBU)  The inflation burden on consumers is expected to increase 
given an anticipated rate hike for electricity by at least 15 
percent in early March.  (Note:  The GOA's energy regulatory entity 
is widely expected to approve a belated increase in electricity 
rates later this month, which was requested by KESH and urged by 
donors, Ref B.)  An increase in electricity prices would compound 
the burden of significant fuel price increases during the last year. 
 Fuel price increases affected businesses ranging from private shops 
to industrial users, all operating on private generators during 
frequent blackouts during Albania's prolonged energy crisis.  To 
make matters worse, in the midst of the crisis, the GOA increased 
the fuel excise tax to offset the loss in revenue resulting from its 
decision to lower business taxes.  Opposition leader Rama recently 
told supporters that the electricity crisis (which engulfed the 
country starting in 2005, when the current government took office) 
is at the heart of the expanding price crisis. 
 
Buy-Now-Pay-Later Scheme Reemerges 
---------------------------------- 
 
¶5.  (U)  As the effect of food price increases has spread, many 
low-income families have succumbed to an informal borrowing 
arrangement originating from the pre-pyramid scheme era (i.e., 
before the 1997 financial collapse).  The scheme allows poor 
families to buy their daily food items from stores by adding their 
names to the shopkeeper's list and running a grocery tab.  The 
unwritten agreement is that these families will eventually pay 
whenever money is available.  (Note: The eradication of the 
buy-now-pay-later scheme was one of the most popular electoral 
promises of Berisha's 2005 campaign. It has unexpectedly reemerged 
among the working poor during a time of growing affluence for 
Albania's emerging middle class.)  Also, recent media reports 
describe a trend in some border regions of the country where 
inhabitants travel to Montenegro in the north, Macedonia in the 
 
TIRANA 00000102  002 OF 002 
 
 
southeast, and less often to Greece in the south to purchase basic 
food products at cheaper prices.  Apparently, these countries have 
not been affected by international market prices to the same degree 
as Albania. 
 
Wage, Tax Policies Fail 
to Address Inflationary Pressure 
-------------------------------- 
 
¶6.  (U)  In an attempt to offset the negative effects of aggregate 
price increases, in 2006 the government increased public employees' 
salaries as well as pensoons and the minimum wage.  However, price 
increae s since then have outpaced those raises.  Also, the decision 
by the government to introduce a flat aax on personal income last 
year translated into i(gher taxes for almost all taxpayers, 
including   greater burden on the lower income levels.  For the past 
two weeks, the media has been echoing mounting calls by the 
opposition and some economic experts for the government to intervene 
to counteract rising food prices.  To date, the GOA has resisted 
this pressure, favoring its current laissez faire economic policies 
and invoking the merits of market self-regulation. 
 
Comment 
------- 
 
¶7.  (SBU)  Inflation is becoming a pressing political problem for 
the GOA that significantly impacts people's living standards. 
Having focused its attention on macroeconomic stability and revenue 
collection, the Government was caught off guard by the growing 
public and media pressure that emerged in January.  The debate 
became particularly sharp at a time when the Prime Minister was in 
Japan with a coterie of ministers and senior officials.  Berisha's 
right-wing coalition won office in2005 primarily by waving the flag 
of fighting orruption and organized crime in order to improve he 
ualit of life for ordinary Albanians.  Howeer,the rea highlight 
of the Berisha Governmenttured ut to be Euro-Atlantic accession. 
It statedwit ignng the Stabilization Association Agreet wt 
he EU in 2006, and the Government (adms lanins) believes it 
might be crowned ti pi iha NATO membership invitatio in 
Buhrs. oee, this focus on foreign afairsma omea 
ot.  The Prime Minister an hi ofcastaee o much during 
the last yer tatoneaalytcaled it "the Government of Foegn 
Affairs,"wichis not able to provide stabefod prices for its 
citizens, but sends militaytoops on foreign missions.  After 
April, the rm Minister will have to turn to the "bread and 
uter" issues that concern his citizens. 
 
¶8.  SU  With the 2009 general elections looming, Bershawill 
also have to ponder national voting patern.  Albanian pensioners 
are more than 15 percn of the population; the unemployed are 
estimate at 30 percent (despite an official employment rat that is 
under 14 percent); and most of the popuation has internally 
migrated, creating an entir class of disadvantaged "suburbanites" 
living arund crowded cities.  These social groups represent hole 
classes of voters that are the first to be ffected by drastic food 
prices increases.  At ths rate, public dissatisfaction over 
spiraling prces could continue to grow, eventually overshadowing 
other positive developments such as Kosovo's independence or a NATO 
invitation.  End Comment. 
WITHERS