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DE RUEHPS #0639/01 3591400
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O 241400Z DEC 08
FM AMEMBASSY PRISTINA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8699
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUCNDT/USMISSION USUN NEW YORK PRIORITY 1580
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RUEAWJA/DEPT OF JUSTICE WASHDC PRIORITY
RUZEJAA/USNIC PRISTINA SR PRIORITY

UNCLAS SECTION 01 OF 04 PRISTINA 000639 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/SCE, DRL, INL, AND S/WCI, NSC FOR 
HELGERSON, USUN FOR SGEE, USOSCE FOR AHYDE 
 
E.O. 12958: N/A 
TAGS: PREL ETRD ECON EAID EAIR ETTC PTER KTFN UNMIK
KV, YI 
SUBJECT: KOSOVO: PROMOTING REFORM AND RATIONALITY IN 
BUDGETING AND SOCIAL/LABOR SECTORS 
 
SENSITIVE BUT UNCLASSIFIED -- PLEASE HANDLE ACCORDINGLY. 
 
¶1. (SBU) SUMMARY:  For many Kosovars, the declaration of 
independence in February was a sign that tough economic times 
were coming to and end, leading to more development, more 
jobs and more benefits for all.  Nearly a year after 
independence, Kosovars are still waiting for and expecting 
significant improvements to their social situation, from 
higher civil service salaries, to increased social benefits 
payments, to more employment opportunities, without regard 
for the actual capacity of the GOK to deliver such largesse. 
The Kosovo Consolidated Budget is not in a position to absorb 
a significant increase in recurring obligations, yet the GOK 
has had difficulty managing the enormous expectations of the 
many groups demanding more assistance.  Kosovo lacks a 
foundation for pension, health and labor laws to help guide 
GOK responses to demands for increases in benefits.  As a 
result, government officials find themselves pressured to 
make ad hoc policy decisions that are not properly vetted for 
budgetary impact, including with the IMF.  A government-wide 
review of current policies and practices that would ideally 
lead to comprehensive social sector reform is sorely needed, 
and has been advocated strenuously by international donors. 
Solid policies in these areas will lead to stronger economic 
growth and development, and sound fiscal management.  While 
much remains to be done, steps in this direction are being 
taken with the assistance of the international community, 
particularly in the areas of public administration reform, 
implementing sound budget and fiscal management practices, 
and drafting a social sector white paper to provide a 
foundation from which to develop broader policies. We see our 
primary role as providing the political muscle to make 
certain the GOK keeps to this reform agenda, which will 
ultimately lead to job creation and a more stable economic 
environment. END SUMMARY. 
 
Overview of Labor and Social Welfare Sector 
------------------------------------------- 
 
¶2. (U) Unemployment in Kosovo is the highest in Europe, 
around 40% according to a 2007 IMF Aide Memoire.  According 
to the Ministry of Labor and Social Welfare (MLSW), 
approximately 90 percent of registered unemployed are 
long-term unemployed, meaning without work for longer than 
two years.  The Ministry of Economy and Finance's (MEF) 
Macroeconomic Unit estimates that 30,000 Kosovars enter the 
workforce every year, with young people between the ages of 
16-25 comprising the overwhelming majority of this group. 
The challenge of finding stable employment in Kosovo has 
forced many young people to participate in the informal 
economy or immigrate illegally to other European countries to 
find work.  According to the Ministry of Labor and Social 
Welfare (MLSW), 15 percent of Kosovo's population is living 
in extreme poverty (less than one dollar/day according to 
UNDP), and 45 percent is living in relative poverty (less 
than two dollars/day).  Families eligible for social 
assistance benefits receive 60 euros per month, approximately 
USD 76.00. 
 
¶3. (U) In order to halve the current unemployment rate by 
2020, the Macroeconomic Unit estimates that Kosovo must 
achieve a constant 7.3 percent GDP growth rate, while a 
growth rate of 4.7 percent will keep current unemployment 
rates stable.  According to a 2008 IMF Aid Memoire, Kosovo's 
2007 GDP growth rate was estimated at only 4.1 percent. 
Although the IMF predicts a 6.1 percent growth rate for 2008, 
this growth is fueled primarily by short-term 
post-independence government expenditures versus long-term 
private capital investment.  The largest single employer in 
Kosovo is the government.  The Kosovo Tax Administration 
estimates that around 75,000 people are employed in the 
public sector, earning an average monthly wage of 224 euros, 
compared to 275 euros per month in the private sector. 
 
¶4. (U) Kosovo has replaced the old Yugoslav pay-as-you-go 
 
PRISTINA 00000639  002 OF 004 
 
 
(PAYG) pension plan with a two pillar pension program 
intended to provide at least some coverage for all Kosovo 
citizens. The first pillar is a "basic" universal pension 
plan financed by the Kosovo Consolidated Budget.  All 
individuals aged 65 and older are qualified to receive 
benefits of 40 euros per month from the basic plan.  In March 
2008, the MLSW began payment of an additional 35 euros per 
month to individuals who contributed to the old Yugoslav PAYG 
system.  The second pillar is a "funded" pension system, 
similar to the Thrift Savings Plan implemented in the U.S. 
These pensions are funded by mandatory contributions of five 
percent each from the employee and the employer.  The monies 
are invested in capital markets to provide future retirement 
income, and the funds remain the property of the contributing 
employee.  The Kosovo Pension and Savings Trust (KPST) has 
been established to administer the funded system. 
 
State of the Unions 
------------------- 
 
¶5. (U) Kosovo has a number of active unions, varying in 
objective, size and aggressiveness.  There are two large 
umbrella trade unions, the Kosovo Federation of Independent 
Trade Unions (BSPK) and the Confederation of Free Union of 
Kosovo (SKLK).  The BSPK grew out of the former Yugoslav 
socialist trade union and assumed an independent political 
role as the main organization coordinating miners strikes 
during the 1980,s and 1990,s.  BSPK has not had a major 
political role since 1999 but still claims to have over 
100,000 members who are largely long-term unemployed. The 
union occasionally organizes protests and strikes but depends 
heavily on political support to carry out an event, even to 
the extent of needing assistance transporting strikers to a 
demonstration site.  In early 2007, the BSPK split and the 
SKLK was formed by the former BSPK president, who now heads 
the new union.  The SKLK claims a membership base of 25,000 
people, all employed.  The two unions refuse to cooperate 
with each other due to personality conflicts, and the BSPK 
does not recognize the "legitimacy" of the SKLK.  There are 
also many smaller unions representing specialized interests, 
including a civil servants union, a Kosovo Electric 
Corporation (KEK) union, a pensioners union, a teachers 
union, and a Trepca miners union, among others.  These unions 
may or may not be associated with either of the two umbrella 
unions. 
 
¶6. (U) Since independence, the GOK has been approached by 
numerous groups asking for special consideration of their 
situation.  Refusal to meet union demands, or even to have a 
meeting, has usually resulted in a strike, demonstration or 
some other demonstrative effort to protest GOK 
unresponsiveness.  On May 1, International Labor Day, BSPK 
staged a general demonstration in front of the main 
government building.  Thousands of mostly elderly unemployed 
workers protested in front of the main government building 
demanding better workers, rights protections and an increase 
in social benefits.  Demands included, among other things, 
social dialogue between the government and BSPK, adoption of 
a new labor law, and establishment of social, pension and 
disabled worker funds. 
 
¶7. (U) As happens every year in August, teachers threatened a 
nationwide strike if salaries were not increased.  A 
last-minute agreement between the government and the teachers 
union granted teachers a salary increase based on their level 
of experience.  Other social and labor groups took note of 
this reward.  Health workers subsequently organized several 
strikes with demands for higher wages and better working 
conditions.  The strikes themselves were not widespread, most 
likely because of the Minister of Health's promise to provide 
a 44 euro per month raise for all health sector employees. 
After teachers and health workers had secured at least a 
portion of their demands, other groups stared clamoring for 
their share.  The Judiciary Trade Union threatened to strike 
if its members wages were not also raised.  The Customs 
 
PRISTINA 00000639  003 OF 004 
 
 
Service Trade Union gave the government 15 days to review its 
request for a minimum 100% pay increase on the base salary 
for all officers, plus health insurance, an increase in 
annual leave accruement based on time in service, and a daily 
per diem of at least three euros to cover meals.  The union 
representing the Kosovo Police Service also threatened to 
protest over salaries and incentive pay, but canceled the 
event after reaching agreement with the GOK.  The Trepca 
miners union also demanded higher salaries and pensions. 
Representatives of Kosovo's pensioners were promised by 
Deputy Prime Minister Kuci that a new pension law would be 
submitted to the Assembly before the end of the year, with 
higher pay-outs for all pensioners.  In an apparent effort to 
hold back the rising tide of demands, the GOK also decided to 
shorten the work week for government employees from 40 to 35 
hours. 
 
Need for Social Sector Policies 
------------------------------- 
 
¶8. (SBU) The promise of benefits to one group at the 
exclusion of others has generated a cascade of vociferous 
demands, demonstrations and threats of strikes.  Without a 
comprehensive social sector policy approach to help guide 
their actions and respond to pressure from these groups, the 
GOK has extended ad hoc agreements for increased benefits and 
wages.  This led to extreme dissatisfaction among the 
remaining groups not receiving additional benefits, further 
feeding the cycle of pressure on the GOK.  Not only has this 
struck a bad tone in government-union relations, it has also 
significantly undercut the government's fiscal discipline. 
The final cost of these many individual promises has been 
wholly unsustainable by the KCB, putting the GOK in the even 
more difficult position of trying to manipulate the budget to 
honor its commitments, while at the same time keeping the 
final amount under overall IMF spending caps.  In the end, 
and with a high degree of involvement by Embassy Pristina, 
the GOK submitted a budget in December awarding a 10 percent 
across-the-board salary increase to all public sector 
employees, with the exception of teachers, who were allowed 
to retain a higher increase based on experience -- and 
keeping the final amounts within IMF-recommended spending 
caps. 
 
¶9. (SBU) Unfortunately, these actions have not been 
accompanied by substantive policy reforms in public 
administration or the civil service, increasing the 
likelihood that the GOK will be forced into the same 
situation again next year.  In lieu of developing 
comprehensive social and labor policies, the government has 
allowed itself to be burdened by efforts to introduce several 
pieces of expensive legislation awarding new and discrete 
benefits to individuals designated alternately or 
concurrently as political prisoners, martyrs or war heroes. 
Not only do these laws have the potential to bust the budget, 
they are being proposed in the absence of a foundation for 
pension, labor and health laws.  The ad hoc nature of this 
legislating also threatens to leave out segments of the 
population unable to obtain such a special designation in 
order to receive more benefits.  Implementing sound base laws 
would provide a much needed framework to address follow-on 
legislation that awards benefits to discrete groups, as well 
as assess the fiscal feasibility of the proposed new laws. 
 
Addressing the Policy Challenges 
-------------------------------- 
 
¶10. (SBU) In order to assist the GOK in meeting these 
significant policy challenges, international donors are 
working closely with the government to develop and implement 
projects that will allow meaningful social sector reform. 
The World Bank's Economic Policy and Public Expenditure 
Management Technical Assistance Project (PEMTAG II) will be 
extended into 2009, and has been tackling key public 
expenditure management problem areas within high-spending GOK 
 
PRISTINA 00000639  004 OF 004 
 
 
ministries, including budget formulation, budget execution, 
and following proper procurement procedures, all areas that 
need to function in tandem with any newly proposed 
legislation.  In acknowledgment of the increasing public 
pressure on the GOK to create more jobs, the World Bank also 
plans to support two job creation projects in the future. 
The Business Environment Technical Assistance Project, 
scheduled to run into 2010, will focus on improving the 
business environment in Kosovo by clearly outlining 
regulatory processes, improving delivery of business 
services, strengthening property rights, and increasing 
transparency and accountability of implementing institutions, 
in order to encourage more business growth in Kosovo.  The 
Sustainable Employment Development Policy Program (SEDPP) is 
still in the preparatory stages, but is envisioned to 
encourage reforms and provide program implementation support 
in the areas of education, health, social protection and 
public sector governance, as well as fostering sustainable 
employment in these areas. 
 
¶11. (SBU) Britain's Department for International Development 
(DFID) is also supporting social sector reform initiatives, 
and is currently funding the Functional Review and 
Institutional Design of Ministries (FRIDOM) project.  Taking 
a "whole government" approach, FRIDOM aims to help all line 
ministries develop fiscally sustainable restructuring plans, 
while also assisting the GOK with devising a similar strategy 
for reforming the overall architecture of Kosovo's public 
administration.  Public financial management reform and 
public administration reform were also areas of concern 
discussed at the July 2008 Kosovo donors conference and based 
on this discussion, and in cooperation with other donors, the 
World Bank and DFID are taking steps to establish new and 
strengthened approaches for implementing GOK-driven reform 
strategies.  Although still in the design stage, anticipated 
government-wide outcomes of this initiative include the 
establishment of a credible and sustainable public financial 
management policy setting process; strengthening budget 
development execution and controls; improving linkages 
between policy and priority setting; and using performance 
measurement and monitoring tolls in planning.  These are all 
essential tools the GOK needs to make sound policy decisions 
that correspond with fiscal realities, while at the same time 
addressing key social sector needs. 
 
¶12.  (SBU)  COMMENT:  The bad news is that Kosovo has a long 
way to go to establish sound social and labor policies that, 
as a result, will one day meet citizens' expectations for job 
creation and a stable economic environment.  The good news is 
that, with the World Bank and DFID taking the lead, there is 
technical assistance to bring reform and rationality to the 
budgeting and entitlement process in Kosovo, including a new 
grade and salary system for the public sector.   A few steps 
in the direction of this process have already been taken: 
with GOK agreement, the World Bank is developing a public 
administration reform program and the EC is assisting the 
Labor and Social Affairs Ministry with drafting a social 
sector white paper that will provide a foundation for 
pension, labor and health laws, promised by the GOK at the 
July Kosovo donors conference.  We see our role as providing 
the political muscle to make this happen and to keep the GOK 
on the right path to develop the sound policies needed to 
foster economic growth and job creation that reaches all 
corners of Kosovo. 
 
YAZDGERDI