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DE RUEHTI #0884/01 3520733
ZNR UUUUU ZZH
O 170733Z DEC 08
FM AMEMBASSY TIRANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7690
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 TIRANA 000884 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/SCE J.ISMAIL 
TREASURY FOR V.ATUKORALA 
 
E.O. 12958:N/A 
TAGS: EFIN ECON PGOV AL
SUBJECT: ALBANIA'S 2009 (ELECTORAL) BUDGET 
 
SUMMARY 
------- 
 
¶1. (SBU) PM Berisha declared that the 2009 budget, approved by 
Parliament on November 29, is an important instrument to finish his 
2005 electoral promises, mainly the increase of salaries and 
pensions and the completion of several infrastructure projects.  The 
opposition claims the budget is designed to win votes in the 2009 
elections, ignores the global economic crisis and fails to provide 
adequate social protections for the poor.  The budget supports a 
growth rate of six percent despite adverse global economic 
conditions, with an inflation rate between three and four percent. 
Total expenditures are USD 4.25 billion, and projects a budget 
deficit of 4.2 percent of GDP - slightly above the IMF's 
recommendation.  Additional funds have been allocated for education 
and health programs as well as the continuation of the 
decentralization process.  Spending for the defense sector will meet 
the NATO requirement of two percent of GDP.  (Note:  Please see 
Post's unclassified Intellipedia site http://www.intelink.gov/wiki 
/Albania_Economy_At_A_Glance for additional detail on the 2009 
budget including comparisons to previous years.)  End Summary 
 
Growth with stability and security 
---------------------------------- 
 
¶2. (U) The 2009 budget, which will take effect January 1, continues 
to reap the benefits of tax reform and reduction of the informal 
sector.  The budget helps boost business through lower taxes and 
streamlined administrative procedures, which could help shield the 
domestic economy from the global downturn.  So far Albania has 
managed to keep the economy growing despite the recent global 
slowdown, mainly due to financial sector oversight and controls, and 
stronger than anticipated domestic demand.  The GOA expects a real 
growth rate of six percent for 2009, higher than the four to five 
percent consensus among international financial institutions, with 
inflation remaining between two and four percent. 
 
¶3. (U) The new budget forecasts total revenues to be USD 3.7 billion 
(all USD figures are based on an exchange rate of 90 lek to the 
dollar), or 28.2 percent of GDP.  Revenues are expected to be higher 
than in 2008 in absolute terms, but will remain the same percentage 
of GDP.  Revenue growth is mainly due to higher tax and customs 
revenues and payments from local governments, the result of further 
modernization of the fiscal system through tax reform and reduction 
of the informal sector.  However, after three years of continuous 
fiscal stimulus through tax reductions, the government has decided 
to postpone a further reduction of the labor tax until May 2009 as 
recommended by the IMF. 
 
¶4. (U) The IMF was pleased with the budget after the GOA reduced the 
budget deficit to 4.2 percent of GDP (from an original 4.5-5 
percent) and delayed lowering the labor tax.  The IMF has already 
reduced its estimate of Albania's GDP growth rate from 6 to 3.5 
percent and has delivered a clear message that the Albanian economy 
is not an island and it will not remain fully insulated from the 
global downturn, especially due to lower remittances and exports. 
 
Higher budget, lower public investments 
--------------------------------------- 
 
¶5. (U) At USD 4.25 billion, the 2009 budget, although Albania's 
highest in absolute terms, represents 32.5 percent of GDP, almost 
one percent less than the 2008 budget.  Public investments of USD 
one billion are also lower than in 2008.  The reduced capital 
spending will result in a lower budget deficit of 4.2 percent, 
something the IMF has been pushing to limit the negative effect of 
the global crisis. 
 
¶6. (U) The Ministry of Transportation and Public Works will once 
again be the main recipient of public investment funds, with 63 
percent of the total or USD 567 million.  Almost all of it will be 
spent on road construction, with USD 333 million going toward the 
completion of the Durres-Kukes highway.  Health and education remain 
two other priority sectors.  The education sector will receive USD 
467 million, or 3.6 percent of GDP, while the health sector will 
receive USD 366 million or 2.8 percent of GDP.  However, in past 
years, neither of these sectors has been able to absorb the money 
allocated to it, resulting in further deterioration of the desperate 
conditions of schools and hospitals throughout Albania. 
 
Budgeting for the crisis 
------------------------ 
 
¶7. (U) The global financial crisis has also affected Albania's 
budget by making it more difficult to borrow internationally.  The 
GOA has postponed the issuance of USD 400 million in Eurobonds 
originally planned for 2009.  The Eurobonds would have helped 
finance the Durres-Kukes road, but the GOA must now look to domestic 
 
TIRANA 00000884  002 OF 002 
 
 
financing schemes. The 2009 budget also includes the highest ever 
contingency reserve fund, USD 200 million, which will serve as a 
buffer against any crisis involving potential lack of cash and will 
ensure that salaries and pensions are paid. 
 
Buying votes? 
------------- 
 
¶8. (SBU) The budget provides for significant increases in pensions 
and certain public sector salaries.  PM Berisha considers the higher 
salaries (in some cases, twice what they were in 2005) as one of his 
key successes and the fulfillment of a 2005 campaign promise.  The 
raises this year will become effective May 1, just one month before 
the elections, and will, according to Berisha, increase 2005 
salaries by an average of 78 percent or USD 456 for 104,000 public 
administration employees.  Certain categories, including elementary 
school teachers, nurses, and doctors, will see their paychecks 
doubled.  520,000 pensioners will receive higher pensions as of May 
1 as well.  Those in rural areas will on average double their 
retirement benefits compared to 2005 while other pensioners will see 
a 60 percent average increase.  However, it is not clear where the 
salary increases will come from since the wage fund for 2009 is 
lower than in the 2008 budget. 
 
¶9. (U) The opposition is concerned that the 2009 budget does not 
include any stimulation that could help protect the domestic economy 
from the global crisis.  It also claims that the salary and pension 
increases do not match the recent increase of food, fuel and 
transport prices. 
 
Comment 
------- 
 
¶10. (U) It is much easier to win peoples' hearts and minds when you 
control what goes into their pockets.  This budget is clearly 
designed to give the ruling Democratic Party an advantage this 
summer.  However, there are many unknowns that could upset the DP's 
plans and cause their strategy to backfire.  The biggest unknown is 
the effect of the global economic crisis, which could cause the 
government to default on payments for the Durres-Kukes road and 
possibly force a devaluation of the lek.  Availability of electrical 
energy could cause problems as well.  While the reservoirs are 
filling due to heavy rains recently, if the rains stop, blackouts 
could be common again next spring.  Finally, since the IMF program 
ends at the end of 2008, there will be no one to oversee the GOA's 
spending, which could exceed budgeted amounts in areas where votes 
are critical.