VZCZCXRO1059
PP RUEHIK
DE RUEHTI #0813/01 3531229
ZNR UUUUU ZZH
P 191229Z DEC 09
FM AMEMBASSY TIRANA
TO RUEHC/SECSTATE WASHDC PRIORITY 8690
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 02 TIRANA 000813 
 
SENSITIVE 
SIPDIS 
STATE FOR EEB/IFD/OMA 
STATE FOR EUR/SCE 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PRIL PGOV AL
SUBJECT: The GOA's Overly Optimistic 2010 Budget 
 
TIRANA 00000813  001.2 OF 002 
 
 
¶1. (SBU)Summary: Last month, Parliament approved the 2010 budget. 
The budget anticipates a growth rate of 6.5 percent (vs 2009 revised 
budget), revenue growth of 11 percent, a budget deficit of 3.9 
percent of GDP and inflation stable at three percent.  Even though 
Albania is one of the few countries with positive economic growth in 
the region for 2009, the 2010 budget remains overly optimistic both 
in terms of projected revenues and GDP growth, and will be difficult 
to accomplish.  Based on this budget, unless revenues recover at a 
record pace in the first half of 2010, the GOA could face severe 
budget shortfalls by mid-2010.  End Summary. 
 
A Mixed Story                  ------------- 
¶2. (SBU) The Albanian economy is rare in the region in that it is 
expected to have positive economic growth this year.  In October, 
the IMF revised upwards its earlier growth forecast of 0.7 percent 
GDP to 2 percent for 2009 growth, which, despite falling short of 
the GOA's estimates of 4.5-5 percent, remains an achievement.  The 
strong fiscal stimulus throughout the year, particularly before the 
June election, is seen as a major contributing factor for the 
increase. 
¶3. (SBU) However, the domestic economy is experiencing a slowdown, 
mainly due to low trade volume, which has hit public revenues.  In 
September, the government was forced to revise downward the 2009 
budget and reduced both revenues and public spending.  It appears 
that even with the revision downward the GOA may be as much as 30 
billion lek (315 million USD)short and ministries are being 
pressured to immediately put off projects until 2010.  A large 
portion of non-entitlement government spending comes at the end of 
the fiscal year (Jan-Dec 2009. 
 
A Faulty Crystal Ball for Revenues 
---------------------------------- 
¶4. (SBU) The 2010 budget projects a growth rate of 6.5 percent, an 
increase in GDP per capita of 10 percent, and a slight drop in 
unemployment.  Additionally, public revenues are expected to 
increase by 11 percent.  The revenue increase is justified by the 
GOA through a deepening of structural reforms, mainly in the tax 
system administration.  However, in the 2009 budget revenues were 
forecast to rise 15 percent (original budget), then 12 
percent(revised budget)and may in fact only rise 2-3 percent when 
actual 2009 revenue figures are published.  This means that the GOA 
would need a revenue growth rate of 20 percent or more compared to 
actual 2009 receipts to meet their current 2010 targets.  In the 
past ten years the average revenue growth rate has been ten percent, 
and never exceeded 15 percent. 
 
2010: Roads, Salaries and Pensions 
---------------------------------- 
¶5. (SBU) The total budget for 2010 is 4.45 billion USD, which is a 
2.5% increase in total spending compared to 2009, but a 15% decrease 
in capital investment.  The fall in capital investment is mainly due 
to the projected completion of the Durres-Kukes road. (Note: The 
recent partial collapse of one of the tunnels will likely cause this 
to be, at least in part, revised. End Note). The GOA's budget 
continues to focus on modernization of infrastructure (namely a 
network of roads).  In addition, a graduated (four to 15 percent 
range)increase in pensions and government salaries and a 20 percent 
increase in social assistance is planned. 
 
A Budget That Faces Many Challenges 
----------------------------------- 
¶6. (SBU) Despite GOA's attempt to convey optimism, there are several 
challenges that the Albanian economy is expected to face in 2010. 
The GOA believes that global economic recovery will serve as a boost 
both for imports and exports.  However, the IMF has projected a GDP 
growth rate of three percent vs GOA's estimate of 6.5 percent. 
Insecurity over the domestic currency exchange rate and any 
reduction of consumer demand will not help restore business 
confidence.   The private sector will also face an increase in 
production costs with electricity prices set to rise 13 percent or 
more.  Finally, the ongoing political strain continues to impact 
government efficiency and reduce confidence.  The opposition, while 
boycotting Parliament, has harshly criticized the budget as 
unrealistic in the face of the economic crises. 
 
 
 
A Budget in Need of Financing 
----------------------------- 
 
¶7. (SBU) Financing the budget deficit is another key issue.  If 2009 
revenue continue to track low there could be a revenue deficit of 30 
billion lek for just the last quarter of 2009 (315 million USD) that 
needs to be covered.  The GOA has made a strong push to reduce 
spending in the last quarter of 2009 and many projects and payments 
are reportedly being put off in order to make up the potential 
shortfall.  The GOA is near its debt ceiling and other options for 
covering the anticipated 2009 shortfall and future deficit are; 
issuing local currency debt, raising international debt, 
privatizations, or increasing grants from International Financial 
 
TIRANA 00000813  002.2 OF 002 
 
 
Institutions (IFIs). 
 
¶8. (SBU) The 2010 budget anticipates raising 14 billion lek (152 
million USD) locally on the domestic debt market, but this will be 
difficult as bank deposits are still rebounding from previous lows 
and the interest rate is relatively high, around 9.2 percent, for 
government issued debt.  The budget also plans on a 25 billion lek 
(equivalent) Eurobond (272 million USD)bringing the total level of 
financing sought to 39 billion lek (430.5 million USD).  The 
Eurobond will not finance the budget however but is , informally 
earmarked  for paying off the high interest rate 200 million euro 
syndicated loan that matures in 2012,.  Only two major 
privatizations are left; INSIG (life and non-life insurance) and the 
GOA's 17 percent share in Albtelecom.  (Note: Both privatizations, 
but particularly INSIG's, have had a serious of starts and stops 
over the past few years and to privatize both within a year is 
ambitious. End Note).  Grants and loans from IFIs remain a viable 
option and the Minister of Finance (MOF) has announced that it is in 
consultations with EBRD, EIB, and the World Bank for additional 
project financing. 
 
¶9. (SBU)The MOF has also been in talks with international banks 
about possibly doubling the size of the Eurobond to 50 billion lek 
(equivalent)(543 million USD).  This would allow the government to 
both pay off the syndicated loan and to use the additional 25 
billion lek (272 million USD)to pay for 2010 budget programming. 
One international bank has passed on the bond as being too large but 
the MOF is continuing talks with another international bank that has 
been more receptive. 
 
 
¶10. (SBU) Comment: The Minister of Finance declared recently that 
that the worst is over and he expects the economy to rebound next 
year.  This is an ambitious statement that follows an even more 
ambitious budget.  The effects from the crises are still felt in the 
region, most recently in Greece.  The 2009 budget had a similarly 
ambitious growth and revenue forecast - projections which were not 
met in the wake of the global economic crisis and aggressive 
pre-election spending.  However, the GOA was able to make up much of 
the shortfall through a number of big-ticket privatizations, which 
altogether brought in nearly 293 million USD.  The GOA is cutting 
2009 spending deeply to try to reduce the expected shortfall, but it 
remains to be seen what portion they are able to cover through a mix 
of delayed spending and outright cuts.  At this point, the bigger 
concern remains the 2010 budget.  Projected revenues for 2010 are 
unrealistically high, and there are relatively few viable or simple 
privatizations left to make to cover any shortfall.  The GOA has put 
itself in a difficult position of setting expectations unreasonably 
high, which could force future budget revisions and potential 
political backlash if it is not able to realize its budget 
projections. 
 
 
 
JONES