SERBIA: THE COST OF KOSOVO

UNCLAS SECTION 01 OF 02 BELGRADE 001473

SIPDIS

SIPDIS
DOC FOR 4232/ITA/MAC/EUR/OEERIS/SSAVICH

E.O. 12958: N/A
TAGS: EFIN ECON EINV SR
SUBJECT: SERBIA: THE COST OF KOSOVO

Summary
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1. Serbian government spending in Kosovo in support of Kosovo-Serbs
is substantial, but not unsustainable. There are several avenues
through which money is flowing from Serbia to Kosovo. Serbia
services foreign debt attributable to Kosovo, NIP expenditures, and
direct and indirect budget expenditures regarding Kosovo. Added
together, Serbia's annual spending on Kosovo for 2007 will reach
nearly $400 million or 3.5% of Serbia's $11 billion budget
expenditures. Regardless of the status of Kosovo, the Serbian
government's spending on Kosovo is likely to continue at similar
levels. End Summary.

Kosovo Related Debt Approximately $36 Million Annually
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2. According to the National Bank of Serbia, the total foreign debt
related to Kosovo on August 31, 2007 was $1.2 billion. The cost of
servicing this debt is $36 million annually. The bulk of this debt
- 85% - is owed to the World Bank and to Paris Club creditors,
originating from loans for infrastructure projects in the 1970's and
1980's. Kosovo-related debt decreased from $1.7 billion in 2001
with Paris Club and London Club write-offs and regular servicing by
Serbia. Deputy Prime Minister Djelic asked the World Bank during
the October 20-21 Bank meetings in Washington to credit Serbia for
the debt service it had paid on Kosovo related loans, but Minister
for Kosovo Samardzic said later that any Kosovo debt issues would
have to be resolved as part of an overall Kosovo status agreement.


Direct Budget Expenditures for Kosovo $113.2 Million
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3. Kosovo expenditures in the 2007 Serbian budget include:

-- Ministry for Kosovo expenditures of $65 million - including
wages, social allowances, transportation costs, subsidies to NGOs,
transfers to municipalities, maintenance, etc.

-- Fund for Kosovo expenditures of $3.8 million.

-- Direct transfers to five districts in Kosovo with a total value
of $20.4 million.

-- Coordination Center for Kosovo expenditures valued at $24
million.

Added together, the direct budget cost of Kosovo in 2007 is $113.2
million.

2007 NIP Kosovo Expenditures $11.7 Million
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4. The Serbian Government also allocated an additional $11.7
million from the National Investment Plan (NIP) for infrastructure
investments in Kosovo, such as construction of small medical
centers, apartment buildings, reconstruction of schools, improvement
of roads, etc.

Indirect Budget Expenditures over $225 Million
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5. Indirect budget expenditures linked to Kosovo are hidden in the
budget of various ministries - e.g. the Education Ministry wage bill
includes salaries of teachers in Kosovo, the Health Ministry wage
bill includes salaries of health workers in Kosovo. Dusan
Prorokovic, State Secretary in the Ministry for Kosovo told UNMIK's
head of office in Belgrade that an estimated 45,000 people from
Kosovo received salaries from Serbia's budget. He also used this
figure in public comments made to Radio Free Europe on October 24.
According to Prorokovic, this number includes two categories of
citizens: those employed in companies and institutions funded by
Belgrade in Kosovo, and unemployed persons in Kosovo receiving
social allowances or IDPs outside Kosovo who do not have additional
income. Approximately 10,000 people live and work in Kosovo in
Belgrade-funded companies and institutions. These workers receive
double the average Serbian public sector wage, thus earning on
average $1,100 monthly. According to refugee affairs office
sources, there are 12,000 persons in Kosovo receiving monthly social
allowances of $150 and an additional 12,000 persons living outside
Kosovo receiving monthly allowances of $85. According to various
sources, including Nenad Popovic from the Coordination Center, there
are also 10,000 persons who used to work in large public companies
in Kosovo who continue to receive full salaries (on average $550)
through their companies. Added together, the total wage bill for
Kosovo-Serbs is approximately $228 million annually.


6. Although wages are by far the largest expenditure, there are
also other expenses paid from the Serbian budget such as: tuition

BELGRADE 00001473 002 OF 002


fees, room and board for university students, medicines, hospital
supplies, scientific research projects, transportation costs, office
supplies for state administration, etc. In addition, there are
almost 30,000 Kosovo-Serb pensioners with an annual pension cost of
approximately $72 million. It is impossible to determine an exact
figure since data are not publicly available and cannot be
confirmed, according to Dusan Janjic Coordinator of the Forum for
Ethnic Relations.

Comment
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7. Kosovo's total annual cost to Serbia's budget of nearly $400
million, or more than one million dollars per day, is a substantial
sum. A Kosovo status settlement, even one where Belgrade and
Pristina reach an agreement, is unlikely to alter Belgrade's
spending significantly. An agreement which distributes
Kosovo-related debt service to Pristina, or which targets
international assistance to cover this debt, would reduce Serbian
government Kosovo costs by just 10%. Spending on salaries for
Kosovo-Serbs and direct support to Kosovo-Serb municipalities for
operation and infrastructure is likely to continue, whether inside
the framework of a status agreement or, as today, outside of a
formal structure. The salaries, pensions, and social payments are
likely to continue, but would decrease over time, as the number of
pensioners decreases. Lack of political will may also prevent this
cost to decrease significantly, since few politicians would advocate
reducing payments to Kosovo-Serbs. Such a move would be politically
unpopular since it would also undercut Serbia's arguments that
Kosovo is an "integral part" of Serbia, as outlined in the 2006
Constitution. While $400 million is a significant cost to Serbia's
budget, it is not so large that it is likely to become a political
or economic issue in the near future. Given the above, the argument
that Serbia would be "better off economically" without Kosovo, is
unconvincing here. End Comment.

BRUSH