Identifier
Created
Classification
Origin
07PRISTINA306
2007-04-18 14:30:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Pristina
Cable title:  

KOSOVO TAKING PROACTIVE APPROACH FOR DONORS

Tags:  EAID ECON PGOV YI 
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VZCZCXYZ0001
RR RUEHWEB

DE RUEHPS #0306/01 1081430
ZNR UUUUU ZZH
R 181430Z APR 07
FM USOFFICE PRISTINA
TO RUEHC/SECSTATE WASHDC 7269
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/USDOC WASHDC
RHEHNSC/NSC WASHDC
UNCLAS PRISTINA 000306 

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE, EUR/ACE, EB/IFD/OIA
STATE PLEASE PASS TO USAID FOR EE/ECA AND EE/DGSR
STATE PLEASE ALSO PASS TO TREASURY-E.MEYER
NSC FOR BRAUN

E.O. 12958: N/A
TAGS: EAID ECON PGOV YI
SUBJECT: KOSOVO TAKING PROACTIVE APPROACH FOR DONORS
CONFERENCE PREPARATION


Sensitive but unclassified - please protect accordingly.

UNCLAS PRISTINA 000306

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE, EUR/ACE, EB/IFD/OIA
STATE PLEASE PASS TO USAID FOR EE/ECA AND EE/DGSR
STATE PLEASE ALSO PASS TO TREASURY-E.MEYER
NSC FOR BRAUN

E.O. 12958: N/A
TAGS: EAID ECON PGOV YI
SUBJECT: KOSOVO TAKING PROACTIVE APPROACH FOR DONORS
CONFERENCE PREPARATION


Sensitive but unclassified - please protect accordingly.


1. (SBU) Summary. In preparation for a donors conference, the
PISG hopes to complete the draft of the Medium Term
Expenditure Framework by late April and have a final document
by late May highlighting Kosovo's development needs and
priorities. The PISG started discussions with the IMF on
April 13 to negotiate a letter of intent, which is crucial
for establishing the economic and fiscal policies the PISG
must adhere to in order to receive donor and international
financial institution assistance. The Ministry of Finance
and Economy appears willing to negotiate and compromise with
the IMF on politically sensitive but budget-busting
legislation, such as the law on providing benefits to former
Kosovo Liberation Army (KLA) fighters, and other draft
legislation dealing with labor, health insurance and social
welfare. The political commitment of top Kosovo leaders and
Kosovo parliamentarians to this belt-tightening, however, is
less certain, and donors will need to work together to
impress upon the PISG the necessity of making these changes.
USOP, along with the other donors, will encourage flexibility
from the PISG and IMF to ensure that the donors conference
remains on track. End Summary.

PISG ON TRACK WITH MTEF PREPARATION


2. (SBU) Officials of the Ministry of Finance and Economy
(MFE),along with assistance from USAID-funded advisers, told
us recently that a draft Medium Term Expenditure Framework
(MTEF) would be ready by late April for donor countries and
agencies and noted that a final product should be complete by
late May. These officials believe the MTEF provides a much
clearer picture of PISG priorities, which include the rule of
law (judicial reform, development of the public prosecutors
office and resolution of the case backlog of courts),energy
sector (construction of distribution and transmission lines,
Sibovc Southwest mine development, and electricity bill
collection improvements),transportation (road and highway
construction),and education (education reform, classroom

construction for primary and secondary education, hiring more
teachers and teacher training). The MTEF estimates that
almost two billion euros will be needed over six years for
capital and non-capital expenditures in these areas. Donors
are expected to provide half of that amount, which excludes
debt relief and technical assistance.

LOI WITH IMF CRITICAL TO KEEP DONOR CONFERENCE ON TRACK


3. (SBU) MFE officials said that before the official MTEF can
be presented to donors, the ministry must negotiate a new
letter of intent (LOI) for economic and fiscal policies with
the IMF. MFE officials said this was necessary since the EU
and World Bank must have a LOI for the donor conference,
noting this document establishes the economic and fiscal
policies to which the PISG must adhere in order to receive
donor assistance. MFE Minister Haki Shatri started
discussions with the IMF to negotiate a new LOI on April 13.

MFE HOPING FOR IMF FLEXIBILITY ON SENSITIVE LOI ISSUES


4. (SBU) The MFE hopes it can negotiate with the IMF on two
politically sensitive but expensive budget issues: spending
for social welfare programs (implementing the law on benefits
to former Kosovo Liberation Army (KLA) members, and
redrafting legislation for pensions, labor and health
insurance benefits) and the 0.5 percent limit on growth in
recurrent spending in the Kosovo Consolidated Budget (KCB).
On social welfare issues and in particular the budget-busting
KLA law, the MFE proposes to tighten the eligibility criteria
based on financial need and eliminate hard-to-quantify
provisions of the legislation such as electricity subsidies,
customs and tax exemptions, purchase of cars for KLA veterans
by the PISG, academic scholarships, and free room and board
and textbooks at universities. MFE officials asserted that
under the strict criteria proposed by Minister Shatri, the
cost of the KLA law would be 23 million euros per year
instead of 80 million euros per year as estimated by senior
PISG officials. MFE officials said that to save more money,
Minister Shatri would propose annulling the health insurance
legislation recently passed by the Kosovo Assembly,
redrafting the labor and pension legislation currently under
review in the Assembly, and replacing them all with more
modest legislative provisions.


5. (SBU) The MFE will ask the IMF to relax the 0.5 percent
limit on growth in recurring spending, increase the basic
pension from 40 to 50 euros per month, and hire more teachers
at higher salary levels. MFE officials estimate that these
additional expenditures will total 43 million euro. The MFE
believes that the IMF would be willing to relax the 0.5
percent limit rule for this LOI. For its part, the MFE
remains committed to reducing public sector employment by up
to 10 percent, but advocates a gradual, systematic approach
to be completed by 2009. The international community,
including the World Bank, has urged both the IMF and PISG to
be flexible in order to complete the LOI in a timely manner.
European Commission officials have signaled that the European
Union is willing to consider a flexible approach towards
relaxing the 0.5 percent limit for recurrent spending.

COMMENT


6. (SBU) The commitment of the MFE to maintain the timeline
for submitting the MTEF to donors is an encouraging sign that
the PISG understands the importance of this process.
Nevertheless, there are serious concerns -- including within
the MFE itself -- that senior-level PISG officials will not
support some of Minister Shatri's proposals, particularly
those that deal with the KLA law and social welfare spending.
We will need a unified line among the donor community to
impress upon Kosovo's political leadership and, even more
difficult, upon its parliamentarians that extravagant social
spending will endanger donor commitments. USOP will continue
to work with the PISG and international community to
encourage flexibility and compromise to ensure that the
donors conference takes place in a timely manner and is fully
integrated with Kosovo's post-transition needs. End
Comment.


7. (SBU) USOP clears this cable in its entirety for release
to UN Special Envoy Ahtisaari.
KAIDANOW