Identifier
Created
Classification
Origin
07TIRANA1078
2007-12-27 09:02:00
UNCLASSIFIED
Embassy Tirana
Cable title:  

GOA'S 2008 BUDGET INCREASES INFRASTRUCTURE AND SOCIAL

Tags:  ECON EAID PGOV AL 
pdf how-to read a cable
VZCZCXRO9998
PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHTI #1078/01 3610902
ZNR UUUUU ZZH
P 270902Z DEC 07
FM AMEMBASSY TIRANA
TO RUEHC/SECSTATE WASHDC PRIORITY 6497
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 02 TIRANA 001078 

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/SCE (ERIN KOTHEIMER AND YOULIANA IVANOVA)
PASS TO TREASURY FOR VIMAL ATUKORALA

E.O. 12958:N/A
TAGS: ECON EAID PGOV AL
SUBJECT: GOA'S 2008 BUDGET INCREASES INFRASTRUCTURE AND SOCIAL
SPENDING

Summary
-------

UNCLAS SECTION 01 OF 02 TIRANA 001078

SIPDIS

SIPDIS

DEPARTMENT FOR EUR/SCE (ERIN KOTHEIMER AND YOULIANA IVANOVA)
PASS TO TREASURY FOR VIMAL ATUKORALA

E.O. 12958:N/A
TAGS: ECON EAID PGOV AL
SUBJECT: GOA'S 2008 BUDGET INCREASES INFRASTRUCTURE AND SOCIAL
SPENDING

Summary
--------------


1. The GOA's 2008 budget increases both spending and borrowing as
the government looks toward national elections in 2009. Further tax
reductions and a dramatic increase in spending on infrastructure
projects as well as social and defense programs to meet NATO
accession criteria will be financed by projected increases in
revenue and debt financing. The opposition has criticized the new
budget for running up the country's national debt. However, the
real challenge for the government will be the successful
implementation of the budget. Prior public investment performance
has been poor. End Summary.

Budget Based on Continuing
Growth and Low Inflation
--------------


2. The Albanian Parliament approved the final version of the 2008
national budget on November 26; the budget was approved on time for
the second year in a row. The vote in Parliament fell along
predictable party lines, 66 votes in favor and 34 against. The $4.1
billion budget is marked by higher revenues compared to last year
and increased borrowing is expected to enlarge the budget deficit to
7.9% of GDP. The new budget anticipates a real growth rate of at
least 6% in 2008 and an inflation rate within a range of 3-4%. It
also foresees a modest reduction of unemployment to around 13% (from
about 14% currently) and an improving trade deficit. Both outcomes
would continue slow but steadily improving trend lines regarding
unemployment and the country's trade imbalance over the last few
years.

Revenue Growth Accelerates
--------------


3. The new budget forecasts total revenues to be $3.15 billion
(26.4% of GDP). Revenues are expected to grow by 7.5% over 2007's
projected revenues and 24% over revenue generated in 2006. These
anticipated revenue targets, in both absolute and relative terms,
would be the highest amount collected during the last decade. If
achieved, they would occur as new tax policies reduce domestic tax
rates by 50% and a flat tax of 10% for both corporate and personal
tax rates is adopted. (Note: The new tax rates will give Albania
among the lowest tax burdens in the region.) According to Finance

Minister Bode, tax reduction will save the business community up to
$133 million or 1.1% of GDP.


4. This projected revenue growth is based mainly on estimated
higher revenues collected from the tax and customs agencies as well
as from local governments. The further modernization of the fiscal
system, based on the implementation of tax reform policies (and a
Millennium Challenge Account project),and efforts to reduce the
informal sector (gray economy) are also factors driving higher
revenue collection. Tax collections will account for almost 92% of
total government revenues. Tax and customs revenues in 2008 are
forecast to reach $2.16 billion - 12 percent more than expected 2007
results - representing 18.2% of GDP.

Capital Spending Jumps
--------------


5. The 2008 budget increases spending significantly, especially for
capital projects. The government's goal is to reach an optimal
level of spending in public investments consistent with other
rapidly developing countries. The 2008 budget will total $4.1
billion, representing 34.3% of GDP, marking an increase of almost 3%
in terms of GDP and a 20% increase in straight dollar terms compared
to 2007 projections. Although the increased spending is supported
by higher revenues, substantial increased borrowing is also part of
the GOA's fiscal planning. In total, debt financing will jump to
$740 million, more than triple the amount borrowed in 2007.


6. Capital expenditures get the lion's share of this boost and are
forecast to hit $1.16 billion (9.8% of GDP),50% higher than in the
2007 budget and triple what was spent in 2006. In 2008, capital
spending will be one-third of the total budget, up from one-seventh
two years ago. The increased expenditures aim to boost important
infrastructure projects and support economic reforms in the
framework of NATO and EU integration. The Ministry of Transportation
and Public Works will be the main recipient of public money: $810
million, 95% of which will go for capital investments, roads, water
supply projects, sewage treatment and housing. Road infrastructure
projects alone are expected to receive $650 million, although more
than half of this amount ($353 million) will go to the high-profile
road project connecting Durres to Kosovo, the major portion of which
is being constructed by a U.S./Turkish consortium led by Bechtel
Corporation. Several other nationwide road projects will also start
in 2008.


TIRANA 00001078 002 OF 002



7. The defense sector will receive $241 million or 2% of GDP, which
is in line with NATO accession requirements two years ahead of the
GOA's self-imposed 2010 deadline. (Note: Additional funding
channeled to the Ministry of Defense through the Ministry of
Finance, earmarked for payment of pensions to retired officers
raises this total to 2.07% of GDP, exceeding Albania's NATO
requirements.) Total spending for the defense sector will have
doubled over the last four years, a sign of the GOA's determination
to join NATO.


8. As in previous years, health and education will remain priority
sectors. The education sector will receive $475 million, or 4% of
GDP compared to 3.4% in 2006. Spending for education will grow by
17% compared to 2007. The health sector will receive $345 million
or 2.9% of GDP, up from 2.1 percent in 2006. The 2008 budget also
provides for significant increases in pensions and certain public
sector salaries, building on past increases that aim to double them
by 2009. The agriculture sector, an important contributor to GDP,
still suffers from government inattention; total spending is 0.55%
of GDP or $65 million.

Growing Debt, Poor Public Administration
Worry Critics
--------------


9. The GOA plans to borrow $730 million to support the expansion of
public investment next year. At the end of 2007, total debt
amounted at 531.4 billion lek ($5.9 billion) or 54% of GDP. In
2005, the ratio to GDP was 57%. Higher borrowing will translate into
a higher budget deficit, which is forecast to reach 7.9% in 2008,
reversing a positive trend experienced during the last year when the
budget deficit was under 4%.


10. The GOA's decision to sharply increase borrowing has been a
major issue for the opposition Socialist Party. The Socialists
claim that over-inflated public spending will create a serious
threat to the macroeconomic stability Albania has achieved since the
economic chaos of the late 1990s and could grow into a fiscal burden
for future generations. The opposition has also criticized the
Democratic Party-led majority for the government's lack of capacity
to implement public investments and points to the GOA's
unsatisfactory budgetary track record since it came to power in

2005. Specifically, the opposition - and other critics, as well -
contend that the government's inability to efficiently spend public
money and the concentration of spending during the last month of the
fiscal year contribute to inflation and threaten the country's
financial health.

Comment
--------------


11. The 2008 budget reflects the determination of the government to
expand public investments to foster economic growth. However,
politics is the main factor driving GOA budget priorities as Prime
Minister Berisha prepares to lead his government into national
elections in 2009. Albania, which has enjoyed impressive
macroeconomic stability in recent years, requires rapid improvement
of its dilapidated infrastructure if it is to build on the economic
growth of the past decade. Improving public administration
performance and keeping debt pressures manageable will remain
pressing challenges for the government. End Comment.
CRISTINA