FOOD PRICES SKYROCKET AS GOA PINES FOR NATO

UNCLAS SECTION 01 OF 02 TIRANA 000102

SIPDIS

SENSITIVE

SIPDIS

DEPARTMENT FOR EUR/SCE (ERIN KOTHEIMER AND YOULIANA IVANOVA)

PASS TO TREASURY FOR VIMAL ATUKORALA

E.O. 12958:N/A
TAGS: ECON PGOV AL
SUBJECT: FOOD PRICES SKYROCKET AS GOA PINES FOR NATO

REF: A) TIRANA 21 B) 07 TIRANA 1089

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


1. (SBU) Fears that 2008 will bring rising inflation grew as local
media extensively reported on price increases for basic food items.
Prices for food products, which represent the largest share in the
government's basket of consumer goods for measuring inflation, have
increased in recent years. This trend had gone unheralded until
recently when a drastic price increase for bread, a sensitive item
with average daily consumption per capita of 200 grams a day, stoked
public ire. The opposition, which had previously ignored inflation
as an issue, has seized on the food price increases while the media
echoes growing public frustration. Both suggest that Prime Minister
Berisha and his government have spent more time looking abroad than
seeing to the needs of everyday citizens. End Summary.


2. (U) Throughout 2007, while the Berisha Government took credit
for Albania's continuing economic stability and growth, independent
sources warned of upcoming economic strain, driven by both imported
and domestic inflation. Following a 33 percent increase in bread
prices last year, another 25 percent increase occurred in early
February. Bread producers have warned that additional increases are
coming and that the price of bread could go as high as 120 leke per
kilogram, a 100 percent increase from 2006. In the last two years,
other food items have seen increases ranging from 25-100 percent.
The price of cooking oil increased by 45 percent compared to 2006,
while the price of milk grew by approximately 25 percent. Prices
for fruits and vegetables also increased substantially. Newspapers
have speculated that the price of cooking oil might reach 400 leke
per liter, an increase of 250 percent compared to 2006. Experts
estimate that Albanians will pay approximately 100 million euros
more for bread and cooking oil alone in 2008. (Note: In 2007,
Albania's estimated Gross Domestic Product was just over USD 10
billion.)


3. (U) The prevailing suspicion is that price fixing by cartels is
the main cause for the disproportionate price increases. Albania
imports over half of its grain supply and data from international
wheat markets show that the global price of wheat has increased by
only 5 percent in recent months, giving some credence to the claim
that price increases in the domestic market are speculative.
Although inflation overall in 2008 has been forecast by both the
Central Bank and the IMF to remain at a modest 3 percent (Ref A),it
is widely believed that food price increases are not adequately
reflected in official data. (Note: INSTAT, the GOA's statistics
agency, is regularly criticized by outside experts, including the
IMF, for the unreliability of its data.)

Electricity and Fuel Prices Add to the Crisis
--------------


4. (SBU) The inflation burden on consumers is expected to increase
given an anticipated rate hike for electricity by at least 15
percent in early March. (Note: The GOA's energy regulatory entity
is widely expected to approve a belated increase in electricity
rates later this month, which was requested by KESH and urged by
donors, Ref B.) An increase in electricity prices would compound
the burden of significant fuel price increases during the last year.
Fuel price increases affected businesses ranging from private shops
to industrial users, all operating on private generators during
frequent blackouts during Albania's prolonged energy crisis. To
make matters worse, in the midst of the crisis, the GOA increased
the fuel excise tax to offset the loss in revenue resulting from its
decision to lower business taxes. Opposition leader Rama recently
told supporters that the electricity crisis (which engulfed the
country starting in 2005, when the current government took office)
is at the heart of the expanding price crisis.

Buy-Now-Pay-Later Scheme Reemerges
--------------


5. (U) As the effect of food price increases has spread, many
low-income families have succumbed to an informal borrowing
arrangement originating from the pre-pyramid scheme era (i.e.,
before the 1997 financial collapse). The scheme allows poor
families to buy their daily food items from stores by adding their
names to the shopkeeper's list and running a grocery tab. The
unwritten agreement is that these families will eventually pay
whenever money is available. (Note: The eradication of the
buy-now-pay-later scheme was one of the most popular electoral
promises of Berisha's 2005 campaign. It has unexpectedly reemerged
among the working poor during a time of growing affluence for
Albania's emerging middle class.) Also, recent media reports
describe a trend in some border regions of the country where
inhabitants travel to Montenegro in the north, Macedonia in the

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southeast, and less often to Greece in the south to purchase basic
food products at cheaper prices. Apparently, these countries have
not been affected by international market prices to the same degree
as Albania.

Wage, Tax Policies Fail
to Address Inflationary Pressure
--------------


6. (U) In an attempt to offset the negative effects of aggregate
price increases, in 2006 the government increased public employees'
salaries as well as pensoons and the minimum wage. However, price
increae s since then have outpaced those raises. Also, the decision
by the government to introduce a flat aax on personal income last
year translated into i(gher taxes for almost all taxpayers,
including greater burden on the lower income levels. For the past
two weeks, the media has been echoing mounting calls by the
opposition and some economic experts for the government to intervene
to counteract rising food prices. To date, the GOA has resisted
this pressure, favoring its current laissez faire economic policies
and invoking the merits of market self-regulation.

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


7. (SBU) Inflation is becoming a pressing political problem for
the GOA that significantly impacts people's living standards.
Having focused its attention on macroeconomic stability and revenue
collection, the Government was caught off guard by the growing
public and media pressure that emerged in January. The debate
became particularly sharp at a time when the Prime Minister was in
Japan with a coterie of ministers and senior officials. Berisha's
right-wing coalition won office in2005 primarily by waving the flag
of fighting orruption and organized crime in order to improve he
ualit of life for ordinary Albanians. Howeer,the rea highlight
of the Berisha Governmenttured ut to be Euro-Atlantic accession.
It statedwit ignng the Stabilization Association Agreet wt
he EU in 2006, and the Government (adms lanins) believes it
might be crowned ti pi iha NATO membership invitatio in
Buhrs. oee, this focus on foreign afairsma omea
ot. The Prime Minister an hi ofcastaee o much during
the last yer tatoneaalytcaled it "the Government of Foegn
Affairs,"wichis not able to provide stabefod prices for its
citizens, but sends militaytoops on foreign missions. After
April, the rm Minister will have to turn to the "bread and
uter" issues that concern his citizens.


8. SU With the 2009 general elections looming, Bershawill
also have to ponder national voting patern. Albanian pensioners
are more than 15 percn of the population; the unemployed are
estimate at 30 percent (despite an official employment rat that is
under 14 percent); and most of the popuation has internally
migrated, creating an entir class of disadvantaged "suburbanites"
living arund crowded cities. These social groups represent hole
classes of voters that are the first to be ffected by drastic food
prices increases. At ths rate, public dissatisfaction over
spiraling prces could continue to grow, eventually overshadowing
other positive developments such as Kosovo's independence or a NATO
invitation. End Comment.
WITHERS