Identifier
Created
Classification
Origin
08TIRANA21
2008-01-10 15:02:00
UNCLASSIFIED
Embassy Tirana
Cable title:
Inflation Likely to Be Modest in 2008 as Albania's Economy
how-toVZCZCXRO8857 PP RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG DE RUEHTI #0021 0101502 ZNR UUUUU ZZH P 101502Z JAN 08 FM AMEMBASSY TIRANA TO RUEHC/SECSTATE WASHDC PRIORITY 6536 INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS TIRANA 000021
SIPDIS
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: Inflation Likely to Be Modest in 2008 as Albania's Economy
Matures
Summary
-------
UNCLAS TIRANA 000021
SIPDIS
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: Inflation Likely to Be Modest in 2008 as Albania's Economy
Matures
Summary
--------------
1. Rising inflation in the second half of 2007 has stoked public
anxiety in Albania, especially price increases for food. Although
inflation will likely increase in 2008 over last year's rate of 3.0
percent, it is expected to stay within the GOA's target rate for
inflation. End Summary.
Inflation: By the Numbers
--------------
2. After increasing by approximately 4 percent for the months of
August, September and October, inflation cooled in November and
December to an annual rate of 3.5 and 3.1 percent, respectively.
The increases for food items - which represent the largest share in
the basket of consumer goods and household staples used by the
government to calculate the country's core inflation rate - were 6.9
and 5.4 percent respectively in November and December. During the
prior three months when inflation reached 4 percent, food price
increases averaged approximately 9 percent. The Central Bank has
established a target rate for inflation between 2 and 4 percent and
expects the annual average inflation rate to remain below 3.5
percent in 2008.
3. Inflation data is produced by INSTAT, the GOA's statistics
office. However, INSTAT's reliability is widely distrusted,
including by the opposition, which considers its data to be
politically biased. (Note: The IMF and the European Commission have
also criticized INSTAT's accuracy and lack of technical capacity.)
A telling example of doubts over INSTAT's data is found in its
reporting of price increases for bread in recent months. Anecdotal
evidence confirmed by Embassy staff indicates that the price of
bread, once a sensitive daily staple in Albania where price
increases a decade ago triggered street riots - has risen by 40
percent, far more than what is officially reported.
Import Imbalance and Energy Increases Drive Inflation
-------------- --------------
4. Several factors are driving inflation. Price increases in
Albania's small economy generally reflect worldwide trends, and
global increases in commodity prices have rippled throughout the
economy. Also, in 2007 an extended drought damaged domestic
agricultural production. Drought conditions also reduced domestic
electricity generation, forcing the country to import high priced
electricity. The power crisis, coupled with the rise in the cost of
fuel for back-up generators, has increased the cost of production in
Albania for businesses. These factors, together with the rapid
growth of commercial lending, have raised concerns about
inflationary pressure. In response, the Central Bank increased the
prime interest rate three times in 2007 - the last time in November
- to bring it to 6.25 percent.
5. Finance Minister Bode is unconvinced that inflation is a threat
to the macroeconomic stability Albania has achieved over the last
six years. Bode believes that the current increase is due to
imported inflation, aggravated by Albania's dependence on foreign
imports for a wide variety of products, and that the country's
inflation rate is nonetheless low compared to neighboring countries.
A contrary opinion was given to the Embassy by the head of one of
Albania's leading private banks. The banker said he expects
inflation to spike up to six percent in 2008. The IMF is
forecasting modest inflation for Albania this year between 2 and 4
percent per annum.
Comment
--------------
6. Despite inflationary pressures caused by surging oil prices,
Albania has largely been spared the inflationary effects of the oil
price shock. Although Albania imports 75 percent of its petroleum
needs, the doubling of dollar-denominated oil prices over the last
two years has been offset by the lek's 30 percent appreciation
against the dollar during this time period. Additionally, the lack
of any public protest or political controversy over recent food
price increases underscores the rapid economic development the
country has enjoyed since its dramatic collapse in 1997. Albania,
despite a daunting number of structural challenges to its future
economic development, has evolved into a more normal country where
an increasingly prosperous population can shrug off food price
increases that would have led to instability in prior years. End
Comment.
CRISTINA
SIPDIS
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: Inflation Likely to Be Modest in 2008 as Albania's Economy
Matures
Summary
--------------
1. Rising inflation in the second half of 2007 has stoked public
anxiety in Albania, especially price increases for food. Although
inflation will likely increase in 2008 over last year's rate of 3.0
percent, it is expected to stay within the GOA's target rate for
inflation. End Summary.
Inflation: By the Numbers
--------------
2. After increasing by approximately 4 percent for the months of
August, September and October, inflation cooled in November and
December to an annual rate of 3.5 and 3.1 percent, respectively.
The increases for food items - which represent the largest share in
the basket of consumer goods and household staples used by the
government to calculate the country's core inflation rate - were 6.9
and 5.4 percent respectively in November and December. During the
prior three months when inflation reached 4 percent, food price
increases averaged approximately 9 percent. The Central Bank has
established a target rate for inflation between 2 and 4 percent and
expects the annual average inflation rate to remain below 3.5
percent in 2008.
3. Inflation data is produced by INSTAT, the GOA's statistics
office. However, INSTAT's reliability is widely distrusted,
including by the opposition, which considers its data to be
politically biased. (Note: The IMF and the European Commission have
also criticized INSTAT's accuracy and lack of technical capacity.)
A telling example of doubts over INSTAT's data is found in its
reporting of price increases for bread in recent months. Anecdotal
evidence confirmed by Embassy staff indicates that the price of
bread, once a sensitive daily staple in Albania where price
increases a decade ago triggered street riots - has risen by 40
percent, far more than what is officially reported.
Import Imbalance and Energy Increases Drive Inflation
-------------- --------------
4. Several factors are driving inflation. Price increases in
Albania's small economy generally reflect worldwide trends, and
global increases in commodity prices have rippled throughout the
economy. Also, in 2007 an extended drought damaged domestic
agricultural production. Drought conditions also reduced domestic
electricity generation, forcing the country to import high priced
electricity. The power crisis, coupled with the rise in the cost of
fuel for back-up generators, has increased the cost of production in
Albania for businesses. These factors, together with the rapid
growth of commercial lending, have raised concerns about
inflationary pressure. In response, the Central Bank increased the
prime interest rate three times in 2007 - the last time in November
- to bring it to 6.25 percent.
5. Finance Minister Bode is unconvinced that inflation is a threat
to the macroeconomic stability Albania has achieved over the last
six years. Bode believes that the current increase is due to
imported inflation, aggravated by Albania's dependence on foreign
imports for a wide variety of products, and that the country's
inflation rate is nonetheless low compared to neighboring countries.
A contrary opinion was given to the Embassy by the head of one of
Albania's leading private banks. The banker said he expects
inflation to spike up to six percent in 2008. The IMF is
forecasting modest inflation for Albania this year between 2 and 4
percent per annum.
Comment
--------------
6. Despite inflationary pressures caused by surging oil prices,
Albania has largely been spared the inflationary effects of the oil
price shock. Although Albania imports 75 percent of its petroleum
needs, the doubling of dollar-denominated oil prices over the last
two years has been offset by the lek's 30 percent appreciation
against the dollar during this time period. Additionally, the lack
of any public protest or political controversy over recent food
price increases underscores the rapid economic development the
country has enjoyed since its dramatic collapse in 1997. Albania,
despite a daunting number of structural challenges to its future
economic development, has evolved into a more normal country where
an increasingly prosperous population can shrug off food price
increases that would have led to instability in prior years. End
Comment.
CRISTINA