How to Finance an "Election Year" Budget

UNCLAS TIRANA 000342 SIPDIS SENSITIVE STATE FOR EUR/SCE E.O. 12958: N/A TAGS: ECON EFIN PGOV KDEM PREL AL SUBJECT: How to Finance an "Election Year" Budget ¶1. A recent IMF report underlines that Albania and Cyprus are expected to be the only countries in Europe that will show positive economic growth for the current year. Despite downgrading Albania's 2009 GDP growth rate to 0.4 percent from 3.5 percent in early January, the IMF still considers the Albanian economy able to grow, mainly due to stable domestic demand. This has been a major indicator which will allow the GOA to borrow approximately USD 300 million via a syndicated loan from private banks while many other East European counties and Balkan neighbors have sought emergency financing from the IMF. The loan is expected to help the GOA safely cruise through the year, even though a lot depends on the length and depth of the global crisis. The GOA's main goal in getting the loan is twofold; complete an upgrade of the main highway to Kosovo, and to inject foreign denominated currency in the domestic market in order to balance the negative effects of global financial crisis resulting in lower remittances and volume of exports. ¶2. The reaction to the GOA's decision to move forward with the loan - despite the very high interest rates it is paying (almost 11.5 percent annually) - has been quite dissimilar. The Minister of Finance praised the loan as another indication of the maturity and macroeconomic health of the Albanian economy, and contrasting Albania with other countries in the region which are struggling to find financing. The opposition blamed the government for excessively increasing public debt through commercial loans instead of accepting IMF low-interest loans. However the IMF rep in Tirana said that getting the loan should be considered a success, particularly in light of the very challenging financial situation. ¶3. The decision to turn to the commercial banking sector rather than the IMF is obviously rooted in political rationale more than just economic ones. The completion of the PRG/EFF agreement with the IMF in February enabled the GOA to terminate the rigid monitoring status under the IMF and allows the GOA, in the Prime Minister's own words, "to pursue an election year budget." Sending the IMF packing just before the general elections would help the GOA implement certain budget-busting initiatives and policies which otherwise would have been impossible, such the increase of salaries and pensions being only the most striking examples. The leader of the opposition Edi Rama has clearly stated that he will sign an agreement with the IMF during the first week of any Rama government. However, it is very likely that in the event of a Democratic Party victory, Berisha will also seek a new arrangement with the IMF, which remains crucial in order to maintain the confidence of foreign investors.