The Political Impact and Economic Cost to Albania of the Crisis in Kosovo

For many years now, the world has been occupied with developments and recurring crises in the Balkan region. In 1999, a negotiated solution for Kosovo became impossible after the Rambouillet and Paris international conferences collapsed. Apparently, the regime of Slobodan Milosevic and his military machine decided to do away with the peaceful coexistence of ethnic groups in Serbia and eagerly started implementing a policy of genocide and ethnic cleansing against the ethnic Albanians in Kosovo. In the face of a humanitarian disaster, the North Atlantic Treaty Organization felt forced to pursue a policy of bombing when its members believed that everything else had failed. NATO bombing of Yugoslavia started on 24 March 1999 for the purpose of stopping ethnic cleansing in Kosovo and reestablishing democratic values in the entire Balkan region. However, the situation in Kosovo and the NATO response has also had a strong impact on the neighboring countries, including Albania, the Former Yugoslav Republic of Macedonia, Bosnia-Herzegovina, and others. Although it is the poorest country in the region, Albania faces the heaviest cost.

Soon after the NATO attacks on Yugoslavia, the Albanian government faced acute human and financial burdens. By late May 1999, it had received and accommodated, as best as it could, 450,000 refugees forcefully displaced from Kosovo as a result of the policy of genocide and ethnic cleansing pursued by the Belgrade regime. It is estimated that the refugee total could grow to more than 700,000, which is approximately 20 percent of the entire population of Albania. This would be the equivalent of the United States receiving from abroad something like 55 million destitute people in two months. And Albania is hardly comparable to the United States in economic terms.

There seems to be no end in sight for the refugee influx into Albania. NATO sources were reporting that more than eight hundred thousand people were internally displaced within Kosovo as this essay was being written. They all looked for a way into Albania, as a safe haven and as a place that they are sure will provide them their basic needs and humane treatment. Although Albania is very poor, its doors will always remain open to offer a safe haven to the traumatized refugees from Kosovo. Historically, the Albanian people and government have always been ready to share everything, including their poverty, with their Kosovar brothers. But in the face of this major and unique crisis, the generosity and resources of Albania and its readiness to alleviate suffering are clearly insufficient without international economic assistance and political support from the world community. The needs have been great and urgent, the situation is very grave, and Albanian requests for assistance have been very modest. In the final analysis, what the Albanian government has been urging the world to do is not to allow this humanitarian catastrophe to turn into an economic and financial crisis that could make the situation far worse than it already is.

Albania is very proud of the hospitality it has been able to offer, and, although the country is poor, its history provides a unique example in Europe when it comes to helping those in need. I must state that all of our foreign friends have stood by Albania in these difficult days. I would like to mention specifically the assistance given to us by the United States of America, the European Union—through both multilateral and bilateral initiatives—other European countries, international financial institutions (the International Monetary Fund and the World Bank), NATO, and numerous governmental and nongovernmental humanitarian organizations.

The Political Situation and Governance in Albania

The refugee crises occurred when Albania was undergoing a careful and often painful transition to economic stability and market reform. Despite obstacles and the new crisis, the government of Albania is committed to continuing its structural and economic changes. The coalition government, what we call the “alliance for the state,” is making maximum efforts to mobilize all social and political structures and to ensure effective coordination among the offices of the president, parliament, ministries, and political parties so as to be able to face this new situation with maximum effect.

The Council of Ministers established a task force under the prime minister’s office to coordinate the work of relief institutions and the international community, to ensure transparency in the process of assisting refugees, and to make their stay in Albania as decent as we possibly can.

It is my belief that the current government has grown in popularity in Albania among both the general public and the political parties as a result of the policies it has implemented to address the Kosovo issues. On the other hand, the opposition Democratic Party led by former president Sali Berisha seems quite confused in its stand on the Kosovo situation and has pursued a policy of boycotting the parliamentary process. Berisha’s return to parliament would have been a good and positive sign, ensuring the continuity of the democratic processes that the Albanian people expect of their leaders. Regrettably, as of May 1999, this had not happened.

Responding to a major crisis, the Albanian parliament voted to allow complete access by NATO to Albania’s territory and air space, and the growing number of NATO forces in Albania has placed our country de facto within NATO. The presence of NATO forces has been a positive psychological factor and is seen by the Albanian people as a guarantee of stability and peace.

The Economic Situation in Albania Prior to the Influx of Refugees from Kosovo

After the turmoil of 1997, our government managed by early 1999 to bring macroeconomic and financial stability to Albania. This goal was achieved in a relatively short period of time with our great efforts and commitment and with the help of the international community. The economy had started on an upward trend prior to the Kosovo crisis.

Economic growth in 1998 reached 8 percent, as compared to a 7 percent decline in 1997. Moreover, we had succeeded in having the budget deficit domestically financed and in reducing the inflation rate to 8.7 percent at the end of 1998. The government’s economic and financial program for 1999 had forecast 8 percent growth in the gross domestic product (GDP) and an end-of-year inflation rate of 7 percent. This program has ensured growth in currency reserves sufficient to cover four months of imports as well as maintenance of a balance-of-payments status quo with a lower current account deficit than foreseen in the medium-term program. In full compliance with these indicators, the government had also forecast a domestically financed budget deficit of 5.6 percent of GDP.

An additional characteristic of the Albanian state budget for 1999 is its direct involvement with the population in various ways. The level of government employment, at 133,000 persons, is considered high, and we anticipate drastic cuts over several years. Personnel costs now consume about 15 percent of the budget based on domestic revenues. Thirty percent of the budget is used to pay retirement benefits (500,000 retirees), social assistance (120,000 families), and unemployment benefits (27,000 people). We may say that about half of the state budget is used as a means of subsistence for almost one-third of the Albanian population.

The Economic and Fiscal Impacts of the Kosovo Events

As a result of the rapid deterioration of the situation in Kosovo, the government is now faced with the challenge of providing means for the survival of the displaced Kosovar population that arrived in vast numbers in Albania. As noted above, it was estimated in late May that the number of Kosovars seeking refuge in Albania was 450,000, but considering the fact that this influx was rapidly increasing, we estimated that the number would soon reach 700,000.

Under the conditions in our country, the Albanian government pointed out that a further worsening of the Albanian economic situation could be expected as a result of the imbalances created within different sectors of the economy. It could be expected that the forecast economic growth will be threatened and that inflation will rise, although probably only to a small extent.

It is estimated that the predicted 8 percent GDP growth in 1999 will be negatively influenced by the new situation, particularly from May through July, with perhaps modest recovery in the following six months. More than any other sector of the economy, macroeconomic stability could be threatened by an increase in the budget deficit as a result of considerable unforeseen and unanticipated expenditures and the likelihood of shortfalls in meeting revenue targets. Under the circumstances of a 15 percent growth in population and the need to increase spending to meet the new situation, it is very difficult to avoid macroeconomic imbalances even in a more diversified and consolidated economy than is currently the case in Albania.

To address the emerging conditions, the Albanian government saw the need to develop a multidimensional strategy to garner support for Albania by the international community. The purpose of this strategy was not only to confront the emergency problems created by the influx of refugees from Kosovo but also to maintain economic stability. We were fully aware that imbalances of this dimension, as a result of the sudden growth of the population, were impossible to be handled by the domestic resources of Albania. It was particularly impossible to handle the situation given the extreme fragility of the Albanian economy, which has been in radical transition for nine years and which has experienced only one year of stability after the dire crisis of spring 1997. The Albanian government budget lacked flexibility to face the huge needs that suddenly arose.

The government calculated the total cost of facing the humanitarian crisis at about $800 million, $150 million of which represented the direct cost of supporting the budget. We have calculated the cost of receiving and accommodating the Kosovar refugees, whatever the length of their stay and whether they stay in camps or with Albanian families, at more than $650 million. This amount will secure for them minimum conditions of food, shelter, and sanitary and health care for at least one month. This figure assumed that seven hundred thousand people will stay in Albania until the end of 1999. This amount also serves as a basis for calculating a 5 percent contingency fund (or $140 million) for implementation of programs that have not been included in the state budget.

The $140 million in supplementary expenses includes more than $105 million for current expenditures and $34 million for capital items. This amount covers supplementary expenses for health care, education, public order, local and central government, economic assistance to the families that have sheltered and fed refugees, and some infrastructure investments that are necessary for bringing water, electricity, and improved roads to the refugee camps.

An additional $10 million will be needed to compensate for a possible shortfall in revenues, which will result mainly from a decrease in tax collections and a change in the structure of imported goods, even if one takes into account a likely increase in the total volume of imports. This factor is substantial considering that about two-thirds of government budgetary revenue comes from imports.

The impact of the crisis is also strong on domestic and foreign investment, which virtually ceased as a result of fear of war in the region.

Addressing Acute Problems

The commitment of the international community to provide shelter and basic necessities for the survival of the displaced people from Kosovo has been vital. This challenge could not have been faced by the Albanian government alone, and a humanitarian disaster could very well have occurred. International humanitarian organizations and institutions continue to assist us in helping the Kosovar refugees survive, but they are also expected to help to meet the refugees’ daily problems over a longer period.

So far I have discussed only the immediate impact on 1999, but soon, and depending on the situation, the Albanian government will have to face anticipated longer term ramifications of the massive population influx and will be obliged to program for its effects on the country at large and on the country’s economic well-being. Though under difficult circumstances, we are making all efforts not only to secure food and shelter for our displaced brothers but also to maintain the macroeconomic stability of Albania and to ensure continuous development in conformity with our annual and medium-term financial programs.

The measures the government took initially to curtail some of the expenditures will produce only very small and temporary savings. But realistically speaking, these savings, too, will be far outweighed by the unexpected costs of the crisis. Suspending routine expenditures, even for a short time, could affect the normal functioning of the economy and the state.

Under these conditions, the government of Albania has taken additional measures to better manage expenditures. A system of monitoring every two to three days of expenditures and the fiscal situation has been initiated, as has a daily review of the tax revenue situation. It is my judgment that the situation is under control, but the situation in late April and early May did show a tendency toward an increase in expenditures over and above the initial projections, and at the same time there was a significant decrease in customs revenues. As a result, a surplus of revenues that had prevailed until the end of March started to reverse.

We do realize our responsibility not to allow undesired imbalances to occur, but we are also aware of the fact that under the extreme circumstances facing Albania, the situation could easily get out of control within a few days. This is the reason the Albanian government called upon the international community and international institutions for budgetary support. We believe this support is urgently needed, given the fact that all such contributions are aimed at assuring the survival of the Kosovar refugees.

I must also note that we in Albania are faced with social problems that are the direct consequence of the refugee crisis. The crisis may not end soon, and we have to plan ahead for ways to make the refugees feel useful and socially involved. We therefore are looking into programs to integrate refugees into the social and community life of Albania and possibly even to allow their entry into the workforce if their return to home is not possible or assured. All these programs need financial support that goes beyond the budgetary ability of the government.

We had received by May the commitment of the EU, which will grant Albania an initial sum of 62 million euros to be disbursed in three installments. We have also received support from the World Bank, which under expedited procedures will give Albania a new public expenditure credit of $30 million. In addition, Albania and the World Bank have negotiated a $45 million structural adjustment credit.

At a donors’ meeting in Brussels on 26 May 1999, the Albanian government received pledges of $200 million to meet its external financing requirements. Of this total, $160 million was necessitated by the current crisis in Kosovo; $40 million would have been needed even if that conflict had not occurred. We appreciate the long-term commitment of donors, both bilateral and multilateral, to support Albania’s development. We also welcome the recognition by donors that further external financing could be needed later in 1999, and we hope they will continue to monitor the situation closely with our authorities.