LACK OF MONEY AND A SINGLE TREASURY ACCOUNT LIKELY

C O N F I D E N T I A L JERUSALEM 001436 SIPDIS SIPDIS NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS/GREENE/LOGERFO/WAECHTER; NSC FOR ABRAMS, DORAN, LOGERFO; TREASURY FOR ADKINS E.O. 12958: DECL: 04/03/2016 TAGS: EFIN ECON PGOV KWBG SUBJECT: LACK OF MONEY AND A SINGLE TREASURY ACCOUNT LIKELY TO IMPEDE PAYMENT OF PA SALARIES REF: A. TEL AVIV 1368 ¶B. JERUSALEM 1383 Classified By: Consul General Jake Walles for reasons 1.4 (b) and (d). ¶1. (C) Action request/comment in para 7. ¶2. (C) Summary: Although the new PA Finance Minister had publicly promised to pay PA salaries by April 15, he told the PA cabinet April 5 that he had received a ministry with an empty treasury. USD 40 million in external assistance from Saudi Arabia and the United Arab Emirates may be in the pipeline, but few if any commercial banks are willing to provide the PA with new bridge loans. Most banks are applying domestic revenue they collect on behalf of the PA to outstanding PA credit lines they hold. The Arab Bank froze the PA's single treasury account in late March and is actively closing down the PA's credit line and loans with it. No other commercial bank appears willing to take over the single treasury account. With little revenue in sight and no operational single treasury account through which to receive funds or disburse salaries, the new PA government faces an enormous challenge in its first week governing. End summary. PA government admits the treasury is empty -------------- ¶3. (SBU) While PA Finance Minister Omar Abdel Razeq was quoted by the local Arabic press April 3 and 4 as stating that the PA Finance Ministry would pay March salaries before April 15, he noted to the cabinet in its first meeting April 5 that he had received a ministry with an empty treasury, according to the WAFA press agency summary of the meeting. The Prime Minister in a press conference after the cabinet meeting announced that the ministers, led by himself, would not receive their salaries before any employee in the government receives his salary, or the families of prisoners and detainees receive their special payments. (Note: USD 25 million of the PA's February wage bill and transfers remain unpaid. USD 9 million of this is due to Palestinian personnel abroad, including diplomats and retirees. End note.) Little help on the horizon -------------- ¶4. (C) According to International Monetary Fund (IMF) Resident Representative Joel Toujas, the PA may have USD 40 million in external assistance in the pipeline: USD 20 million from Saudi Arabia and USD 20 million from the United Arab Emirates. Toujas noted Finance Ministry statements that Kuwait might send USD 40 million, though Post is not aware of any information confirming that this sum will be transferred. Regardless of what may be in the pipeline, few if any local commercial banks appear willing to extend new credit to the PA. (Note: The previous government had been able to obtain bridge loans from commercial banks against promises of specific external assistance. End note.) In fact, most banks have been keeping domestic revenue (such as taxes and fees) that they collect on behalf of the PA in order to reduce any open PA credit lines they hold. For this reason, Toujas could not suggest how much domestic revenue the PA would actually receive this month. No operational single treasury account -------------- ¶5. (C) Complicating the PA's financial problems is the fact this it currently does not have an open single treasury account. The Arab Bank froze the PA's single treasury account in late March and is moving aggressively to close down the PA's credit line (USD 48 million) and loans (USD 280 million),according to Arab Bank Regional Manager Mazen Abu Hamdan. For example, a USD 34 million check sent by the Algerian government in late March to the PA for budget support was seized by Arab Bank and is being applied against the USD 48 million remaining balance on the frozen single treasury account's credit line (from the payment of February salaries). Abu Hamdan confirmed that Arab Bank would close the PA's single treasury account once the credit line was covered, noting that the bank planned to recover the remaining USD 14 million from the Arab Bank's collection of PA domestic revenue. Abu Hamdan said that the PA's outstanding loans would be repaid through USD 10 million monthly installments, unless credit balances could be used to offset the loans. If the PA fails to keep up with the monthly installments, he said Arab Bank would move forward with the liquidation of loan collateral, including PIF stocks. ¶6. (C) According to its chairman Hani Shawa, the Bank of Palestine refused to accept the transfer of the PA's single treasury account out of concern about how the bank would then be viewed by its U.S. correspondent bank, JPMorgan Chase. Shawa stressed that his first duty was to his customers and shareholders. Palestinian Monetary Authority (PMA) Governor George Abed told EconChief he did not think that any commercial bank operating in the West Bank and Gaza would agree to handle the PA's single treasury account if doing so would make it appear to be handling "suspect transactions." Third Way PLC member and former Finance Minister Salam Fayyad told Consul General that he did not think that any other Palestinian commercial bank had enough capital to handle the PA's single treasury account since such an operation would involve providing at least a USD 50 million credit line to disburse PA salaries. How will salaries be disbursed? -------------- ¶7. (C) Arab Bank's Abu Hamdan told EconChief that, without a single treasury account, he did not know how the PA could disburse salaries by April 15. IMF ResRep Toujas noted that the lack of a single treasury account would make it more difficult for the PA both to receive transfers of external assistance and to execute salary payments. PMA Governor Abed predicted that the PA would return to the old system of cash salary payments. (Comment: With the state of its banking relations in a shambles, its doubtful the PA could get cash to pay salaries. In the recent past, the PA has used post offices to distribute unemployment transfers in cash. The PA might decide to expand this practice for all salary payments, but neither Post nor the IMF ResRep currently has details on how this could be done in practice. End comment.) Enormous challenge for new PA government -------------- ¶8. (C) Comment/Action Request: The absence of an operating single treasury account coupled with the two Israeli banks' decision to cease correspondent banking relations with Palestinian banks (reported reftels) demonstrate the enormous challenges facing this new Hamas-led government in its first week on the job. Post recommends that the Department contact key Gulf donors to urge them not to transfer external assistance to the PA Ministry of Finance. We should encourage them to support President Abbas instead. End comment/action request. WALLES