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