FAYYAD AND AL-WAZIR ON PA'S CURRENT AND FUTURE

C O N F I D E N T I A L JERUSALEM 000802 SIPDIS SIPDIS NEA FOR FRONT OFFICE; NEA/IPA FOR WILLIAMS/GREENE/WAECHTER; NSC FOR ABRAMS, DORAN, MUSTAFA; TREASURY FOR ADKINS E.O. 12958: DECL: 02/24/2015 TAGS: EFIN ECON EAID KWBG SUBJECT: FAYYAD AND AL-WAZIR ON PA'S CURRENT AND FUTURE FINANCES, REFUND OF USG CASH TRANSFER, AND PIF ASSETS REF: JERUSALEM 585 Classified By: Consul General Jake Walles for reasons 1.4 (b) and (d). ¶1. (C) Summary: Salam Fayyad said February 22 he did not think a Hamas-led government would receive large amounts of external assistance. Fayyad said he thought the PA could manage to survive to May or mid-June but only by liquidating assets in the Palestine Investment Fund (PIF). PA Deputy Finance Minister al-Wazir said he personally promised that the USG's USD 50 million cash transfer would be refunded before the end of the caretaker government. Subsequent conversations indicated that the PA planned to refund the money in two tranches, one using USD 30 million in cash from the PIF and the balance in a final tranche using proceeds from a new Arab Bank loan. Al-Wazir asserted that while he had been pressing President Abbas to liquidate or further collateralize PIF assets to fund the interim government's budget needs, he had only managed to obtain one new USD 25 million loan using PIF assets as collateral. Fayyad described Abbas' decree moving the PIF under control of the office of the President as a violation of the Basic Law and described the new board as weighted in favor of specific commercial business interests and not those of the Palestinian people. End summary. Fayyad: Huge flows of external assistance to Hamas-led PA unlikely -------------- ¶2. (C) New Palestinian legislator and former Finance Minister Fayyad told DAS Dibble, Consul General, USAID Mission Director, EconChief, and NEA/IPA EconOff February 22 that a Hamas-led government should not assume that it would receive large amounts of external assistance. He recalled that the PA historically had, on average, received USD 30 million per month in external assistance and in no year had it received more than half of the projected need. Without the customs clearance revenue from Israel, Fayyad estimated that the PA would need USD 100-120 million in assistance per month. In 2005, the PA received only USD 348 million in external assistance. ¶3. (C) While cutting non-Arab external assistance will make a difference, he said the next government would still likely receive some funding from the Gulf states but noted that moving large sums "particularly from Iran" would be operationally difficult. He noted that commercial banks in the region are likely to be quite conservative in their actions in order to avoid being labeled as terrorist financiers. ¶4. (C) He acknowledged that it would be strange if the Gulf states ended up giving more to a Hamas-led government than they had when President Abbas had asked for assistance. Fayyad wryly noted that any assistance from Iran would help bankrupt Iran but thought that assistance in significant amounts was also unlikely. PIF could help PA survive until May/June -------------- ¶5. (C) In Fayyad's estimation, the PA could manage to survive to May 15 or mid-June with little external assistance, but only if the Palestine Investment Fund (PIF) is liquidated and used to finance the PA. Fayyad said that the PIF has USD 320 million in marketable securities that have not yet been collateralized for commercial bank loans (likely the un-collateralized portion of the roughly 11 million shares in Orascom Telecom that the PIF still owns) to the PA and another USD 30 million in cash. Fayyad said that the USD 30 million in cash had been held in the PIF's Arab Bank Cairo branch account but had recently been moved to its Arab Bank Ramallah branch account. A second tranche of PIF assets, he believed, could be liquidated with some ease to generate another USD 150 million, in order to provide a total of around USD 500 million for the PA budget. Fayyad described the PIF as a vehicle that should be tapped in order to save the PA when other sources of financing dry up. ¶6. (C) According to the International Monetary Fund, PIF assets at the end of March 2005 were valued at USD 1.3 billion and Fayyad concurred with this valuation. Fayyad said that USD 243 million had been distributed to the PA in 2005 as profit from asset sales and dividends which had been used for budget support and transfers, including funding 85-90,000 employment opportunities in Gaza between July and September 2005 during Israel's disengagement. Therefore, PIF assets were likely around USD 1.057 billion but could have crept back up closer to USD 1.3 billion given stock market price increases since March 2005. PIF will be tapped to refund USG cash transfer -------------- ¶7. (C) In a separate meeting, Deputy Finance Minister al-Wazir said February 22 that he personally promised that the funds would be refunded before the end of the caretaker government. He confirmed that he is working on refinancing the PA's USD 100 million commercial bank loan from Arab Bank London branch that was collateralized with USD 240 million in PIF assets. (Note: The USAID mission's legal advisor noted to EconChief that the PA's collateralization of the cash transfer was a clear violation of the transfer agreement and bolstered the USG's legal basis for requesting a refund of the remaining balance. End note.) ¶8. (C) Subsequent ConGen discussions with the IMF ResRep indicated that the new loan would be in the amount of USD 45 million, to be used both to repay the USG and for the PA budget. (Note: Part of this new loan may also be used to repay wealthy Palestinian businessman and Arab Bank shareholder Sabih al-Masri who personally guaranteed USD 20 million for the PA in early February when Arab Bank decreased the PA's credit line for salary payments from USD 70 million to USD 50 million. Al-Wazir said February 22 that he had to repay USD 10 million on this guaranty in February and another USD 10 million in March. End note.) According to the Consul General's February 23 conversation with Fayyad, the majority of the refund would come from the PIF's USD 30 million in cash holdings, not from the sale of PIF stock assets. ¶9. (C) Al-Wazir bemoaned February 22 the resistance he faced from PIF Managing Director Mohammad Mustafa on tapping the PIF for the PA's emergency needs, stressing that he had been arguing that the PIF is the PA's treasury for a rainy day and that "today" is such a rainy day. He said both he and Fayyad had spoken to President Abbas about the PA's pressing financial needs shortly after the January 25 election and had asked for USD 100 million from the PIF. While Abbas had agreed with them, fifteen days later, al-Wazir had only been able to obtain a USD 25 million loan from the Jordan Investment Bank collateralized against PIF assets. ¶10. (C) USAID Mission Director delivered to al-Wazir February 22 a separate letter asking for the refund of the balance of the money remaining from the 2003 cash transfer for municipality-level infrastructure projects. Since the amount remaining was less than USD 500,000, al-Wazir said he would be able to quickly refund this amount directly from the Finance Ministry's account. Al-Wazir calls for donor funding of health and education under next government -------------- ¶11. (C) Al-Wazir, aware of the enormous financial pressure facing the next government, made a plea for donors to provide more than humanitarian assistance to prevent a total collapse. He said that donor-provided budget support for the health and education sector, under a program like the World Bank's Emergency Social Service Program (ESSP),would be vital until there is a political alternative. Fayyad on new PIF board and decree -------------- ¶12. (C) Fayyad described President Abbas' February 4 presidential decree (reported reftel),placing the PIF under his control, as a violation of the Basic Law. While the PA President has the right to name the Chairman of the PIF's Board, Fayyad said he also viewed Shukri Bishara's appointment as the new Chairman as a clear conflict of interest since Bishara works for Arab Bank, the bank that holds the PA's single treasury account and also is the PA's main creditor. Fayyad said he viewed the new board as favoring Samer Khoury and the Khoury clan's Consolidated Contracting Company (CCC) to ensure that projects such as the offshore Gaza gas deal and the Gaza power plant are handled to the benefit of Khoury and the CCC. Fayyad described this sort of undue commercial influence peddling with Abbas as the real reason behind his decision to resign from the PA cabinet. ¶13. (C) Note: In a February 3 conversation with EconChief, PIF Managing Director Mustafa confirmed that the PIF holds the PA's investment stake in the British Gas/CCC offshore natural gas project. He noted that currently the royalties from the sale of the natural gas are slated to be fed into the PA's single treasury account. Mustafa argued for them to be turned over to the PIF as a way for the PIF to recoup the budget support that had been "incorrectly" provided to the PA at the expense of PIF assets. He noted that technical and commercial negotiations were on-going with Egypt Gas which would partner with British Gas for the liquification of the gas. BG would also market the liquefied natural gas. He said that drilling was currently scheduled to start in September 2006. He did note that he was still pursuing the increased ownership stake in the project that Fayyad had launched, though to little success given CCC's unwillingness to concede a larger share to the PIF. He said the next operational meeting would be February 24 in London. Recent local press reports indicated that Israel remained interested in buying the Gaza natural gas in order to diversify its natural gas sourcing which is currently fully sourced from Egypt. End note. WALLES