PA MORE THAN 1.5 BILLION IN THE RED FOR 2007;

C O N F I D E N T I A L JERUSALEM 001766

SIPDIS

SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR SHAMPAINE/BELGRADE; NSC
FOR ABRAMS/SINGH; TREASURY FOR
HARRIS/LOEFFLER/NUGENT/HIRSON; BRUSSELS FOR LERNER

E.O. 12958: DECL: 08/19/2017
TAGS: EFIN EAID ECON KWBG IS
SUBJECT: PA MORE THAN 1.5 BILLION IN THE RED FOR 2007;
ISRAELI TRANSFERS TO MASK THE PROBLEM FOR ONLY A LITTLE
LONGER


Classified By: Acting Principal Officer Thomas Duffy for reasons 1.4 b,
d.


1. (U) On August 20, the Palestinian Authority (PA) Cabinet
approved its 2007 budget, with total expenditures of USD 2.5
billion and an estimated budget deficit of more that USD 1.5
billion this calendar year. The PA's wage bill remains its
single largest expenditure: more than USD 1.3 billion a year.
In addition, the PA will fund USD 500 million of "net
lending" this year, which includes deductions for dues owed
to Israeli utility companies, transfers to the electricity
sector and subsidies for Palestinian fuel and utility costs.


2. (C) In addition, the PA continues to owe substantial
arrears, estimated at close to one billion USD, to its
employees and private sector businesses. The PA has used
recent clearance transfers to begin paying these arrears: one
Palestinian businessman told Econoff that he had been paid
one-quarter of the two million USD he was owed by the PA.


3. (C) The PA's dismal fiscal situation is temporarily masked
by the resumption of revenue transfers from the GOI,
including the transfer of funds withheld between March 2006
and July 2007. In early August, the GOI transferred USD 170
million to the PA (representing 90 million from withheld
funds and 80 million from July's collections). The PA
Ministry of Finance (MOF) estimates that the GOI still holds
1.2 billion NIS (USD 300 million) of withheld revenue and
expects these funds to be transferred in three monthly
installments. The MOF is negotiating now with the GOI on the
amount to be transferred in early September. These funds
would then be used by the PA to pay its August wage bill (and
presumably some of its arrears).


4. (C) The PA will be able to pay salaries through October
based on expected transfers of withheld funds from the GOI.
MOF officials say they will be able to pay November salaries
(in early December) with the tail of those transfers. By
December, given the PA's monthly operating deficit of
approximately USD 100 million and with the store of withheld
funds used up, the PA will not generate enough revenue to
cover salaries. MOF officials expect to be forced to rely on
cash-on-hand to pay the December wage bill. Absent
significant other sources of money, the PA will then quickly
face an acute crisis. Even in the most optimistic scenario,
the PA will not only be unable to make salary payments, but
it will still have substantial arrears to its public and
private sectors.


5. (C) The actual moment of crisis may be delayed only
slightly by improved cooperation with the GOI. MOF DG Hatem
Youssef told Econchief that the GOI's Airport Authority had
just transferred 50 million NIS (USD 12 million) to the PA
from Allenby bridge crossing fees. He is also optimistic
that there's more to be "found" in discussions with the
Israelis, as the two sides go back through the deductions
taken from clearance revenues for payments to Israeli firms
by the GOI over the months that the two sides were not
communicating. Youssef claims the working-level contacts
with his GOI counterparts are "going pretty well" and he
praised them as "open-minded and professional."
DUFFY