PA HOLDING THE BUDGET LINE, BUT DECLINE IN DOLLAR

UNCLAS SECTION 01 OF 02 JERUSALEM 000511

SIPDIS

SENSITIVE
SIPDIS

NEA/IPA FOR GOLDBERGER/SHAMPAINE/SACHAR; EEB FOR
DEMARCELLUS; NSC FOR PASCUAL; TREASURY FOR CONNOLLY
DEPT PLEASE PASS TO USAID FOR MCCLOUD/BORODIN

E.O. 12958: N/A
TAGS: EFIN EAID ECON KWBG IS KPAL
SUBJECT: PA HOLDING THE BUDGET LINE, BUT DECLINE IN DOLLAR
INCREASES FISCAL GAP

REF: JERUSALEM 169


1. (SBU) Summary. The IMF reports that the PA's total
financing needs for 2008 are now forecast at more than USD
2.1 billion (up from 1.8 billion in December). The IMF notes
that donor contributions to date (including USG assistance)
have been sufficient to sustain PA operations, but at current
exchange rates, if all announced and pledged 2008 budget
support is delivered, the PA will still face a gap of USD 570
million this year. The team's findings will form the basis
for the IMF's report to the AHLC meeting in May. End Summary.

PA Holds Down Costs, But Fiscal Gap Grows
--------------


2. (SBU) An IMF team reported its findings to local donor
representatives during the week of March 17. Mission Head
Oussama Kanaan told donors that the PA has maintained "strict
control" on payroll costs, including by refusing a general
salary increase and by maintaining the payroll levels at
totals agreed in December. In addition, collection rates for
utility payments have increased dramatically and are expected
to reach 80% by the end of the year. These actions are
forecast to slash the PA's net lending costs by one-third
(from NIS 2.2 billion in 2007 to NIS 1.44 billion in 2008).
In all, Fayyad's actions have cut the PA's expected operating
deficit by NIS 200 million in 2008.


3. (SBU) Despite these measures, however, the fall of the
dollar and a more aggressive PA effort to pay its debts has
increased the dollar-denominated fiscal gap in 2008. The
three-year framework presented to donors in December was
calculated at an exchange rate of 4.1 NIS/USD. The IMF and
PA have redone the numbers based on a 3.6 NIS/USD rate,
although the dollar has fallen as low as 3.4 NIS/USD
recently. Although the PA's revenues and expenditures are
almost entirely in NIS, a number of significant donors,
including the U.S. and the GCC states, contribute in dollars.
The IMF now calculates that the dollar-denominated budget
deficit - for recurrent expenditures only - in 2008 will
total USD 1.63 billion (USD 135 million/month). Combined
with the public infrastructure investments included in the
PRDP, the total external financing needed in 2008 is more
than USD 2.1 billion.

Donors Stepping Up
But a Large Gap Looms
--------------


4. (SBU) Kanaan and IMF Country Representative Toujas-Bernate
noted that March contributions - including the U.S. cash
transfer of USD 150 million - are sufficient to pay salaries
and other recurrent expenses through May. The World Bank
will also disburse approximately USD 150 million from its
trust fund between now and May, including USD 40 million of
its own funds.


5. (SBU) Looking ahead, Toujas-Bernate said that if all
pledged budget support is delivered at current exchange
rates, the PA will receive approximately NIS 3.9 billion in
2008 (out of a need for nearly NIS 5.9 billion),leaving a
gap of NIS two billion (USD 570 million) for which there are
no donors currently identified.

Access and Movement
--------------


6. (SBU) The IMF said GOI restrictions on access and movement
had not been relaxed as had been forecast when the PA put
together its three-year budget. Some restrictions had, in
fact, been tightened. The IMF has not yet changed the
framework's basic assumptions, admitting that it was too
early to understand fully the impact on economic growth. The
IMF has, however, downgraded its forecast growth in the
Palestinian economy from 3.5 to 3 percent in 2008.


7. (SBU) The PM's economic adviser, Karim Nashishibi, said
that on the issue of economic growth, he was as concerned
about a possible slowdown in the Israeli economy, the PA's
largest export market. Nashishibi agreed with the IMF that
it was too early to dramatically adjust growth forecasts
based on access and movement restrictions, as "inside some
West Bank cities growth has picked up more than expected."


8. (U) The IMF briefing on the PA's Public Financial

JERUSALEM 00000511 002 OF 002


Management structures, as well as the updated fiscal
framework tables (in USD and NIS) can be found on ConGen
Jerusalem's unclassified intelink site at:
http://www.intelink.gov/communities/state/pal econ.
WALLES