PA FISCAL UPDATE: WESTERN DONORS CARRYING THE

UNCLAS SECTION 01 OF 02 JERUSALEM 000725 SIPDIS SIPDIS NEA FOR FRONT OFFICE; NEA/IPA FOR GOLDBERGER/SHAMPAINE/SACHAR; NSC FOR ABRAMS/PASCUAL; TREASURY FOR CONNOLLY LONDON FOR TSOU DEPT PLEASE PASS TO USAID FOR ANE/MEA:MCCLOUD/BORODIN E.O. 12958: N/A TAGS: EFIN EAID ECON KWBG IS KPAL SUBJECT: PA FISCAL UPDATE: WESTERN DONORS CARRYING THE LOAD, BUT PROBLEMS AHEAD REF: A. JERUSALEM 511 ¶B. JERUSALEM 657 ¶C. JERUSALEM 169 ¶D. JERUSALEM 586 ¶1. (SBU) Summary. Though donors have provided more budget support than expected to date in 2008, absent new pledges the PA faces a significant financing shortfall later this year. The IMF expects the PA will fall USD 400 million short of its 2008 budget requirements, a gap that will increase to closer to USD 600 million given the PA's repayment of salary arrears. World Bank and PA officials are urging donors to encourage the GOI to make available wireless spectrum necessary for the PA's second mobile telephone operator, as a means of reducing the financial burden on donors in 2008. End Summary. PA gets cash quicker than expected... -------------- ¶2. (SBU) In briefings for donors in advance of the Ad Hoc Liaison Committee (AHLC) meeting, the IMF, World Bank and Palestinian Authority (PA) Ministry of Finance report that the PA has received more external budget support than expected (in excess of half a billion USD) through the first four months of 2008. This total includes USD 240 million from the EC; USD 150 million from the U.S.; USD 90 million from the UAE; USD 60 million from Saudi Arabia; and USD 62 million from Algeria. In addition, the World Bank Trust Fund disbursed USD 83 million to the PA in April. ... but financing gap continues to grow -------------- ¶3. (SBU) However, these early transfers reflect a 'front-loading' of donors' support for the PA. According to IMF calculations, the total amount of budget support pledged to the PA in 2008 falls short of the PA's needs by USD 400 million. The USD-denominated gap has increased since Paris largely due to the decline in the dollar (ref a). ¶4. (SBU) This financing gap is further widened as the PA is paying back arrears faster than planned in the 2008 budget. Through April, the PA has paid USD 146 million in arrears to civil servants and USD 75 million in commercial debt in 2008. The PA has approximately USD 250 million in civil service arrears to be repaid, which Prime Minister Salam Fayyad has committed to repay by October 1, 2008. Fayyad had established this repayment policy prior to the deal with labor unions to end their strikes against the PA (ref b). PA officials stress to donors that the more aggressive repayment schedule is a political necessity and budget neutral over the three-year budget framework. ¶5. (SBU) Because the PA's 2008 budget allocates USD 274 million for arrears repayment, and the PA is likely to pay closer to USD 500 million in arrears this year, the actual financing gap for 2008 - if no further donors step up - is expected to be on the order of USD 600 million. PA undertakes prudent reforms -------------- ¶6. (SBU) The IMF notes that this significant financing gap exists despite the fact the PA is "implementing prudent fiscal policies and reforms in the context of an ambitious budget for 2008." The reforms include the aggressive effort to cut costs associated with utilities payments (ref c). As part of the first disbursement from its Trust Fund, the World Bank has agreed with the IMF and the PA on a "matrix" of policy reforms, included as an annex to its AHLC report. ¶7. (SBU) Fayyad's economic adviser, Karim Nashashibi, told donors that utility collections are running ahead of expectations despite a court order to suspend the implementation of the PA's utility certificate scheme. He and Ministry of Finance Director General Mazen Jadallah asked donors to encourage the GOI to be more supportive of efforts to have PA municipalities pay their bills directly to the Israel Electric Company (IEC). According to Jadallah and Nashashibi, efforts to get IEC to present invoices to municipalities directly have been rebuffed. The PA plans to raise this issue at an upcoming meeting of the Joint Economic JERUSALEM 00000725 002 OF 002 Council. Release of wireless spectrum would ease the burden (slightly) -------------- ¶8. (SBU) In discussing the looming fiscal gap with donors, World Bank and PA officials have noted that GOI allocation of the frequencies required for the second PA mobile telephone operator (ref d) would result in an immediate transfer of USD 100 million to PA accounts, and significant ongoing revenue stream. The World Bank and the PA have urged donors to raise this issue with the GOI as a means of reducing the expected financing gap - and the burden on donors - in 2008. (Comment: We understand discussions between the GOI and PA continue and that Quartet Representative Blair has written the GOI to encourage transfer of the necessary spectrum prior to the private sector investment conference in Bethlehem in May. End Comment) ¶9. (U) The IMF and World Bank reports prepared for the AHLC can be found on ConGen Jerusalem's unclassified intelink site at: http://www.intelink.gov/communities/state/pal econ. WALLES