PA MAKES SALARY PAYMENT AS OVERALL FISCAL

C O N F I D E N T I A L SECTION 01 OF 02 JERUSALEM 001142 SIPDIS NEA FOR FRONT OFFICE AND NEA/IPA; NSC FOR SHAPIRO/KUMAR; TREASURY FOR AHERN; DEPT PLEASE PASS TO USAID FOR ANE/MEA: MCCLOUD/BORODIN; JOINT STAFF FOR LTGEN SELVA E.O. 12958: DECL: 07/01/2019 TAGS: ECON EAID EFIN KWBG PGOV IS SUBJECT: PA MAKES SALARY PAYMENT AS OVERALL FISCAL SITUATION DARKENS REF: JERUSALEM 1117 Classified By: A/DPO Jonathan Carpenter, for reasons 1.4b and d ¶1. (SBU) Summary: The Palestinian Authority (PA) paid June salaries on schedule July 6, thanks to an influx of cash from a one-time telecom deal. However, a visiting IMF team told donors that the PA is now certain to end the year with substantial commercial debt to banks and private sector arrears. Overall, the IMF credited the PA with strong fiscal discipline on wage expenditures and net lending (utility subsidies). They also expressed hope that continued reduction of restrictions on movement and access will spur economic growth in the West Bank. End summary. Salaries -------------- ¶2. (SBU) The PA paid salaries in both the West Bank and Gaza on July 6, on the basis of USD 100m received as fees from the extension of the current monopoly cellphone license as part of the PalTel/Zain merger. Banks in Gaza had sufficient liquidity in NIS to disburse PA employees' salaries, but face a serious shortage of USD. Palestine Monetary Authority (PMA) contacts report they have not yet received a response to their July 1 request to transport NIS, USD and JD into Gaza. The GOI transferred NIS 250m in clearance revenue, after taking deductions totaling approximately NIS 135m. The only contribution from donors in June was the usual monthly transfer from the EC of 13m Euro (USD 18m). PA Debt Piles Up -------------- ¶3. (C) Ministry of Finance and banking contacts confirmed that the total amount of PA debt to the banks is hovering around USD 700m. This includes loans, lines of credit, and overdraft facilities. The IMF estimates the PA is paying above 10 percent interest on its bank loans. Private sector arrears are more difficult to quantify, but the IMF reports USD 90m is listed on the PA's books as arrears (outstanding for more than 90 days.) Anecdotal evidence from business contacts indicates that the amounts could be substantially higher. PA Fiscal Update -------------- ¶4. (SBU) In a brief to donors on the PA's current financial situation, the IMF projected that the PA could achieve a 5.6 percent growth rate in GDP in an "optimistic but conservative" baseline scenario that assumes continued reduction of restrictions on movement and access. The IMF noted that it is not clear whether this level of growth is sustainable. IMF and Ministry of Finance officials argued that greater economic growth is possible with the continued removal of restrictions, in particular, that limit trade with Israel. Ministry of Finance DG Mazen Jadallah noted that while the relaxation of checkpoints inside the West Bank shows goodwill and is a step in the right direction, restrictions related to trade with Israel and beyond need to be relaxed in order for there to be a noticeable increase in GDP. Ziad Karablieh, Director General of International Economic Relations at the Ministry of National Economy, noted that 90 percent of the West Bank's exports go to Israel, and expressed concern about the recent GOI decision to forbid meat and dairy products from the West Bank from entering East Jerusalem (reftel) in violation of the Paris Protocol and the Customs Union governing rules. ¶5. (SBU) The IMF noted that the PA has made good progress in reducing electricity subsidies (net lending),particularly in the municipality of Hebron. According to IMF calculations, collection for electricity payments increased markedly, from 9% in 2007, to 34% in 2008, to 64% thus far in 2009, as a result of aggressive efforts by the PA, including the use of pre-paid meters. ¶6. (SBU) The IMF said in order to meet recurrent expenditures, USD 900m in external financing is needed for the second half of 2009. That figure includes the PA's planned USD 300m in emergency spending in Gaza. The IMF noted that a survey of donors' likely contributions comes up short of the target. Without additional assistance, the IMF JERUSALEM 00001142 002 OF 002 said, "enormous arrears will be accumulated." WALLES