PM FAYYAD AND AMBASSADOR RICE DISCUSS

C O N F I D E N T I A L SECTION 01 OF 02 JERUSALEM 001986 C O R R E C T E D C O P Y (PARA 1,9 CLASSIFICATION) SIPDIS NEA FOR FRONT OFFICE, IPA, AND SEMEP; NSC FOR SHAPIRO/KUMAR, JCS FOR SELVA E.O. 12958: DECL: 10/22/2034 TAGS: PREL ECON PGOV KWBG KPAL IS SUBJECT: PM FAYYAD AND AMBASSADOR RICE DISCUSS STATEBUILDING AND THE PALESTINIAN ECONOMY JERUSALEM 00001986 001.2 OF 002 Classified By: Consul General Daniel Rubinstein for reason 1.4 (d). ¶1. (C) Summary. In an October 22 meeting with USUN Ambassador Susan Rice, PM Fayyad said the Palestinian economy is growing at an impressive pace, but can go only so far under occupation. Increasing private sector investment is only possible, Fayyad noted, if Israeli restrictions on Palestinian economic activity are eased. These restrictions go beyond those on movement and access, and include constraints on Palestinian economic activity in Area C (the 59 percent of the West Bank currently under full GOI control),the permit regime, and other impediments. Only then, he said, can private sector economic activity begin to sustain what until now has been a donor and government stimulus-led recovery. Fayyad updated Ambassador Rice on his two year state-building plan, which he termed "positive unilateralism." End Summary. ¶2. (U) USUN Ambassador Susan Rice met PM Salam Fayyad at the Consul General's residence on October 22. The Consul General, NSC Senior Director Dan Shapiro, USUN Speechwriter Bass, USUN Media Advisor Kornblau, USUN political officer Schedlbauer, and Polchief also attended. Fayyad Upbeat on the Economy -------------- ¶3. (C) PM Fayyad began the meeting with an overview of economic developments. After his government first formed in June 2007, Fayyad said, he spent most of his time justifying his political strategy of institution-building as the path to a Palestinian state. Two years later, the West Bank economy is growing at a seven percent annual rate, and an "emerging sense of self-empowerment" is spreading. Fayyad contrasted the situation with Gaza, where economic conditions are increasingly "miserable." While he stressed that the growing disparity between the West Bank and Gaza is not a goal of his policy, developments over the past two years have produced a "West Bank First" result. Comment: In the summer of 2007, after Hamas took control of the Gaza strip, non-USG commentators coined the moniker "West Bank First" to describe a strategy of strengthening Palestinian moderates through economic and institutional development in the West Bank, to draw a distinction with the impact of Hamas rule in Gaza. Neither the USG nor the Palestinians officially used this terminology. End comment. ¶4. (C) Fayyad cautioned that the current drivers of economic growth are unsustainable. Even though these factors produced impressive results in a small economy, new drivers must be found. For the past two years, he said, fiscal stimulus and foreign assistance (totaling USD 1.7 billion in 2008 alone) were the primary contributors to the increase in Palestinian GDP. By regularizing PA salary and supplier payments, it was possible to "manufacture" a recovery in the small Palestinian economy. "Our reliance on external assistance is neither desirable nor sustainable," Fayyad said, adding, "something else must now (drive growth). Only private sector investment can do this." Limits to Growth -------------- ¶5. (C) Increasing private sector investment is only possible, Fayyad noted, if Israeli restrictions on Palestinian economic activity are eased. "It is the only way to change (investor) attitudes... and to give a sense of irreversibility to the process," he added. Fayyad acknowledged that the GOI had taken some limited steps in this area during the second half of 2009, and predicted the results would only be known once economic data for that period is released. "Removing (obstacles to movement) is important to create a sense of freedom," Fayyad said, but it is not enough. The GOI must go further and address constraints on Palestinian economic activity in Area C (the 59 percent of the West Bank currently under full GOI control),the permit regime, and other obstacles. ¶6. (C) Fayyad said that continued settlement activity creates frictions between Palestinians and Israelis, undermining his efforts to shape a positive attitude of empowerment. He said that on the eve of a recent visit to the Jalazon refugee camp near Ramallah, IDF guards had killed a young boy. "The Israelis cannot continue to be trigger-happy against non-violent resistance in support of our desire for self-determination," Fayyad said. On another recent trip, JERUSALEM 00001986 002.2 OF 002 Fayyad said he visited a man who refused to leave his house in the middle of a settlement. When the separation barrier was constructed, it left him surrounded on three sides. Fayyad said he actively encourages nonviolent resistance. "I know many (of the demonstrators) by name - including some who are Israelis," he added. Fayyad Describes Two-Year Statebuilding Plan -------------- ¶7. (C) Ambassador Rice said that she had been impressed with PM Fayyad's two-year statebuilding plan, particularly its emphasis on democratic values and human rights. Fayyad said the plan is an attempt to "make the case for our freedom" by building the institutions of Palestine even before the state comes into existence. The target is for PA institutions to function according to international best practices, not merely the standards of other Arab governments in the region. He noted that the PA's public sector financial management systems are "superior to any other in the region, and on par with Israel's own." He was appreciative of the transfer of USD 200 million in cash to the PA as an important vote of confidence. ¶8. (C) Now, Fayyad said, his focus is on "quick improvements" in areas such as justice sector reform, security, infrastructure (including wastewater management),education, and health. He noted that a recently launched student loan program has already expanded to 257,000 students and USD 132 million in total lending. The PA is in the "final stages" of health insurance reform -- a debate which had been complicated by "people watching the U.S. health care debate on C-SPAN and Crossfire," he noted jokingly. ¶9. (U) Ambassador Rice cleared this cable. RUBINSTEIN