DEMARCHE REQUEST: JAPANESE BUDGET SUPPORT FOR THE

UNCLAS STATE 071091 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAID KPAL PGOV PREL WBG JA IS SUBJECT: DEMARCHE REQUEST: JAPANESE BUDGET SUPPORT FOR THE PALESTINIAN AUTHORITY ¶1. (U) This is an action request. Please see para 3. ¶2. (SBU)Summary: The Palestinian Authority (PA) under President Mahmoud Abbas and Prime Minister Salam Fayyad is facing a severe financial crisis that threatens its financial and political stability. According to the PA and International Monetary Fund (IMF) projections, the PA needs a minimum of $300 million in donor financing for the remainder of 2009 to meet recurrent costs. Japan is one of the only major economies that has not provided significant budget assistance to the PA since donors committed to support the PA government at the Paris Donors' Conference in December 2007. To date, Japan has provided only $10 million in budget support in 2008 in the form of a grant for petroleum and equipment purchases. Japan's embassy in Washington has informed us, however, that Japan's Ministry of Foreign Affairs has indicated support for increased budget assistance this year, but that the Ministry of Finance may hold ultimate authority over the decision within the Japanese government. The USG is engaging donors at the highest levels to mobilize support for the PA in order to advance our peace efforts, and has identified Japan as a focus in that effort. The Department requests that Post engage the appropriate interlocutors in the Ministries of Foreign Affairs and Finance, as well as other relevant government bodies, to (1) determine whether and when Japan will provide budget support to the PA and (2) press the urgency of budget assistance to help create the conditions that will support successful peace negotiations. End summary. ¶3. (U) Action request: The Department requests that the Embassy use its discretion in identifying the appropriate interlocutors to achieve the objectives in paragraph 4. ¶4. (SBU) Objectives: -- Inquire about Japan's position on providing budget support to the PA this year, particularly finding out who in the Japanese system is responsible for making a final decision. -- Emphasize that budget support is essential to meet the PA's expected 2009 budget shortfall of $300 million and to stabilize the PA financially and politically. -- Stress that the US is committed to moving the parties as quickly as possible to meaningful negotiations to realize a two-state solution to the Israeli-Palestinian conflict. By ensuring the PA's financial and political stability, donors help create the conditions for successful negotiations. -- Relay that the U.S. expects to transfer $200 million in budget support to the PA before the end of the month. This builds on $300 million in budgetary assistance that the US transferred to the PA through the PA's Single Treasury Account in CY2008. ¶5. (U) Post is requested to report initial responses as soon as possible. Please contact Andrew Lentz, Desk Officer, Palestinian Economic Affairs, at lentzan@state.gov, 202-647-2268, if you have any questions or requests for additional background. Background - - - - - - ¶6. (U) Despite billions pledged at the March 2 donors' conference in Sharm al-Sheikh, direct budget support for the PA in 2009 has failed to meet the PA's need and, as a result, the PA faces acute deficits that threaten its political and financial stability. Absent increased flows of donor assistance through the end of the year, the PA risks defaulting on its obligations. The PA already is unable to fund government operations, putting at risk reform efforts, security operations and institutional development. Primarily because of decreased donor assistance this year compared to last, the PA has accumulated more than $700 million in bank debt to help cover its deficits, accrued millions of dollars in arrears to private sector providers, and, in one instance, postponed the payment of civil servant salaries by two weeks. Congress appropriated $200 million in direct budget support for the PA under the 2009 Supplemental, which we hope to transfer to the PA before the end of July. The Administration has requested an additional $150 million in further budget support from Congress for the PA in FY2010. The U.S. is engaging major donor nations at the highest levels to commit to help the PA solve its recurrent financial crises with timely and regular flows of assistance. The PA is doing its part by instituting reforms and budget austerity that has steadily decreased its deficit. In his address to the Ad Hoc Liaison Committee meeting on June 8 in Oslo, U.S. Special Envoy for Middle East Peace Senator George Mitchell made it clear that we cannot advance our goals for economic growth or a stable and lasting peace between two states if we allow the governing institutions of that future Palestinian state to fail. ¶7. (U) Japan pledged $150 million over three years at the 2007 Paris Donors' Conference, against which it provided approximately $13 million in 2008 in the form of development assistance. None of Japan's pledged assistance was earmarked as budget support. At the Sharm al-Sheikh donors' conference on March 2, 2009, Japan announced $200 million in support for Gaza recovery and continued development of the West Bank, which included the balance of its Paris commitment, assistance tied up in ongoing and stalled projects, and $60 million in humanitarian aid. Japanese officials have explained that regulations and laws governing Japan's foreign assistance make budget support difficult to provide. Japan, therefore, has prioritized assistance for development projects like the Corridor for Peace and Security (Jericho Agricultural Park). There is precedence for Japan to give budget support, however. In addition to its 2008 development assistance, Japan provided $9.5 million to cover PA petroleum and equipment purchases from private sector providers. Under the terms of the support, Japan did not provide any funds to the PA - the PA submitted purchase requests and Japan's development agency conducted the transactions. ¶8. (SBU) The Department has made a concerted effort recently to press Japan to provide budget support to the PA. In May, Deputy Secretary Steinberg raised this issue with Japan's Special Envoy to the Middle East Ambassador Arima. The US delegation to the AHLC further emphasized the PA's need for budget support during its bilateral meeting with the Japanese delegation, led by Ministry of Foreign Affairs (MOFA) Deputy Director General Kigawa, on June 7. Officials in Japan's Washington embassy have indicated that Tokyo now is seriously considering budgetary assistance to the PA this year. While the MOFA is leading the discussion of support for the PA with Japan's foreign partners, officials at the Japanese embassy suggest that the Ministry of Finance may have ultimate authority over the decision within the Japanese government. The Department relies on Embassy Tokyo's understanding of the Japanese governmental system to identify the most appropriate interlocutors on this issue. ¶9. (SBU) Japanese officials in Washington have indicated that Tokyo is interested in information on how the U.S. processed its two cash transfers of $150 million in CY2008. For each transfer, USAID enters into a cash transfer agreement with the PA to ensure the accountability and proper use of our budget support. According to the terms of the transfer agreement, U.S. budget assistance can be used only for purposes explicitly authorized by the USG. In the past two cash transfers, U.S. budget support was tied to specific PA expenditures and required to be used to pay down commercial debt and/or commodity purchases. Vetting of specific private sector creditors is a prerequisite to disbursement of funds. USG budgetary assistance is placed in a separate sub-account of the PA Ministry of Finance's Single Treasury Account (STA),and are not co-mingled with other funds. USAID has direct access to the bank statements detailing any deposits to and withdrawals from the separate sub-account and the PA must provide USAID with a written description of the proposed uses of the funds prior to any transaction. (Note: Upon request of the Japanese embassy in Washington, NEA/IPA provided the embassy with a non-paper on the PA's financial accountability and transparency and a paper with the specific bank routing information that the U.S. utilizes to conduct its transfer. The Department's Japan desk will forward the non-paper via separate email. End note.) CLINTON