DEMARCHE REQUEST: IMMEDIATE BUDGET SUPPORT FOR

UNCLAS STATE 008722 SENSITIVE SIPDIS 2ND C O R R E C T E D COPY (CAPTION AND PORTION PARAS MARKING) E.O. 12958: N/A TAGS: EFIN PGOV PTER PHUM KPAL KWBG SUBJECT: DEMARCHE REQUEST: IMMEDIATE BUDGET SUPPORT FOR THE PALESTINIAN AUTHORITY REF: A. STATE 732 ¶B. KUWAIT 22 ¶1. (U) This is an action request: see paragraph 3. ¶2. (SBU) Summary: Special Envoy George Mitchell's trip to the region demonstrates the start of the Obama Administration's active U.S. engagement in the Middle East peace process. Empowering the Palestinian Authority (PA) is a focus of Mitchell's trip and critical to the success of the Israeli-Palestinian track of peace negotiations. The PA needs urgent support from foreign donors to make February salary payments to its employees in both the West Bank and Gaza. Not making these payments and accruing arrears would constitute a major political blow to Prime Minister Salam Fayyad and the improved reputation he has built for the PA. In addition, the PA's immediate budget crunch limits its ability to take the lead in addressing the humanitarian and recovery needs in Gaza. Last year, the U.S. made the largest single contribution to stabilize the PA budget. European Union (EU) countries played a critical role, but contributions from regional countries were also important; Saudi Arabia, the United Arab Emirates (UAE), Kuwait and Algeria provided significant budget support to the PA in 2008 to help it avoid an end-of-year budget crisis and pay off outstanding arrears and private debt. This cable follows a previous demarche to Arab and European capitals (ref A) and requests that posts again emphasize the PA's urgent need for budget assistance. End summary. ¶3. (U) Action Request: The Department requests that action addressees' demarche relevant government officials to achieve the objectives listed below and report responses via front channel cable. Objectives - - - - - - - - - ¶4. (U) Objectives include: -- Stress that Middle East Special Envoy George Mitchell intends to intensify US engagement in the peace process and has indicated that support for the PA is an essential component of bringing stability and peace to the region. Arab assistance to help empower the PA is critical to the success of this renewed effort. -- Urge addressees to provide immediate budget assistance to the PA so that it can make salary payments on February 4, including to its 77,000 employees in Gaza. -- Emphasize that budget support will help the PA take the lead on meeting the humanitarian and recovery needs in Gaza, including through direct transfers of assistance to families who lost their homes in the recent fighting. -- Express appreciation for 2008 contributions from Saudi Arabia, the UAE, Kuwait, and Algeria, which helped the PA avoid a budget crunch at the end of 2008. Stress that the PA needs a similar influx of Arab financial support now. -- Stress that addressing the PA's immediate budget needs cannot be postponed until the international pledging conferences that are being planned in Cairo and Europe. Reporting Deadline - - - - - - - - - - - - - - - - ¶5. (U) Please report all host country responses to NEA/IPA Desk Officer Andrew Lentz no later than February 4. Background - - - - - - - - - - ¶6. (SBU) According to the IMF, the PA's revenues in 2009 will fall short of expenditures by $1.1 billion, or approximately $95 million per month, affecting the PA's ability to pay public sector salaries and provide essential public services. PA Prime Minister Salam Fayyad has reported that he presently does not have sufficient donor funding in the pipeline to meet this shortfall and that his government will not be able to make this month's salary payments on February 4 - including to 77,000 employees in Gaza - without assuming short term debt. The costs associated with the recent fighting in Gaza are not included in the IMF's estimate and place a further strain on the PA's budget. The PA has indicated that it may be forced to postpone future salary payments in order to fund its strategy for assistance to Gaza in the absence of alternative financing. Accumulating salary arrears now would erode confidence in the government. ¶7. (SBU) Saudi Arabia ($210 million),the UAE ($133 million), Kuwait ($80 million) and Algeria ($62.5 million) provided the majority of Arab state budget support to the PA from Arab states in 2008. Saudi Arabia already has pledged $1 billion to assist with Gaza reconstruction, although it has not specified the mechanism through which this assistance will be delivered or if any of this money will be in the form of budget support to the PA. Kuwait responded to a previous demarche about the PA budget (ref B),indicating that it plans to provide the PA with an additional $80 million in 2009 but did not specify its timetable. Algeria and the UAE have not indicated if or when they intend to commit budget support to the PA this year. Support from these four Arab states would help send a strong signal of support for the PA and help solidify its lead role in addressing the humanitarian situation in Gaza. ¶8. (U) Special Envoy Mitchell is traveling in the region to demonstrate active US engagement in the peace process and refocus international diplomatic efforts. Through his meetings in Israel, Egypt, Saudi Arabia, Europe and with the Palestinian Authority he is seeking to advance several near-term objectives: consolidating the ceasefire in Gaza; increasing and sustaining humanitarian assistance into Gaza and enhancing assistance to the West Bank; and bolstering Arab moderates. Central to achieving these objectives is empowering the PA. The US provided the PA with $150 million in direct budget assistance in October 2008 as part of our fiscal year 2009 contribution. The contribution brought our calendar year contribution to the PA's budget to $300 million, the largest level of assistance to the PA from a single nation. Point of Contact - - - - - - - - - - - - - ¶9. (U) The point of contact is NEA/IPA Desk Officer Andrew Lentz, ext. 7-2268, email lentzan@state.gov. CLINTON