FAYYAD LAYS OUT 2010 BUDGET AND PROJECT PRIORITIES

1. (SBU) Summary. Palestinian Authority (PA) Prime Minister
Salam Fayyad told donors that the PA is likely to require USD
1.2 billion in external budget support in 2010, and urged
early disbursement. He presented the PA's priority project
list for 2010, which includes over USD 5 billion in projects,
stressing that many of the projects were already underway
and/or funded by donors, and that the projects would be many
years in duration. He noted that a French proposal to host a
donors' conference needed further discussion, but that such a
conference would be most useful if held towards the end of
the year. End Summary.

Fayyad Stresses Budget Support


--------------------------





2. (SBU) At PA Prime Minister Fayyad's request, the Local
Development Forum (LDF; a coordination body for donors in the
West Bank and Gaza) met on January 14 in Ramallah. Fayyad
used the meeting to present the PA's list of priority
projects for 2010 and to outline the PA's upcoming 2010
budget. Speaking to about 50 local donor representatives,
Fayyad noted that he had just spoken to Norwegian Foreign
Minister Stoere, who had provided a positive report on
January 12 donor meetings in Brussels. Fayyad stressed the
importance of donors front-loading their 2010 budget support
so as to secure predictable, consistent financing for the
first six months "so that the PA can better manage its cash
flow." (IMF Resident Representative Oussama Kanaan, later in
the LDF meeting, echoed the need for this sort of
predictability.)



3. (SBU) Fayyad expressed appreciation for donor support in
2009 and the commitments made so far in 2010. He commented
positively on the fact that the USG had brought forward 2010
budget support to meet urgent needs at the end of 2009. He
urged all donors to look at their bilateral assistance
programs and encouraged "acceleration" wherever possible.

2010 Budget to Continue Fiscal Tightening


--------------------------





4. (C) The Prime Minister presented a brief outline of the
PA's 2010 budget, which, he noted, remains under discussion
in the Ministry of Finance. Fayyad said the PA did not want
to finalize the budget until it is confident it has secured
the necessary sources of financing. He told donors to expect
a lower requirement for external budget support in 2010 of
about USD 1.2 billion, down from USD 1.45 billion in 2009,
based on tight controls on wage and recurrent expenditures
and a reduction of net lending (estimated at USD 300 million
for 2010, most of which is electricity subsidies). The PA
expects net revenue in 2010 to grow 18 percent over 2009 (to
$1.9 billion) and total expenditures to grow by only 3
percent (to USD 3.1 billion). Comment: This was the first
most donors have heard of the 2010 projections, although the
PM's Economic Advisor has provided us a more detailed written
version in confidence. Post has emailed the document to
NEA/IPA, SEMEP, and Treasury. End Comment.



5. (SBU) Fayyad said the 2010 budget would be another step
towards self-sustainability, noting that the 2010 wage bill
would consume a smaller percentage of domestic revenue and
make up a smaller share of GDP. Saying, "We do not plan
perpetual dependence on foreign aid," he stressed that the
PA's focus in 2010 would be on boosting domestic revenue,
including income tax and VAT collection, while continuing to
reduce net lending. He said that any additional donor
financing made available to the PA in 2010 would be used to
address a rolling stock of arrears (estimated at USD 100
million) or to pay down the PA's commercial debt.

The PA's 2010 Priority Projects


--------------------------





6. (SBU) "Don't be shocked," Minister of Planning Ali Jarbawi
said as he introduced the PA's "Priority Interventions for
2010." The document contains USD 5.5 billion worth of
projects that the PA considers a priority for 2010 and
beyond. Jarbawi emphasized that the projects are to be
implemented over a period of many years. Many of them are
already on-going, he said, and others have been fully or
partially funded, or pledged against by willing donors.
Jarbawi and Fayyad both noted that the PA had attempted to
integrate its state building plan into the last year of the

JERUSALEM 00000114 002 OF 002


existing reform and development plan, so as to give donors a
priority list of projects. The full text of the PA's 2010
priority projects document is available on ConGen Jerusalem's
unclassified intelink site
(http://www.intelink.gov/communities/state/pa lecon).



7. (SBU) Jarbawi and Fayyad also predicted that actual
development expenditure in 2010 will total approximately USD
670 million, in accordance with the three-year plan approved
by donors in December 2007. Jarbawi noted that the Ministry
of Planning is already preparing the next three-year reform
and development plan, which will integrate the PA's
development and reform priorities with the overall fiscal
framework. Many, if not all, of the projects in the 2010
document that are not completed this year will be carried
over into the next plan, to cover 2011-2013. The Norwegian
chair of the LDF noted that he would convene informal
consultations among donors and the PA to discuss how best to
use the local aid coordination mechanism to support
implementation of the 2010 priority projects, as well as to
contribute to the development of the next three-year plan.



8. (SBU) In addition to supporting Fayyad's call for
predictable budget support, the IMF Resident Representative
said that the PA budget represented a significant shift in
expenditures from wages and salaries to non-wage
expenditures, which are more conducive to economic growth.
He added that the 2010 forecast real rate of growth for the
West Bank and Gaza (of seven percent) would require "real"
private sector growth, driven by increased exports.

Paris Ready (Eager?) to Host


--------------------------





9. (SBU) The French representative noted that Paris remains
willing to host a donors' conference to secure pledges for
the next three-year planning cycle. Fayyad responded that,
"while the need for another conference is evident," the
timing and content will need to be discussed, and it would
logically occur after the production of the PA's 2011-2013
planning document. "A full-fledged conference is likely to
be most useful towards the end of the year," he said. He
also noted that the donor community does not need "new
mechanisms or structures." He called the 2010 document an
"instrument" for donors and the PA to use to ensure maximum
progress on the ground.

RUBINSTEIN