SCENESETTER FOR DEPUTY SECRETARY LEW'S VIST TO

C O N F I D E N T I A L JERUSALEM 000224 SENSITIVE SIPDIS E.O. 12958: DECL: 02/04/2020 TAGS: PREL EAID PGOV KWBG IS SUBJECT: SCENESETTER FOR DEPUTY SECRETARY LEW'S VIST TO JERUSALEM AND RAMALLAH Classified By: Consul General Daniel Rubinstein for reasons 1.4 (b) and (d). ¶1. (SBU) Mr. Secretary: Your meetings will give you a chance to see USG assistance efforts first hand; hear from Prime Minister Salam Fayyad on progress in implementing his state-building plan; and learn from private sector and key economic policy makers what is needed to create the conditions for the private sector-driven, sustainable economic growth essential to decreasing the PA's dependency on donor assistance. Political Update -------------- ¶2. (C) Your visit will occur shortly before President Mahmoud Abbas (Abu Mazen) returns from a ten-day trip to Asia. His deliberations on whether and how to return to negotiations with the Israelis continue. Fatah and PLO leaders remain deeply skeptical of the prospects of success for negotiations with the current Israeli government, given ongoing settlement activity and Israeli actions in Jerusalem, as well as GOI statements about the future of Jerusalem and the Jordan Valley. For that reason, many are focused on next steps if "proximity talks" fail. The Palestinian side's ability to engage on political issues in a systematic and constructive manner has been constrained by uncertainty regarding the position of key Arab states, as well as unhelpful internal Palestinian dynamics set off by Abu Mazen's November declaration that he will not run for President in a future election. ¶3. (C) While election and succession politics are not as prominent as they were after last fall's Fatah General Congress or Abu Mazen's statement on his personal future in early November, these issues could easily return to the top of the agenda. National elections were postponed indefinitely in December as a result of Hamas's unwillingness to allow them to go forward in Gaza absent an intra-Palestinian reconciliation deal. With no deal imminent, senior Fatah and Palestinian Authority (PA) leaders are now focused on holding municipal, syndicate, and other local elections, in part to test Fatah's readiness for national elections. A PA cabinet decision on municipal elections is widely expected by the end of February; senior PA and Fatah leaders appear to be converging on a July 2010 date, though many details remain to be worked out. Reconciliation with Hamas does not appear to be imminent. 
However, given the significant public support in Gaza and the West Bank for reconciliation, political leaders on both sides feel pressure to demonstrate a willingness to proceed. The daily political struggle with Hamas (which Abu Mazen believes he is winning) consumes significant time and political energy in Ramallah. Supporting Fayyad's State-Building Plan -------------- ¶4. (SBU) PM Fayyad is now focused on operationalizing his two-year state-building plan, released in August 2009. He has successfully delivered consistent economic growth in the West Bank since June 2007, due to significant inflows of donor funding and revenue previously withheld by the GOI, as well as improvements in access and movement within the West Bank. Fayyad has delivered a grassroots development campaign. But despite Abu Mazen's support for Fayyad, Fatah remains effectively outside the Government, denying Fayyad significant popular support from Fatah's political base. ¶5. (C) With the GOI, Fayyad's seeks progress on security and economic issues in order to demonstrate to the Palestinian public that the occupation of the West Bank is receding, and to provide space for the economy to grow. PA security commanders claim they are ready to assume greater responsibilities in Palestinian population centers in the West Bank, where their operations are limited at night and by IDF restrictions and incursions. The PA has conducted a consistent security campaign against Hamas in the West Bank, including actions that have resulted in the loss of life among their security forces, and has maintained security coordination with the GOI. On the economic front, Fayyad needs the GOI to permit greater access to land and resources outside urban centers ("Area C" - the Oslo Accord designation that left 60% of the West Bank under the control of the GOI), and continue the easing of movement and access both internally and across the Green Line for people and goods. ¶6. (SBU) Fayyad's first economic priority with donors remains securing sufficient external budget support to cover his fiscal deficit. Although the PA has provided rough estimates of its expected 2010 shortfall, it has not yet produced a final budget, in part because Fayyad wants to ensure that he can reasonably expect donors to cover the gap. U.S. efforts to press European donors to front-load assistance have been well received by the PA and translated into a more aggressive disbursement by the EU of their 2010 funds. Fayyad remains deeply appreciative of the fact that the U.S. delivered half of its 2010 support at a critical time at the end of 2009. Western donors, however, will not be able to cover Fayyad's 2010 gap, and so the spotlight will soon shift again to Arab states, with the requisite need for a strong U.S. role. ¶7. (SBU) The PA has taken meaningful and aggressive steps to control spending and increase revenue, particularly in the area of energy subsidies. However, long-term economic growth and the ability to close what is a significant structural fiscal deficit will require substantial private sector growth. The PA needs to do more to improve the investment environment in the West Bank (the World Bank dropped its "Doing Business" ranking of the West Bank to 138 this year). In addition, private sector growth hinges on decreasing Israeli restrictions on imports essential to manufacturing and facilitating Palestinian trade through the Israeli-controlled crossing points. Your conversation with key West Bank businessmen and economic policy makers will give you a sense of what needs to happen on both sides to create a the conditions for privates sector growth. Minister of National Economy Hasan Abu-Libdeh has focused on improving the investment climate, and is trying to use the vehicle of WTO observer status to leverage the adoption of key economic reforms. U.S. Assistance -------------- ¶8. (SBU) The USG remains the single largest bilateral donor to the PA. This assistance has been -- and remains -- an essential factor in the marked improvements in stability, security, and economic growth in the West Bank, and it is explicitly tied to Fayyad's state-building plan. Our assistance is coordinated with the PA at all levels, including with the Prime Minister and his cabinet. There is also an intensive local donor coordination mechanism, led by the Norwegians, that provides a means of engaging with the PA on a sector-specific basis alongside other donors. The PA recently released a list of priority projects for 2010, many of which the U.S. already actively supports. In addition, the PA is in the middle of preparing a three-year development plan, which should be ready by summer 2010. PM Fayyad has agreed to a periodic bilateral review of U.S. assistance against the goals of his state-building plan, in order to establish benchmarks and identify gaps that we -- or other donors -- need to fill. ¶9. (SBU) In addition to direct budget support, the increase in U.S. development expenditures over the past three years has provided significant capacity to the PA in key areas, including health, education, and justice. USAID also runs a capacity building project inside key PA ministries and agencies to explicitly support the PM's institutional priorities. USAID infrastructure programs constitute a significant percentage of the ongoing public capital investment in the West Bank, while programs in support of the private sector include efforts to expand Palestinian markets and improve movement and access. These programs have been instrumental in improving West Bank access to external markets, including through the GOI-controlled crossing points and at Allenby Bridge. ¶10. (SBU) OPIC is also delivering significant support to the Palestinian private sector. The ongoing loan-guarantee program is an important tool to increase the availability of capital to Palestinian enterprises. OPIC's participation in the soon-to-launch Affordable Mortgage and Loan (AMAL) Corporation will expand the availability of low cost mortgages to broader sectors of the Palestinian people. As part of follow-up to President Obama's Cairo speech, OPIC is also considering funding West Bank-focused venture capital funds for small and medium enterprises that would provide essential capital for start-ups and expanding companies. ¶11. (SBU) Security assistance through the vehicle of INL and the U.S. Security Coordinator (USSC) has directly supported the PA's tangible improvements in West Bank security. Through FY 2010, USD 392 million in INL funds have been allocated to provide non-lethal security assistance and training programs overseen by the U.S. Security Coordinator (LTG Keith Dayton). To date, USSC has partnered with a Jordanian police facility to train four battalions (approximately 2,200 men) of gendarmerie-like National Security Forces (NSF),and one 400-man battalion of Presidential Guards. A fifth NSF battalion is in training now. U.S. assistance has funded the construction of a training center and a garrison (more are under construction), as well as a Strategic Planning Department within the Ministry of Interior to build the Ministry's capacity. INL is also implementing programs to support rule of law capacity building in the justice and corrections sectors. ¶12. (SBU) The U.S. is the largest bilateral donor to the UN Relief and Works Agency for Palestine Refugees (UNRWA), contributing nearly USD 268 million to the agency's operations in FY2009. UNRWA struggles against chronic underfunding and aging infrastructure, but delivers critical health, education, and relief services to roughly one-third of the West Bank population and two-thirds of the Gaza population. USG support for UNRWA's emergency programs in the West Bank and Gaza, equal to USD 119 million in 2009, allowed the agency to provide food assistance and cash-for-work to over one million vulnerable refugees. You will meet with UNRWA's new Commissioner General Filippo Grandi and UNRWA Director for Gaza John Ging during your visit to Jalazone refugee camp outside Ramallah. Gaza -------------- ¶13. (C) The gap between the West Bank and Gaza continues to grow. Hamas remains focused on continuing to consolidate economic and security control, chipping away at its international isolation, and imposing social and cultural change in accordance with Islamic values. Trade between the West Bank and Gaza is now virtually nonexistent (with negative consequences for each). The traditional business community in Gaza, exporters of agriculture, textiles, furniture, and other finished products, has completely collapsed. Unemployment in Gaza is estimated to be close to 40 percent. ¶14. (SBU) In the past six months, interference and harassment from Hamas has become a major impediment to donors, including USAID, and NGOs carrying out needed humanitarian relief activities. Hamas has detained and harassed NGO staff, forced volunteers to sign documents pledging to no longer work with certain NGOs, and has seized USAID-funded commodities, which were only released after UN interventions. Hamas is also increasingly demanding "coordination" from international NGOs in aid distribution. RUBINSTEIN