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Cablegate: Pa Fiscal Update: Western Donors Carrying The

VZCZCXRO0452
PP RUEHROV
DE RUEHJM #0725/01 1200858
ZNR UUUUU ZZH
P 290858Z APR 08
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC PRIORITY 1313
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY
RUEHLO/AMEMBASSY LONDON PRIORITY 4076
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 JERUSALEM 000725

SIPDIS

SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR
GOLDBERGER/SHAMPAINE/SACHAR; NSC FOR ABRAMS/PASCUAL;
TREASURY FOR CONNOLLY
LONDON FOR TSOU
DEPT PLEASE PASS TO USAID FOR ANE/MEA:MCCLOUD/BORODIN

E.O. 12958: N/A
TAGS: EFIN EAID ECON KWBG IS KPAL
SUBJECT: PA FISCAL UPDATE: WESTERN DONORS CARRYING THE
LOAD, BUT PROBLEMS AHEAD

REF: A. JERUSALEM 511
B. JERUSALEM 657
C. JERUSALEM 169
D. JERUSALEM 586

1. (SBU) Summary. Though donors have provided more budget
support than expected to date in 2008, absent new pledges the
PA faces a significant financing shortfall later this year.
The IMF expects the PA will fall USD 400 million short of its
2008 budget requirements, a gap that will increase to closer
to USD 600 million given the PA's repayment of salary
arrears. World Bank and PA officials are urging donors to
encourage the GOI to make available wireless spectrum
necessary for the PA's second mobile telephone operator, as a
means of reducing the financial burden on donors in 2008.
End Summary.

PA gets cash quicker than expected...
-------------------------------------

2. (SBU) In briefings for donors in advance of the Ad Hoc
Liaison Committee (AHLC) meeting, the IMF, World Bank and
Palestinian Authority (PA) Ministry of Finance report that
the PA has received more external budget support than
expected (in excess of half a billion USD) through the first
four months of 2008. This total includes USD 240 million
from the EC; USD 150 million from the U.S.; USD 90 million
from the UAE; USD 60 million from Saudi Arabia; and USD 62
million from Algeria. In addition, the World Bank Trust Fund
disbursed USD 83 million to the PA in April.

... but financing gap continues to grow
---------------------------------------

3. (SBU) However, these early transfers reflect a
'front-loading' of donors' support for the PA. According to
IMF calculations, the total amount of budget support pledged
to the PA in 2008 falls short of the PA's needs by USD 400
million. The USD-denominated gap has increased since Paris
largely due to the decline in the dollar (ref a).

4. (SBU) This financing gap is further widened as the PA is
paying back arrears faster than planned in the 2008 budget.
Through April, the PA has paid USD 146 million in arrears to
civil servants and USD 75 million in commercial debt in 2008.
The PA has approximately USD 250 million in civil service
arrears to be repaid, which Prime Minister Salam Fayyad has
committed to repay by October 1, 2008. Fayyad had
established this repayment policy prior to the deal with
labor unions to end their strikes against the PA (ref b). PA
officials stress to donors that the more aggressive repayment
schedule is a political necessity and budget neutral over the
three-year budget framework.

5. (SBU) Because the PA's 2008 budget allocates USD 274
million for arrears repayment, and the PA is likely to pay
closer to USD 500 million in arrears this year, the actual
financing gap for 2008 - if no further donors step up - is
expected to be on the order of USD 600 million.

PA undertakes prudent reforms
-----------------------------

6. (SBU) The IMF notes that this significant financing gap
exists despite the fact the PA is "implementing prudent
fiscal policies and reforms in the context of an ambitious
budget for 2008." The reforms include the aggressive effort
to cut costs associated with utilities payments (ref c). As
part of the first disbursement from its Trust Fund, the World
Bank has agreed with the IMF and the PA on a "matrix" of
policy reforms, included as an annex to its AHLC report.

7. (SBU) Fayyad's economic adviser, Karim Nashashibi, told
donors that utility collections are running ahead of
expectations despite a court order to suspend the
implementation of the PA's utility certificate scheme. He
and Ministry of Finance Director General Mazen Jadallah asked
donors to encourage the GOI to be more supportive of efforts
to have PA municipalities pay their bills directly to the
Israel Electric Company (IEC). According to Jadallah and
Nashashibi, efforts to get IEC to present invoices to
municipalities directly have been rebuffed. The PA plans to
raise this issue at an upcoming meeting of the Joint Economic

JERUSALEM 00000725 002 OF 002


Council.

Release of wireless spectrum
would ease the burden (slightly)
--------------------------------

8. (SBU) In discussing the looming fiscal gap with donors,
World Bank and PA officials have noted that GOI allocation of
the frequencies required for the second PA mobile telephone
operator (ref d) would result in an immediate transfer of USD
100 million to PA accounts, and significant ongoing revenue
stream. The World Bank and the PA have urged donors to raise
this issue with the GOI as a means of reducing the expected
financing gap - and the burden on donors - in 2008.
(Comment: We understand discussions between the GOI and PA
continue and that Quartet Representative Blair has written
the GOI to encourage transfer of the necessary spectrum prior
to the private sector investment conference in Bethlehem in
May. End Comment)

9. (U) The IMF and World Bank reports prepared for the AHLC
can be found on ConGen Jerusalem's unclassified intelink site
at: http://www.intelink.gov/communities/state/pal econ.
WALLES

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