Cablegate: Imf Outlines Pa's Fiscal Gap Ahead of Paris

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OO RUEHROV
DE RUEHJM #2399/01 3241231
ZNR UUUUU ZZH
O 201231Z NOV 07
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9719
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY
RUEHFR/AMEMBASSY PARIS PRIORITY 3682
RUEHBS/USEU BRUSSELS PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 JERUSALEM 002399

SIPDIS

SENSITIVE
SIPDIS

NEA FOR FRONT OFFICE; NEA/IPA FOR
GOLDBERGER/SHAMPAINE/BELGRADE; EEB FOR DIBBLE; NSC FOR
ABRAMS/WATERS; TREASURY FOR HARRIS/LOEFFLER/NUGENT/HIRSON;
BRUSSELS FOR LERNER; PARIS FOR JORDAN/DWYER

E.O. 12958: N/A
TAGS: EAID ECON KWBG EINV
SUBJECT: IMF OUTLINES PA'S FISCAL GAP AHEAD OF PARIS
DONORS' CONFERENCE

1. (SBU) Summary. The IMF reports that the Palestinian
Authority (PA) will need international assistance totaling
more than $5.8 billion over the next three years to pay
salaries, meet recurrent operational expenditures and make
basic investments in health, education, security and
infrastructure. The IMF team produced an overall fiscal
framework for the PA based on an expectation of relaxed
restrictions on access and movement for the Palestinian
private sector and economic growth that slightly outpaces
population growth. The projection assumes the situation in
Gaza to remain unchanged and for the PA to undertake
significant, but modest, reforms in addressing the civil
service wage bill and utility subsidies. End Summary.

PA Needs More than $1.8 Billion in 2008
---------------------------------------

2. (SBU) An IMF Mission, after two weeks in Ramallah and
Jerusalem helping the Palestinian Authority (PA) prepare its
fiscal and macroeconomic framework for the Paris Donors'
Conference, debriefed the donor community on Thursday,
November 15. According to estimates developed in
consultation with the PA Ministries of Finance and Planning,
the PA will need $1.85 billion in external budget support in
2008, $1.95 billion in 2009, and $1.99 billion in 2010. The
majority of this external assistance will be needed as budget
support to meet recurrent expenditures (mostly the wage
bill). The percentage of external assistance devoted to
recurrent expenditures is expected to decline slightly over
the three year period, as the PA freezes its wage bill and
devotes more of its budget to capital expenditures. At these
levels of external budget support, the IMF expects the PA to
pay off approximately 60% of its $900 million in accumulated
arrears.

"Reasonable" Access and Movement Required,
While PA Holds the Line on Salaries
-----------------------------------------

3. (SBU) Mission Director Oussama Kanaan said that the team
based its economic projections on a baseline scenario that
assumed "reasonable" improvements in access and movement for
the Palestinian private sector and "modest growth" in the
economy over the medium term (3.5% in 2008, 5% in 2009 and 6%
in 2010), slightly outpacing population growth. The scenario
also envisions increasing donor support through the
Palestinian Ministry of Finance (MoF) and "more aggressive"
funding of public sector investment. Kanaan said, however,
that IMF projections expected the maintenance of the status
quo in Gaza.

4. (SBU) The IMF figures expect the PA, as part of its reform
efforts, to essentially freeze the number and wages of public
sector employees (with only an increase of 3,000 employees a
year anticipated to meet increasing demands on the health and
education sectors). In addition, the government will work
with municipalities in the West Bank to address the problem
of increasingly expensive utility subsidies. However,
according the reform plan laid out by the IMF, by 2010 the
wage bill will still equal more than 20% of GDP and utility
subsidies will total more than $550 million annually.

5. (SBU) Overall, Kanaan said, the PA's three-year reform and
development program "will not be viable" if restrictions on
access and movement in the West Bank are not relaxed and the
donor community does not meet the needs of the PA's recurrent
budget and public investment costs. He thought the PA's
development and investment projections (averaging
approximately $500 million/year) were reasonable, though the
IMF did not have as much clarity in the area of security
sector reform as they did in other sectors.

6. (SBU) The IMF team said that it had considered two other
scenarios in addition to the "baseline" described above. In
their "optimistic scenario", rapid improvements in movement
and access allow the private sector to drive economic growth
and unemployment declines to 15% by 2010. This improving
economic situation is buttressed by substantial, flexible and
timely donor support. In their "pessimistic scenario",
restrictions on access and movement are not relaxed and
donors do not provide adequate or timely support to the PA
budget. As a result, the PA increasingly accumulates

JERUSALEM 00002399 002 OF 002

arrears, per capita GDP declines and the official
unemployment increases to 28% by 2010, "with the real
unemployment rate much higher." When donor representatives
asked the IMF team to detail further the ramifications of
this latter scenario, the IMF responded that they did not
spend much time on it, "because the political and security
consequences are so significant."

7. (U) The full IMF tables are available on ConGen
Jerusalem's unclassified intelink site at:
http://www.intelink.gov/communities/state/pal econ
WALLES

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