VZCZCXRO3854
OO RUEHROV
DE RUEHJM #0511/01 0851329
ZNR UUUUU ZZH
O 251329Z MAR 08
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC IMMEDIATE 0956
INFO RUEHXK/ARAB ISRAELI COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHDC PRIORITY

UNCLAS SECTION 01 OF 02 JERUSALEM 000511 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NEA/IPA FOR GOLDBERGER/SHAMPAINE/SACHAR; EEB FOR 
DEMARCELLUS; NSC FOR PASCUAL; TREASURY FOR CONNOLLY 
DEPT PLEASE PASS TO USAID FOR MCCLOUD/BORODIN 
 
E.O. 12958: N/A 
TAGS: EFIN EAID ECON KWBG IS KPAL
SUBJECT: PA HOLDING THE BUDGET LINE, BUT DECLINE IN DOLLAR 
INCREASES FISCAL GAP 
 
REF: JERUSALEM 169 
 
¶1. (SBU) Summary.  The IMF reports that the PA's total 
financing needs for 2008 are now forecast at more than USD 
2.1 billion (up from 1.8 billion in December).  The IMF notes 
that donor contributions to date (including USG assistance) 
have been sufficient to sustain PA operations, but at current 
exchange rates, if all announced and pledged 2008 budget 
support is delivered, the PA will still face a gap of USD 570 
million this year.  The team's findings will form the basis 
for the IMF's report to the AHLC meeting in May.  End Summary. 
 
PA Holds Down Costs, But Fiscal Gap Grows 
----------------------------------------- 
 
¶2. (SBU) An IMF team reported its findings to local donor 
representatives during the week of March 17.  Mission Head 
Oussama Kanaan told donors that the PA has maintained "strict 
control" on payroll costs, including by refusing a general 
salary increase and by maintaining the payroll levels at 
totals agreed in December.  In addition, collection rates for 
utility payments have increased dramatically and are expected 
to reach 80% by the end of the year.  These actions are 
forecast to slash the PA's net lending costs by one-third 
(from NIS 2.2 billion in 2007 to NIS 1.44 billion in 2008). 
In all, Fayyad's actions have cut the PA's expected operating 
deficit by NIS 200 million in 2008. 
 
¶3. (SBU) Despite these measures, however, the fall of the 
dollar and a more aggressive PA effort to pay its debts has 
increased the dollar-denominated fiscal gap in 2008.  The 
three-year framework presented to donors in December was 
calculated at an exchange rate of 4.1 NIS/USD.  The IMF and 
PA have redone the numbers based on a 3.6 NIS/USD rate, 
although the dollar has fallen as low as 3.4 NIS/USD 
recently.  Although the PA's revenues and expenditures are 
almost entirely in NIS, a number of significant donors, 
including the U.S. and the GCC states, contribute in dollars. 
 The IMF now calculates that the dollar-denominated budget 
deficit - for recurrent expenditures only - in 2008 will 
total USD 1.63 billion (USD 135 million/month).  Combined 
with the public infrastructure investments included in the 
PRDP, the total external financing needed in 2008 is more 
than USD 2.1 billion. 
 
Donors Stepping Up 
But a Large Gap Looms 
--------------------- 
 
¶4. (SBU) Kanaan and IMF Country Representative Toujas-Bernate 
noted that March contributions - including the U.S. cash 
transfer of USD 150 million - are sufficient to pay salaries 
and other recurrent expenses through May.  The World Bank 
will also disburse approximately USD 150 million from its 
trust fund between now and May, including USD 40 million of 
its own funds. 
 
¶5. (SBU) Looking ahead, Toujas-Bernate said that if all 
pledged budget support is delivered at current exchange 
rates, the PA will receive approximately NIS 3.9 billion in 
2008 (out of a need for nearly NIS 5.9 billion), leaving a 
gap of NIS two billion (USD 570 million) for which there are 
no donors currently identified. 
 
Access and Movement 
------------------- 
 
¶6. (SBU) The IMF said GOI restrictions on access and movement 
had not been relaxed as had been forecast when the PA put 
together its three-year budget.  Some restrictions had, in 
fact, been tightened.  The IMF has not yet changed the 
framework's basic assumptions, admitting that it was too 
early to understand fully the impact on economic growth.  The 
IMF has, however, downgraded its forecast growth in the 
Palestinian economy from 3.5 to 3 percent in 2008. 
 
¶7. (SBU) The PM's economic adviser, Karim Nashishibi, said 
that on the issue of economic growth, he was as concerned 
about a possible slowdown in the Israeli economy, the PA's 
largest export market.  Nashishibi agreed with the IMF that 
it was too early to dramatically adjust growth forecasts 
based on access and movement restrictions, as "inside some 
West Bank cities growth has picked up more than expected." 
 
¶8. (U) The IMF briefing on the PA's Public Financial 
 
JERUSALEM 00000511  002 OF 002 
 
 
Management structures, as well as the updated fiscal 
framework tables (in USD and NIS) can be found on ConGen 
Jerusalem's unclassified intelink site at: 
http://www.intelink.gov/communities/state/pal econ. 
WALLES