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