VZCZCXYZ0007
PP RUEHWEB

DE RUEHC #1091 1901649
ZNR UUUUU ZZH
P 091626Z JUL 09
FM SECSTATE WASHDC
TO RUEHKO/AMEMBASSY TOKYO PRIORITY 0000
INFO RUEHTV/AMEMBASSY TEL AVIV PRIORITY 0000
RUEHJM/AMCONSUL JERUSALEM PRIORITY 0000

UNCLAS STATE 071091 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EAID KPAL PGOV PREL WBG JA IS
SUBJECT: DEMARCHE REQUEST: JAPANESE BUDGET SUPPORT FOR THE 
PALESTINIAN AUTHORITY 
 
¶1. (U) This is an action request.  Please see para 3. 
 
¶2. (SBU)Summary: The Palestinian Authority (PA) under 
President Mahmoud Abbas and Prime Minister Salam Fayyad is 
facing a severe financial crisis that threatens its financial 
and political stability.  According to the PA and 
International Monetary Fund (IMF) projections, the PA needs a 
minimum of $300 million in donor financing for the remainder 
of 2009 to meet recurrent costs.  Japan is one of the only 
major economies that has not provided significant budget 
assistance to the PA since donors committed to support the PA 
government at the Paris Donors' Conference in December 2007. 
To date, Japan has provided only $10 million in budget 
support in 2008 in the form of a grant for petroleum and 
equipment purchases.  Japan's embassy in Washington has 
informed us, however, that Japan's Ministry of Foreign 
Affairs has indicated support for increased budget assistance 
this year, but that the Ministry of Finance may hold ultimate 
authority over the decision within the Japanese government. 
The USG is engaging donors at the highest levels to mobilize 
support for the PA in order to advance our peace efforts, and 
has identified Japan as a focus in that effort.  The 
Department requests that Post engage the appropriate 
interlocutors in the Ministries of Foreign Affairs and 
Finance, as well as other relevant government bodies, to (1) 
determine whether and when Japan will provide budget support 
to the PA and (2) press the urgency of budget assistance to 
help create the conditions that will support successful peace 
negotiations.  End summary. 
 
¶3. (U) Action request: The Department requests that the 
Embassy use its discretion in identifying the appropriate 
interlocutors to achieve the objectives in paragraph 4. 
 
¶4. (SBU) Objectives: 
 
-- Inquire about Japan's position on providing budget support 
to the PA this year, particularly finding out who in the 
Japanese system is responsible for making a final decision. 
 
-- Emphasize that budget support is essential to meet the 
PA's expected 2009 budget shortfall of $300 million and to 
stabilize the PA financially and politically. 
 
-- Stress that the US is committed to moving the parties as 
quickly as possible to meaningful negotiations to realize a 
two-state solution to the Israeli-Palestinian conflict.  By 
ensuring the PA's financial and political stability, donors 
help create the conditions for successful negotiations. 
 
-- Relay that the U.S. expects to transfer $200 million in 
budget support to the PA before the end of the month.  This 
builds on $300 million in budgetary assistance that the US 
transferred to the PA through the PA's Single Treasury 
Account in CY2008. 
 
¶5. (U) Post is requested to report initial responses as soon 
as possible.  Please contact Andrew Lentz, Desk Officer, 
Palestinian Economic Affairs, at lentzan@state.gov, 
202-647-2268, if you have any questions or requests for 
additional background. 
 
Background 
- - - - - - 
 
¶6. (U) Despite billions pledged at the March 2 donors' 
conference in Sharm al-Sheikh, direct budget support for the 
PA in 2009 has failed to meet the PA's need and, as a result, 
the PA faces acute deficits that threaten its political and 
financial stability.  Absent increased flows of donor 
assistance through the end of the year, the PA risks 
defaulting on its obligations.  The PA already is unable to 
fund government operations, putting at risk reform efforts, 
security operations and institutional development.  Primarily 
because of decreased donor assistance this year compared to 
last, the PA has accumulated more than $700 million in bank 
debt to help cover its deficits, accrued millions of dollars 
in arrears to private sector providers, and, in one instance, 
postponed the payment of civil servant salaries by two weeks. 
 Congress appropriated $200 million in direct budget support 
for the PA under the 2009 Supplemental, which we hope to 
transfer to the PA before the end of July.  The 
Administration has requested an additional $150 million in 
further budget support from Congress for the PA in FY2010. 
The U.S. is engaging major donor nations at the highest 
levels to commit to help the PA solve its recurrent financial 
crises with timely and regular flows of assistance.  The PA 
is doing its part by instituting reforms and budget austerity 
that has steadily decreased its deficit.  In his address to 
the Ad Hoc Liaison Committee meeting on June 8 in Oslo, U.S. 
Special Envoy for Middle East Peace Senator George Mitchell 
made it clear that we cannot advance our goals for economic 
growth or a stable and lasting peace between two states if we 
allow the governing institutions of that future Palestinian 
state to fail. 
 
¶7. (U) Japan pledged $150 million over three years at the 
2007 Paris Donors' Conference, against which it provided 
approximately $13 million in 2008 in the form of development 
assistance.  None of Japan's pledged assistance was earmarked 
as budget support.  At the Sharm al-Sheikh donors' conference 
on March 2, 2009, Japan announced $200 million in support for 
Gaza recovery and continued development of the West Bank, 
which included the balance of its Paris commitment, 
assistance tied up in ongoing and stalled projects, and $60 
million in humanitarian aid.  Japanese officials have 
explained that regulations and laws governing Japan's foreign 
assistance make budget support difficult to provide.  Japan, 
therefore, has prioritized assistance for development 
projects like the Corridor for Peace and Security (Jericho 
Agricultural Park).  There is precedence for Japan to give 
budget support, however.  In addition to its 2008 development 
assistance, Japan provided $9.5 million to cover PA petroleum 
and equipment purchases from private sector providers.  Under 
the terms of the support, Japan did not provide any funds to 
the PA - the PA submitted purchase requests and Japan's 
development agency conducted the transactions. 
 
¶8. (SBU) The Department has made a concerted effort recently 
to press Japan to provide budget support to the PA.  In May, 
Deputy Secretary Steinberg raised this issue with Japan's 
Special Envoy to the Middle East Ambassador Arima.  The US 
delegation to the AHLC further emphasized the PA's need for 
budget support during its bilateral meeting with the Japanese 
delegation, led by Ministry of Foreign Affairs (MOFA) Deputy 
Director General Kigawa, on June 7.  Officials in Japan's 
Washington embassy have indicated that Tokyo now is seriously 
considering budgetary assistance to the PA this year.  While 
the MOFA is leading the discussion of support for the PA with 
Japan's foreign partners, officials at the Japanese embassy 
suggest that the Ministry of Finance may have ultimate 
authority over the decision within the Japanese government. 
The Department relies on Embassy Tokyo's understanding of the 
Japanese governmental system to identify the most appropriate 
interlocutors on this issue. 
 
¶9. (SBU) Japanese officials in Washington have indicated that 
Tokyo is interested in information on how the U.S. processed 
its two cash transfers of $150 million in CY2008.  For each 
transfer, USAID enters into a cash transfer agreement with 
the PA to ensure the accountability and proper use of our 
budget support.  According to the terms of the transfer 
agreement, U.S. budget assistance can be used only for 
purposes explicitly authorized by the USG.  In the past two 
cash transfers, U.S. budget support was tied to specific PA 
expenditures and required to be used to pay down commercial 
debt and/or commodity purchases.   Vetting of specific 
private sector creditors is a prerequisite to disbursement of 
funds.  USG budgetary assistance is placed in a separate 
sub-account of the PA Ministry of Finance's Single Treasury 
Account (STA), and are not co-mingled with other funds. 
USAID has direct access to the bank statements detailing any 
deposits to and withdrawals from the separate sub-account and 
the PA must provide USAID with a written description of the 
proposed uses of the funds prior to any transaction.  (Note: 
Upon request of the Japanese embassy in Washington, NEA/IPA 
provided the embassy with a non-paper on the PA's financial 
accountability and transparency and a paper with the specific 
bank routing information that the U.S. utilizes to conduct 
its transfer. The Department's Japan desk will forward the 
non-paper via separate email.  End note.) 
CLINTON