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DE RUEHJM #0329/01 0541623
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P 231623Z FEB 10
FM AMCONSUL JERUSALEM
TO RUEHC/SECSTATE WASHDC PRIORITY 7652
INFO RUEHTV/AMEMBASSY TEL AVIV 5209
RUEHAM/AMEMBASSY AMMAN 8816
RUEHEG/AMEMBASSY CAIRO 0047
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

C O N F I D E N T I A L JERUSALEM 000329 
 
SIPDIS 
 
DEPT FOR D - JBUTTE-DAHL; NEA FOR IPA AND SEMEP; NSC FOR 
KUMAR 
 
E.O. 12958: DECL: 02/22/2020 
TAGS: PREL ECON KWBG KPAL PINS EAID IS
SUBJECT: DEPUTY SECRETARY LEW'S MEETING WITH PALESTINIAN 
AUTHORITY PRIME MINISTER FAYYAD 
 
REF: JERUSALEM 185 
 
Classified By: CG Daniel Rubinstein, reasons 1.4 (b) and (d) 
 
¶1. (C) Summary.  In a February 21 meeting with Deputy 
Secretary Jacob J. Lew, Palestinian Authority (PA) Prime 
Minister Salam Fayyad stressed the importance of Israel 
ending Area A incursions and creating conditions for the 
Palestinian private sector to generate sustainable economic 
growth.  He said that the PA's fiscal retrenchment efforts -- 
both on expenditures and revenue -- were paying off, and that 
he expected the deficit to drop 5% in 2010.  He also 
expressed appreciation for the delivery of budget support and 
the alignment of U.S. assistance to fit the PA's focus on 
smaller projects that deliver immediate results.  End summary. 
 
Alignment of U.S. Assistance to PA Plans, Budget Support 
--------------------------------------------- --------- 
 
¶2. (C)  In a meeting with Deputy Secretary Lew on February 21 
in Ramallah, Fayyad expressed appreciation for U.S. budget 
support and the realignment of U.S. assistance to fit the 
PA's shift in strategy to smaller development projects that 
can be implemented more quickly.  He said that this strategy 
allowed the PA to focus on marginalized areas and show 
responsiveness to the needs of local communities.  While most 
of the projects cost less than USD 200,000, they contributed 
to economic growth and shored up political support for the 
PA, he said. 
 
Ending Area A Incursions 
------------------------ 
 
¶3. (C) Fayyad described how an improved security environment 
in the West Bank, a seeming impossibility in 2007, had become 
reality.  He noted improvements in personnel and leadership 
had an immediate positive impact, evidence of the importance 
of institution building.  Fayyad stressed the importance of 
making security sector reform a local effort, both on the 
ground and in the public's perception.  He said that 
U.S.-supported train-and-equip efforts for the PA security 
forces had evolved and become more "administrative" in nature. 
 
¶4. (C) Fayyad expressed concern about ongoing Area A 
incursions by the Israeli Defense Forces (IDF).  These 
undermined the PA's security forces and gave the impression 
that the PA is "subcontracting for the Israelis."  He said 
the IDF had entered Ramallah twice on February 20, but made 
no attempts to arrest anyone or otherwise give any reason for 
the incursions.  Fayyad asserted that security coordination 
between the GOI and PA had never been better, a fact, he 
said, that even the Israelis acknowledged.  He urged that 
threats be countered through GOI-PA coordination, rather than 
by a physical Israeli presence in Area A.  The PA's security 
forces have demonstrated capacity, and now is the time to 
extend their presence to all Palestinian population centers 
in the West Bank, he said.  Not only would this be a 
political deliverable, it also would be "invisible to main 
street Tel Aviv," according to Fayyad.  He drew a contrast 
between the visible (and therefore presumably more difficult) 
removal of checkpoints and the ending of Area A incursions, 
that he said would be nearly invisible to the Israeli public. 
 The Deputy Secretary noted that Israelis recognized the 
progress made on security, and understood that economic 
conditions were tied to security improvements. 
 
Improved Governance at the Local Level 
-------------------------------------- 
 
¶5. (C) Responding to the Deputy Secretary's query about the 
durability of the institutional reforms that had been 
implemented, Fayyad said that the PA's focus on capacity 
building and institution building over the last year had paid 
off.  He noted that a year after Hamas's win in the January 
2006 elections, "the system had ground to a halt."  But the 
systems put in place over the last three years, and the civil 
service base, would make the progress hard to undo.  As an 
example, Fayyad pointed to the increased accountability at 
the local government level.  During a visit to 13 villages 
near Jenin on February 18, he was struck by the local 
municipalities' responsiveness to their residents and their 
achievements in more efficient management structures and 
finances. 
 
Private Sector Growth, not Fiscal Stimulus 
 
------------------------------------------ 
 
¶6. (C) Fayyad said that even before the GOI began to ease 
movement and access restrictions in 2009, the West Bank 
economy was showing signs of growth, with the positive trend 
going back to 2007.  He said that while double digit growth 
was possible, real sustainable growth had to start with the 
private sector, not fiscal stimulus.  The private sector 
needed access to markets in Israel and beyond, and the 
removal of physical restrictions (back-to-back requirements 
at the crossings, checkpoints in the West Bank) to grow, 
Fayyad said.  The most damaging part of this web of 
restrictions, he said, are the functional restrictions on a 
wide range of inputs.  He described the restrictions as 
capricious, informal, and poorly understood.  As a result, 
companies had difficulty planning -- some were forced to keep 
70 days of inventory (much higher than the norm), a huge 
tie-up of capital that had a negative impact on growth. 
Despite these restrictions, some companies had been able to 
adapt and even flourish, he noted, pointing to Palestinian 
pharmaceutical companies now exporting to Europe. 
 
¶7. (C) Part of this growth, he said, was due to the PA's 
repayment of its arrears and financial obligations incurred 
during the Hamas and National Unity Government rule, 
front-loaded by the release of revenues by the GOI.  He noted 
that the regularization of payments instilled the private 
sector with confidence and opened the door to growth.  He 
also noted that any economy injected with this large a fiscal 
stimulus and open to imports would demonstrate short-term 
growth. 
 
Curbing Expenditures and Increasing Revenues 
-------------------------------------------- 
 
¶8. (C) Fayyad said that the PA's fiscal retrenchment is 
paying off.  In 2009, the PA required USD 1.34 billion in 
external budget support, and in 2010 he expected a 5% 
reduction in that figure.  He said the reopening of Gaza 
could deliver serious revenue and have an immediate positive 
impact.  Prior to the closure, 30% of the PA's total revenue 
was collected in Gaza.  Now, Hamas is collecting that money 
instead of the PA, he said. 
 
¶9. (C) Fayyad said the PA was making progress on ending the 
"irrational subsidies" that amounted to about $500 million 
annually, primarily in the form of utility payments deducted 
by the GOI from the PA's revenue transfer.  Previously, 
Fayyad said, the municipalities knew the central government 
would be held accountable for the utility bills, so the few 
payments collected were diverted to other uses.  Now, 
particularly in the Central West Bank where electricity was 
supplied by the Jerusalem District Electric Company (JDECO), 
service was being cut off when municipalities didn't pay, 
according to Fayyad, and the improved security meant that 
JDECO could carry out the cutoff. 
 
¶10. (C) Similar measures were being undertaken in Gaza to 
increase collection of electricity payments.  The Gaza power 
plant hearkened from an old era when "business and government 
were one and the same," according to Fayyad.  The PA paid NIS 
40-45 million/month to the GOI for 120MW (not a low cost 
option, he said), but only received 50-60MW from the power 
plant.  Fayyad estimated that the Gaza Electricity 
Distribution Company (GEDCO) collected a mere 10-14% of money 
owed, but following the termination of the EU's fuel 
subsidies and the PA's gradual cutback in subsidies beginning 
in January (reftel), Fayyad said GEDCO would be forced to 
start handing over money it collected.  GEDCO did have 
resources, Fayyad asserted, noting the company had paid NIS 5 
million in January and another NIS 4 million in February for 
fuel.  Fayyad estimated that the cutback in fuel subsidies in 
Gaza would save the PA USD 60 million in 2010, or 1% of GDP. 
 
Bottom Up and Top Down in Parallel 
---------------------------------- 
 
¶11. (C) Fayyad stressed that bottom-up institution building 
alone could not end the occupation; the political process was 
essential.  He said that this process must begin, because the 
Palestinians stood to lose the most without it.  He noted 
that his statebuilding efforts had stirred up debate within 
Israel and resulted in three different views: the first group 
was reminded of their own "bottom-up" statebuilding 
experience; the second was apprehensive; and the third viewed 
 
his efforts with concern and outright hostility.  He said he 
had been very transparent about his goals and that he 
intended to create positive facts on the ground.  If, two 
years on, the political process hasn't ended the occupation, 
he said, these facts would help create pressure for an end. 
 
RUBINSTEIN