Palestinian government seen needing $1.6 bln a year

By Adam Entous
Reuters
Tuesday, September 18, 2007; 12:22 AM



JERUSALEM (Reuters) - The Western-backed government of Palestinian President Mahmoud Abbas estimates that it will need at least $1.62 billion in donor assistance per year to close its soaring budget gap, the World Bank said.

In a bleak report to donors obtained by Reuters on Tuesday, the international lending agency said local revenues were not enough to sustain the government's wage bill and that there was little chance of improvement as long as Israel refused to lift restrictions on Palestinian travel and trade.

The World Bank said 94 percent of the foreign aid needed by the Palestinian Authority would be used to cover recurring expenditures, including salaries, utility bills and social payments, leaving little money to fund development.

The World Bank report was prepared for next week's meeting of the Ad Hoc Liaison Committee, a major Palestinian donors' group. The meeting, which will lay the groundwork for a donors' conference in December, is part of a U.S.-led effort to bolster Abbas and the government he appointed in the occupied West Bank following Hamas's takeover of the Gaza Strip in June.

Western diplomats said Abbas's government, led by Prime Minister Salam Fayyad, would be able to cover this year's budget gap by using foreign aid and frozen tax revenues recently released by Israel.

But the diplomats questioned Fayyad's ability to cover a fiscal hole estimated at $1.6 billion per year in the absence of a political breakthrough that will revive the Palestinian economy and bring in larger amounts of Arab aid.

"It's huge and we don't see how the Palestinian Authority can finance it," said one diplomat who monitors its funds.

PEACE CONFERENCE

U.S. President George W. Bush is expected to convene a conference on Palestinian statehood in November but it is unclear what will result from it.

In April, Fayyad estimated that the Palestinian Authority would need at least $1.3 billion in international aid in 2007. Fayyad was serving at the time as finance minister of a unity government between Hamas and Abbas's secular Fatah faction.

While foreign aid and tax funds started flowing again to the Palestinian Authority after the unity government ended in June, Western sanctions remain in place against the Islamist Hamas in the Gaza Strip, where economic conditions have deteriorated.

Despite some initial steps by Fayyad to rein in spending, the World Bank said the government wage bill would exceed total revenues even after taking into account Israel's decision in June to hand over frozen tax funds.

Fayyad's government has sought to reduce payroll by not paying workers hired by the Hamas-led government, but the World Bank said the prime minister "may find it politically challenging to reduce the work force any further."

It is unclear how Fayyad will be able to cover the government's energy and infrastructure needs long-term.

In Hamas-controlled Gaza, the economic crisis is more acute. Gaza's main border crossings have been closed to all but humanitarian supplies, prompting the suspension of up to 90 percent of the coastal territory's industrial operations.

"The impacts of these closures will become more difficult to reverse," said the World Bank. It estimated that unemployment could reach the unprecedented level of 44 percent.

Despite the embargo, Israeli, Palestinian and Western officials say Hamas has been able to bring in tenq of millions of dollars to fund its military and social programs.

© 2007 Reuters