Despite promises of support, Fayyad facing budget woes
By Adam Entous and Mohammed Assadi
JERUSALEM, Oct 29 (Reuters) - An impending drop in revenues and a lack of direct budget support for Palestinian Prime Minister Salam Fayyad's government is raising the prospect of a large cash shortage starting in January, Western officials said.
The fiscal problem has been all but eclipsed by preparations for a U.S.-sponsored conference on Palestinian statehood, set to convene in as little as a month, and a focus by donors on high-profile development projects rather than the budget.
Officials said the cash crunch will begin within two months when Israel finishes handing over tax revenues it had withheld for 17 months while Hamas controlled the Palestinian Authority.
Fayyad will then have to rely on donors to meet the government's running costs.
"The financial situation is worrying," Palestinian Information Minister Riyad al-Malki acknowledged on Monday.
Economy Minister Kamal Hassouneh said the budget gap was large but that he expected donations to come through in time.
Apart from relatively small sums pledged by countries like Kuwait, Saudi Arabia and even Iraq, large budget commitments have been slow to materialise for Fayyad, appointed in June after Hamas seized the Gaza Strip, Western officials said.
While the United States, Fayyad's most vocal supporter, asked Congress last week to approve $350 million in aid, including $150 million in direct support, none of the money can go to salaries, the biggest budget expense, U.S. officials said.
The European Union, which runs its own programme to pay a portion of the Palestinian Authority's wage bill, wants to see Fayyad's budget priorities before committing more funds.
"It's too early to make up our mind at this very stage," the EU's visiting commissioner for external relations, Benita Ferrero-Waldner, told Reuters on Monday.
DONORS' CONFERENCE
A major donors' conference is planned for December but Western diplomats said it is focused on development assistance and a proposed World Bank trust fund to channel budget support to the government may not be up and running for months.
Without an infusion of budget support, Fayyad could face shortfalls of $90 million a month starting in January, Western diplomats said. A World Bank report said the government would need at least $1.62 billion a year in donor assistance.
Donors say they are reluctant to give money before Fayyad takes steps to rein in spending by cutting the Palestinian Authority's payroll. "He can't expect a blank cheque," said one senior diplomat involved in the donor conference preparations.
The Authority's wage bill averaged about $110 million per month as of June, exceeding total revenues. That compares to a wage bill of less than $80 million a month in 2005, according to International Monetary Fund estimates.
Fayyad, a former IMF economist, is pushing ahead with plans to trim the payroll by shedding up to 30,000 security jobs, but may put the independent technocrat on a collision course with the old guard of President Mahmoud Abbas's Fatah faction.
So far, Fayyad has been able to cover the Palestinian Authority's running costs largely by using tax revenues Israel had collected and then froze while Hamas was in government.
Israel plans to pay out the last of the frozen tax arrears -- totalling 900 million Israeli shekels ($224 million) -- in early November and early December, according to Miri Eisin, spokeswoman for Israeli Prime Minister Ehud Olmert.
Part of the problem for Fayyad is that many donors prefer to fund high-profile development projects. Diplomats say Middle East envoy Tony Blair has focused on such projects.
"Projects don't cut it," a senior Western diplomat said.
Another Western diplomat added: "If Fayyad's not able to pay full salaries in January and February, then what? Will people say he's not doing much better than Hamas?"
Hamas has been paying its own workforce in Gaza since June with funds from Islamist allies including Iran, Israel says. (Additional reporting by Arshad Mohammed in Jerusalem)
