Disturbing Times for Palestinian Reform

By Brad Nielson

November 28, 2005

The donor community has placed a lot of political and financial capital on Salim Fayyad, the internationally respected Finance Minister of the Palestinian Authority. Mr Fayyad is seen as one of the few Palestinian personae, actively pursuing reform. As the World Bank and others have repeatedly stressed, fiscal and judicial changes are an essential pre-requisite for donor aid to be effective.

It emerges that Mr. Fayyad recently quit his position in the Palestinian cabinet. The official reason is that he intends to run in the forthcoming Parliamentary elections, which may be held in January. However, various news agencies contend that "his resignation was in protest against Ramallah's refusal to implement concrete fiscal reforms".

As Reuters noted:

In a quarterly report released earlier this week, the World Bank criticised the Palestinian Authority sharply for not following advice by Fayyad to restrain spending . . . . The report also said the Palestinian Authority had created a serious fiscal crisis for itself and that spending on salaries was "essentially out of control".

The issue of the Palestinian Authority payroll has clearly reached a crisis point, which needs to be tackled immediately.

A critical 2003 report from the IMF had already drawn attention to the highly inflated salary budget. At the time, it was calculated at $673m and considered as being well above international norms. The figure has now passed the $1 billion mark, an increase of over 50% in two years.

The August 2004 Funding for Peace Coalition report confirmed that until March of that year, a significant portion of the payroll was paid in cash. Evidence was presented, including specific names, pointing to financial diversions to pay Al-Aksa Brigades terrorists. Donors have continued to ignore these damning facts.

On November 24, 2005, the MENL news agency reported the concerns of the Palestinian Legislative Council Economic Committee chairman Azmi Shueibi that 25% of the 60,000 PA security personnel could not be traced. This is more than double the number of fictitious employees that were scrubbed from the PA payroll in March 2004, when the cash payroll was finally eliminated.

Shueibi's complaints of fiscal negligence were substantiated by the PA's own daily newspaper, "Al-Hayat Al-Jadida". It observed that Fayyad resigned because Interior Minister Nasser Yousef, who has responsibility for the security services, employed an additional 2,500 youths without fiscal permission. It must be recalled that 25% of PA expenditure is funded by overseas taxpayers.

The news of Fayyad's turmoil is not the only disappointment for those who are trying to coax the PA towards democracy. In Gaza, the PA has failed to take control of lands evacuated by the Israelis in August 2005.

The offices of Mr. Frieh Abu Medin, chairman of the PA's Land Authority, have detailed how armed gangs, including members of the security services, had fenced off several plots of land belonging to former Israeli settlements. In several cases, the infrastructure for water and electricity has been destroyed, resulting in damage of approximately $12 million.

In a related development, the "Jerusalem Post" newspaper in Israel reports that: -

19 Palestinian public organisations in the Gaza Strip . called for the establishment of an independent body that would be entrusted with taking control of the lands of the former settlements. They also urged the PA to launch an immediate and thorough investigation into allegations of land theft and the destruction of the greenhouses and infrastructure.

As the Christmas period approaches, numerous political and religious delegations are expected to visit the region for an update of the situation on the ground. These guests and potential donors must be left to wonder at the high level of risk now involved in investing in Palestinian projects, particularly when one of the main pillars of hope for clean government is leaving his post.

What follows is the Reuters report of Fayyad's resignation.

Palestinian finance minister submits resignation

Sat Nov 19, 2005 By Wafa Amr

RAMALLAH, West Bank (Reuters) - Palestinian Finance Minister Salam Fayyad, who has battled parliament to force it to carry out fiscal belt tightening measures, has submitted his resignation ahead of legislative elections due in January.

Fayyad, a former International Monetary Fund official, said on Saturday he wanted to step down because he was considering running in the polls, and turned in his resignation several days ago as required under Palestinian law.

Other officials who asked not to be named said his resignation was in protest against the government's refusal to implement concrete fiscal reforms.

"Our election law requires that cabinet members considering running for parliament should resign two months before the election date, and I am one of those," Fayyad told Reuters. He did not say whether he had made a final decision on running.

The aid-dependent Palestinian Authority is under pressure to carry out fiscal reforms, and Fayyad's resignation followed threats by foreign donors in October to suspend direct budget support unless ballooning public wage costs were reversed.

There was no immediate word on whether Prime Minister Ahmed Qurie would accept the resignation, which comes as Palestinians are under increasing scrutiny over how they run the Gaza Strip -- seen as a proving ground for statehood following Israel's withdrawal after 38 years of occupation.

"His resignation is going to affect the Palestinian Authority very negatively," political analyst Ali Jarbawi said. "He was trusted by the international community, and this trust will disappear when he goes."

The World Bank has said boosting the Palestinian economy is crucial to peacemaking. Donors have given an average of $25 million a month this year in budget support for the Palestinian Authority, according to figures from an international envoy.


The Palestinian economy has withered since the start of an uprising against Israel in 2000, hampered by violence as well as mismanagement and corruption that discouraged donors. Fayyad has said a suspension of donor aid could threaten economic revival.

In a quarterly report released earlier this week, the World Bank criticised the Palestinian Authority sharply for not following advice by Fayyad to restrain spending. Earlier reforms by Fayyad had earned him international praise.

The report also said the Palestinian Authority had created a serious fiscal crisis for itself and that spending on salaries was "essentially out of control".

"In spite of the efforts of the finance minister to maintain discipline, the PLC (parliament) and cabinet have shown little appreciation of the need for restraint," the report said.

"If the Palestinian Authority is not exercising fiscal restraint, it becomes very difficult for some donors to justify continued budget support."

Despite opposition from Fayyad, the Palestinian parliament voted to increase wages earlier this year following strikes and protests by civil servants. Fayyad had met with lawmakers repeatedly to warn that such a move would complicate reforms.

He had called in July for policies to restrain public spending and told parliament the overall deficit was expected to rise to $900 million in 2005 from $660 million a year earlier.

To keep the deficit under control, he proposed the government operate with a $2.2 billion budget, reducing its military and civil wage bill through a programme under which government workers must retire at age 60.

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