Middle East Envoy Warns of Palestinian Authority Collapse

02/27/2006

By Scott Wilson
Washington Post Foreign Service
Monday, February 27, 2006

JERUSALEM, Feb. 27—A special Middle East envoy, James D. Wolfensohn, has warned international donors that the Palestinian Authority could collapse within two weeks unless fresh funding can be found to pay salaries, clear overdue energy bills and sustain government services financed largely by foreign aid.

In a Feb. 25 letter addressed to senior diplomats from Russia, the United States, the European Union and the United Nations, Wolfensohn said Israel’s decision to withhold the sales tax and customs fees it collects for the Palestinian Authority has pushed the caretaker government to the brink of insolvency.

Palestinian leader Mahmoud Abbas’s secular Fatah movement currently runs the government. But that will change in a few weeks when Hamas, designated a terrorist organization by the United States and the European Union, forms the next cabinet following its victory in parliamentary elections.

Wolfensohn, a former World Bank president, said the Palestinian Authority needs $60 million to $80 million by the first week of March to pay 150,000 civil service employees and trainees, nearly half of them in the security forces. The European Commission, the executive body of the EU, agreed Monday to provide $144 million to the Palestinian Authority, designating most of it for social programs and energy bills. About $20 million could be used for salaries.

“If we do not want to see rising tension leading to violence and chaos—particularly just before the Israeli election—we will have to develop urgently a convincing strategy addressing the PA’s financial and developmental needs, not only in the short-term of the next few weeks but also in a longer time frame,” Wolfensohn wrote.

Wolfensohn addressed his letter to senior diplomats of the Quartet, as the group of Middle East peace interlocutors is known, before he briefs them later this week on the Palestinian Authority’s fiscal health. A Quartet member provided a copy to The Washington Post, but Wolfensohn’s office declined to comment on its contents.

In the letter, Wolfensohn proposes a donor meeting in mid-March to find ways of financing the Palestinian government without violating anti-terrorism laws that prohibit funds from going to Hamas, which refuses to recognize Israel.

“If we don’t get this right, I am afraid past investment in the Palestinian development will be lost, a Palestinian economy will not be sustainable, the Palestinian people will live off humanitarian handouts, and security for both Palestinians and Israelis will be in greater jeopardy than it has been for years,” he wrote.

The Quartet agreed Jan. 30 to continue financing the caretaker government to strengthen Abbas, who has called on Hamas to pursue a negotiated peace with Israel based on a two-state solution to the conflict. But Wolfensohn, the Quartet’s special envoy here, warned that Israel and the United States are pursuing policies at odds with that position by restricting vital funding before Hamas installs its cabinet. That is due to happen within the next month.

The Quartet has demanded that Hamas renounce violence, recognize the Jewish state, and abide by previous agreements backed by Fatah or lose foreign aid that accounts for a large portion of the Palestinian Authority’s roughly $2 billion annual budget. Hamas leaders have declined to do so, although they have said they would consider a long-term truce with Israel if it withdraws from all territory occupied in the 1967 Middle East War, including East Jerusalem.

With national elections scheduled for March 28, the Israeli government decided after the Hamas majority was sworn into parliament earlier this month to freeze a $55 million monthly tax and customs transfer to the Palestinian Authority.

That payment, which covers about half of the Palestinian Authority’s monthly payroll and unemployment benefits, would have been due in the next few days. President Bush, meanwhile, has demanded the return of $50 million in direct U.S. aid to the Palestinian Authority.

In his letter, Wolfensohn said the Palestinian Authority faces a $260 million budget deficit “over the expected remaining lifespan of the caretaker government mainly because of Israel’s decision to withhold tax and customs revenue transfers of up to $130 million.” Bush’s decision to seek the return of direct U.S. aid would increase the deficit, he wrote.

“It can be said that we are in the midst of directly undermining the policy set out by you on 30 January which I had understood was set to avoid the collapse of the PA and to allow us all to work together to find a way through this crisis,” Wolfensohn wrote. “Without a better effort, public finances will not be stabilized and there will be no alternative but deterioration in the overall situation—which is something I hope we all wish to avoid.”

Wolfensohn said Palestinian officials have identified funding to cover about half the deficit, and he confirmed that Saudi Arabia intends to make a $20 million contribution by the end of this month. He said Russia and Norway are also preparing plans to donate $10 million each. But he warned that those measures did not resolve the Palestinian Authority’s long-term fiscal problems that will arise when Hamas takes control of the cabinet.

Wolfensohn also said that Israel “may wish to consider ways in which it maintains its decision not to support Hamas but find an alternative route” to make the monthly transfer payments, an arrangement established by the 1993 Oslo accords. He suggested that Israel could use the frozen funds to pay Palestinian fuel bills owed to private Israeli companies, which come to roughly $60 million a month.

The European Union has been considering ways to bolster Abbas, who as Palestinian Authority president has power over the security services and the ability to fire the cabinet. The European Union is the largest contributor to the Palestinian Authority, providing roughly $300 million a year.

Benita Ferrero-Waldner, the European Union’s external relations commissioner and a recipient of Wolfensohn’s letter, said the funds approved Monday would “reduce the pressure on the caretaker government so that President Abbas can continue his important task of building the next government.”

Jihad al-Wazir, the acting Palestinian finance minister, said that because all but $20 million of the European aid is earmarked for humanitarian projects and utility bills it will help the government only slightly with its most pressing problem of paying salaries.

“It will help the Israeli companies receive payment for energy bills,” Wazir said. “But it really doesn’t help with our immediate crisis.”

In recent public comments, U.S. diplomats have indicated that Abbas could serve as a conduit for future funding, even though that policy would contradict past U.S. efforts to weaken the Palestinian presidency when it was held by the late Palestinian leader Yasser Arafat. U.S. development aid to the Palestinian territories last year exceeded $400 million, all of it channeled through non-governmental organizations.

The Israeli government, however, has sought to discourage that strategy. Israel’s acting foreign minister, Tzipi Livni, characterized Abbas, commonly known as Abu Mazen, as “no longer relevant” on the eve of traveling to Europe where she hopes to convince governments to isolate the Palestinian Authority.

Mark Regev, the Israeli Foreign Ministry spokesman, said, “If there is a difference of opinion, it is only over when one should consider Hamas as having taken over the Palestinian Authority.”

“We’ve agreed to disagree on this, but soon it will be immaterial when Hamas becomes the actual government,” Regev said. “It appears that the real political power will be held by Hamas, and Israel does not believe it would be in anyone’s best interest to ignore that. To put it in Jewish terms, we would be very worried that Abu Mazen could be used as a way of making the Palestinian Authority kosher.”