Fayyad Resignation Raises Aid Risks for Palestinian Economy

The resignation of Palestinian Prime Minister Salam Fayyad, whose commitment to transparency reassured donor nations, may make it tougher for the Palestinian Authority to raise the foreign aid it needs to survive.

Fayyad, 62, quit in an April 13 meeting with President Mahmoud Abbas that capped months of tension between the two leaders. He agreed to remain in the post until a replacement is named, Abbas said in a statement.

The Palestine Liberation Organization’s Executive Committee called a meeting for April 18 to discuss Fayyad’s resignation and the possibility that Palestinian President Mahmoud Abbas may form a new government, committee member Wassel Abu Yousef said by phone.

The U.S.-trained economist called an end to his six-year stint as prime minister just days after meeting for the third time in a month with Secretary of State John Kerry, who is trying to resurrect Middle East peace talks with a new aid package to bolster the Palestinian economy. Saying Fayyad “made a huge difference,” Kerry expressed disappointment with the resignation while suggesting Fayyad may not be leaving so soon.

“He’s sick, tired, he’s been at this for seven years,” Kerry told reporters yesterday in Tokyo. “There will be a caretaker process for a period of time” and “he is not going to go away from Palestinian politics completely.”

Situation Unsustainable

The Palestine Stock Exchange’s al-Quds Index dropped 0.2 percent to 453.76 at 10:50 a.m. The benchmark has slumped about 5 percent since President Barack Obama visited Ramallah and said the Palestinians would need to compromise to reach a peace deal with Israel. The Tel Aviv Stock Exchange in Israel rose 0.2 percent yesterday to 1230.35.

The International Monetary Fund, where Fayyad worked for 14 years in Washington and the West Bank, said in March that the Palestinian Authority’s ability to govern was being eroded by its financial difficulties. Fayyad warned repeatedly that the situation is unsustainable.

Abbas appointed Fayyad as prime minister in 2007 after he served five years as finance minister. After long arguing that Israel must ease restrictions on the movement of Palestinian people and goods in the West Bank to strengthen the economy, Fayyad presented a plan in 2009 to build governing institutions aimed at ensuring the future stability of a Palestinian state.

Donors Reassured

He won the trust of lenders, the U.S. and Israel because of his campaign to make the Palestinian Authority’s finances transparent. His IMF experience provided credibility in negotiations that led to billions of dollars in donations for the Palestinian Authority. Donor funds make up almost one-third of the authority’s 2013 budget.

“Fayyad was trusted because he understood finance, he believed in transparency and his presence reassured international donors that the flow of money would go to legitimate purposes,” Mukhemer Abu Sada, a political scientist at Al-Azhar University in Gaza City, said in a phone interview.

“It’s going to be very difficult to find anybody to replace him who has the level of credibility that Fayyad had with the international community,” Abu Sada said.

Among possible successors with the kind of experience in international finance that could win the trust of investors are Mohammed Mustafa, a U.S.-educated adviser to Abbas who worked at the World Bank for 15 years and was founder and chief executive of the Palestine Telecommunications Co., Abu Sada said.

Security Force

Another possible contender, he said, would be Jihad al Wazir, governor of the Palestine Monetary Authority, a former acting finance minister and the son of Khalil Abu Wazir, who was assassinated in 1988 when he was top deputy to longtime Palestinian leader Yasser Arafat.

As prime minister, Fayyad also oversaw the formation of a U.S.-trained security force that brought law and order to the West Bank and worked in coordination with Israel to prevent militant attacks.

Throughout his tenure, Fayyad had clashed with Abbas over the extent of the premier’s authority, most recently after he accepted the finance minister’s resignation, over the president’s objections. He also opposed Abbas’s attempts to reunite his government with the Hamas-led administration in the Gaza Strip. Hamas is considered a terrorist organization by the U.S. and European Union.

Reconciliation Efforts

Fayyad, a political independent, was not part of Abbas’s ruling Fatah party and often had conflicts with it. Amin Maqboul, secretary-general of the Fatah Revolutionary Council, said the party “feels comfortable with Fayyad’s resignation.”

“He failed to manage the economic crises and put the Palestinian Authority in debts of $1.5 billion dollars and was not able to provide salaries on time,” Maqboul said.

Hamas said Fayyad’s departure wasn’t related to reconciliation efforts between the Palestinian movements or internal divisions.

Fayyad steps down at a tough time for the fragile Palestinian economy, World Bank statistics show.

Without foreign aid, Abbas’s government would face a budget deficit of more than 7 percent of GDP at a time when government borrowing from local banks is according to the World Bank “at the limit that the banking sector can sustain.” Foreign aid accounts for about 14 percent of GDP, while public sector jobs account for 22 percent of total employment, according to the World Bank.

The West Bank and Gaza’s $10 billion GDP expanded about 5 percent in 2011, down from an average of about 9 percent from 2008 to 2010, according to the International Monetary Fund. Unemployment rose to 19 percent in the first half of 2012 from 16 percent in the previous year, the IMF said.

Cash Crisis

The Palestinian Authority was in the throes of a cash crisis in recent months because U.S. and Arab countries that help to fund its budget had not delivered all promised aid. That forced government workers to subsist on partial and overdue salaries.

Exacerbating the problem was an arrangement whereby Israel collects tens of millions of dollars a month in customs, border and income taxes on behalf of Palestinians who work and do business in Israel, and transfers them to the Palestinians. Israel withheld the transfers twice in recent months after the Palestinians sought UN backing as a state.

U.S. Aid

Fayyad took loans to cover some of the shortfall, though protests broke out in 2012 because of his inability to pay salaries in full and on time, and over planned tax increases that the demonstrations forced him to cancel. The Palestinian Authority is the West Bank’s largest employer, with some 150,000 civil servants and security personnel on its payroll.

The U.S. has relieved some of the pressure on the Palestinian Authority’s finances, announcing the delivery of about $500 million in withheld aid around the time of President Barack Obama’s visit to the region last month. Israel has resumed the transfers.

Kerry, in his latest visit to the region last week, spoke of the need for Israel and the Palestinians to work together to improve the Palestinian economy. The U.S. secretary of state is scheduled to meet in Washington today with former British Prime Minister Tony Blair, representative of the so-called Quartet of international Middle East peace mediators, to discuss the Palestinian aid package.

“We’re totally committed to moving forward with the economic thing, no matter what,” Kerry said.

Before it's here, it's on the Bloomberg Terminal.