Palestinians Pin Hopes on Gas Project to Counter Donor Fatigue

The Palestinian Authority, its economy crippled by donor fatigue and conflict with Israel, is looking to offshore gas and loan restructuring as possible lifelines, its deputy prime minister said.

A peace agreement with Israel could also go a long way to pulling the Palestinian economy out of its slump, Deputy Prime Minister Mohammed Mustafa said in an interview in Davos.

If talks on a final peace deal begin, “there will be an economic discussion,” said Mustafa, an economist who worked at the World Bank in Washington for 15 years and as an economic adviser to Kuwait. “But what we are focusing on now is what we can do even before a new arrangement.”

Topping Mustafa’s agenda is developing a gas field off the coast of the Gaza Strip, ruled by the Hamas militant group, which was discovered by U.K. company BG Group Plc in 2000 and remained untapped because of geopolitical tensions. He estimates it will take $1.2 billion to develop the field, which BG says holds about 1 trillion cubic feet of gas.

“This can be transformative,” said Mustafa, chairman and former chief executive of the Palestine Investment Fund.

BG is in talks with Israel to get the green light to proceed, and “we hope that in the coming few months BG will be able to feel comfortable that they will have the necessary permits and level of comfort that will enable them to invest and develop this project,” he said.

Investigating Options

BG, which has a 90 percent interest in the Gaza gas license, closed its Israel office in 2008. It said in an e-mailed statement that it maintains contact with the sides “to investigate options” to develop the field.

The Jerusalem office of former U.K. Prime Minister Tony Blair, who has been trying to promote the Palestinian economy in his role as a special peace envoy, said there has been recent progress in talks to tap the resources. Blair’s office, commenting in an e-mailed statement, said he has been mediating between Israel and the Palestinians on the project.

An Israeli official, speaking on condition of anonymity because the issue is politically sensitive, said he was unaware of contacts with his government.

The International Monetary Fund, in a September report, projected Palestinian economic growth would slow to 4.5 percent in 2013 from 5.9 percent in 2012, with unemployment topping 20 percent. It cited Israeli restrictions on the movement of Palestinian goods and people, together with Palestinian overspending and inadequate tax collection, as main reasons for the Palestinian economic weakness.

‘Policy Shift’

“We have to make sure investors find an investment-friendly environment,” Mustafa said. “But clearly a good part of the enabling of the private sector has to come from a serious policy shift on the Israeli side.”

Israeli Foreign Ministry spokesman Yigal Palmor denied Israel is holding back the Palestinian economy. “This is nothing but a pretext for the PA to cast away responsibility and evade accountability for its own misconduct and incompetence.”

By 2016, growth will slow to 3 percent because of an aid falloff and political uncertainty, the IMF forecast in its report.

Donor aid has dropped to $1 billion or less last year from about $1.8 billion annually, in part because governments are reluctant to pledge more money without breakthroughs on peacemaking, Mustafa said.

Wage-Heavy Budget

A public sector of 170,000 employees gobbles up about two-thirds of the government’s budget, which Mustafa said was $3.6 billion in 2013 and had a $1.3 billion deficit. Public sector debt was $4.4 billion last year, he said.

Mustafa said he’s looking into restructuring debt by issuing a few hundred million dollars in 5-year bonds to local banks and examining the benefits of Islamic finance. The Palestinian government currently owes banks $1.2 billion.

“It is becoming clear that depending on donor finance and assistance is not the way forward, especially if we are talking about creating jobs,” said Mustafa, 59. “The private sector has to be the answer.”

Yet without “more clarity on the political horizon,” investors will stay away, he said.

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