An IMF audit of the Palestinian Authority revealed that President Yasser Arafat diverted $900 million in public funds to a special bank account he controlled.
Transcript of a Press Briefing on the West Bank and Gaza by Adam Bennett and Karim Nashashibi of the IMF’s Middle Eastern Department with William Murray, Deputy Chief of Media Relations
Dubai, United Arab Emirates
MR. MURRAY: Good afternoon. I’m William Murray, Deputy Chief of Media Relations at the IMF. Thanks for coming today. To my immediate left is Karim Nashashibi, the IMF’s Resident Representative in West Bank-Gaza, and to Karim’s left is Adam Bennett, the IMF’s Mission Chief for West Bank-Gaza in the preparation of the current report which we are presenting to you today.
Before we open the floor to questions, Karim and Adam will have some brief remarks, and I would ask you to mute your cell phones if possible right now so that we can try to keep the room as quiet as possible for the speakers.
I’ll turn to Karim.
MR. NASHASHIBI: Thank you. This is a study which basically covers the last three years of economic developments in the West Bank and Gaza. It covers the impact of the conflict on the economy and the banking sector, and it also covers all the fiscal and budgetary developments during a time of crisis.
The other kind of main coverage of this study is the whole reform process. As you know, a reform process was reactivated last June of 2002, with donor participation, but essentially promoted by the Palestinians themselves.
Now, why did we want to do this study? We really wanted to do it for two reasons:
The first is to try to measure the impact of this conflict on the economy.
We had many different estimates of declines due to, of course, the recession that ensued, the conflict. Tourism stopped to a standstill. Palestinian workers could not work in Israel any more. There were checkpoints, and curfews, and roadblocks in various areas in the West Bank which basically fragmented the whole West Bank and, you know, paralyzed economic activity and paralyzed trade. So all of this, obviously, had a pretty disastrous effect on the economy, and there were estimates of declines reaching 50 percent of GDP.
On the other hand, we noticed that there are many kind of indicators of resilience of the economy. For instance, bank deposits only declined initially by 10/15 percent and started rising again. If you look at cement consumption and fuel consumption, there have been much less than these large estimates, and so we wanted to find out what is it that made this economy still function and be resilient in the face of very severe external shocks. So this was basically the fundamental reason.
The other reason was that they wanted to get to the bottom of this whole reform process; in particular, reform was spearheaded by the current Minister of Finance, Dr. Salam Fayyad, since June of 2000. And, of course, he took main responsibility over the fiscal and financial area, but reform also spread to various other areas, and we wanted to find out how deep the process was, what were the actual needs for reform and what are some of the remaining outstanding issues in the reform process.
Finally, I should say that this study could not have been possible without the new atmosphere of openness and transparency that has permeated the PA, particularly in the financial and fiscal sphere, under Minister Fayyad, who, incidentally, was my predecessor, as resident representative, for a period of six years in the West Bank and Gaza, so he obviously knows all of the issue quite well.
So this openness actually led to posting the budget, on a monthly basis, the budget, as well as budget execution, on the website of the Ministry of Finance. You can all obtain the details of expenditures and revenues, which is quite extraordinary in this region.
For instance, in the study, for the first time, we have a table which covers the period from ‘95 to 2000, outlining the diversion of revenue from the budget to a special bank account controlled by President Arafat. We estimated that amount to be around US$900 million over a period of five years. So, I mean, this is the type of things that we were able to do in this new kind of atmosphere of openness.
Finally, let me say a couple of words about what the IMF does in the West Bank and Gaza. From the inception of the PA, we have been helping in building Palestinian institutions, particularly on the financial side, with a budget, with a Revenue Department, with tax administration. We’re currently helping the Minister draft an income tax law which is very much in conformity with best international practices.
So, I mean, this is a major function, is basically to provide advice, technical assistance, and help in building transparent and accountable Palestinian institutions.
The second purpose is to participate with the donors in the task force, which reports to the quartet—the Task Force on Palestinian Reform. For instance, I am the co-chair of the Financial Accountability Support Group, and I brief the donors every two or three weeks on the latest fiscal developments and reforms which go on.
And, finally, I coordinate very closely with my Israeli counterparts. There is very good cooperation. I keep them briefed on what is happening on the Palestinian side, and of course I brief myself on what is happening on the Israeli economic side, which affects directly the function of the Palestinian economy.
So maybe Adam will give some of the highlights of the conference.
MR. BENNETT: Thanks, Karim.
First of all, as Karim mentioned, one of the things we were most interested in is what has actually been happening to the Palestinian economy during these three very difficult years of conflict, and estimates have been floating around that the economy could have contracted by as much as 50 percent, which would be a very, very major collapse.
We looked at a number of different sources of information and indicators, and we’ve come to the view that the economy is, indeed, has been very severely affected by this conflict, but the decline could be on the order of 30 percent and maybe even less than that.
So, although the regime of closures, and checkpoints and other security infrastructure that has been imposed on the economy has definitely had a negative effect, the economy has been much more resilient than one might have expected. In fact, by looking at data for the first half of this year, there are signs it is even beginning to recover somewhat.
Another area that we looked at was the financial sector. And, again, one might have expected banks to have been, well, to have found conditions that are extremely difficult, and so, indeed, they have. However, they have weathered the storm extremely well, and one of the reasons for this is that, in the years before the conflict, when the economy was actually booming, they, nonetheless, proceeded with very conservative lending strategies which prevented them from becoming overexposed when the situation turned for the worse, as indeed it did in September of 2000.
And because the banking system is still functioning, the residents in the West Bank and Gaza can continue to conduct their daily lives, making deposits, withdrawing money, writing checks, and so on. And that’s another reason why the economy has been able to withstand this difficult situation better than might have been expected.
And another perhaps rather surprising fact is that the, as some of you may not be aware, but there is, in fact, a stock market in Nablus, in the Northern part of the West Bank, and that continues to trade virtually every day for a few hours every day, and that’s a sign that the economy is continuing to function, despite what has happened.
Turning to the fiscal area, the Minister of Finance has been able to prepare and execute budgets, despite these very, very difficult circumstances. And this has been helped by the fact that the clearance revenues collected by the Israelis, which are due to the Palestinians, which were initially withheld at the beginning of the conflict, were resumed at the end of last year, and this has been very important to enable the Palestinian Authority to manage a budget in a viable way.
And the other key factor in this has been the role of international donor support for the budget, which is essential.
Turning to, Karim mentioned also the reform program, and the reforms in the fiscal area have been very, very impressive. And they’re focused on, amongst other things, on improving the transparency of the whole budget process. And I think it’s fair to say that, as a result of these reforms, the level of transparency and probity in the fiscal process of the Palestinian Authority is probably the equal of the best in the region. They’ve made major progress in that area.
But there are still, of course, areas where other reforms are still needed.
In some areas where progress is underway, one area that is important is pension reform. This is quite well advanced. Another area where things are proceeding rather more slowly is in the reform of the civil service and the grappling of high levels of civil service employment, which is a problem for the budget, and this needs to make further progress.
Another area where there’s been some progress is in the remuneration of the security services, where now half of the security forces are paid by direct bank transfer, which means that it’s clear to the Ministry of Finance who is being paid, and those who are being paid are readily identifiable as owners of the bank deposits—the bank accounts. So there’s various areas on the fiscal side where reform is more or less advanced, but there are still areas that need to make further progress.
In other areas, reform is also proceeding, some more rapidly than others. One important area is a raft of reforms that is designed to push the Palestinian economy into a modern market economic framework, and there’s a whole raft of laws at various stages of development, covering competition, company law, securities law, intellectual property rights and many other related areas which are in the pipeline and which should make the, when they all come to fruition, should make the Palestinian economy one of the most modern and market-oriented economies in the region.
There are still areas where there are problems. One area, for example, is in land registration, which is not reliable, and without proper land registration, it’s hard to use land as collateral, it’s hard to buy or sell property. So there are things like that that still require a lot of further work, but, nonetheless, attention has been paid to all of these issues.
Areas where there’s been relatively limited progress so far are areas like the reform of the local government. The provision of local government services has been severely affected by the lack of resources available to local government. That is partly related to the effect of the conflict, but also it reflects a need for the reform of local government and a reorganization of local government finance. And related to this is also a need to have an elected local government. Therefore, there needs to be elections at some point for local government.
There also needs to be elections at the national level, for which a comprehensive voter registration needs to be undertaken, and that obviously has been held up by all of the closures and the checkpoints, which prevent the officers from going out and gathering the information necessary to establish such a register.
Another area where there has been good progress lately is in judicial reform. The state security courts, which had long been criticized as a forum for arbitrary justice, have now been abolished, and the judicial system is now headed by an independent Supreme Judicial Council.
So there are diverse areas of reform, some of which have progressed extremely well, and some of which have progressed quite slowly. But, anyway, they’re all discussed at some length in this study. So I invite you to follow-up there.
MR. MURRAY: Thanks, Adam.
For those of you who have not received this, we have some bullet points that also distill this report. If you have not received it, please indicate that and some of my colleagues will retrieve a few of the bullet points. Maybe, Mazen, if you could help out there. Thanks.
We will now take questions from the floor. If you could just identify yourselves to help out with the transcription, please. The gentleman in the front row. Why don’t we start there.
QUESTION: (Interpreted from Arabic) I shall be speaking in Arabic. You have outlined a pink image of the Palestinian economy, a very nice image of the Palestinian economy with all the achievements.
However, what we see in reality is completely different, and what testifies to that is not only what we read in the newspapers but the UNDP report that clarifies in many documents and reports and studies the continuous, steep deterioration of the Palestinian economy. None of the services are of a basic standard or acceptable standard in terms of health, education, general circumstances or living. Not a single tree that was cultivated in the year ‘48 still exists today. The Palestinian economy that has been developed with the help of the World Bank and IMF and other donor community services has not proven to be up to the level. The Palestinian economy is still deteriorating and the citizens are living a real crisis.
How can you as an IMF push forward economic development and development at this daily level of the citizens and not at the level of stock exchange in Nablus or another achievement in the economy in general?
MR. NASHASHIBI: Maybe I’ll answer this question. There is no doubt that the Palestinian economy has suffered a severe decline. We estimate it at 30 percent. Unemployment has increased dramatically, and poverty has increased as well. And the World Bank, indeed, has a full report which outlines all these indicators.
However, at the same time what is very interesting is that there are other factors which mitigated this decline or alleviated it. It could have been far worse than it actually is. If it were not for, first of all, donor support, which was about US$500 million in 2001 and US$460 million in 2002, this donor support helped finance directly the budget. And the PA has 130,000 people employed in it. And when you pay these people salaries it permeates into the whole economy. We’re talking again about another US$600-US$650 million.
So this has been kind of a shock absorber; donor support, the PA as an engine, I would not say of growth, but simply something that has arrested the decline. And the Israeli authorities have also resumed the transfers. Since last July in 2002, they resumed the transfer of the stock of taxes retained by them and they have started paying the monthly flows of the taxes that they collect. And this has helped tremendously. So this is one set of factors.
Another set is the coping mechanisms of the Palestinian society. The Palestinian society is very—has a lot of solidarity in the community. They all help themselves out. Their relatives abroad have sent more money, so you have that factor. So there are various kind of stabilizing factors that have come from various sources which have prevented the decline from becoming worse.
MR. MURRAY: Thanks, Karim. The gentleman in the center, center of the room here. Thanks.
QUESTION: Mr. Nashashibi, you mentioned more or less in passing that you discovered that some US$900 million over five years had been diverted from the budget to an account, if I understood you correctly, personally controlled by Yasser Arafat. Can you indicate whether there’s anything very unusual in this? And are you leaving open the possibility that some of that money has been, let’s say, misused?
MR. NASHASHIBI: No, this money was basically, as I said, in a special account. Most of it has been used to invest in Palestinian assets, both internally and abroad. One of the things that the reform process has done is they have tallied all the Palestinian assets by international auditors. It turns out that the PA was involved in 69 commercial activities, both at home and abroad. The tally of this current level of asset is around US$700 million in terms of at today’s market prices, which probably in ‘99 were US$900 million.
So I would say that the large majority of this money has been invested in assets that today are still within the public domain. So I think at least there is a follow-up, there is disclosure. The Palestinian Investment Fund has been set up to manage these assets, and to privatize these operations. I think the objective of the PA is to get out of all these commercial activities.
QUESTION: That’s the large majority. But what happened to the rest?
MR. NASHASHIBI: Well, I think that there will be accounting for the rest at some point, but we’re taking it all a step at a time.
QUESTION: But you are leaving open the possibility it’s been misused then.
MR. NASHASHIBI: Well, in any system you can always have a possibility of some misuse of funds. But what we’re trying to do is level of disclosure and transparency so that future or present misuse does not happen.
QUESTION: And you say that this was personally controlled, this fund, in its entirety by President Arafat?
MR. NASHASHIBI: Well, it was basically controlled by the president and his chief economic financial advisor. And we alerted, back in the year 2000 this was all disclosed. There was the IMF, in fact Minister Fayyad when he was resident representative went to President Arafat, told him this must be disclosed; we have to have a full accounting of these assets. And it was part of what we called the economic framework, the Palestinian economic framework. And it was presented to the donors in Lisbon. All this happened in April of 2000.
MR. MURRAY: Thanks, Karim. Anyone else?
QUESTION: I was wondering what it would take, how much money—there’s a figure of US$1 billion floating around—to revive the economy. Would this be a correct estimate in your mind?
MR. NASHASHIBI: There are two parts. There is, one part has to do with making sure that the PA budget is fully financed because there are 1 million children in schools, there are 22 hospitals. There are a lot of services to be provided. There is right now a deficit of the order of US$250 million in the PA budget. So that’s the kind of direct budget support that’s needed for the remainder of this year.
But in addition, there is a lot of infrastructure repair, damage. There are orchards that have to be rehabilitated and replanted. And indeed, the World Bank has made estimates of around US$1 billion in terms of quick rehabilitation work.
QUESTION: Is it a reasonable estimate
MR. NASHASHIBI: Well, I would stick to this figure. Maybe I would add to it this budget support so it would be like US$1.2 billion, something in that neighborhood.
MR. MURRAY: Thanks. The gentleman in the far back of the room.
QUESTION: I have not been able to read the report, but I’ve just seen some of the bullet points. Surely, the performance of the economy has been very much affected by the closures and Israeli policies, and those are policies both that have led to the segmentation of markets, the fact that the labor market cannot perform accurately or efficiently, but in addition to that, there’s the issue of transfer pricing of resources, electricity and other services which are sold by the Israelis to the Palestinian Authority.
Does your report identify what sort of changes need to be done in Israeli policies that would alleviate the poverty, destruction and the bad impact on the economy that the Palestinians have been suffering? You have mentioned the reforms, and those are very welcome by the Palestinians. Does the report also identify what policies the Israelis have to change because they are in control of the territory, they affect the segmentation of markets, they raise transaction costs and others? Have you identified those?
MR. BENNETT: I suppose I should answer this question. The report does discuss, in some detail, the many things you’ve mentioned about; the effect of the checkpoints, the closures, and curfews, and also, in fact, the potential future problems that could arise with the construction of the separation wall. And you’re right; these things have had a very major effect on the economy through a number of different channels.
And though a decline of 30 percent is less than a decline of 50 percent, it’s still a very severe decline. But I think that the crucial thing will be the lifting of all of these various indications and so on, but that will depend upon, itself, on improvement in the security situation.
So, once there is an improvement in the security situation, which hopefully will result from rapprochement again, in terms of the peace process, then we would hope that the Israelis would feel able to lift all of these various different restrictions, and that would provide very important sources of or remove the constraints to the recovery in the economy.
Now, it may very well be that the economy would need some additional help to sort of get it back on its feet, and I think that we have been trying to work out in what way that could be provided, but the main thing would be the lifting, in the first instance, of all of these different treasures and other restrictions, but that will depend upon steps towards peace.
MR. NASHASHIBI: This gentleman here wants to follow up.
MR. MURRAY: Is there a follow-up question? Sure. First, we’ll get to the gentleman in the back, and then I’ll get to the gentleman in the front next.
QUESTION: So just to follow up on two previous questions, really. The question was by somebody about the US$1 billion. So this would be additional injections, but could you estimate, if the Israelis remove the restrictive policies that they’re currently imposing, you might not even need the billion dollars.
MR. NASHASHIBI: Right. No. Certainly, the closures and the roadblocks are the key factors, and we should recall that back in ‘99, the PA had a surplus in its current budget. It did not need any budget support. In fact, Minister Fayyad was with the G-7 this morning, and he said, you know, as soon as we go back to a normal mode, we will not need any budget support.
And so I think what will be needed, however, is probably this billion dollars for just repair of all of the infrastructure that has been damaged, but basically I think the PA will be able to graduate from budget support and, indeed, to finance some of its development needs.
MR. MURRAY: The gentleman in the front here.
QUESTION: I will ask by Arabic, please.
(Interpreted from Arabic): My question deals with the volume of loss for the Palestinian economy since the beginning of the crisis 2000 until now. Many of the Palestinian Authority members state that the losses are billions of dollars, and we know what are the expected losses of the economy as a result of building this separation. This will be a restriction to the growth of the Palestinian economy.
MR. NASHASHIBI: Yes. Obviously, the losses of the Palestinian economy have been major, not only the decline in the GDP, but a lot of facilities and projects that were stopped and investments, you know, that did not take place. It’s very difficult to estimate that, and certainly we have not done that. The World Bank has made some attempts. But, again, I mean, one has to have a forward look at things.
I think what the Palestinians more than anything would want to see is some resumption of normal kind of relationship within the West Bank and with Israel. I mean, after all, the relationship with Israel was, to them, extremely productive in the sense that Israel is US$110 billion economy; the West Bank and Gaza is a $5-billion economy. We have a huge market next door. And it was extremely, there was tremendous synergy, and it was extremely productive.
Therefore, should we have peace, finally, in the area, I think it will be to the benefit of both economies.
MR. BENNETT: Thanks, Karim.
The gentleman in the center of the room here.
QUESTION: I did not think you mentioned the work of the Palestine Monetary Authority in your remarks, and I wonder if you could say a few words about how you assess that, how effective it is, and are you working with them on institution building and which areas need strengthening?
MR. NASHASHIBI: Yes. We’ve been working quite closely with the Palestinian Monetary Authority. Immediately, we’ve had some relief, that, in fact, there was the confidence in the banking sector remained. The Arab Bank, in particular, had a policy of opening, when curfews were lifted for two hours, they would open even on holidays. So anyone could always withdraw cash, and this actually cemented the confidence of the public into the banking system.
But then, of course, a lot of people could not repay their loans, so nonperforming loans rose to 26 percent of total assets. So that was quite worrisome. And what we concentrated on with the governor, Dr. Amin Haddad of the PMA, was on bank supervision and how to manage the need for provisioning and applying the Basel Principles in a situation of crisis and liquidity crunch.
Adam, maybe you’d like to add something.
MR. BENNETT: Maybe I should just add something. The nonperforming loans did reach I think 29 percent, but these are the ratio of nonperforming loans to total loans. In fact, in relation to the bank’s total assets, they were relatively small because the banks have been pursuing extremely conservative lending policies. And a large portion of their assets were liquid assets held outside and abroad. So that’s one of the reasons why the banks, where they suffered on their own loan portfolios, they didn’t suffer as a whole.
And the other area that I think is worth mentioning with regards to PMA is that they have been making good progress in developing the capacity to undertake banking supervision, and to the extent that they can in the present situation, they do that. But they’re not a central bank yet in that their role really is, at the present time, confined to banking supervision and also the holding of required reserves to banks operating in those territories, and there’s a balance sheet actually in the report which is for your own information.
MR. MURRAY: Okay. Thanks, Adam, for clarifying that.
The gentleman on the side of the room here. Well take one more two more questions, and then wrap up. Thanks.
QUESTION: My question is apart from the Israeli restrictive policy, my question to Mr. Nashashibi is what was the role the Arab countries have played since the outbreak of the Intifada? Have they played any role to alleviate the Palestinian sufferings? And if they have, how effective was this? Thank you.
MR. NASHASHIBI: Yes; the Arab countries have been very supportive. Indeed, immediately, when Israel basically stopped transferring the taxes that they collect on behalf of the PA to the PA, and this was from the beginning of 2001 on, so it lasted for two and a half years, basically, the Arabs and the European Union but mostly the Arabs stepped in and provided a lot of budget support, which, in 2001, was about US$530 million just from the Arab countries. And then, in 2002, it went down a little bit to about US$450 million.
So they were really there. Now, what happened is that along the way, they changed the formula of support from the Islamic Bank providing the support to the Arab League asking each country to contribute. And the major contributors have been the Gulf countries, but as a result of that, the amount went down. But the support has always been there.
MR. MURRAY: Thanks, Karim.
Last question? Gentleman in the front row here; thanks.
QUESTION: Sir, I want, please, this study, just I want to know how this study will contribute to the alleviation of the suffering of the Palestinians, in what way? And secondly, how does the IMF look or deal with the Palestinians as an entity? As a state? As a group of people? How? How do you look at them? Thank you.
MR. NASHASHIBI: Maybe I’ll start, and then, Adam will continue.
Basically, I think this study lays out the facts and kind of gives you some orders of magnitude of what has happened. And also, therefore, it gives you an idea of what may happen if restrictions are removed and if closures are removed and if the economy starts growing. So I think it was very useful in that sense.
The second part is it also revealed all of the areas where reforms were needed, you know. Expenditure control was lacking. Revenues were not unified in the treasury. All of these issues have been addressed. So, in a sense, the study has a complete inventory of what were the weaknesses in the system, you know, in institutions, and what was done about it and what remains to be done.
So I think there is some contribution there. Now, on the IMF, I’ll let Adam answer.
MR. BENNETT: Well, I think that the answer to the question is that we work with the Palestinian Authority.
MR. NASHASHIBI: Right.
MR. BENNETT: And I think that dates to the Oslo Accords, when the IMF and the IFIs were brought in as part of this agreement to work with the Palestinians to help develop their institutions and move them towards the objectives of that peace accord.
And again, under the Road Map that was published by the Quartet, it envisages our continued role in helping them develop their institutions and the structures of their economy to move them towards the goal in that road map, ultimately, of an independent state. But at the moment, they are not a member country of the IMF, so they have a rather unusual role in that respect.
MR. MURRAY: Thank you all for coming. I appreciate it. Thanks to Karim for coming in from Gaza and Adam from Washington.
I just want to remind you that on Monday, we will also have a briefing on Afghanistan and our analysis of the Afghani economy. A report will be available on Sunday, ahead of that Monday briefing.
Thank you again for coming.