Bloomberg News

Fayyad Quits as Palestinian Premier After Fiscal Warnings

April 14, 2013

Palestinian Prime Minister Salam Fayyad resigned yesterday after repeatedly warning of the government’s precarious finances, a move that could complicate new U.S. efforts to revive peace talks.

Fayyad, 62, who sought to create a stable foundation for an independent Palestinian state, will continue in his post until President Mahmoud Abbas, with whom he has been sparring for years, assembles a new Cabinet. The International Monetary Fund said in March that the Palestinian Authority’s ability to govern was being eroded by its financial difficulties, while Fayyad has said the situation is unsustainable.

The departure of Fayyad, a former IMF economist, comes a week after he met with U.S. Secretary of State John Kerry, who said he’s seeking a “quiet strategy” to resuscitate peace negotiations between the Palestinians and Israel.

“With Abbas being busy in having to form a new government and working to overcome the budget crisis, he may not have that much time for the peace process that the U.S. is trying to restart,” said Menachem Klein, a professor of political science at Bar Ilan University and a former adviser to the Israeli government on peace talks.

Palestinian State-Building

British Foreign Secretary William Hague praised Fayyad’s “outstanding contribution to Palestinian state-building” and said his resignation was “a reminder of the urgency of returning to negotiations on a two-state solution.”

Abbas appointed Fayyad as prime minister in 2007 after a five-year stint as finance minister. After 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.

Fayyad 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.

“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.

An opponent of violence, 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.

Clashed With Abbas

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’ attempts to reunite his government with the dueling regime in the Gaza Strip, which is run by the militant Hamas movement that’s considered a terror organization by the U.S. and European Union.

It’s not clear how quickly Fayyad will be gone, because he will stay on until a new Cabinet is formed, said Khalil Shaheen, director of the Masarat Center for Policy Research in Ramallah.

“There was a lot of tension with Abbas, but Fayyad’s resignation actually preserves the status quo,” Shaheen said. “This could go on for a week, a month or even two years.”

Reconciliation Efforts

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 (BOWEMBA) statistics show.

The economy has become less competitive as agricultural productivity has been cut in half and manufacturing stagnates, the World Bank said in a report that found that Israeli restrictions restrain growth. The share of exports in the economy dropped to 7 percent in 2011, among the lowest in world.

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 the share of public sector jobs accounts for 22 percent of total employment, according to the World Bank.

Economic Outlook

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.

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 for a unilateral statehood bid.

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

To contact the reporters on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net; Fadwa Hodali in Bethlehem at fhodali@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net


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