Opening address AHLC meeting in Brussels 21 March

Check against delivery

Excellencies, ladies and gentlemen,

It is a pleasure for me to welcome you to this annual spring meeting of the Ad-Hoc Liaison Committee in Brussels.

I would like to thank High Representative Ashton for hosting this meeting here at the EU. I would also like to extend a special welcome to Prime Minister Fayyad, the head of the Israeli delegation and Quartet Representative Tony Blair.

This region is facing a number of challenges, and although we continue to see regrettable incidents and loss of lives, hope still prevails.

I would like to remind you that the core mission of the AHLC is to assist the Palestinian Authority in building viable state institutions and ensuring sustained economic growth. Not to deal with political issues emanating from the challenges in the region.

I have repeatedly referred to this endeavour as a bottom-up process that we support on the basis of our long-standing commitment to the vision of an independent and sovereign state of Palestine living side by side with Israel in peace and security.

As we agreed at our last meeting in New York, donors and the Government of Israel should now step up their cooperation with the Palestinian Authority with a view to facilitating a gradual and orderly transition to economic self-reliance, without undermining the progress achieved during the last few years.

From my consultations during the weeks leading up to this meeting, I sense that donors are concerned over lack of progress in our common undertaking. We have to ensure that the conclusions from AHLC meetings are implemented locally on the ground. This is the responsibility of Israel, the Palestinians and donors alike.  

We have succeeded in part in our mission. I believe the AHLC has been more successful than many other processes. At the first AHLC meeting hosted here in Brussels last year by the EU High Representative, we welcomed the assessment by the World Bank, the IMF and the UN that the Palestinian Authority had achieved the objectives of the state-building programme as set out in Prime Minister Fayyad’s thirteenth Government Programme.

According to them, the Palestinian institutions had achieved a level of performance above the threshold criteria for a functioning state in key sectors such as revenue and expenditure management, economic development, service delivery, security and justice. Accordingly, the September 2011 meeting in New York reconfirmed that the Palestinian state building process is an international success story.

But however successful this bottom-up process has been, the last months have amply demonstrated that institution-building cannot by itself translate the two-state vision into reality without negotiations leading to agreements on all the outstanding final status issues. Let’s call this the top-down process.

Moreover, when this political process stalls without any prospect of resumption, the successes on the ground are jeopardised by the inherent dynamics of the occupation.

Our model for success is based on the tripartite cooperation between the donors, the PA and the Government of Israel: The donors provide the necessary financing and assistance, the Palestinian Authority implements major reforms and gets their economy working, and the Government of Israel responds by gradually easing its restrictions so that the structural basis for economic sustainability can be created.

In the period 2008-2010, this model produced remarkable results in terms of the quality and functioning of the Palestinian institutions. We saw high levels of growth, we saw the restoration of basic living conditions, we saw improved security in the West Bank, and we saw, not least, greater hope for the future among the Palestinian people.  

The objective assessments made by the World Bank, the IMF and the UN from their respective vantage points provide important guidance for us in our efforts. They keep the PA under day-to-day scrutiny and sum up their findings twice a year for presentation to the AHLC. This gives us a sound basis for discussing the best way to move forward.

These biannual reports have enabled us to monitor, in full transparency and in real time, the deliverables of the PA, the donors and the Government of Israel and how they translate into results on the ground.

The PA’s current fiscal crisis should therefore come as no surprise. In 2011, the limitations of the model gradually became clear, as expectations for convergence between the top-down and bottom-up processes evaporated.

Without a clear political horizon that can motivate and sustain high-level donor contributions, and a significant easing of restrictions to improve the framework conditions for economic growth, the Palestinian economy could easily slide into a major slowdown.

This was the case last year. We saw the warning signals a year ago when donor contributions started to decline.

As Chair of the AHLC, I expressed my alarm during our September meeting in New York as the signs of economic retraction became apparent. I said that if Israel holds back clearance revenues and discontinues its efforts to ease restrictions on access and movement, if donors significantly reduce their contributions, and if the PA does not succeed in continuing its reform process with a particular focus on fiscal discipline, we will see an escalation of the current financial crisis with consequences far beyond red figures on the balance sheet.

I am afraid that this, ladies and gentlemen, is what is now about to happen.

All the reports presented to this meeting by the World Bank, the IMF and the UN paint a picture of a looming economic crisis for the PA, in the midst of the political and diplomatic stalemate on the negotiation track. They leave no room for misinterpretation. According to the UN, the institution-building process is at increased risk. The World Bank portrays the state-building process as being at a crossroads between stagnation and revival.

According to the reports, the West Bank economy grew more slowly in 2011 than in previous years, by 5.7%, compared with close to 10%.

In Gaza, however, growth continued its sharp recovery, surging by almost 20% in 2011.

We know that these figures need to be interpreted. The high growth in Gaza in part reflects the low base from which it started. The double digit growth can partly be attributed to a combination of donor aid inflows and a more flexible Israeli import policy, in particular regarding building materials for infrastructure projects. The increased imports of material through the tunnel system have also contributed to the construction boom.

According to the reports, the average Gazan is still no better off today than in the late 1990s. Substantial investments in key sectors such as water and wastewater, electricity and solid waste are now desperately needed.

According to figures from the UN, half of the houses that were severely damaged or demolished during the war in 2009 and operation Cast Lead have now been rebuilt and repaired. We must redouble our efforts to complete the remaining 3 000 housing units by providing swift access for building materials and adequate funding. If this is done, the UN can complete the part of the task assigned to the AHLC by UN Security Council resolution 1860.

According to the reports, the slowdown in growth in the West Bank can be attributed to falling donor support combined with the uncertainty caused by the Palestinian Authority’s fiscal crisis, as well as insufficient easing of restrictions. The Palestinian Authority apparently delivered on the factors under its control by once again taking steps to raise domestic revenues and control expenditures.

Ladies and gentlemen,

This has created an untenable situation for the PA that simply cannot continue. The financial crisis threatens to destroy our common project, which means that previous efforts will have been in vain.

I would like to commend Prime Minister Fayyad for his relentless efforts to bring expenditure levels closer to domestic income levels. According to the reports presented to this meeting, he has delivered on his promise to maintain strict fiscal discipline and continue reforms. The PA has entered into a dialogue with representatives from both the private and the public sector to gain acceptance for urgently needed austerity measures. This has improved the understanding and acceptance of the need to reduce projected recurrent expenditures towards expected levels of income.

As donors, we should recognise and welcome these efforts, and assist the Prime Minister in the forthcoming transition to economic self-reliance.

At the same time, donors need to be realistic and patient. The PA is simply not in a position to reduce the projected recurrent deficit to the currently expected levels of aid.

As long as the Palestinian Territory is under occupation, the Palestinian Authority cannot be expected to achieve economic viability through austerity measures alone. The occupation creates structures on the ground that severely hamper the functioning of the Palestinian economy.

Therefore, I call on all donors to share the burden equitably and make the extra effort needed to reverse the current fiscal crisis before it becomes completely unmanageable. I say this knowing that many donors have budgetary constraints. The transition to lower levels of external funding of recurrent costs must be an orderly one.

I have learned from the Israeli report that the parties have had several meetings to discuss technical issues. I welcome this and find it is encouraging.

While I understand Israel’s security concerns, it is important that the Government of Israel now redouble its efforts to further relax the constraints of the occupation until such time as the political process can deliver a Palestinian state. Anything that can be done today to strengthen the institutional and economic foundations for a state will enhance the peace-building process and ultimately benefit both peoples when the time comes.

In the meantime, it is absolutely essential to uphold economic growth and support the efforts of the Palestinian Authority. It is important to underscore that fiscal sustainability can only be achieved through rapid and sustained private sector growth.

Given the critical nature of the situation, the following actions for implementation should be considered:

• First, donors should make available adequate funding for budget support and frontload payments – if they are able to do so - to cover the PA’s immediate need for around USD 1 billion;
• Second, the clearance revenue mechanism should be made continual, predictable and transparent, and it should be separated from politics. It is imperative that the Government of Israel and the PA reach an understanding on this issue as swiftly as possible and translate this into action;
• Third, the restrictions on access and movement in the West Bank and Gaza must be further eased to allow for increased public and private investment and the development of essential infrastructure, as well as increased economic activity and expanded public services in Area C;
• Fourth, the Palestinian trade regime should be significantly improved so that Palestinian trade between the West Bank and Gaza, as well as with Israel and third countries, can be increased. 
• Fifth and finally, the PA must continue to exercise strong fiscal discipline and control, increase its domestic revenues and further tighten its public spending during the transition to self-sustainability.

Thank you.