Donors Increase Aid to PNA

By Colin MacKinnon

There is good news on the financial side for the Palestinians. On Jan. 9, international donors met in Paris and pledged a further $865 million in aid to the Palestinian National Authority. If you add that to some $500 million in aid that has not been spent so far, foreign aid available to the PNA from now until March 1997 will total $1.365 billion. That's more than enough to cover the cost of the $500 million or so of PNA projects for this year and the PNA's expected 1996 deficit, estimated at $75 million.

The European Union will contribute $120 million of the new funds, Saudi Arabia $100 million, the World Bank $90 million, and the United States $71 million.

Though France hosted the conference, much of the spadework for it was done by the Ad Hoc Liaison Committee chaired by Norway, a small country that has played a large role in the Palestinian-Israeli peace process. The World Bank is coordinating the aid.

The donors' move is a very up-beat sign and the money is likely to be well spent. Back in October the PNA submitted a detailed list of projects worth more than $1.5 billion to the Consultative Group of donor nations. The PNA and donors agreed at the time to give priority in 1996 to a so-called "Core Investment Program" of projects worth some $550 million. The program will focus on economic development and job creation and the projects will include roads, wells, schools, hospitals and water supply and other infrastructure.

Besides pledging money, donor nations have agreed to supply in-kind assistance, especially technical aid. Germany and Holland, for example, will be helping to improve the port of Gaza.

The World Bank, in a report issued just before the October meeting, predicted that the PNA would show a current deficit of $96 million for 1995, a figure lower than expected. The main reason for the lower figure, said the Bank, was that domestic tax collection has improved and tax revenues transferred from Israel were higher than anyone had predicted for 1995.

Donors have more confidence now in the PNA's financial administration and this is making it easier for them to pledge funding. The World Bank deserves a lot of credit for this. The Bank's Holst Fund, which was established to help cover PNA operating expenses, tells the PNA what it may use Bank funds for and uses an established auditing firm—Touche Ross, Saba & Co.—to document the spending. The Fund makes sure that donor funds are transferred to the PNA only to pay for approved and documented disbursements.

The Arab Palestine Investment Bank

The banking scene is looking up, too. The International Finance Corporation will participate in a new bank in the Palestinian Territory, the Arab Palestine Investment Bank, which, if things go well, will be the region's first comprehensive commercial and investment banking institution. Headquarters will probably be in Ramallah.

The IFC, a not very well-known corner of the World Bank, promotes private sector investment in developing countries by lending them money and buying into projects—including banks. The IFC charges market rates and tries to make a profit. It has a good success record. So if the IFC okays a project, the project is pretty sound.

Donors have more confidence in the PNA.

The IFC will invest up to a quarter of the new bank's capitalization and also will open a line of credit to the bank for on-lending to small and medium-sized Palestinian enterprises.

The new bank won't be huge—capitalization will be only $15 million at first—but that's fine. The institution is expected to grow as the needs of its clients evolve.

The Arab Bank Group based in Amman will hold 51 percent of the new bank's shares and the rest will be held by the German private sector financing agency DEG (15 percent) and Palestinian private investors.

The bank will address a real need. The West Bank and Gaza have never had good banking. A particularly difficult obstacle to development in the Palestinian Territory has been the lack of term financing. Business people have simply not been able to get long-term loans. The new bank will change this and at the same time, the IFC hopes, will become a model institution for the region.

At first the new bank will do project lending, trade finance, corporate advisory services, and will try to mobilize funds from local and overseas investors. But working from this last activity the bank might get into more sophisticated work such as underwriting bonds and promoting investment funds.

The IFC was hoping the bank would start up early in 1996. It won't, because there have been some delays. But the bank will start up before the end of 1996. Keep your fingers crossed. It's a good idea.

Middle East and North Africa Bank

Less of a good idea, but much larger, is the coming Middle East and North Africa Development Bank. Despite European skepticism and outright hostility from Gulf states, the new multilateral regional institution, a product of the Casablanca summit of 1994, seems to be moving along. The U.S. Treasury Department says preliminary discussions on the articles of agreement have been concluded, though the proposed articles have not been made public.

The bank will be modeled on the InterAmerican Development Bank and the Asian Development Bank, both of them respected regional institutions, but it will have a large political axe to grind: it will aim at promoting regional peace by supporting economic development and by pushing "integration." The latter concept is, let us say, fluid, but it basically means that the bank will try to get Israelis and Arabs into joint projects and facilitate trade between them.

Capitalization will be large, $5 billion, though only half of what the bank's original backers had proposed. The U.S. share will be 21 percent. At least 16 other countries have so far agreed to kick in, including Italy, Russia and Japan. Great Britain, France and Germany have not come in yet. Saudi Arabia, Kuwait, the UAE, and Bahrain are against the whole thing and probably won't budge.

What will the bank do? The bank will make market-rate loans to projects it considers viable, from Morocco to Oman, Syria to Yemen, and will act as a merchant bank by co-financing its projects with other sources of funding and will leverage resources to the region supposedly without competing with existing institutions. The U.S. Treasury Department says the bank will avoid duplicating what other institutions do.

Unlike existing regional institutions such as the Arab Fund for Social and Economic Development and the Islamic Development Fund, the new bank would not only include Israel, it would work toward Israeli-Arab partnership.

The bank's reach and funding will be very large and, with any luck, some of the bank's financing and expertise should find their way to the Palestinian Territory and contribute to meaningful development there. It's all worth a try, and taken together the outlook for infrastructure building and productive economic activity has improved immensely in the first month of 1996 over the last month of 1995.

Colin MacKinnon is chief editor of the Washington-based Middle East Executive Reports.