<u>Budget Proposal for FY2003</u> <br> Excerpts from = the Statement of the Minister of Finance to the Palestinian Legislative = Council December 31,2002

Minister of Finance Salam Fayad has submitted the following = PNA=20 Budget Proposal for FY2003 to the Palestinian Legislative Council = (PLC)on=20 December 31,2002:

It is a pleasure and honor for me to = present=20 to you the draft budget law of the Palestinian National Authority = (PNA)=20 for the year 2003=85 I wish to express my deep appreciation for = the=20 extraordinary effort which all PNA ministries and agencies have = made , and=20 under very difficult conditions, toward the preparation of this = budget=20 submission. This attests to the great importance that we all = attach to the=20 unique role which the budget process plays as a pillar of the = fundamental=20 precepts of good governance that form the basis of our reform=20 effort.

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The baseline scenario in the 2003 = budget=20 proposal assumes the continuation of status quo in terms of = underlying=20 economic conditions .Under this scenario, GDP is projected to = decline by 7=20 percent in 2003.Revenue=96making capacity is also projected to = decline to=20 about US$530 million, while external budgetary support is assumed = at=20 around the same level as in 2002 (US$500 million). On the other = hand , it=20 is assumed that the Government of Israel will resume the regular = transfer=20 of the revenues it collects on behalf of the PNA, and that the = stock of=20 withheld revenues will be released in 2003.

Under these=20 assumptions, it should be possible for us to fund current and = capital=20 expenditure in the amount of about US$1.1 billion, while = eliminating the=20 stock of budgetary arrears and significantly reducing our = indebtedness to=20 the banking system. A phased approach to the reduction of arrears = will be=20 followed in the event of a shortfall in external = assistance.

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For illustrative purposes , an=20 alternative scenario was developed to capture the effects of a = return in=20 the first quarter of 2003 to the conditions that prevailed in the = third=20 quarter of 2000. The removal of the restrictions imposed by Israel = assumed=20 in this scenario could lead to GDP growth of 17 percent in 2003, = 15=20 percent in 2004, and 9 percent in 2005.This would lead to a = substantial=20 improvement in our revenue-making capacity in 2003 and over the = medium=20 term. Specifically, revenues are projected to rise to US$66 = million per=20 month in 2003, US$97 million in 2004, and US$108 million in 2005. = This=20 compares to only US$ 44 million per month under the baseline = scenario.=20 What such an improvement means is that our external recurrent = budgetary=20 support needs would decline by 50 percent in 2003, before they are = completely eliminated in 2004. In fact ,under this scenario, we = could be,=20 by 2005, in a position to fund a substantial portion of our = development=20 expenditure needs (about US$100 million), in addition to providing = full=20 funding for our current expenditure needs out of our own = revenues.

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Basic Considerations that Guided = the=20 Budget Preparation Exercise:

(1) Short =96 Term=20 Considerations:

The need to increase government spending as soon as possible = to=20 address the state of weakness of aggregate demand that prevailed = over the=20 past two years.

The need to establish confidence in the public finance system, = especially in view of the damage to the credibility of the system = entailed=20 by the failure to meet obligations in a timely fashion and the = associated=20 accumulation of budgetary arrears.

The need to address the deterioration in living conditions and = damage=20 to infrastructure sustained over the past two years.

The need to restore the capacity of our institutions to = function in an=20 orderly manner after nearly two years of a state of near paralysis = which=20 the dearth of resources has entailed.

The need to restore of the margin for maneuver which fiscal = management=20 has lost due to a sharp increase in commercial bank=20 borrowing.

(2) Longer =96Term Considerations:

Firm commitment to full market orientation and to limiting the = government role to the provision of basic services , an adequate = and=20 transparent regulatory framework, and an efficient social safety=20 net.

The adoption of a fiscal policy stance capable of enhancing = private=20 sector confidence in the prospects of the Palestinian economy = .This=20 requires ,among other things, the adoption of budgets that are = based on=20 realistic assessments of resource availability, and the avoidance = of=20 borrowing on commercial terms.

The need to generate public sector savings to permit coverage = of=20 development spending needs out of our own resources.

The need to achieve a better balance among the various = spending needs.=20 In particular , the share of the wage bill in total spending = should be=20 reduced over the medium term.

The need to allocate adequate funds for human resource = development,=20 which should entail greater emphasis on the needs in the = education, health=20 , and other social sectors.

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Financial Reform Measures = Envisaged=20 under the 2003 Budget Proposal

Continue to work with the international donor community to = ensure that=20 donor funds are channeled through the PNA Treasury. Our position = on this=20 matter derives considerable strength from the actions we took to = improve=20 the functioning and enhance the transparency of our public finance = system=20 , including by consolidating our own revenues in the Single = Treasury=20 Account .

Complete the work currently underway to achieve full = operational=20 integration between the various units of the Ministry of Finance = in Gaza=20 and the West Bank. Full computerization and the establishment of = online=20 links will facilitate this task, and so will the establishment of = a branch=20 budget unit in the West Bank to ensure that all expenditure = operations=20 represent an orderly execution of the budget approved by you. = These=20 measures will enable us to publish , as of April 2003, detailed = budget=20 execution reports on a monthly basis . These reports will exceed = in scope=20 and detail data provision requirements under programs supported by = the IMF=20 and the World Bank .And, speaking of publication and dissemination = of=20 information, I am pleased to announce that the construction of a = website=20 for the Ministry of Finance (www.mof.gov.ps) is nearing completion = , and=20 that it will be inaugurated later today with the posting of the = full=20 budget proposal for 2003. This is meant to mark the beginning of a = new era=20 of openness and absolute commitment to the highest transparency = and=20 accountability standards in the management of public = funds.

Eliminate the use of cash in government transactions , = including in=20 the payment of wages and salaries. Specifically , the direct = deposit=20 scheme currently used to pay civilian wages should immediately be = extended=20 to cover the police. This measure will greatly enhance the = transparency=20 and credibility of the Palestinian public finance system, and it = should,=20 therefore, be implemented without delay.

Complete the work currently underway, with the assistance of a = specialized international firm, to reorganize the investment and=20 commercial operations of the PNA by consolidating them completely = under=20 the purview of the Palestine Investment (PIF) that was set up last = August=20 , and whose Articles of Association require the adoption of the = highest=20 disclosure and audit standards for asset management . An asset = valuation=20 exercise is currently being undertaken, and we are firmly = committed to the=20 full disclosure of the valuation report immediately following its=20 completion, in mid-February 2003. I am confident that we are on a = path=20 that will put an end to managing public funds in a manner that = greatly=20 undermined the credibility of our public finance system.

Complete the work currently underway to reorganize and = strengthen the=20 internal audit role of the Ministry of Finance, with a view to = ensuring=20 the appropriate use of public funds and the integrity of the = public=20 finance system. The effort in this area involves establishing = permanent=20 presence of well-trained Ministry of Finance auditors in all PNA=20 ministries and agencies , as well as securing the capacity to = undertake=20 periodic and spot inspections and investigations , as may be = needed, to=20 ensure full compliance with all relevant rules and = regulations.

Rationalize public sector hiring policy and practices by = limiting=20 additional hiring only to the education ,health , and judiciary = sectors ,=20 and to cases judged absolutely necessary for the proper = functioning of the=20 government, with recruitment decisions taken solely on the basis = of a fair=20 and impartial evaluation of the needs and qualifications. We view = success=20 in this endeavor as absolutely essential if we are to ensure that = public=20 sector employees are both qualified and adequately = remunerated.

Advance the work currently underway to adopt a modern pension = system,=20 which we view on a basic component of a fully integrated social = safety net=20 that we believe the Palestinian people should have.

Ensure full compliance by all the PNA ministries and agencies = with the=20 provisions of the General Procurement Law that pertain to bidding = in the=20 acquisition of goods and services. Toward this end , I will not = hesitate=20 to use the powers vested in me by the law , including the = withholding of=20 budgetary appropriations of violating agencies. And , lest there = be doubt=20 in anyone=92s mind, let me state unequivocally that when I say all = ministries and agencies , I mean all ministries and agencies , = including=20 the Security Financial Administration. In particular , I wish to = point to=20 the exclusive transactional relationship between this = administration and=20 the Security Cooperative .This relationship represents a clear = violation=20 of the law, and it, therefore, should not, and will not, be = allowed to=20 continue.

(Source: Palestine Ministry of Finance)