AP Interview: Bleak outlook for West Bank economy

RAMALLAH, West Bank (AP) -- The Palestinians this week replaced one internationally respected, U.S.-trained economist with another in hopes of solving long-running problems in the West Bank, including a drop in foreign aid, a crippling budget deficit and Israeli development restrictions.

But Mohammad Mustafa, who took over the economics portfolio from outgoing Prime Minister Salam Fayyad, acknowledged in an interview Wednesday that he has no radical new solutions, and at best can push harder to get a slightly better outcome.

"On the financial side, things look pretty bleak," he said a day after taking office as deputy prime minister for economic affairs.

Illustrating the problem, Mustafa said he's short $150 million for covering the government payroll and operating costs for June, and he will soon tour Arab countries to persuade leaders there to make good on promises of hundreds of millions of dollars in aid.

The Palestinians' economic problems are linked to the long deadlock in negotiations on the terms of a Palestinian state alongside Israel.

U.S. Secretary of State John Kerry is pushing to restart talks that have been frozen for nearly five years, but so far he has failed to find sufficient common ground to get Palestinian President Mahmoud Abbas and Israeli Prime Minister Benjamin Netanyahu to the table.

The Palestinians want a state in the West Bank, Gaza and east Jerusalem, territories Israel captured in 1967. Before going to talks, Abbas wants Netanyahu to recognize Israel's pre-1967 line as a starting point or promise to stop building in Israeli settlements, but the Israeli leader has refused to do either.

In trying to lure the Palestinians to the table, Kerry has floated a three-year, $4 billion development plan that is supposed to create tens of thousands of jobs and expand the Palestinian economy by 50 percent.

The plan could be launched only if there is progress in Israeli-Palestinian negotiations, said an official involved in devising it. He spoke on condition of anonymity because the plan has not been formally adopted and he was not authorized to release details to reporters.

Any projects, if begun before a final peace deal, would still require approval from Israel, which retains overall control over the West Bank.

The Palestinian Authority has limited say in 38 percent of the territory where most of the Palestinians live.

The remainder of the land, home to more than 350,000 Israeli settlers and known as Area C — terminology from interim peace deals of the 1990s — has largely been off limits to major Palestinian development.

Starting under Fayyad, the Palestinian Authority tried to launch its own development projects in Area C, including a tourism resort on the northern end of the Dead Sea, a $1.4 billion plan that was to create 40,000 jobs. Mustafa said Wednesday that his Palestine Investment Fund proposed the plan 2 1/2 years ago and presented it to Israel, but that "until now the project is not authorized."

Other proposed projects include a new city north of the biblical town of Jericho and an expansion of a nearby agro-industrial park.

Israeli government spokesman Mark Regev said Wednesday that Israel supports efforts to develop the Palestinian economy and is ready to work with the Palestinians and others to achieve that goal. Regev did not comment on Palestinian complaints about Israel blocking large projects in Area C.

With peace efforts still deadlocked and development prospects uncertain, the Palestinians' economic future largely depends on others.

The Palestinian Authority raises only one-third of its annual budget from local revenues, while another third comes from taxes and customs Israel collects for the Palestinians, Mustafa said.

Foreign aid has to close the funding gap, but support has dropped off, with Arab donors most often going back on payment pledges.

In recent months, Fayyad struggled from month to month to cover the bloated government payroll of 153,000 civil servants and members of the security forces, and Mustafa now faces the same problem. "In terms of dealing with the immediate issues of needing to cover the recurrent expenditures, salaries for the coming few months, it looks very difficult," he said.

Fayyad served as prime minister for six years and won praise for reviving the West Bank economy after years of conflict-driven downturn. The small boom eventually flattened.

Fayyad, a political independent, resigned in April after growing tensions with Abbas and leaders of his Fatah movement, who felt one of their own should be prime minister.

Fayyad's successor as prime minister, Rami Hamdallah, is a West Bank university dean with no previous government experience.

The 59-year-old Mustafa, who is taking charge of the economy, is in some ways remarkably similar to Fayyad, 61. Both hold advanced degrees from U.S. universities. Mustafa worked at the World Bank, Fayyad at the International Monetary Fund. Both are pragmatists and political moderates.

Fayyad's economic policies, including tax hikes, prompted increasing strikes and street protests in recent months, often led by Fatah-controlled unions. The new government is perceived as Fatah-run, and Mustafa will likely be given a grace period, but that could quickly change.

"It's a personal risk," he said of the new job, adding that "hopefully (it's) a contribution to helping our people manage their affairs in a smooth way, in a reasonable way."