US embassy cable - 05TELAVIV363

C O N F I D E N T I A L SECTION 01 OF 02 TEL AVIV 000363 
 
SIPDIS 
 
NSC FOR ABRAMS/DANIN 
 
E.O. 12958: DECL: 01/18/2015 
TAGS: ECON, EFIN, PREL, KWBG, IS, ECONOMY AND FINANCE, U.S.-ISRAEL RELATIONS, GAZA DISENGAGEMENT 
SUBJECT: FINANCE MINISTRY DG ON U.S. ASSISTANCE, BUDGET AND 
JOINT ECONOMIC DEVELOPMENT GROUP (JEDG) 
 
REF: TEL AVIV 244 
 
Classified By: Ambassador Daniel C. Kurtzer for Reasons 1.4 (d,b) 
 
1.  (C) Summary.  Economic Counselor and Deputy held a 
wide-ranging meeting with Finance Ministry DG Yossi Bachar on 
January 18.  Bachar discussed the Cabinet's January 16 
decision to name him chair of a committee coordinating all 
assistance requests to the USG.  He believes this would give 
coherence to the GOI's policy in this area.  In this regard, 
Bachar noted it was "too early" for the GOI to submit any 
assistance request for disengagement.  Furthermore, 
Washington should not view recent Israeli probing on U.S. 
assistance for Israel's Palestinian quality of life program 
as an official request.  During the meeting, Bachar also: 
 
-- Accepted the USG's proposal to hold a Joint Economic 
Development Group (JEDG) meeting in April.  He noted GOI 
interest in utilizing rolled-over U.S. loan guarantees in 
March or April, and agreed to seek a USG determination 
approving such an issuance closer to the actual date of loan 
issuance. 
-- Said the GOI was about to release $75 million in attached 
revenues to the PA. 
-- Noted that PA Finance Minister Fayyad was key to the 
revenue transfer arrangement and said Israel hoped he would 
continue in his current capacity; 
-- Stressed that, come what may in the political sphere, the 
GOI would maintain the 2005 budget framework agreed upon by 
the cabinet in 2004 (i.e. 3% budget deficit and 1% real 
expenditure growth, aside from disengagement).  He emphasized 
that the GOI was "paying" for the new coalition (i.e. funding 
Labor and UTJ budgetary priorities) out of a 3% 
across-the-board cut in ministerial budgets (primarily in the 
area of procurement); 
-- Expressed hope that the Knesset would approve his 
financial reform package in mid-February. 
End Summary. 
 
--------------------------------------------- -------- 
Bachar to Coordinate All Requests for U.S. Assistance 
--------------------------------------------- -------- 
 
2.  (C) Bachar outlined a new GOI effort to bring improved 
coordination to its requests for U.S. assistance.  He noted 
the wide variety of Israeli officials who went to the U.S. 
and asked the U.S. to provide funding for their own pet 
projects.  In many cases, these requests were made with no 
intragovernmental coordination, leading to a lack of policy 
coherence.  Bachar had successfully lobbied the Prime 
Minister's Office (PMO) to implement a new way of doing 
business.  From now on, all assistance requests would be 
coordinated by a new committee he would chair, which would 
include representatives from appropriate ministries, 
including PMO DG Ilan Cohen.  Bachar said that future 
assistance requests would be smaller in number, and 
transmitted through a very limited number of channels:  at 
the political level by the PMO's advisor Dubi Weissglas, and 
at the working level by himself.  The PM and Weissglas would 
decide on a case-by-case basis who would raise such requests 
in Washington, but Bachar promised that any such requests 
would be closely coordinated. 
 
----------------------------------------- 
"Too Early" for Disengagement Request, 
PA Quality of Life Request "Not Official" 
----------------------------------------- 
 
3. (C) Bachar noted that it was "too early" to submit a 
request for disengagement assistance, saying the GOI had to 
first "prove its seriousness" on implementation.  As for 
Washington discussions held by Ambassador Ayalon and 
Economics Counselor Boaz Raday on U.S. assistance for the 
GOI's Palestinian quality of life initiative (reftel), Bachar 
termed these exploratory only and stressed they should not be 
viewed by Washington as official assistance requests. 
 
----------------------------- 
No Need for JEDG Before April 
----------------------------- 
 
4. (C) Bachar said the GOI agreed to the U.S. proposal to 
hold a Joint Economic Development Group (JEDG) in April or 
May.  He asked whether the USG agreed to Israeli utilization 
of rolled-over loan guarantees in a late-March or April bond 
issuance.  EconCouns noted that, according to the Loan 
Guarantee Agreement (LGA), the USG would need to make a 
"determination" that the GOI continued to meet the economic 
conditionalities laid down by the 2003 and 2004 JEDG 
consultations before the GOI could utilize rolled-over 
guarantees.  Although the GOI was now meeting these 
conditionalities, it was premature to issue a blanket 
determination so far in advance of an April issuance.  The 
USG would prefer to make such a determination closer to an 
actual issuance in a forum less formal than a JEDG.  Bachar 
said this was acceptable, and asked for a letter outlining 
this understanding. 
 
-------------------------------------- 
GOI Concern over Fate of Salaam Fayyad 
-------------------------------------- 
 
5. (C) Bachar stressed Israeli support for Salaam Fayyad's 
efforts to reform PA finances. The GOI was now preparing to 
transfer an additional USD 75 million in court attachments to 
the PA.  Bachar said he hoped Fayyad would continue in his 
current capacity, and said he was concerned a change in the 
PA Finance portfolio could impact on the current revenue 
transfer arrangement, which in large part hinged on the GOI's 
trust in Fayyad. 
 
--------------------------------- 
Politics be Damned: The Budgetary 
Framework "Can't be Broken" 
--------------------------------- 
 
6.  (C) In response to the Economic Counselor's question how 
much the new coalition government had cost in budgetary 
terms, Bachar stressed that any such costs would be borne 
within the budgetary framework approved by the cabinet in 
2004.  The recent agreement with the Histadrut had left GOI 
finances for 2005 in "good shape" and with new flexibility. 
Aside from disengagement, Bachar said, the 2005 budget 
deficit would not exceed 3% and real expenditure growth would 
not exceed 1%.  Disengagement included, the deficit would not 
exceed 3.4%.  "If the government wants to spend more in a 
certain area, cuts will have to be made elsewhere."  PM 
Sharon had made this point crystal clear in a January 16 
cabinet meeting, which had agreed to an across-the-board 3% 
cut in ministerial budgets (primarily in the area of 
procurement) to make up for new expenditures on Labor and UTJ 
priorities.  Although Bachar did not respond directly to a 
follow-up question relating to how much it would cost to 
bring Shas into the government, he again noted that the 
budget framework would not be broken.  Bachar expected the 
Knesset to pass the 2005 budget sometime in mid- to 
late-February. 
 
-------------------------------------- 
Bachar Beams over the Fischer Coup and 
Exudes Hope over His Own Reforms 
-------------------------------------- 
 
7.  (C) Bachar ended the meeting by exulting over the recent 
appointment of Stanley Fischer as the new Bank of Israel 
(BOI) governor.  "This was a real coup, wasn't it?"  He said 
that "only someone like Netanyahu could have convinced 
Fischer to come here."  Bachar hoped the appointment would 
help bolster cooperation between the MoFinance and the BOI. 
Bachar specifically noted that Fischer supported his 
financial sector reform program, which Bachar said he 
expected the Knesset to pass sometime in mid-February. 
 
 
********************************************* ******************** 
Visit Embassy Tel Aviv's Classified Website: 
http://www.state.sgov.gov/p/nea/telaviv 
 
You can also access this site through the State Department's 
Classified SIPRNET website. 
********************************************* ******************** 
KURTZER