WRITTEN QUESTION E-1554/02

by Bob van den Bos (ELDR) to the Commission

(3 June 2002)

Subject: EU aid to the Palestinians

According to the Israeli Government, the Palestinian Authority has misused EU aid funds to finance terrorism. The Dutch newspaper NRC Handelsblad even reported on 8 May 2002 that the European Union was aware of the Palestinian Authority's misuse of funding but had refrained from raising the issue in the interests of a resumption of the peace process.

In his letter of 7 May 2002 to the Ministers for Foreign Affairs of the European Union, Commissioner Patten rejected these accusations. However, the information about the nature of the EU's aid to the Palestinians which he attached to his letter by way of evidence does not make it clear exactly what the budget support is being spent on or how its use is monitored.

Will the Commission draw up a more specific account of the distribution of the EU funding among the various expenditure headings of the Palestinian Authority and indicate how the IMF monitors expenditure?

Why did the Commission seek the assistance of the IMF in monitoring the use of European aid funds a year ago? What was the situation before the IMF started to provide such assistance?

What will the Commission do to prevent funding being misused by the Palestinian Authority for purposes of terrorism and corruption?

If the misuse of funds for purposes of terrorism and corruption has been proven, is the Commission considering measures? If so, what?

In what respect will the reforms which have been initiated within the Palestinian Authority also include reform of financial management and supervision thereof? Will the Commission urge the Palestinian Authority to ensure that they do?

Answer given by Mr Patten on behalf of the Commission

(2 August 2002)

The Community's intervention consists of direct budgetary support, equivalent to about 10 % of total expenditure. The Community support is merged with the support of other donors, converted into shekkels and used by the Palestinian Authority (PA) to finance its austerity budget (mainly salaries for the public sector and emergency expenditure).

The Fund secures a continuous presence at PA's Ministry of Finance through its Resident Representative who certifies, on a monthly basis, that all revenues and payments are channelled through the Ministry of Finance's Single Treasury Account (STA). With respect to expenditures in particular, the Resident representative of the International Monetary Fund (IMF) is permanently following the unfolding of the expenditures pattern during each month and is able to report on expenditure outturn approximately six weeks after the close of any month. In effect he sees all spending information, received by the Minister of Finance in aggregate form including the payroll expenditure (which constitutes approximately two thirds of the total expenditure of the PA). Furthermore the IMF also regularly mounts major missions to the PA from its Washington based staff.

Cooperation between the Commission and the IMF dates back to 1997 when it was agreed to establish a loan fund for the Palestinian Authority in response to the temporary freezing by Israel of clearance revenues. It is recalled, however, that following the outbreak of Intifada, the situation deteriorated considerably with Israel freezing indefinitely all monthly transfers of tax revenues to the PA. These transfers, making up more than 60 % of its own revenue, threatens economically the very existence of the PA. To avoid the collapse of the Palestinian Territories into chaos and anarchy, which would deprive the population from the delivery of basic services and reinforce fanatic and violent groups, the Community decided to provide direct budgetary assistance to the PA (May 2001). Throughout the establishment of this budgetary package, the Community continued to work closely with the IMF which had agreed to provide a monitoring role. Thus the IMF has been involved since the start of the budgetary assistance package to the PA. The Community assistance of EUR 10 million (namely USD 9 million) is, on a monthly basis, equivalent to only 1/3 of fiscal transfers from Israel (USD 30 million). The Community budgetary assistance is provided to stabilise the PA and allow it pay the salaries of the public sector and provide basic services to its population (more than half of the Palestinian population lives under conditions of poverty with a revenue of less than USD 2 per day). Furthermore, the Community's budgetary assistance is provided on the basis of a conditionality aiming at strengthening the consolidation and transparency of the PA's public finances and promoting reform in the PA. The evaluation of the compliance with the conditionality attached to Community's budgetary assistance is carried out on the basis of monthly comfort letters provided by the IMF. The rigour and objectivity of the IMF are well known. The Fund is the world authority in macroeconomic analysis and particularly in fiscal developments. Its monthly reporting to the Community has given it the possibility to monitor fiscal developments in the PA on a regular basis.

Deepening the reform in the PA and improving its financial management capacities is the best preventive strategy against the misuse of funds and corruption in the PA. The Community's budgetary assistance is provided on the basis of a conditionality aiming at strengthening consolidation and transparency in the PA's public finances and promoting reform in the PA. This conditionality has already brought fruits: the IMF certifies every month that all revenue and expenditure of the PA is channelled through the Treasury's Single Account. Another key condition of the budgetary support has been the recently approved Judiciary Independence Law which constitutes an important step towards the reform of the Judiciary in the Palestinian Territories and the separation of powers. The Community's conditionality also provides for the strengthening of the General Control Institute (Court of Auditors).

The Commission examined the allegations that have been made by the Israeli authorities on the misuse of Community funds. It has looked carefully at the evidence provided by the Israeli government (Minister Naveh) and by the Israeli Defence Forces. The Commission also invited the IMF and the Palestinian Authority to comment on the allegations. The Commission, on the basis of the material it has examined, has not found any evidence of Community funds being used for purposes other than those agreed between the Community and the PA. The Commission takes this matter extremely seriously and will continue to give utmost priority to the examination of any allegations of misuse of Community funds.

The reform of the financial management of the PA is the objective of several key conditions of the conditionality attached to the Community budgetary assistance. For instance, conditions aim, inter alia, at the implementation of the austerity budget of the PA, which has been prepared with the help of the IMF. They also aim at the control of the payroll and the containment of budgetary arrears. Monitoring of these conditions is provided in the IMF's monthly comfort letters, on the basis of which the Commission evaluates compliance and approves the payments.