Israel Sought to Borrow $100 Million From IMF to Prevent Collapse of Palestinian Authority

Request was turned down because Palestinian Authority is not a state, and cannot ask the IMF for help on its own.

Israel recently asked the International Monetary Fund for a bridge loan of a $100 million dollars that it planned to transfer to the Palestinian Authority to help prevent its financial collapse, but the IMF turned down the request.

The PA, which is not a state, cannot ask the IMF for help on its own. The plan therefore, was for Israel to take the loan on the Palestinians' behalf, have the PA repay the loan to Israel, and Israel would repay the IMF.

The IMF rejected the Israeli request, however, saying it did not want to set a precedent of a state taking a loan on behalf of a non-state entity.

Israel's approach to the IMF began to take shape during the IMF's annual conference in Washington in mid-April. PA Prime Minister Salam Fayyad met during the conference with Bank of Israel Governor Stanley Fischer and the two discussed the PA's serious financial crisis.

According to a senior Israeli official, Fayyad explained to Fischer that the euro crisis in Europe and the financial crisis in the United States made it impossible for Western nations to increase their financial assistance to the PA. At the same time, Arab states were not transferring funds that they had promised, and Palestinian banks were refusing to extend any more credit to the government due to its inability to make debt payments.

This economic squeeze was giving the PA a serious cash-flow problem that was making it hard to pay salaries to government workers, particularly to security personnel. Salaries are being paid late, and many only get half their salaries when they are paid.

Fayyad told Fischer that the PA needed $100 million to make its payments for the coming year and asked him to help the Palestinians get a bridge loan from the IMF. Since the PA is not a state and not a member of the IMF, it cannot qualify for a loan, even if its circumstances might merit it.

Fischer discussed the matter with Prime Minister Benjamin Netanyahu and got a green light to proceed.

"Netanyahu is interested in preventing a situation whereby the PA collapses financially, which is liable to have a very negative impact on the West Bank security situation," a senior Israeli official said.

Fischer approached IMF officials and suggested that Israel would take the loan from the IMF and would in turn loan the money to the Palestinians. The PA would pay Israel back, and Israel would forward the money to the IMF.

The IMF considered the request, but in the end, refused it, saying that the proposal was against its regulations and was liable to set a problematic precedent.

Despite the refusal, Fischer and Fayyad are trying to find an alternate solution.

Fischer and Fayyad know each other well from the period when the two of them worked at the IMF from the end of the 1990s until 2001. During those years Fayyad was the IMF representative to the PA and Fischer was the fund's deputy director. Both ended their terms at the IMF at about the same time; Fayyad was named finance minister in the PA government and Fischer went to the private sector, becoming Bank of Israel governor in 2005.

In 2011, when Fischer was contending for the post of IMF director after the resignation of Dominique Strauss-Kahn, who was caught up in a sex scandal, Fayyad publicly supported Fischer.

Read this article in Hebrew

Yuval Steinitz Benjamin Netanyahu Stanley Fischer Haim Shani - Tomer Appelbaum - 23022012
Tomer Appelbaum
International Monetary Fund