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Cash crisis grips Palestinian enclaves

THERE are no telephone lines to the small West Bank office which tries to serve as the nerve-centre of Palestinian economic planning. But it does not seem to matter. There is no money there, and nobody to call.

The planners at Pecdar (The Palestinian Economic Council for Development and Reconstruction) await permission from the Israeli military authorities for a telephone line. Israel has withdrawn from the Gaza strip and Jericho area, and the administration was handed over to the newly formed Palestinian authority. But most of the West Bank remains under Israeli military occupation before its status is finally determined.

The Pecdar planners are waiting for a decision from donor countries to release dollars 2.2bn ( pounds 1.4bn) in funds pledged last year to underpin Palestinian self-rule.

Economic paralysis is gripping the new self-rule areas. Palestinians had hoped for immediate funds to help pay for the salaries and running costs of the schools, hospitals and other services in Gaza and Jericho.

The Israelis spent pounds 55m a year running Gaza and Jericho, money raised largely through taxes levied by the Israelis. Israeli officials say Palestinians will need at least three times as much. Yesterday Yitzhak Rabin, the Israeli Prime Minister, warned that the financial crisis could jeopardise self-rule

An emergency pounds 12m has been handed over by the World Bank, and the European Union is hoping to release pounds 7m for the Palestinian police in the next few weeks.

However, Palestinian civil servants, who received their last salary cheques this week from the outgoing Israeli authorities, have no idea where their next cheques will come from.

Senior Israeli military sources said: 'The dilemma is that if there is not money to fund the expenses the whole thing may collapse.'

Israel has made little effort to reduce bureaucratic controls over life in the rest of the West Bank (such as telephone permits). For 27 years Israel encouraged Palestinians to take low-paid jobs in Israel. Now it is imposing closure orders 'for security reasons' which prevent thousands of Palestinians from reaching jobs in Israel proper, fuelling economic hardship.

When the Oslo accords were signed last September, the world pledged to help Palestinian economic revival. Since then, hopes of a co-ordinated aid effort have been dashed, and Palestinian economists are lowering expectations of swift economic progress.

Countries which insisted that the aid be co-ordinated are pursuing back-door contracts with the PLO. The Danes are seeking contracts for ports, the British are offering banking services and several countries are touting for telecommunications contracts. The euphoria in Gaza and Jericho will evaporate rapidly, when economic realities become clear, Palestinian leaders say.

'The hang-over will start in July. Then the people will start drinking unsweetened tea,' said Hasan Abu Libdeh, deputy managing director of Pecdar. 'The challenge for us now is to minimise the chaos and try to create conditions in the long term which might attract private investors.'

Israelis, Palestinians and donors have their own explanations for the financial mess. The Palestinians have taken over services in Gaza and Jericho without any preparation and have rejected Israeli offers to help them learn how to run the tax system, Israeli officials say. Now, no Palestinian taxes are expected to be levied until late in the summer.

The international donors accuse Yasser Arafat of refusing World Bank terms for accountability over the way the development money is spent. The donors insist that the spending be supervised by the World Bank, with money funnelled through an accountable Palestinian body inside the West Bank or Gaza. Pecdar was set up to fulfill this role. But Mr Arafat has refused to delegate authority to the body, and all contracts must be signed by him in Tunis.

'Our experience of the PLO is that it spends money in the occupied territorries to gain political support for its own factions,' a Western diplomat in Jerusalem said. Western officials say Mr Arafat is running a 'contracts bazaar' in Tunis, offering direct contracts to companies and countries, to by-pass the World Bank.

The donors are now considering funnelling aid money through independent aid agencies and United Nations bodies.