By Josh Mitnick in Ramallah, Sunday Telegraph, March 11, 2007.

A former World Bank official who is about to become the Palestinian finance
minister has warned foreign donors that he has no idea where much of their
money has been spent.

In the 14 months since Hamas won elections, Palestinian finances have
descended into such chaos that there is now no way to confirm whether aid is
going to its stated purpose, according to Salam Fayyad, 54, who is poised to
start his second stint as treasury chief once the rival Hamas and Fatah factions
finalise a “unity” government.

An estimated GBP 362.5 million has flowed into Palestinian government coffers
from abroad since the election that brought Hamas to power and ushered in a
period of internal conflict that came close to all-out civil war.

The European Union alone provided GBP 59.5 million last year and sent a
far greater sum directly to hospitals, power generation projects and to families
in need.

Now, Palestinian Authority spending is out of control, salaries are being paid to
workers who never turn up, and nobody can track where the money is going,
according to Mr Fayyad.

There was no way to be certain that aid was being used as intended, he
admitted. “Please write this: no one can give donors that assurance. Why?
Because the system is in a state of total disrepair.”

Five years ago, Mr Fayyad – who had worked at the US Federal Reserve Bank -
was asked to create order out of Palestinian finances by the president at the
time, Yasser Arafat. Now, he is confronting the fact that his accounting reforms
have all unravelled, there is a ballooning wage bill, a yawning budget shortfall
and an international financial boycott of Hamas.

Mr Fayyad conceded that until he assumed office he could not be sure of the
depth of the crisis or how to fix it. He expected it to take weeks to regain
enough control over Palestinian funds to restore oversight over new donations.
It would take several months to begin reining in the inflated salary bill.

Hours earlier, the World Bank had published a 197-page report warning the
Palestinians to control a wage bill that totals two thirds of all spending, and of a
“dire” budget deficit, estimated at GBP 57 million per month.

Hamas refuses to recognise Israel’s right to exist and is widely viewed as a little
more than a terrorist faction. Last year, a ban on funding it was enforced by the
EU, the US, many Arab states and international banks.

Ironically foreign aid to Palestinians increased, either carried across the border
into Gaza in cash-stuffed briefcases by Hamas officials, or through a special
financial channel to the office of President Mahmoud Abbas, the leader of the
rival Fatah faction with whom the West is prepared to work.

As a result, Mr Fayyad said, incoming funds have been widely dispersed
with no central authority to monitor them. Some have gone to people who do
not appear on the Palestinian budget ledger. “Where is the control?” asked Mr
Fayyad. “It’s gone. Where is all the transparency? It’s gone.”

He said his first objective would be to make the finance ministry the sole
conduit for incoming aid, and to reinstate proper audits. That meant no more
financial back channels or border smuggling, he said. “It’s not my intention to
manage the Palestinian budget system through the brown bag.”

The Palestinian Authority’s unchecked proliferation of government jobs -
growing by 11 per cent a year – is another threat to its existence, the World
Bank said. Mr Fayyad acknowledged that the problem of thousands of absentee
employees was “serious”, but said it would take up to five years to bring wages
into line with income.

He was reluctant to say how he would do that, perhaps understandably, given
that unpaid security forces have a habit of barging into government offices with
guns blazing, and that gunmen recently shot up the outside of his office.

Now some of Mr Abbas’s presidential guard is assigned to his premises -
a stark reminder of the connection between restoring security and bringing
finances under control. “This will be extremely difficult,” he said. “It’s virtually
impossible.”