To be described in an Israeli national newspaper as “everyone’s favourite Palestinian” is, to say the least, a mixed blessing for a politician from the Occupied Territories. Nonetheless, Palestinian Prime Minister Salam Fayyad is highly esteemed in Tel Aviv and Washington at a time when dialogue, however fitful, has been reopened on Palestinian statehood, and interlocutors for peace are in short supply on either side.

Moreover, he retains cross-party respect within the rival factions of Fatah and Hamas at a time of critical division in Palestinian society, and was an obvious choice as prime minister when President Mahmoud Abbas formed his emergency government in June last year. Even those who furiously challenge the legitimacy of his administration and the methods of the Palestinian Authority (PA) stress their respect for him personally.

Under his stewardship, confidence in the public finance system has been restored to such a degree over the past nine months that the US recently transferred $150m in aid directly into the government’s coffers, the largest transaction of its kind in the PA’s history. Few, if any, other Palestinians could have assured Washington that this money would arrive at its intended destination.

“It is a measure of the renewed integrity in the system,” says Fayyad. “There is no way that the US, with all its checks and balances, with congressional oversight, and with the history of its feelings about our public finance system - which are not very favourable - would have agreed for that $150m to be transferred to us had we not achieved this degree of consistency and accountability.”

Fayyad has been a politician for long enough to be well acquainted with the iniquities of Palestinian politics. But even so, the events that led to him becoming Prime Minister were extraordinary.

In just over a week in early June, the mistrust that had been simmering between Fatah and Hamas since the Islamist party’s election victory in January 2006 exploded into open violence throughout the Gaza Strip. By 15 June, 120 people had been killed and 550 wounded, and Abbas’ Fatah party had been deposed in the territory. Abbas responded by dissolving the unity government, expelling Hamas and promoting Fayyad to prime minister of an emergency administration.

Palestinian society has yet to recover. Foreign aid and weapons have poured into the West Bank as Western governments seek to bolster the new administration. Meanwhile, Gaza has been driven to collapse, caught in a constant cycle of cross-border violence and subject to the almost total Israeli closure that prompted the desperate scenes on the Egyptian border earlier this year.

International boycott

Fayyad himself has had to endure constant accusations from opposition figures that his administration is illegal, while seeking to overhaul a system that had already fallen into disarray through the international boycott of the Hamas government.

As finance minister for the unity government, Fayyad had watched the government payment system collapse as international and then Palestinian banks refused to deal with Hamas. Even though aid to the PA actually increased as Arab nations countered the Western boycott, the payment system fractured.

“The boycott by the banking system was devastating,” he says. “It led to a lot of cash transactions and a multiplicity of spending centres, which in turn caused a loss of the centralisation that had been a hallmark of the reform of the previous period.”

In becoming prime minister, Fayyad had to deal with this fragmen-tation, as well as the huge burden of public sector salaries to be paid in Gaza, where government staff constitute half the workforce. More-over, bridges needed to be rebuilt with Western economies.

“The first priority was to end our state of isola-tion, but that had to be accompanied by a major effort in revamping the public finance system,” he recalls. “We also inherited a series of severe financial obligations. Not just the well-publicised obligations to public sector employees, but also to the private sector and pension fund. The priorities were clear but we had inherited a system that was very much in decay.”

Fayyad is proud of the manner in which his team have reassembled the public finance system without bringing in foreign expertise. Opposition figures complain that the government has taken too long to restore transparency to public finances, but the prime minister again points to the system he inherited and the progress made.

At Washington’s insistence, the payment structure was audited by external accountants and passed easily. In April, the Finance Ministry published the first of what are to be monthly government accounts, supplemented by quarterly reports on all fiscal operations, including the movement of foreign aid.

Since the formation of the emergency government, the widely held perception has been that Western governments, headed by the US, have seized on the schism between the West Bank and Gaza. The influx of aid to Ramallah in the West Bank has driven a wedge between the two, and Gaza is suffering from the West’s desire to isolate Hamas with apparently little thought for how to resolve the dispute.

As the gap widens, the possibility of reconciliation recedes, which is a source of deep unease among the ordinary population. Palestinians talk darkly of the ‘two-state solution’ in fact referring to separate states in the West Bank and Gaza.

This only adds to the pressure on Fayyad’s government, which is pushing through a series of reforms without recourse to the legislative council. Abbas promises to bring investment to Gaza when possible, but so far there has been little sign of a rapprochement with Hamas.

Fayyad rejects the notion that Israel and the US are seeking to capitalise on the division, or that his government is leading Palestinian politics away from democracy. “I do not believe the international community wishes the situation to be one of separation between the West Bank and Gaza,” he says. “It is a key objective to re-establish the Palestinian Authority in Gaza and restore unity to the country. This is a core policy. We view the situation now as transitional. We have to get away from it as soon as we can.”

The government also faces the daunting task of shifting a heavily aid-dependent economy away from a reliance on public sector employment to foster the private investment that could breed economic sustainability.

“The system is so vulnerable to political instability, it has shifted away from sustainable development and profitable business enterprise, either to public employment or more lucrative fields like NGOs [non-governmental organisations],” says Fayyad. “Part of the problem we faced when we took office was this bloated bureaucracy. We have made good advances in cutting the civil service, but it is not easy in the best of circumstances, and you can imagine how much harder it is in conditions of abject poverty and degradation.”

Fayyad is overhauling the tax, legislative and regulatory frameworks to encourage the private sector, but remains wary of dictating terms to the current workforce at a time of huge instability. “I am a firm believer in people being allowed to respond to market signals,” he says. “They should be allowed to move where they are paid most, and it would be a mistake to try to administratively change that.

“What we should try to do is realign the incentive structure to make it profitable to employ, and hence to seek employment in, the private sector. Can we do this? Yes, depending on the degree to which we are enabled to function by Israel, which controls the context in which we are operating.”

Investment limitations

Publicly at least, Fayyad is optimistic about the prospects for the forthcoming Palestine Investment Conference in Bethlehem on 21-23 May. But he is aware of the limitations for any future investment without progress in the peace process, and is deeply frustrated at the foot-dragging in Jerusalem. Asked if he feels Olmert’s government is truly willing or capable of making the concessions required for a solution, he is phlegmatic.

“I do not spend much time thinking about their motives,” he says. “I look at what they do or don’t do and at the consequences. It is very obvious to me that Israel has been very, very slow in moving towards what is necessary, which is easing and ultimately lifting all mobility restrictions. The way they are imposed right now means one thing for sure: a higher cost of doing business in Palestine.

“We live in a competitive world. Unless we can compete, we are never going to be export oriented and never able to flourish economically in ways that would let the private sector develop as a key source of job creation.”

Though he condemns Israel’s concessions on easing movement in the West Bank as “way short of what is required”, Fayyad is aware that it serves no purpose to carry such a negative outlook into the Bethlehem conference. About 50,000 young men and women join the workforce each year and the government has a responsibility to provide them with work and maintain the hope they may help found a new Palestinian state, even if final-status negotiations appear fruitless.

“The conflict we have to settle is political in nature and no amount of work on the economy alone is going to do the trick,” says Fayyad. “At the same time, there are opportunities, and we have to do everything we can to build towards statehood despite the occupation.”