Ultimately crippling


The Palestinian Authority has been plagued this year by various financial troubles that are affecting, in turn, its ability to fulfill some of its financial obligations. The most recent source of these problems has been a decline in PA revenues. The Palestinian budget is usually composed of two sources of income. One is external funding ($1.83 billion annually) from donors, and the other is made up of domestic revenues, direct ($812 million a year) and indirect ($1.442 billion annually collected by Israel).

In spite of the fact that the Palestinian Authority has been systematically reducing the need for external funding, that funding remains a substantial part of its budget. In the last three years, the PA has reduced a budget deficit financed by foreign aid from $1.8 billion in 2008 to $1 billion this year. Yet, some donors (for reasons that the Palestinian Authority does not know) have not fulfilled commitments made in donor conferences or in Arab League meetings. That decline in external funding began a few months before the beginning of this year and has continued to accumulate throughout 2011. It was dealt with by borrowing from banks–to the extent that the Palestinian Authority has reached the debt limit allowed by domestic laws and regulations.

In the second half of this year, a new source of financial difficulty started to emerge. Israel collects indirect taxes on commodities imported and exported by Palestinian businesses, by virtue of Israel’s control over the borders. The Paris protocol, part of the Oslo agreements, stipulates that Israel should collect taxes on behalf of the Palestinian Authority and regularly transfer these revenues to it.

In June, however, Israel announced that it was not going to transfer the tax revenues for that month for reasons having to do with the political behavior of the Palestinian Authority. This added significantly to the already-existing financial troubles. The indirect taxes that Israel collects and transfers monthly are two-thirds of local revenues and almost two-thirds of the public sector wage bill. Further, Israel twice more repeated its refusal to transfer the taxes. In all three cases, the Palestinian Authority was unable to pay workers’ salaries until international pressure convinced Israel to make the transfer.

This growing crisis, especially last month, created a lot of debate among Palestinians–but also among internationals involved in the peace process and the program of support to the Palestinian Authority. Their assessments indicated that the crisis created by the combination of these two factors–and especially if Israel continues withholding these tax revenues–embodies an existential threat to the Palestinian Authority. This raises the question of whether there has been an Israeli decision made to move beyond the already-existing policy of undermining the Authority to measures that might cause its collapse.

This financial crisis is not new. Nor is Israel’s withholding of Palestinian tax revenues. We lived with similar crises when we had a government led by Hamas, and during Israel’s 2002 reoccupation of the Palestinian territories and destruction of Palestinian infrastructure. However, the effect of the current financial crisis is different because this crisis comes on top of political stagnation. Now we have the combination of political stagnation, in which the Palestinian Authority is unable to deliver politically due to Israeli settlement activities, together with a financial crisis in which the Palestinian leadership is unable to deliver financially and economically. The combination of these is crippling.