Capital Ethiopia Newspaper

The impact of the economic crisis in the Palestinian Authority

European Union officials are preparing for a key summit in Brussels, where they will be trying to clinch a deal on how to tackle the euro zone debt crisis.


The talks have been described by analysts as “do-or-die” for the 17 euro zone nations. Germany and France are pushing for new EU treaties, saying stricter fiscal rules should be enshrined there. Meanwhile the European Central Bank is set to cut interest rates amid fears the euro zone is in recession.


To a lesser extent, the Palestinian Authority has been plagued this year by various financial troubles that are affecting, in turn, its ability to fulfil some of its financial obligations. The most recent source of these problems has been a decline in Palestinian Authority revenues. The Palestinian budget is usually composed of two sources of income. One is external funding from donors, and the other is made up of domestic revenues, direct and indirectly 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 Palestinian Authority has reduced a budget deficit financed by foreign aid from $1.8 billion in 2008 to $1 billion this year. Yet, some donors 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.

The Palestinian Authority’s latest financial crisis which Palestinians widely believe was punishment for President Mahmoud Abbas’ request for statehood at the United Nations in late September has seriously impacted various sectors within the Palestinian community, including both civil sector employees and West Bank security personnel.

Israel’s blockade of taxes over two months forced the Palestinian Authority to borrow the amount needed to pay salaries for 160,000 public employees in both the security and civilian sectors. These people feed about 800,000 family members.

Even though this is not the first financial crisis the Palestinian Authority has suffered, this one is more complicated and appears to be more serious. Senior Palestinian officials and some international observers in the West Bank have gone so far as to express their deep concern that its continuation will certainly lead to the collapse of the Palestinian Authority.

To see how this would unfold, one must only observe that the financial crisis has already harmed Palestinian security. Fuel suppliers have warned the Palestinian Authority police that they will stop providing them with fuel unless they pay their debts accrued over the past two months. This has forced the police force to reduce its patrols. Similarly, food suppliers have said they will not supply vegetables and fruit to the 8,500 policemen and 980 prisoners in Palestinian Authority police jails in the West Bank, unless their money is paid completely. As a result, the police force went for more than three weeks eating bread and canned meat bought previously and stored.

The inability to pay salaries will weaken the discipline of these security officers, since their commanders cannot respond to their needs, confirms the chief of a Palestinian security branch. So far, it is merely the reason behind this financial crisis that keeps them loyal to the security institution that protects their homeland.

These personnel can be expected to bear this crisis for three months in a row but not more. Then they will become unable to feed their families and pay transportation to get to their work places. This has the makings of a serious threat to the Palestinian Authority security services and their performance of their duties.

Surprisingly, main world donors such as the United States seem to care more about the Palestinian Authority security agencies than the rest of the Palestinian Authority. While some Palestinians believe that the Palestinian Authority is being punished by a number of donor Arab states for the ongoing political division between factions Fateh and Hamas, other concerns were raised following Abbas’ meeting with Hamas leader Khaled Meshaal in Cairo. The two leaders agreed to reactivate the reconciliation deal between the factions, and form a new national unity government excluding current Palestinian Authority Prime Minister Salam Fayyad. This, some fear, will force donor countries to sharply cut their finances to the PA.

Thousands of Palestinian Authority employees have taken out bank loans to finance the purchase of apartments, vehicles, or business projects. A halt in salaries will render them incapable of paying their monthly instalments or responding to their families’ needs, broadly harming businesses and the economy.

According to economists, Palestinians are classified into three groups. There are those who are directly and completely dependent on Palestinian Authority salaries in such a way that if the salaries stopped, they would not be able to pay their bills and loans and provide family needs. Even those who have some savings will quickly use that up. The second group provides services to the Palestinian Authority and its employees, including food and fuel suppliers. The third group works in the private sector and would not be harmed by a halt in the Palestinian Authority salaries or the ongoing Palestinian Authority financial crisis.

Overall, because the Palestinian Authority has no control over 80 percent of its income, it will continue being easily affected by those providing donations or collecting its taxes. The Palestinian Authority’s ability to loan the money is also limited banks are not willing to extend much more credit if the crisis extends longer than a couple of months.