The deteriorating situation of the Palestinian coffers is mainly due to the freezing of revenue by Israel and the ending of international aid.
A United Nations (U.N.) report published Thursday warns that the Palestinian Authority (PA) is facing “unprecedented” financial challenges due to loss of revenue and extreme austerity measures.
“A major fiscal crisis, coupled with growing humanitarian needs and lack of a political prospect for a negotiated solution, threatens the stability of the West Bank and the very survival of the Palestinian state-building effort,” reads the report issued by the Special Coordinator for the Middle East Peace Process (Unsco) for the upcoming bi-annual meeting of the Ad Hoc Liaison Committee (AHLC) in Brussels on April 30.
The deteriorating situation of the Palestinian coffers is mainly due to the freezing of revenue by Israel and the ending of international aid. In 2018, the Trump administration ended approximately US$230 million in development funding to the Palestinian people and another US$360 million in funding to the United Nations Relief and Works Agency for Palestine Refugees in the Near East (Unrwa).
In January 2019, the World Food Programme also cut food aid to about 190,000 Palestinians due to a shortage of funds. “The suspension of aid to our people, which included critical sectors such as health and education, will have a negative impact on all, create a negative atmosphere, and increase instability,” Nabil Abu Rudeineh, a spokesman for Palestinian President Mahmoud Abbas, said back on Feb. 1.
Yet the situation became more intense in February, as Israel’s security cabinet approved the freezing of US$140 million for the fiscal year in tax transfers over the PA’s payments to Palestinians jailed by Israel. This meant the withholding of about six percent of the tax revenue levied on goods it collects on behalf of the PA.
However, the Palestinian authorities stated they will continue making payments to prisoners held by Israel, and their families, and that it will not accept anything but the full amount of clearance revenue due to it. As a result of this decision, the government has been deprived of some 65 percent of its revenue and forced to take extreme austerity measures.
Such measures include placing a ceiling on salaries of public employees at about US$2,700 per month and instituting a 50 percent reduction in salaries of public employees earning over US$550 per month. Other measures include an across the board 20 percent reduction in operational expenses, a freeze on recruitment, salary increments, and bonuses.
The income reduction for Palestinians will have an impact on purchasing power, which in turn will keep reducing the already dwindling tax revenues. To make matters worse, the tax collections have already faced a setback. Since mid-February, the PA is no longer present at the Kerem Shalom crossing, as Hamas has adopted measures to restrict imports and increase them through the Rafah crossing with Egypt.
“Unless resolved soon, the impact of this crisis on the economy will take years to undo. The inability of the PA to deliver basic services and social protection in the meantime would hurt the most vulnerable Palestinians the most,” the report concludes.
Meanwhile, on April 21 during the last session of the Arab League Council meeting in Cairo, Arab ministers pledged US$100 million per month to the PA in order to make up for the tax revenues that were withheld by Israel over a long duration. However, as the financial crisis takes a toll on the stability of the government, it will affect talks towards a two-state solution.