Occupation strangling Palestinian economic life

October 17, 2012
Sarah Benton

Palestinian protesters burn an effigy of prime minister Salam Fayyad during a demonstration against the high cost of living in Hebron on 4 September 2012. Photo: AFP – Hazem Bader

Palestinians Cry ‘Feed My Children’ as Abbas Rule Imperiled

By Jonathan Ferziger and Fadwa Hodali, Bloomberg
October 16, 2012

In the Palestinian city of Ramallah, protesters thronged the streets this month shouting “feed my children” after the government once again failed to pay 170,000 civil servants their monthly salaries on time.

In Hebron to the south, hundreds of demonstrators burned tires in September to protest the economic squeeze, while in Bethlehem residents tore down road signs to show their anger.

Palestinian Authority President Mahmoud Abbas is struggling to plug a $1.3 billion budget deficit as foreign aid dries up. That’s forcing government workers to subsist on partial salaries and sidelining the stalled peace negotiations, which are largely being ignored next door in Israel as campaigning gets under way for the Jan. 22 election.

“The PA doesn’t have any magic solutions or even a political vision and all doors seem to be closed,” Naser Abdul Kareem, an economist at Bir Zeit University near Ramallah, said in a telephone interview. “The situation is not just bad and complicated, but it’s leading to an explosion.”

Abbas, 77, returned frustrated from September’s United Nations General Assembly, where he called again for recognition of Palestinian statehood and asked foreign donors to honor outstanding aid pledges. He sent a letter to President Barack Obama today emphasizing his commitment to negotiating a peace agreement with Israel, according to the official Palestinian news agency, Wafa. [Reports,  Ha’aretz; Al Ahram ]

UN Moves
Abbas was responding to criticism yesterday from the U.S. ambassador to the UN, Susan Rice, of his latest effort to upgrade Palestinian status at the world body to “non-member state observer” from “entity observer,” a step that wouldn’t require Security Council approval.

Without foreign aid, Abbas’s government would face a budget deficit of more than 7 percent of gross domestic product at a time when government borrowing from local banks is according to the World Bank “at the limit that the banking sector can sustain.” Foreign aid accounts for about 14 percent of GDP, while the share of public sector jobs account for 22 percent of overall employment, according to the World Bank.

Donors, including Gulf Arab states, cut or reduced aid after Abbas last year asked for UN recognition of Palestinian statehood, a step that the U.S. and Israel opposed.

Uprising Risk
Abdul Kareem said public anger in the West Bank may lead to a third “intifada” — the Arabic name for two previous uprisings against Israel. This time, he said, the violence also may be directed against Abbas and his government.

In the event that does happen, Israel would hardly be left unscathed, said Mkhaimar Abusada, a political scientist at Al- Azhar University in Gaza.

The 4.2 million Palestinians who live in the West Bank and Gaza’s roughly 6,220 square kilometers, which is about the size of Delaware,[smallest state in the USA after Rhode Island, population 907,135] are constantly reminded of Israeli restrictions on movement and land ownership, while Jewish settlements in the West Bank are allowed to keep expanding, Abusada said.

“At the end of the day, Israel will certainly be the primary target,” Abusada said.

Because Abbas’s administration plays a major role in keeping order and preventing attacks on Israelis, it’s unlikely that Israel, the U.S. and the European Union would let it collapse, said Jonathan Spyer, an Israeli political scientist at the Interdisciplinary Center Herzliya, which is north of Tel Aviv.

Israeli ‘Insurance’
“It may be ironic, but Abbas’s best insurance against meeting the fate of other secular rulers in the Arab Spring is the Israel Defense Forces,” Spyer said.

Israel is taking action to bolster the Palestinian Authority, though Abbas says it’s not enough. Israel offered to distribute 5,000 additional permits for Palestinians to work in the country, the Finance Ministry said in a Sept. 27 statement. It also advanced payment of 380 million shekels ($98 million) from taxes collected on the Authority’s behalf.

Though the Palestinian Monetary Authority has rough plans to issue its own currency, West Bank and Gaza residents use the shekel because of the small size of the economy and its reliance on Israel for trade and collection of shipping tariffs, officials say.

Among the biggest barriers to Palestinian economic growth has been Israeli roadblocks throughout the West Bank, which slow the movement of goods to market, according to the World Bank. Israel says the restrictions prevent militant attacks.

Military Checkpoints

Israel has removed several military checkpoints in the West Bank and has eased limitations on imports into Gaza during the past year.

Israel captured the West Bank, Gaza and east Jerusalem in the 1967 Middle East war from Jordan and Egypt. While ceding much of its power with the 1993 Oslo agreements, Israel maintains authority over major roads, airspace and borders. The Islamic militant Hamas group seized full control of Gaza in 2007.

To help soften Palestinian anger, Prime Minister Salam Fayyad vowed last month to cut the price of fuel and to pay government salaries on time. Other Cabinet members say that pledge isn’t realistic.

“The donors have not paid their share and there is no specific data when the salaries will be delivered,” Finance Minister Nabil Qassis told reporters on Oct. 3 in Ramallah, referring to September salaries. August salaries were partially paid. “This month is worse than last month and if financial aid is not provided the crisis will continue.”

The West Bank and Gaza’s $10 billion gross domestic product expanded about 5 percent in 2011, down from an average of about 9 percent from 2008 to 2010, the International Monetary Fund said. Unemployment rose to 19 percent in the first half of 2012 from 16 percent in the previous year, according to the IMF.

“We’re demanding change,” said Hazem Abu Helal, a 27- year-old lawyer who took part in the Ramallah protests. “You just can’t disconnect politics from the economy.”

To contact the reporters on this story: Jonathan Ferziger in Tel Aviv at jferziger@bloomberg.net; Fadwa Hodali in Ramallah at fhodali@bloomberg.net

Understanding the Current Palestinian Financial Crisis

By Mohammed Samhour, Carnegie Middle East Center
October 15, 2012

Early last month, thousands of Palestinians across the Israeli-occupied West Bank took to the streets to protest the rising cost of living, voice their anger over unpaid government salaries and the imposition of tax and fuel price hikes (later revoked under public pressure), and call for the resignation of Palestinian prime minister Salam Fayyad. Two weeks later, on September 23rd, in a meeting of donor countries held in New York City, the World Bank, the International Monetary Fund, and the United Nations reported their grim assessment of the Palestinian fiscal situation, warning of harsher times ahead and urging donors to provide the Palestinian Authority (PA) with $400 million urgently needed to bridge its funding gap for the rest of this year. Failure to act, they argued, would make things far worse and have grave political and social repercussions.

The severity of the Palestinian financial crisis was evident this summer when the cash-strapped PA struggled, for three months in a row, to pay its 150,000-plus employees their full salaries on time. It was only able to meet its obligations after receiving a $100 million grant in July from Saudi Arabia, and, in July and in September, a total of $110 million from Israel as advance payments on future monthly transfers of customs tax which Israel collects on behalf of the PA in accordance with the 1994 economic protocol.

This fiscal crisis began in 2011, when domestic revenues, customs tax transfers from Israel, and international financial support all turned out to be lower than planned in the budget. This resulted in a higher recurrent deficit (13 percent of GDP), forcing the PA to bridge the funding gap by borrowing from domestic banks, accumulating arrears to the private sector, and continually failing to contribute the government’s share of the already-insolvent public pension fund. By the end of 2011, the PA’s debt to commercial banks had reached $1.1 billion, with arrears to domestic suppliers amounting to $530 million, and an estimated $1.5 billion of accumulated debt to the public pension system.

The PA’s financial troubles continued into 2012. The year started with a projected recurrent deficit of $1.1 billion, coupled with low prospects for both economic growth and donor assistance. More specifically, growth in 2012, and in sharp contrast to the impressive 9 percent annual average rate between 2008 and 2010, was forecast at 5 percent, the same as in 2011. Likewise, foreign budgetary support, though still high at an annual average of $1.27 billion over the last four years, was on a declining trajectory, reaching $814 million in 2011, down from $1.76 billion in 2008.

As 2012 progressed, so did the PA’s financial misfortune. By midyear, the PA’s public expenditure had climbed 4.5 percent higher than planned, gross revenues were 7 percent lower than budgeted, and the flow of donor funding was in decline. This led the PA again to turn to commercial banks and the private sector, asking for cash and credit to help finance an expanding recurrent deficit. With the PA already owing $1.7 billion to these parties, they were not in a position to extend more funds. Nor was the Palestinian public in the West Bank willing to put up with higher cost of living when the PA raised taxes and fuel prices early last month.

What makes the PA’s current financial quandary even more serious is the fact that it has very few policy options to get itself out of the woods. Over the past four years the PA has implemented a host of reform measures principally designed to put its fiscal house in order. In the process, PA expenditure was streamlined and domestic revenues increased, mainly through improving tax administration and collection. As a result, the PA’s recurrent deficit was brought down from 21 percent of GDP in 2008 to 13 percent of GDP in 2011. This policy of fiscal consolidation, successful – and controversial – as it has been, seems to have reached its limit now, and can only be pushed further at a high political and social cost, as recent public unrest in the occupied West Bank has vividly demonstrated.

While necessary, the preceding technical explanation of the PA’s financial crisis—which considers the crisis through the prism of changes in revenues, expenditures, and foreign assistance levels—is grossly insufficient to fully understand the true nature of the PA’s current fiscal predicament. To do that, one needs to look beyond the raw statistics and examine the political-economy aspect of the crisis. Through this lens, one would find a territorially-fragmented Palestinian Authority which operates under a prolonged colonial and military occupation that imposes all sorts of physical and administrative constraints on Palestinian economic activities, on access to markets and natural resources, and on the private sector’s ability to plan, invest and grow over the long term.

In this extremely limiting setting, the chances of productive and sustained economic growth along with the capacity to generate enough domestic revenues to finance public expenditure are undermined. What’s more, it is highly unlikely that foreign aid will have a lasting positive impact. Only in this sui generis context can one understand why, among other things, the PA—which received close to $6 billion in international budgetary and development support between 2008 and 2011—is currently experiencing such a severe financial crunch.

What can be done to solve this crisis? In the immediate to short term, donor funds are desperately needed and, politics aside, may be forthcoming. The United States is currently contemplating the release of some $200 million to the PA. The European Union is also considering granting the PA an extra 100 million euros. Israel has already made two advance payments of PA customs duties and may do so again in the near future. But this likely flow of much-needed funds, crucial as it is for the PA’s immediate financial survival, does not address the fundamental underlying causes of its twenty-month-old financial predicament. Nor will the pressure on the PA to adopt more austerity-type measures, outlined in the IMF’s latest report on the Palestinian economy, be without risks.

In the long term, the only cure for the PA’s recurrent budget deficit would be sustained, productive growth led by the private sector—not one bankrolled by massive foreign aid in a highly constrained and heavily distorted setting—that creates real jobs, increases per capita income, broadens the tax base, and provides the PA with more domestic revenues to finance its activities. In today’s occupied West Bank, the possibility of such growth taking place is virtually nil.

With the space for PA policy action vastly narrowing, the Palestinian public’s patience growing thin, the stock of PA domestic debt piling up, donor financial support declining, and Israel’s occupation and settlement policies in the West Bank showing no signs of abating, the prospects for a solution to the PA’s financial crisis anytime soon are very slim. Indeed, unless drastic action is taken on the political front, the Palestinian Authority as it has existed since its establishment in 1994 could very well be on the verge of collapse.

Mohammed Samhouri (msamhouri@yahoo.com) is a senior economist at the Cairo-based Regional Center for Strategic Studies; a former senior fellow and lecturer at Brandeis University’s Crown Center for Middle East Studies in Boston, and a former senior economic adviser in the Palestinian Authority.

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