The PA's terrible economic plight will worsen
By Danny Rubinstein
Haarez, January 18, 2004
The Palestinian Authority is bankrupt, with sources of funding expected to shrink in the coming year
The standard of living in the West Bank and Gaza Strip has plummeted 40 to 50 percent in the last three and a half years of intifada - and is going to get much worse.
Palestinian economists say the crisis is bound to get worse for two reasons. First is the reduced contributions from other states; second is the completion of the separation fence and the implementation of Israel's disengagement plan.
Economist Aryeh Arnon of Ben-Gurion University shares the pessimism of Palestinian Authority officials. "The decline in contributions, together with the disengagement plan, will lead to economic ruin in the territories, whose political consequences are hard to estimate, but there is no doubt they will be severe," he says.
In 2003 the PA prepared its economic program based on a budget of some $1.6 billion, but the budget's actual size was only some $1.2 billion. The Palestinian income comprising the budget derives from three sources. The first and largest is contributing states, who give more than half the amount. The second is Israel, which returns to the Palestinians the taxes - mostly customs and VAT - it collects from Palestinian workers. This makes up more than a third of the budget. The third source, covering little more than 10 percent, is the income from taxes, fees and Palestinian government corporations.
A bottomless pit
All three sources have dwindled recently and are expected to decline further. Representatives of donor states convene every year to discuss the Palestinian budget. The central participants are members of the European Union, the United States, Japan, the World Bank, the Arab states and Israel. In the first two years of the intifada the donor states increased their contributions to the Palestinian budget. But at the last meeting held in Rome more than a month ago, they wanted to know how long they would have to transfer funds to what seems like a bottomless pit.
The bloody conflicts are continuing incessantly, without any solution in sight, the delegates said. The funds per capita that the states have transferred to the PA are among the highest anyone in the world received in recent years. And what came out of it? Once the donors believed the contributions would lead to economic flourishing in the territories, but now they seem to be welfare allowances which have no end.
The United States, which now has other considerable expenses in the Middle East, namely renovating Iraq, spearheaded the move to stop and reconsider the contributions. The Americans complained that the Palestinians have not completed reforms in the PA, and that some 10,000 security men are still not getting paid directly into their bank accounts, as promised, but via their superiors. There are also complaints over the lack of supervision of the funds controlled by Yasser Arafat.
Some of the contributors' representatives, especially from Europe, voiced grave complaints against Israel as well. These focused on the movement restrictions, collective punishment and barricades inflicted on the Palestinian population. Others pointed out the extensive destruction Israel has caused to the infrastructures in the territories, asking why they should pay for rehabilitating these infrastructures. Let Israel pay for them, they said. In Bethlehem, for instance, roads that were destroyed in Operation Defensive Shield less than two years ago have been renovated. The money arrived, inter alia, from Scandinavian countries. At least one Scandinavian representative said Israel should pay for these expenses.
The Rome convention left the Palestinian delegates, headed by PA Finance Minister Salam Fayad, without a clear picture of how much money they would get for this year's budget. The World Bank representatives at the conference suggested setting up a sort of Palestinian rescue fund. They proposed that the World Bank manage the Palestinian budget or supervise the funds of the contributing states to the budget. The proposal was intended to allay the contributing states' fears that their money would be misused.
Meanwhile, Fayad visited the United States last week in an effort to persuade Washington not to reduce the contributions to the Palestinians. The European states have also set up a committee to look into the matter. It is clear at this stage that this year it will be difficult to raise the funds for the PA and it is almost certain that the contributions will be smaller than in the past.
The second source for the Palestinian budget, the taxes Israel deducts, will also be smaller this year than before. This is due to the intolerable economic plight in the territories, as a result of which Palestinians are buying less abroad. This means Israel charges less customs and VAT for the PA. In addition, Israel has frozen the transfer of more than NIS 800 million it owes the PA, as collateral for Palestinians' debts to Israelis. In other words, the PA might lose this sum as well.
The third income source are the taxes, fees and profits of Palestinian government corporations. Here too income has declined, except for in one place - the taxes on cigarettes. Palestinians are smoking more than ever, and the PA's revenues from cigarette taxes are rising steadily. But regardless, all the PA tax revenues are not much more than 10 percent of the budget, so their importance is marginal compared to the other two areas.
PA bankruptcy
A central Palestinian economist says that the PA is bankrupt. The Palestinian treasury failed to balance this year's proposed budget, and in the last few months the PA has been having difficulty paying wages to some 132,000 civil servants and people on the payroll of the Palestinian security mechanisms. The Palestinian treasury is taking out bank loans and raising occasional contributions from the Arab states to keep its head above water. Last week Libyan ruler Muammar Gadhafi reportedly agreed to contribute to Fayad $10 million. "This is true, but the money hasn't arrived yet," a senior PA official said over the weekend.
In addition to the financial crisis, another fatal economic blow is threatening the PA - the completion of the separation fence and Prime Minister Ariel Sharon's disengagement plan. All the economists, both Israeli and Palestinian, are certain that severing the PA from Israeli employment sources and piling obstacles on the passage of merchandise and services between the territories and Israel would sharply exacerbate the economic crisis. PA financiers predict that in a few months the PA may become insolvent. Others say it may still have money for wages, but no budget for buying vital products like medicines for hospitals.
Fayad threatened to resign several times recently over the budget crisis, Palestinian sources say. Arafat persuaded him to stay in office. But it is quite possible that at some stage Fayad will be fed up and Arafat will accept his resignation. He will announce that he had appointed the brilliant economist that everyone, especially the Americans, promoted - yet he too has failed, because in the circumstances that Israel is foisting on the territories, nobody can succeed.
