US experts warn of PA’s mounting fiscal crisis

Bloated public sector, corruption, and Israeli policies among reasons

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AMMAN — Three US experts on Arab-Israeli relations have warned that years of declining international aid, unsustainable public patronage, and controversial policies have pushed the Palestinian government and banking sector in the occupied West Bank to the brink of insolvency. اضافة اعلان

In a joint analysis published on September 1 by the Washington Institute for Near East Policy, Jonah Shrock, Gabriel Epstein, and David Makovsky referred to an extensive visit by IMF officials to the Palestinian territories in August, which pointed to the many internal and external challenges that local officials will face if they hope to reverse declining economic growth and address other chronic fiscal problems.

The experts said that these challenges were exacerbated in July, when the Israeli government announced a deduction of $180 million from the clearance revenues it collects on behalf of the Palestinian Authority (PA), arguing that these funds would have been used for paying stipends to Palestinian prisoners in Israeli prisons and their families.

The deduction — which represents about 4 percent of the PA’s total net revenue — was just the latest setback in a deepening fiscal crisis, preceded by a large budget deficit, a sharp decrease in international budgetary support, and an inability to pay the full salaries of public sector employees, they added.

They wrote that according to the World Bank, the PA budget deficit in 2021 stood at $1.26 billion, with a financing gap of $940 million (i.e., the deficit minus international budgetary and development aid). This gap is attributable to four main factors: a bloated and inefficient public sector, especially in security, health, and education; a massive drop in budgetary aid; the withholding of clearance revenues by Israel in response to prisoner payments; and impaired domestic revenue collection.

The experts pointed that the PA employs an estimated 150,000 people in the West Bank and Gaza, out of a population of nearly five million. Around 40,000 of these employees are civil service or security personnel in Gaza, most of whom have not worked since the 2007 Hamas takeover of the strip, but are still paid by the PA to ensure their loyalty.

They added that international aid to the PA was halved in 2021 after years of decline. Budgetary aid, which represented a whopping 27 percent of GDP in 2008, was down to 1.8 percent last year ($186 million).  In late 2021, Ramallah announced that it would reduce salaries to 70–80 percent of their norm.

The experts said that by the end of 2021, the PA’s total debt to domestic banks (i.e., arrears plus newer obligations) stood at $2.5 billion. In response, these banks cut the government off completely, which will make financing its deficit spending even more difficult.

Among the remedies suggested, in addition to fighting corruption, the experts pointed to a RAND study that estimated that a two-state solution would increase Palestinian GDP by $50 billion over 10 years (in 2014 dollars), with per capita income rising 36 percent. Although reaching such a solution does not look feasible anytime soon, the parties can still take several interim measures to lessen the economic impact of the occupation —in particular, expanding Palestinian access to Area C in the West Bank, which the World Bank estimates could increase revenue by 6 percent of GDP.

They also wrote that the most significant improvements to revenue collection would require Israeli support for revisions of the Paris Protocol, pointing to one promising option that bypasses that obstacle, which is to reform the exit permit regime for the estimated 140,000 Palestinians who work inside Israel and its West Bank settlements.

Israel has been calling on the PA to do more to stem the escalation of armed attacks against Israeli soldiers in the West Bank, with Israeli security officials warning of an imminent eruption of a third intifada. They also warned of a decrease in the ability of PA security personnel to stand up to growing militant movements especially in Jenin and Nablus.

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