The struggling Palestinian economy

The Palestinian Authority (PA) is facing a severe financial crisis. It is substantially in arrears in paying suppliers, and during 2012 Israel twice transferred advance payments to the PA to allow Authority employees’ salaries to be paid on time. In the past few weeks the PA’s financial difficulties have manifested themselves in strikes and riots across the West Bank, triggered by substantial rises in living costs and taxes while wages remain frozen.

These popular protests were targeted at first at Salam Fayyad, the embattled prime minister, then widened to encompass the PA president, Mahmoud Abbas. Latterly protesters have begun demanding that both resign.

The current Palestinian fiscal crisis has been caused primarily by a shortfall in donor aid. Foreign donors are key to propping up the Palestinian economy, but those pledges are not coming through in their full amounts. However, the PA also failed by a substantial amount to meet its own budgetary estimates which, in any case, projected a financial gap of more than $150 million.

Last week, following a World Bank report warning of a deepening Palestinian fiscal crisis, the Ad Hoc Liaison Committee − international donors to the PA, which of course include Israel − met in New York. Israel informed the committee of steps it had taken to relieve the financial pressure on the PA. These included the advanced transfer of NIS 380 million in taxes – customs revenues collected by Israel on the PA’s behalf – to enable the PA to pay the salaries of civil servants.

The Israeli delegation also announced that an extra 5,000 permits have been granted for West Bank Palestinians to work in Israel, with an additional 2,000 given overnight permits. It is estimated that over 100,000 Palestinians are earning their livelihoods directly from Israel, receiving salaries typically double those in the West Bank, where the average monthly wage has been stuck for a long time at something less than 2000 shekels. Israel also reported that it had approved more than 300 Palestinian development projects in Area C – the part of the West Bank under full Israeli control – and that it was making progress with new master plans for the Area. Development in Area C is regarded as important by the international community for the future economic development of the PA.

Why should Israel continue to bail out a near-collapsing West Bank economy? Because the alternative − a possible victory by Islamist Hamas in its fratricidal struggle for power against Fatah – would be a far worse scenario from Israel’s point of view.

Which also explains Israel’s Foreign Ministry announcement confirming Israel’s intention to become involved in developing the Gaza Marine gas field, expected eventually to generate revenues that could contribute dramatically to Palestinian fiscal sustainability.

In 1999 British Gas was given the go-ahead by the PA to explore for natural gas off the coast of the Gaza strip. Israel was always envisaged as being the purchaser of any natural gas reserves discovered. By 2007 two exploratory wells had been located: Gaza Marine, the main field, some 36 kilometers west of Gaza City, and a second smaller field straddling the boundary between Gaza‘s and Israel’s territorial waters. The reserves in the two wells are estimated at 1 trillion cubic feet of natural gas.

To put this in context, exploration for natural gas in Israel began more than a decade ago. By December 2010 Noble Energy had discovered both the Tamar and the Leviathan gas fields off the coast of Haifa. Tamar is estimated to hold about 8.4 trillion cubic feet of gas; Leviathan, around 17 trillion.

Until Gaza Marine can be exploited, however, the PA’s financial position is dire − and the financial corruption which has dogged the PA since the days of Yasser Arafat, and which has not been eradicated, does not help matters.

Last June a PA court in Ramallah sentenced Mohammed Rashid, a former advisor to Yasser Arafat, and three other former PA officials in absentia after they refused to appear before the court. Rashid, who served for nearly twenty years as Arafat's financial advisor, received a 15 year jail sentence after being found guilty of embezzlement and money laundering. He was also fined $15 million and ordered to give back $34 million which he and others had stolen.

One month later the US House of Representatives’ Council on Foreign Relations held a hearing on corruption within the PA. In a paper placed before the council Elliott Abrams, Senior Fellow for Middle Eastern Studies, quotes Fathi Shabaneh, the man charged with rooting out public corruption within the PA, who resigned in 2010:

“In his pre-election platform, President Abbas promised to end financial corruption … unfortunately, Abbas has surrounded himself with many of the thieves and officials who were involved in theft of public funds and who became icons of financial corruption.”

Abrams sees Fatah’s future ability to defeat Hamas as tied to public perceptions of whether Fatah remains a home to corruption. That perception may also explain the falling away of international pledges of financial aid, on which − at least for the present − the PA’s financial viability depends.

Published in the on-line Jerusalem Post, 1 October 2012:
http://www.jpost.com/Magazine/Opinion/Article.aspx?id=286315&prmusr=Vo0puH%2bGQrN9Imh7OU7uXnoMwbvz%2bPosNtkZAoJRmpWRaEAbJBTOahEYIUVQNh5D