Palestinians face Israeli economic blockade

The Israeli government outlined on Friday what is likely to amount to an economic blockade of the Palestinian Authority once a Hamas-dominated parliament is sworn in on Saturday.

With the US and other international donors lining up behind Israel to isolate the Islamic movement that won a decisive victory in last month’s election in the West Bank and Gaza Strip, PA finance officials warned the territories were facing an economic disaster.

The 3.5m people of the territories are dependent on a combination of foreign aid and domestic revenue to support an economy in which half the population already subsists below a poverty line of $2 a day.

Some donor countries have threatened to withhold direct aid unless Hamas bows to demands that it recognise Israel, while the Israeli government was expected to suspend monthly transfers of around $50m in tax and customs receipts that it collects on behalf of the PA. 

“It’s very important for Israel to transfer this money, otherwise it will be a disaster here,” Hatem Yousef, head of customs at the Palestinian finance ministry, told the Financial Times.

The tax receipts, which relate to Palestinian imports and exports that pass through Israel, cover half the monthly salaries of some 135,000 PA employees, including security personnel. Those salaries, in turn, support around 1m Palestinians.

In the first two years of the Palestinian uprising, when Israel similarly withheld tax transfers, Arab states and the European Union covered the budget shortfall. “Now, things may be different, because some countries don’t want to deal with Hamas,” said Mr Yousef.

During the 2001-03 suspension of transfers, Israel continued to deduct monthly charges for water, electricity, sewerage and other services it provided to the territories.

The PA was facing a fiscal crisis even before the Hamas victory cast doubt on future financing. In January, the PA – which typically spends $161m a month – faced a budget deficit of $67m in a month in which net domestic revenues reached a mere $13m.

That was the scale of the PA deficit even after it received belated January tax transfers from Israel. The shortfall would only be partially covered by a promised $20m from Saudi Arabia and $13m from Qatar.

As the new parliament confronts the task of setting a 2006 budget, the incoming government already faces a $1.1bn annual deficit that would soar by 50 per cent if the tax transfers from Israel were suspended.

The only positive news for PA financial planners is that humanitarian aid is likely to be little affected by an economic blockade on a Hamas government. International donors, including the US, spend around $340m a year to support UNRWA, the United Nations agency that provides educational and welfare services to Palestinian refugees.

Tens of millions of additional dollars are channelled from individual foreign donors via non-governmental agencies that operate independently of the PA government.

“The greatest risk from the Palestinian perspective is the attitude of the US [aid] agencies,” said Carl Soderlind, local programme co-ordinator of the Association for International Development Agencies. “But, if we disregard the US sector, I don’t think in the near future that money flows will be affected.”

Many future infrastructure projects, however, are likely to be on hold until relations with the new PA government are clarified.

“All ongoing projects are ongoing,” said Cairo Arafat of the Palestinian planning ministry. “But on future projects, there is a wait-and-see attitude. Everyone’s dragging their feet to see what’s going to happen.”

Ms Arafat listed infrastructure, school building and job creation programmes among the type of projects that could be shelved if bilateral aid were cut. However, the Palestinians would not be the only losers. Many projects, including those supported by US Aid, involve contracts with private suppliers, often based in the donor countries.

The present fiscal crisis could signal a return to humanitarian-based spending that characterised the first years of the Palestinian uprising when donors switched the emphasis from state-building to emergency measures to prevent the economy collapsing.

“We had been moving towards a development agenda,” said Ms Arafat, referring to recent strategies to revive the Palestinian economy. With Hamas in charge, that strategy could be on hold for the foreseeable future.