Inside story

Israel, PA ink deal to release $500 million in withheld Palestinian tax revenues

Funds will be used to pay off debt to Israel Electric Corporation; both sides declare victory after agreeing to mechanism that US hopes can be used for release of additional money

Jacob Magid is The Times of Israel's US bureau chief

Left image: Prime Minister Benjamin Netanyahu, right, speaks with Finance Minister Bezalel Smotrich during the weekly cabinet meeting at the Defense Ministry in Tel Aviv on January 7, 2024. Right image: Palestinian Authority President Mahmoud Abbas, left, poses with newly appointed PA Prime Minister Mohammad Mustafa, in Ramallah on March 14, 2024. (Ronen Zvulun/Pool via AP; PPO / AFP)
Left image: Prime Minister Benjamin Netanyahu, right, speaks with Finance Minister Bezalel Smotrich during the weekly cabinet meeting at the Defense Ministry in Tel Aviv on January 7, 2024. Right image: Palestinian Authority President Mahmoud Abbas, left, poses with newly appointed PA Prime Minister Mohammad Mustafa, in Ramallah on March 14, 2024. (Ronen Zvulun/Pool via AP; PPO / AFP)

Israel and the Palestinian Authority announced Sunday that they had struck a deal allowing for the release of roughly $500 million in Palestinian tax revenues for use in electricity and fuel payments to Israel.

Both sides framed the agreement as a victory after months of negotiations, which US President Joe Biden’s administration helped mediate, according to a senior Western diplomat familiar with the matter, who said the goal was to use the deal as a framework for the release of additional funds that Israel has been withholding from the PA.

Under interim peace accords reached in the 1990s, Israel’s Finance Ministry collects tax revenues on behalf of the PA and makes monthly transfers to Ramallah, but a dispute broke out over the payments in the wake of Hamas’s October 7, 2023, onslaught.

The Israeli cabinet refused to transfer the portion of the funds that Ramallah uses to pay for services and employees in Gaza, arguing that the money could reach the Hamas terror group. The roughly $75 million in revenues amounts to about a quarter of the entire monthly transfer.

Protesting the move, the PA refused to accept any of the tax revenues, which make up the vast majority of the PA’s annual budget. Unable to pay its employees in full for months, the move has risked Ramallah’s complete financial collapse.

In January 2024, the cabinet approved a framework under which the Gaza portion of the funds would be transferred to Norway, which would then be required to hold onto the funds until Finance Minister Bezalel Smotrich signed off on their release to the PA.

The municipality building of Ramallah, the West Bank seat of the Palestinian Authority, is adorned with the flags of Spain, Ireland and Norway on May 24, 2024, in appreciation of the three countries’ intent to recognize Palestinian statehood, announced the previous day. (Ahmad Gharabli / AFP)

That mechanism worked for several months, and Smotrich signed off on the release of some of those funds from Norway to the PA.

But then in May, Norway joined Spain and Ireland in formally recognizing a Palestinian state, infuriating Jerusalem. Smotrich in response announced the end of the agreement involving Norway.

Oslo still had roughly $420 million in Palestinian tax revenues in its possession, but the Israeli Finance Ministry warned that if those funds were transferred to the PA, Israel would dock that money from subsequent monthly tax revenue transfers.

Palestinians shop at the commercial center of the old town, in the West Bank city of Nablus on September 15, 2024. (AP Photo/Majdi Mohammed)

With the PA’s financial state particularly bleak in the year since Hamas’s October 7 massacre, significant efforts were made by the US to secure the release of those funds. Washington sought to recruit Morocco to replace Norway, but this idea was eventually shelved in favor of the current formula that has removed the middle-man, the Western diplomat said.

More recently, Israel proposed allowing the release of the funds if they were used to pay off the massive amounts of debt that the PA owes to Israeli electric and fuel companies that have accumulated over time due to various Palestinian municipalities’ failure to make their payments.

Ramallah initially chafed at the idea, wanting more autonomy over how to spend the funds. Ultimately, though, it caved after Israel made clear it would not accept the release of the money held up in Norway under any other circumstances, the diplomat said.

A view of a section of the security barrier in the West Bank city of Bethlehem, September 17, 2024. (AP Photo/Mahmoud Illean)

Sweetening the deal for the PA, though, is the fact that the payment of the debt to the Israeli fuel and electricity companies improves Ramallah’s standing with Palestinian banks who now see that it is capable of paying off such debts when adjudicating future loan requests.

The released funds, which have accumulated interest over time, will go toward paying off fuel and electricity debt in addition to covering such payments in the months ahead, the Israeli and PA finance ministries said in their respective announcements. Smotrich’s office said the deal resulted in the payoff of $544 million in debt to Israel. He updated the cabinet of the deal on Sunday.

“The PA’s debt to the [Israel Electric Corportation] resulted in high loans and interest rates, as well as damage to IEC’s credit, which was ultimately rolled over to the citizens of Israel,” Smotrich told the cabinet, according to the statement from his office.

The agreement doesn’t release the Gaza portion of Palestinian tax revenues that Israel has continued to withhold since the Norwegian agreement fell apart. However, the Western diplomat said the goal is to use the new framework so that those funds can be used for electricity and fuel payments in the future.

Israel’s National Infrastructure Minister Yuval Steinitz (wearing red tie) and Palestinian Authority Prime Minister Rami Hamdallah cut the ribbon to mark the first-ever commercial agreement between the Israeli and Palestinian energy companies to increase provision in the West Bank area of Jenin, July 10, 2017. Yoav Mordechai, Coordinator of Government Activities in the Territories, stands behind Steinitz,with Yiftach Ron Tal, Israel Electric Corporation head, on the far right. (Yossi Weiss)

Smotrich has been opposed to sending funds to the PA, which uses the money to pay public sector wages. The withheld funds forced the PA to drastically cut public sector wages for months.

Israel also deducts funds equal to the total amount of so-called martyr payments, which the PA pays to families of Palestinian terrorists or the families of slain attackers.

The PA finance ministry said $570 million remains withheld by Israel, bringing the total withheld funds to over $980 million as of 2024.

“This has exacerbated the financial crisis, as the government continues to transfer these allocations directly to the accounts of public servants in Gaza,” the ministry said, adding that it was working with international partners to secure the release of these funds as soon as possible.

Reuters contributed to this report.

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