Refusing tax revenues and loans from Israel, PA on brink of major fiscal crisis

As tensions with Jerusalem rise over annexation and with the pandemic crippling its economy, Ramallah is running a ballooning deficit despite tough austerity measures

Palestinian Authority Finance Minister Shukri Bishara speaking at a press conference in Ramallah on March 11, 2019. (Credit: Wafa)
Palestinian Authority Finance Minister Shukri Bishara speaking at a press conference in Ramallah on March 11, 2019. (Credit: Wafa)

Despite major cuts in spending, the Palestinian Authority ran a deficit of NIS 863 million ($248 million) in May, the Palestinian Finance Ministry in Ramallah announced on Friday on its Facebook page.

In response to the coronavirus crisis, the PA announced new austerity policies and sent out a call for foreign donations in late March. PA Prime Minister Mohammad Shtayyeh announced that it would have to cut up to 50 percent of its planned yearly budget to compensate for lost revenue. Even so, the PA’s new emergency budget, passed in early April, projected the deficit to increase to $1.4 billion in 2020.

Ramallah received NIS 237 million ($68 million) in May, with NIS 137 million ($39.4 million) from local tax revenues and NIS 100 million ($28.8 million) in foreign aid, according to PA Finance Ministry numbers.

The World Bank announced last Monday that the Palestinian economy was projected to contract by as much as 11% as a result of the global economic recession sparked by the coronavirus pandemic.

But as grim as the World Bank’s assessment was, it may have been optimistic.

Palestinian workers from the West Bank city of Hebron carry personal belongings as they arrive at the Tarqumiya checkpoint to cross into Israel on March 18, 2020. (Wisam Hashlamoun/Flash90)

In the last week, the PA’s fiscal crisis has only deepened. The World Bank’s projections were made before Ramallah announced that it would no longer accept the $170 million in import and export taxes which Israel transfers to the PA on a monthly basis. Senior PA officials said the move was part of efforts to void agreements and end coordination with Israel over its plans to annex parts of the West Bank.

As part of ending coordination with Israel, the PA also refused a loan of up to NIS 800 million ($230.2 million) authorized by the Israeli government, which would have been taken out of future tax revenue transfers, to cover its losses.

Tax revenues collected by Israel on behalf of the Palestinians have always constituted a significant part of the PA’s budget: In 2019 they amounted to about 60% of overall revenue.

Since the coronavirus pandemic began, however, they have become even more essential: The domestic tax base has vanished, with businesses closed and much of the population unemployed and at home. Meanwhile, foreign donors have been busy tending to the crisis in their own countries.

As such, import/export tax transfers from Israel have constituted 85% of the PA’s monthly revenue since the start of the pandemic in March, according to numbers provided by the PA Finance Ministry.

PA President Mahmoud Abbas heads a leadership meeting at his headquarters, in the West Bank city of Ramallah, May 19, 2020. (Alaa Badarneh/Pool via AP)

During a standoff between Israel and the PA in 2019, the PA refused to accept the revenues for several months, leading to a disastrous liquidity shock in the West Bank. But none of the deficits in 2019, even in the worst months of that row, approached the size of the deficits the PA has begun to accumulate now.

On Tuesday, the Ramallah Finance Ministry announced that it would not pay civil servants their May wages. Public sector salaries account for 15%-20% percent of Palestinian GDP, according to the World Bank. In a normal month, the PA spends NIS 850 million ($244.5 million) on civil servants, pensioners and stipends to the families of Palestinians convicted by Israel of terrorism or killed during attacks on Israelis. During the 2019 clash over the revenues, Ramallah slashed public sector wages by 40%, but never froze them outright.

In an interview with The New York Times last week, al-Sheikh said that the Palestinian leadership was attempting to put pressure on Israel by giving Jerusalem a taste of the crisis annexation would bring. Palestinian officials know full well that rejecting the funds from Israel could bring economic disaster, al-Sheikh said, but this would put pressure on Israel either to back down or to assume full control of the area as an occupier.

“We are not nihilists, or fools, and we don’t want chaos,” said al-Sheikh. “We are pragmatic. We don’t want things to reach a point of no return. Annexation means no return in the relationship with Israel.”

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