MIFTAH
Sunday, 30 June. 2024
 
Your Key to Palestine
The Palestinian Initiatives for The Promotoion of Global Dialogue and Democracy
 
 
 

I. Introduction

The startling victory of the Islamic Resistance Movement - Hamas – in the Palestinian parliamentary elections January 25th, 2006, and Hamas' subsequent formation of the Palestinian Authority (PA) government, has brought to risk two vital sources of PA finance: an aid package by Western donor countries of about $1 billion a year in humanitarian, developmental, and direct budgetary support; and a monthly transfer by Israel of about $50-60 million in Palestinian customs and tax revenues that Israel collects on behalf of the PA under the 1994 economic protocol.

Israel suspended the remittance of funds soon after the Hamas-dominated Palestinian Legislative Council (PLC) convened its first session in mid-February, tightened its grip over border crossings separating Israel from the Palestinian territories, further restricted the movement of Palestinian people and goods, and boycotted the new Hamas-led PA government. On the other end, a statement by the Middle East Quartet (United States, European Union, United Nations, and Russia) five days after the elections, on January 30th in a meeting in London, warned of Western donors' intention to drastically review their aid policy to the PA unless Hamas agrees to meet three basic political principles or conditions: forswear violence, abide by previous PAIsrael agreements, and recognize Israel's right to exist. Hamas did not budge, and on April 7th, a week after the Hamas-led government was officially sworn into office, both the European Union and the United States responded by curtailing all direct financial aid to the PA— a position that was more recently reiterated by the Quartet members in a meeting on May 9th in New York.1

Given the almost total dependence of the PA government on these two financial resources, i.e., foreign aid and customs revenue transfers, for running PA institutions, delivering essential public services to the nearly 4 million Palestinians under PA jurisdiction, financing development plans and infrastructure projects in the West Bank and Gaza, and providing humanitarian assistance to the most vulnerable segment of the Palestinian population, the new Hamas-led PA government is currently facing an unprecedented cash squeeze in its first months in office. With domestic revenues constituting no more than 20 percent of the PA's total financial needs, and no readilyavailable alternative sources of funds to fill in the gap, this abrupt shortage of cash, if it persists, could very well lead to the virtual institutional collapse of the PA government, and potentially turn the already precarious economic and social conditions in the West Bank and Gaza into an unprecedented humanitarian crisis of major proportions.

A quantitative assessment of what could be expected as a result of a sudden cash crunch in the PA territories has been recently produced by the World Bank. This assessment has gauged the impact of the reduction of Western financial assistance and the suspension by Israel of Palestinian customs and tax transfers along with tightening of restrictions on Palestinian labor and trade movement, on, among other things, GDP per capita income, unemployment, and poverty levels in the West Bank and Gaza over a three-year period, between 2006 and 2008.2

According to the report's analysis, a freeze of customs and tax transfers to the Palestinian coffers, accompanied by further Israeli restrictions on movement, and assuming no change in the level of foreign aid, could, by 2008, lead to a 30 percent fall in Palestinian GDP personal income.

Unemployment is projected to reach 45 percent from its pre-election level of 23 percent (an increase of 22 percentage points), and a projected poverty rate could engulf 70 percent of the Palestinian population, compared to its 2005 level of 44 percent (a dangerous rise of 26 percentage points). If these Israeli measures are coupled with a gradual reduction of international aid to PA territories, to about $900 million in 2008, from its 2005 level of $1.3 billion, further deterioration in all economic and social aggregates is likely to occur: GDP per capita income could decline by 36 percent in real terms, and both unemployment and poverty rates in West Bank and Gaza could jump to 47 and 74 percent, respectively, from their 2005 levels.3

The analysis of the World Bank has been confirmed, less than a month later, by a United Nations report that further exposed the potential grave consequences if the PA financial crisis persists and Israeli restrictions on Palestinian movement continue. Under these conditions, the UN report projects, by the end of 2006, a 30 percent drop in Palestinian personal real income, with unemployment increasing from beginning of the year figure of 23 percent to 40 percent of the Palestinian labor force, and poverty among West Bank and Gaza population to dangerously jump from the 2005 rate of 44 percent to 67 percent.4

The potential gravity of PA conditions, as the joint forces of the deep financial squeeze and the extended repetitive Israeli closures of border crossings work their destructive way in the Palestinian economy faster than previously anticipated, has led the World Bank in a report published May 7th, just six weeks after the publication of its first report, to warn Western donors that its original estimates of the severity of the PA economic crisis were underestimated.

According to the Bank's new analysis, the decline in PA economic indicators "would make 2006, by a margin, the worst year in the West Bank and Gaza's dismal recent economic history," and could cause an institutional decay that will have a negative impact on security, making it difficult for government, the private sector, and providers of humanitarian assistance to operate properly.

The Bank concluded that the ensuing institutional damage may be irreversible, and could lead to a situation in which the West Bank and Gaza in effect become ungovernable.5

The Palestinian humanitarian predicament and the continued worsening of the living conditions in the West Bank and Gaza – precipitated largely by the recent abrupt shortage of the much needed financial resources and the continued crippling restrictions by Israel on the Palestinian movement of people and goods – have generated serious discussion among development professionals of various international organizations operating in the Palestinian territories, and among policymakers in Western donors' capitals. To a large extent, the debate has centered around three major related issues: (1) the nature and depth of the current PA financial crisis, (2) the possible humanitarian and economic consequences of the PA financial quandary, and (3) the possible role that various UN agencies and international NGOs can play to mitigate the Palestinian humanitarian plight.

This paper will not attempt to provide answers to the many sticking questions generated by the current precarious conditions in the Palestinian territories, nor will it suggest solutions to the emerging crisis situation there. Rather, the aim here is to conduct an objective analysis of all the crucial nonpolitical humanitarian and economic issues raised by the sudden change in the Palestinian political landscape, and to contribute positively to the ongoing debate in order to better understand what is at stake for all concerned parties.

The discussion in this paper is organized around seven sections. This introduction will serve as Section one. Section two introduces two preliminary remarks that aim to set the stage for the discussion in the paper. Section three sheds further light on the PA current financial predicament, the crucial role of international aid in maintaining the operation of the PA activities, the possible alternative sources of funds that the PA might tap to bridge the cash shortfall, along with the difficulties facing Hamas-led PA government in tapping these resources. Section four will examine in detail the various potential humanitarian and economic consequences of PA financial crisis, and the hardship it is causing to the population of the West Bank and Gaza. Section five will discuss the various factors that could limit the ability of UN agencies and international NGOs to further extend their present role in helping the Palestinians cope with the ramifications of the current crisis. Section six reflects on some short-term measures and policies needed by all parties to mitigate the current conditions. The paper concludes, in Section seven, with some long-term thoughts on the whole foreign aid question to the Palestinian territories.

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