The Palestinian government has managed to reduce fuel prices. It filled the deficit resulting from this reduction by cutting part of the salaries of senior officials in the Palestinian Authority (PA), and the Palestinian Liberation Organization (PLO) and its institutions.
Prime Minister Salam Fayyad was clear while presenting the new government measures aimed at calming the public. He said that the government’s ability to interfere with prices is very limited. He noted that any reduction in the price of a commodity would require government funding, something that is not available, as the government is suffering from a severe financial crisis.
The financial crisis affecting the PA began in 2010, when a number of donor countries suspended the provision of aid they had previously pledged to the authority. The crisis was exacerbated in the following years after some countries did not pay their obligations and was compounded by an economic downturn resulting from a decline in government spending.
According to the figures from the PA Ministry of Finance, when Fayyad formed his first government after the Palestinian division in June 2007, the treasury was burdened with huge debts worth approximately $3 billion.
The ministry figures show that Fayyad found the following debts owed by the government:
-$1 billion worth of late payments to government employees and those in the private sector accumulated during the term of his predecessor Ismail Haniyeh, whose government had been subjected to an international financial blockade since its first day in power.
-Approximately $900 million worth of debts to local banks.
-Approximately $1.5 billion worth of debts to Arab funds that have accumulated since the era of the late President Yasser Arafat. These are interest-free debts which will possibly turn into a grant.
The figures show that funds were given by donors seeking to create a governance model in the West Bank different from that of the Gaza Strip. The funds given to the Fayyad government poured in during its first three years, and the subsequent government spending led to significant economic growth that reached up to 11%.
However, Fayyad, who seeks to create a different model of government based primarily on self-sufficiency, used these funds to adopt a fiscal policy aimed at phasing out dependence on donor funds. Among the methods he followed was to encourage Arab and foreign investment in the Palestinian territories in order to create jobs, as well as to provide funding to the PA treasury.
According to the figures from the Ministry of Finance, Fayyad’s policy made remarkable progress in the first four years, during which reliance on foreign aid for the budget decreased from $1.8 billion in 2008 to $970 million in 2011.
But the path to self-reliance was soon impeded by the deliberate decision of a number of Arab countries to suspend aid to the authority, each for a different reason. The shortages caused by the lack of funds led the authority to borrow from local banks, until it crossed the $1.2 billion threshold specified by the Palestinian Monetary Authority. Subsequently, it started to cut the monthly salaries of its 153,000 employees. Other domestic debts accumulated by the authority include $1 billion owed to suppliers — particularly suppliers of medicines — the pension fund and others.
The monthly expenses of the authority are almost $300 million, while its revenues do not exceed $150 to 160 million.
The authority’s revenues also dropped as a result of the economic slowdown, which further deepened the crisis. A recent rise in commodity prices, mainly of fuel and cigarettes, has led to the eruption of mass protests in the West Bank. These protests have forced the government to intervene, despite its limited capabilities. Also, the suspension of investments in recent years has led to a steady rise in the unemployment rate, which reached 28% in Gaza and 20% in the West Bank. This was a significant factor that prompted the eruption of the protests.
According to official statistics, 40,000 Palestinians participate in the labor market, while the government and private sector can only accommodate a few thousand of them. The PA’s expenses are distributed among employee salaries ($200 million per month), allowances, and salaries for prisoners, the families of martyrs and the poor worth $100 million a month.
The roots of the financial crisis go back to the employment policy adopted by the Palestinian leadership upon the establishment of the PA in 1994. The PA, in an effort to solve the problem of rampant unemployment in the country and address the issues related to released prisoners and former activists belonging to various groups — especially those from Fatah — resorted to an open recruitment policy.
Economic and political experts say that the only way out of the Palestinian economic crisis is through a political solution. Fayyad said: “The crisis mainly came as a result of the Israeli control of about two-thirds of the West Bank, including the occupation’s efforts to prevent Palestinians from making investments in these territories, and their control over the crossings that prevented commercial traffic between the West Bank and the Gaza Strip.” Economic observers believe that the authority will continue to significantly rely on foreign aid as long as the Israeli occupation continues to control Palestinian resources and crossings. Many predict that the financial crisis will only worsen as a result of the changing priorities of donor countries and the failure of the peace process.