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PA needs Arab safety net to overcome Israeli tax freeze

The Palestinian Authority said it would not abandon its efforts to join international treaties, despite Israel's decision to freeze the transfer of tax revenues, a step considered a pressure card by Palestinian officials.
A Palestinian employee paid by the Palestinian Authority shows money to the camera after withdrawing cash from an ATM machine outside a bank, in Gaza City June 11, 2014. Gaza's public sector union suspended protests on Wednesday that had paralysed the local economy and threatened the deal on a Palestinian unity government but said it would resume its action if its members were not promptly paid. The pay dispute involving some 40,000 public servants erupted last week shortly after Hamas, which has ruled Gaza

RAMALLAH, West Bank — Almost two weeks into January have passed and the Palestinian Authority (PA) has yet to pay the salaries of its employees and fulfill its financial obligations, a result of Israel freezing the transfer of tax revenues on Jan. 3.

Chief Palestinian negotiator Saeb Erekat slammed the Israeli decision as a war crime. The PA heavily counts on tax revenues of a monthly average of $170 million, which accounts for 65% of the salaries bill.

These tax revenues are collected by Israel on behalf of the PA on exported and imported goods in return for a 3% commission. This implies a weak Palestinian economic resilience in light of the freezing of tax revenues and in the absence of alternatives.

The Palestinian government believes Israel's decision is an act of piracy and collective punishment. Its spokesman, Ehab Bessaiso, told Al-Monitor, “Any Israeli decision to freeze tax funds falls within the scope of the collective punishment policy.”

“The Israeli decision will not only affect employees, but also living conditions and various sectors,” he said.

The PA's ability to withstand seems fragile, as former Minister of Labor Ahmed Majdalani told Al-Monitor. “The ongoing freezing of tax revenues in the absence of an Arab safety net will put the PA in a dire situation,” he said.

Hanan Ashrawi, a PLO Executive Committee member, told Al-Monitor that the PA faces an economic collapse without the tax revenues. “Since tax funds are the main source of the PA’s treasury, withholding them would impede the work of numerous institutions, thus heralding an economic collapse.”

An economics professor at Birzeit University, Nasr Abdul Karim, didn’t believe the measure would last long since a stable PA is more valuable to Israeli security. “On the economic level, we must not assume that the Israeli move will last long as the world recognizes that these funds do not represent aid, but are rather rights,” he said. “Stability and peace in the region require the PA’s continuous capacity to fulfill its obligations toward its citizens.”

But the longer the tax revenue is withheld, the more damage it does to the Palestinian economy. “Freezing tax revenues is a threat to the PA’s operation capacity and may lead to its collapse or paralysis. Withholding tax revenue will cause direct damage, represented in the nonpayment of employees’ salaries. This will also directly affect the economy that relies on government spending as a main driving force, which will add to its stagnation,” Abdul Karim said.

The freezing of tax revenues has widespread effects on the Palestinian economies, hindering various sectors, including health and social welfare. Former Minister of Planning and Director of Research at the Palestine Economic Policy Research Institute (MAS) Samir Abdullah told Al-Monitor, “The continued freezing of funds will harm the health and social welfare services provided to citizens, who will lose food security, while the health situation will deteriorate, particularly in Gaza.”

Abdullah said it would also affect the various PA institutions and apparatus: “The PA will not be able to pay for medical supplies, basic requirements and fuel for its vehicles and offices. The situation will be difficult.”

In light of Israel's decision, which is also threatening to impose additional sanctions on the PA, the latter’s options to overcome the crisis seem to be limited to asking Arab states for financial support.

Al-Monitor learned from a government official that contacts are ongoing with the Arab League to activate the net, but without any confirmation.

Regarding the options available to the government, Bessaiso said, “Our political, economic and legal choices are open to face any Israeli decision affecting the lives of citizens. One of the measures we are calling for is strengthening Arab relations and activating a safety net.”

Moreover, the Arab League will hold an urgent meeting at the ministerial level on Jan. 15, with the participation of Palestinian President Mahmoud Abbas. Majdalani told Al-Monitor that the implementation of the safety net will be proposed at the meeting.

Majdalani explained that contacts are being made with Arab League Secretary-General Nabil Elaraby, who is in charge of monitoring the implementation of decisions, as well as with some Arab countries to provide financial support, without which the PA would face an extremely difficult situation.

For her part, Ashrawi demanded Arabs take a stance against the US-Israeli political blackmail by providing financial assistance, saying, “We received many promises to activate this safety net.”

A monthly $100 million financial safety net for the PA was approved by the Arab League during the Kuwait Summit held in 2010, which issued a decision to disburse the amount if the PA is under financial pressure and if Israel decides to freeze the tax funds.

However, Majdalani and Ashrawi believe that the failure to activate this net is due to US pressure exerted on Arab countries.

The PA does not have an array of options, according to Abdul Karim, who said other previously available options are no longer available. The PA can no longer borrow from banks or apply a fiscal austerity policy due to the expenses of its institutions, and cannot raise tax revenues and levies in the absence of economic growth and because of poor living conditions, Karim said.

The current crisis follows a wave of pessimism that prevailed over the Palestinian economy in the second half of 2014 and continued until the beginning of this year.

After monitoring the economic developments for the first quarter of the year, the Palestinian Monetary Authority (PMA) said in a report issued in August 2014 that the Palestinian economy registered in the first quarter of 2014 a 7.1% growth compared with the first quarter of 2013. However, this improvement came in light of two distinct growth paths.

According to the Palestinian Central Bureau of Statistics (PCBS), gross domestic product (GDP) in Palestine witnessed a decline of 2.5% in 2014 compared with 2013. This resulted in a decline in per capita GDP of more than 5% in 2014, compared with 2013.

Abdul Karim explained that this is due to the aggression on Gaza, the Israeli measures in the West Bank — including major raids and arrest campaigns following the disappearance of three settlers in Hebron, military checkpoints at the exits of cities, the prevention of workers from getting to their workplace and blocking traffic circulation between cities — as well as the high unemployment rate that reached up to 27% in 2014, and the 40% deficit in international aid, leading to an actual budget deficit of about $500 million.

According to Palestinian official forecasts, the economic and political situation will remain the same as it was in 2014. The Palestinians expect donor countries will keep providing financial support to maintain the budget at the same level, Israel will keep transferring the tax revenues, tax collection will improve and the number of workers in the public sector will stabilize. Based on this, GDP is expected to increase by 2.8% during 2015, and the value of the total investment by 7.1%. It is also expected that the value of total government revenues will increase by 0.7% as a result of the improvement in tax collection and that the value of government expenditures will increase by 1.8%, thus leading to an increase in the budget deficit by 3.5%.

Despite the PA’s weak economy and Israel’s tax freeze, all interviewed in this article remain confident the transfer of tax revenues will resume and that the PA will not back down from its political position to join international treaties.

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