How long can PA keep borrowing money from Palestinian banks?

RAMALLAH, West Bank — On May 2, the Palestinian government paid 60% of the basic salaries of public servants, with a minimum of 2,000 shekels ($554) and a maximum of 10,000 shekels ($2,770). In addition, it paid the fixed transportation allowance for all civil servants. This was only for the month of April, while measures for the month of May will be announced later.

The payments come after Prime Minister Mohammed Shtayyeh announced in his speech at the fourth annual security conference in the West Bank city of Jericho on April 23 that his government would start paying 60% of the salaries of public servants for the month of April, on the occasion of the holy month of Ramadan.

The Palestinian government only paid 50% of the salaries in February and March following the decision of the Israeli Cabinet on Feb. 17 to deduct 502 million shekels ($138 million) a year from Palestinian clearing funds.

The Israeli Public Broadcasting Corporation said that under a law passed by the Knesset in July 2018, Israel deducted this amount because it represents the money the Palestinian Authority (PA) had paid in 2018 to prisoners in Israel and to families of people the PA terms martyrs and to people wounded as a result of confrontations with Israel.

The Israeli decision prompted Palestinian President Mahmoud Abbas to announce Feb. 19 that the PA had refused — and is still refusing — to receive clearing funds from Israel, resulting in a financial crisis that made the PA incapable of paying full salaries.

The clearing funds for 2018 amounted to over 8 billion shekels, according to Ministry of Finance figures, with a monthly average of 670 million shekels.

Minister of National Economy Khaled al-Osaily told Al-Monitor that the Palestinian government will borrow from banks to make sure it pays the percentage it promised public servants in April.

Since the Israeli decision to deduct clearing funds in February, the Palestinian government has suffered an even greater financial crisis than it has before. As a result, it had to borrow about $54 million from banks operating in Palestine to cover the February and March salaries, Deputy Minister of Finance Farid Ghannam told Al-Monitor.

He said the Ministry of Finance, in cooperation with the Palestinian Monetary Authority and the banks operating in Palestine, has developed a financial emergency plan through the end of July in order to address the crisis; this included borrowing $350 million from local banks. Under the plan, the PA borrowed $54 million at first, followed by a loan of $50 million to $60 million in order to cover the April salaries.

The PA is counting on Israel to withdraw its decision to deduct clearing funds in July, after Israeli Prime Minister Benjamin Netanyahu forms his government coalition, in order for this crisis to end — although no statements in this regard were made by Netanyahu or any other Israeli official.

Palestinian Monetary Authority head Azzam al-Shawa told Voice of Palestine Radio on April 24 that he expects the crisis to come to an end by July.

Perhaps the PA is actually counting on Israel’s fear that this financial crisis could backfire. On April 29, TV7 Israel News, a local Israeli channel, said the Israeli government had transferred hundreds of millions of shekels from the clearing funds to Palestinian banks in secret, without specifying the date of transfer, but the PA asked the banks to return them.

TV7 pointed out that Netanyahu discussed with Israeli Finance Minister Moshe Kahlon the possibility of persuading Abbas to accept the funds. The channel added that Kahlon held a meeting with Hussein al-Sheikh, the Palestinian minister of the General Authority for Civil Affairs, April 27, and discussed the deteriorating economic conditions in the West Bank.

The director general of The National Bank, Ahmad al-Haj Hassan, told Al-Monitor that according to the emergency plan set by the Ministry of Finance, the Palestinian Monetary Authority and the banks, the government needs between $350 million and $400 million to overcome this crisis. Should this plan fail, more meetings will be held to draft a new one, he said.

“This figure is not negligible for the Palestinian banking system, but it is still within reach and banks can support the government this way,” Haj Hassan said, adding, “Each bank has a limit of lending, which should not be exceeded, in order to maintain a cash flow ratio that can meet the needs of customers.”

Haj Hassan said the banks do not see any risk in lending the government more money, explaining, “This is not the first time the government faces a crisis. We have managed to overcome many crises together in the past,” through loans from banks.

Misyef Misyef, an economic researcher at the Palestinian Economic Policy Research Institute – MAS, told Al-Monitor that banks can lend the government $70 million a month until July as per the ministry plan, which, along with local revenues (VAT, income taxes and customs taxes), will cover about 60% of the public servants’ salaries.

He said the crisis in Palestine is political and not truly an economic crisis, saying all previous clearing-funds crises only lasted for about three months. But, he added, if the current one lasts for over four months, it would be a dangerous political indicator with difficult economic consequences.

Israel has deducted clearing funds in the past on several occasion. In January 2015, Israel seized about half a billion shekels of Palestinian money in response to the PA decision to join the International Criminal Court.

Misyef said he believes the Arab Bank and the Bank of Palestine are lending the government the most, adding that the lending rate of each bank should not exceed 70% of the proportion of deposits.

Speaking about the banks' ability to continue to lend to the government after the end of July, Massif said, “I believe banks can lend the government for another six months after July. But it would be risky because that means weakening their ability to lend to the private sector or provide credits, affecting their ability to deal with Palestinian trade activity.”

The escalation of the financial crisis plaguing the PA is of concern to Israel, in terms of this weakening the PA and the possibility that the PA could fall apart and that Hamas could regain control over the West Bank.

Meanwhile, the international community seems worried as well. UN envoy to the Middle East Nikolay Mladenov said in a report April 25 that if the necessary steps are not taken to resolve the Palestinian crisis, it could escalate into major violence threatening the stability of the Middle East, the existence of the PA and all efforts to build a Palestinian state.