PA must take difficult road to financial freedom from Israel

Despite deciding to sever economic ties with Israel, the Palestinian Authority has yet to show it's willing to take the difficult steps that are essential to achieving economic independence.

al-monitor A Palestinian policeman stands guard as a truck loaded with fruits and vegetables waits to cross into the Israeli side of the Kerem Shalom crossing in Rafah, southern Gaza Strip, March 12, 2015. Photo by REUTERS/Ibraheem Abu Mustafa.

Feb 15, 2018

The PLO Executive Council decided last month to halt economic ties with Israel, reject Palestinian recognition of Israel and call for an end to security cooperation, yet Israeli-Palestinian economic relations remain steady in terms of imports, exports and new joint projects.

A source at the Palestinian Ministry of National Economy, who declined to be named, told Al-Monitor that, so far, Palestinian and Israeli "economic relations, including trade relations, haven't deteriorated," despite posturing after US President Donald Trump decided to recognize Jerusalem as Israel's capital.

In fact, Palestinian Minister of National Economy Abeer Odeh and Israeli Minister of Finance Moshe Kahlon jointly inaugurated a new cargo scanner Jan. 30 on the Allenby Bridge to promote the movement of goods among Jordanians, Israelis and Palestinians, and to increase trade volume by allowing 20 trucks carrying 40 tons each of merchandise to cross daily, instead of seven trucks.

Speaking to Al-Monitor on condition of anonymity, a Palestinian Central Bureau of Statistics source said trade activity statistics for December 2017 haven't been issued yet because work on clearance revenues (VAT, import taxes and other revenues) with the Israeli side hasn't been concluded. The source at the Palestinian Ministry of National Economy, however, said there were no significant changes in the import and export volume for December 2017 and January 2018.

Per the Paris Protocol signed in 1994 between the PLO and Israel, the Palestinian economy has become integrated into Israel's. In other terms, the Palestinian economy is subordinate to Israel's through a “customs union” that dispenses with economic borders, despite the disparity in income levels. The protocol also allowed Israel to tax Gaza importers for goods brought in via Israel. Israel continues to collect taxes on Palestinian imports on behalf of the Palestinian Authority (PA) and sends the PA the taxes monthly. Israel has abused this system many times to pressure the PA into meeting demands. The entire Palestinian economy process has to go through Israel first. Palestinians would need to break free from this protocol to end their dependency on the Israeli economy.

That's a tall order for the PA. In addition to economic control, Israel has authority over Palestinian crossings, border posts and basic services such as electricity, fuel and water.

According to Azmi Abdul Rahman, director of the Statistics Department at the Palestinian National Economy Ministry, “So far, indicators on trade with Israel have remained unchanged. The Palestinians’ subordination to Israel continues to prevail over trade relations, as our trading activities are mostly made to or through Israel.”

He told Al-Monitor, “The PA’s [annual] imports are worth $6 billion, 75% of which are made [both directly] from and via Israel. Its exports are worth $900 million, 80% of which are made through Israel. Such indicators have remained unchanged for five years. … Palestinian trade will continue to be subordinate to the occupation as long as the latter controls all of the border and commercial crossings and obstructs activities between Palestinian governorates, especially between the West Bank and the Gaza Strip. The checkpoints, crossings and control over economic resources in Area C hinder a productivity boost.” Area C is a unit of the West Bank populated by Palestinians and Israeli settlers and administered by Israel.

Abdul Rahman added, “Israel holds the reins of the trade activity. Breaking away from subordination to Israel is not beyond the bounds of possibility, but rather a hard task that would take forever.”

Despite a Palestinian boycott of Israeli products, trade volume between the PA and Israel over the past few years has remained steady so far. Abdul Raham said, “Israeli exports in Palestinian markets are worth $2 billion a year. Should national products replace Israeli goods on the market, our subordination would be lessened and thousands of job opportunities would be created.”

Although the PA admits ending economic subordination to Israel is essential, multiple policies need to be modified. Raja Khalidi, research coordinator for the Palestine Economic Policy Research Institute, told Al-Monitor the so-called trade exchange between the PA and Israel is actually "Israeli goods flowing into the Palestinian market."

"Based on that, the lack of political decision and [actual mechanisms] for this purpose prevents an instant and swift end of such subordination,” he said.

Khalidi stressed the need to replace Israeli commodities with Palestinian-made products by promoting national production and marketing products internationally. That kind of change would require protective policies to encourage local production of industrial and agricultural goods, he said.

Khalidi confirmed that to achieve economic recovery, there must be a political and economic decision to reform the internal economic situation and business environment, promote local companies’ capacities and production, and tackle the PA’s 25-year-long open market policy. Palestinians need to adopt a political position aimed at ending the commitment to the Paris Protocol and develop an alternative economic plan.

Palestinian political authorities' decision to sever economic relations with Israel has nothing to do with reality and only serves to temporarily distract the Palestinian public. This is true particularly since severing ties requires a strategic economic plan that has yet to be developed and a willingness to bear its consequences. The PA has yet to show either. The PA must lay the foundation for a new economic path that is a far cry from the situation that has remained the status quo for a quarter of a century.

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