The financial destruction of Palestine

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While the United States recently warned that Palestine faces a budget collapse, few informed observers are surprised that the economic fallout from the Gaza war has spread to the West Bank.

Ahead of the recent G7 summit, US Treasury Secretary Janet L. Yellen, in a rare rebuke of Israel, warned that its plans to cut off Palestinian financial institutions from the global banking system would threaten the economic stability of the West Bank . But her warning may have come too late to stop Israel’s far-right Finance Minister Bezalel Smotrich, who appears determined to undermine the last vestiges of the Palestinian Authority’s (PA) already limited self-rule in the West Bank.

The sanctions that Smotrich wants to impose – specifically the withdrawal of the exemption that allows Israeli banks to facilitate transactions with Palestinians without fear of legal action – are in response to Ireland, Norway and Spain formally recognizing a Palestinian state. Ironically, the PA is on the brink of collapse, due to Israel’s actions and the world’s inaction.

Yellen appears to understand that Smotrich’s plan to sanction the PA cannot be attributed solely to the ideological underpinnings of the most annexationist government in Israel’s history. They also indicate that an isolated Israel is redoubling its offensive in Gaza, even as global pressure to end the war increases. But Yellen may need to take her legitimate concerns about the PA’s financial solvency to US President Joe Biden, given his staunch support for Israel, before she expects other countries to take up the matter.

While the international community has recently expressed concern about the looming economic catastrophe in the West Bank, Palestinians living there (and elsewhere) remain fixated on the war in Gaza – which is already a catastrophe in every sense.

In fact, few informed observers have been surprised by the scale, intensity and speed with which the economic fallout from the war has hit the West Bank and the PA, given their heavy dependence on Israel for jobs, trade and currency. This asymmetrical relationship has been forged over decades of occupation, marked by an ongoing struggle for land, resources and rights, and increasing violence by extremist Israeli settlers, who have long enjoyed impunity.

Part of the dependency dynamic involves Israel collecting and clearing customs and import taxes on behalf of the PA. So when faced with European attempts to build momentum toward a political solution to the crisis, Smotrich decided to seize these tax revenues, in addition to threatening new financial sanctions. Before the war, the PA was entitled to an average of $270 million per month in total revenue from clearance operations – enough to cover the salaries of 147,000 civil servants, its most essential current expenses.

But Israel has been making unilateral deductions for years, starting with unpaid utility and health care bills owed to Israeli service providers (based on government calculations). Since 2018, payments made to families of people considered martyrs by the PA and to families of people imprisoned in Israel have also been deducted.

At the end of 2023, these additional deductions amounted to approximately $1.2 billion. This does not include deductions for unpaid utilities, health care bills and other deductions called “net lending,” which totaled $662 million in 2023 alone.

After Hamas’s October 7 attack on Israel, Smotrich began deducting the amount the PA spends on staff and pensioners in Gaza. By April 2024, these deductions, combined with a sharp decline in private consumption and imports, left the PA with less than US$100 million per month in ‘eligible’ revenue, about a quarter of its monthly budget.

Smotrich has threatened to freeze the transfer of that amount and any approval funds, while also pushing for legislation to expropriate the withdrawn funds – which are in escrow accounts – to finance Israel’s war deficit.

In yet another Israeli twist of the financial screws, the Bank of Israel must still accept the periodic exchange of accumulated stocks of Israeli shekels with Palestinian foreign currency correspondent banks as stipulated in the Oslo Accords. This has caused panic among customers who were unable to deposit Israeli shekels. Meanwhile, the PA’s salary arrears are at least six months. And that’s just part of the $8 billion national debt, which amounts to about 60% of the West Bank’s GDP.

Therefore, the PA faces a looming budget collapse, with the West Bank “on the brink and risking an explosion at any moment,” as the usually cautious Palestinian Prime Minister Mohammad Mustafa recently put it.

The leaders of the G7 and the Ad Hoc Liaison Committee, an international donor group for Palestine that met last week, should heed this warning as they consider making far-reaching decisions that could be as momentous as the outcome of the war. Moreover, policymakers must have a clear idea of ​​what can and cannot be done. It is absurd to demand that the PA implement reforms, build state institutions, reconstruct Gaza and monitor its population, while at the same time withholding Israel’s main source of funding.

In the early days of Biden’s presidency, some Palestinians, still reeling from the hostility of the Trump era and without a viable path to independence, hoped he would push for Palestinian rights. In 2021, I proposed a US-sponsored financial New Deal for Palestine, which would strengthen the PA’s fiscal position without requiring US diplomatic recognition of the Palestinian state. The idea would be to grant Palestine formal status or reach an ad hoc arrangement with the International Monetary Fund so that the country can tap international financial aid like any other developing country, a small step towards sovereignty.

Implementing this plan is more important than ever.

If the countries that have recognized Palestinian statehood – recently or in the past – want their declaration to be more than a symbolic gesture, they must start treating Palestine as the state it will eventually become. And if the United States wants to prove that it is more than complicit in Israel’s war, it must lift its veto on Palestine’s attempt to become the state it deserves to be.

The march toward Palestinian fiscal sovereignty is inevitable, but it must happen sooner rather than later.


Raja Khalidi is the Director General of the Palestine Economic Policy Research Institute (MAS).


Disclaimer: This article first appeared on Project Syndicate and is published through a special syndication arrangement.