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In this Thursday Aug. 16, 2012 photograph, a woman works at the Ramallah Hospital pharmacy in the West Bank city of Ramallah. The cash crunch, mainly due to a sharp drop in foreign aid since 2011, is threatening to set off a chain reaction of business failures, layoffs and economic downturn that would undermine one of the West's fundamental strategies toward resolving the Israeli-Palestinian conflict. (AP Photo/Nasser Shiyoukhi)
Palestinian government debt hurts private sector

First Published Aug 18 2012 06:56 pm • Last Updated Aug 18 2012 06:56 pm

Ramallah, West Bank • Palestinian drug importer Ghassan Mustaklem says he can’t afford to work with the West Bank’s Palestinian government anymore. He recently halted supplies to his biggest client, which now owes $12 million in unpaid bills, or more than half his annual turnover.

The cutoff by Mustaklem and other suppliers has fueled a shortage of key drugs in Palestinian hospitals, making the health sector the latest victim of a deepening financial crisis for the Palestinian Authority.

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The cash crunch, mainly due to a sharp drop in foreign aid since 2011, is threatening to set off a chain reaction of business failures, layoffs and economic downturn that would undermine one of the West’s fundamental strategies toward resolving the Israeli-Palestinian conflict.

Some warn that the Palestinian Authority, key to negotiating and implementing any future peace deal with Israel, will not survive without a major infusion of cash.

The authority, though strapped for cash in the past, is in what economists describe as the worst crisis in its 18-year existence. In recent months, it has been struggling to meet its costliest obligation — salaries for 150,000 civil servants and security personnel which devour half the government’s budget of nearly $4 billion.

Unlike in previous crises, the authority can no longer borrow to ease the pain: It already owes more than $2 billion to local banks, private companies and the public pension fund, said economist Samir Abdullah. In a further blow, it has received only half the needed foreign aid to close a 2012 budget deficit of $1.2 billion, the Finance Ministry says.

The World Bank noted in a recent report that government spending and spending by government employees were important drivers of growth in recent years. "A lack of confidence in the government’s continued ability to spend could have serious consequences for investor confidence and eocnomic growth," the bank said.

"If there is no reversal in the current trend, the Palestinian Authority will not survive this year," predicted Abdullah, a former government minister. The current finance minister, Nabeel Kassis, hasn’t been as specific about the timing, but warned last month that at some point the debt-ridden government would just become too feeble to continue.

For more than a decade — ever since Israel sharply restricted Palestinian trade and movement following the outbreak of the second uprising in 2000 — the Palestinian Authority has had to rely on foreign aid to close a budget gap.

It managed to reduce the shortfall, from half the budget in 2008 to less than one-third last year. But Palestinian officials say major donors have been withholding aid, some as a means of apparent political pressure.

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For example, the Palestinians had counted on $200 million from the U.S. in budget support in June, but the money hasn’t come through yet. The payment was held up by Rep. Ileana Ros-Lehtinen, R-Fla., the chair of the House Foreign Affairs Committee, who is seeking more information about the funds, according to a congressional source.

Lehtinen’s office and the committee declined to comment publicly about the hold.

The 2011 payment was delayed by a congressional hold, in part over Palestinian President Mahmoud Abbas’ appeal to the U.N. to recognize "Palestine" in the West Bank, Gaza and east Jerusalem, territories Israel captured in 1967. The U.S. and Israel say a Palestinian state can only be set up through negotiations, but talks ran aground in 2008.

The United Arab Emirates cut aid from $174 million in 2009 to $42.5 million since the beginning of 2011 — according to Palestinian officials in an attempt to pressure Abbas to reinstate a disgraced former aide, Mohammed Dahlan.

Qatar, another rich Arab state, has linked aid to elusive reconciliation between Abbas and the Islamic militant Hamas, which seized Gaza from him in a violent takeover in 2007 and has set up a separate government there.

The Palestinian Authority was set up as part of interim agreements that were to lead to the establishment of a Palestinian state by 1999. However, negotiations on statehood faltered and what as envisioned as a temporary arrangement — limited self-rule in 38 percent of the West Bank — has taken on an air of permanence.

Palestinian officials, backed by the World Bank and the International Monetary Fund, say their government can only become self-sufficient if Israel removes a network of restrictions on trade and access to resources that discourage investment, drive up costs and limit business opportunities.

An easing of some restrictions in recent years, including a loosening of Israel’s 5-year-old Gaza blockade, led to economic growth, reaching 9.8 percent in both territories in 2010. But international economists say the upturn cannot be sustained unless Israel releases the Palestinian economy from its shackles.

Israel hasn’t done so, citing security concerns, and the growth has been tapering off.

However, Israel has also taken some steps to try to alleviate the situation, negotiating a new deal that improves the transfer of tax rebates it collects on behalf of the Palestinians and issuing thousands more work permits for Palestinian laborers, most of whom had been barred from the Jewish state during the uprising.

Israel’s government, while willing to offer less than its predecessors in negotiations, has said it wants to help improve economic conditions in the Palestinian territories. A collapse of the Palestinian Authority would force Israel, as military occupier, to assume responsibility for millions of Palestinians, a costly scenario it hopes to avoid.

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