Not Too Big To Fail

10.25.12

Why The Palestinian Authority Is Broke

File under: Reading the writing on the wall. As the United States withholds vital aid for the Palestinians, Israel handed over $78 million last week. The early transfer of tax revenues reflects Israeli fears of wider unrest as the crisis strains the Palestinian Authority's budget to the point of government shutdowns over unpaid wages. 

The financial crisis is a potentially destabilizing shortfall in revenues that raises the stakes for Mahmoud Abbas ahead of his return to the U.N. Little has changed a month since unrest paralyzed the occupied territories and called into question the stability of the Western-backed regime. Despite the bailout, Israel's third this year, the occupation and donor chaos behind the crisis are not going away; the PA is still on the brink.

“The situation is fundamentally the same,” says Nour Odeh, a PA spokeswoman. She points to a $1.3 billion budget deficit, the result of a drop in domestic revenues, tax income and donor support. Ramallah’s response, trying to raise revenues and control expenditures, would be sound in any normal country. But this government has access to only a fraction of its economy. Israel’s occupation deprives it of as much as 85 percent of the nominal GDP, while half the budget goes to Hamas-ruled Gaza where the PA cannot collect taxes. Barred these revenues, it relies on aid.

The problem for the Palestinians is that this dependency on foreign money gives the West a larger than usual say over their politics and diplomacy. The dependancy means any wrong move can have devastating consequences. Abbas’s first failed U.N. gambit resulted in the Congress stopping aid in 2011. A year later, the Palestinians are still waiting for the U.S. to free $200 million pledged for 2012, which is less likely to happen if the U.N. agrees in November to upgrade Palestine's status. 

The World Bank and International Monetary Fund say there is only one long-term fix: Israel must lift impediments to growth, mainly in Gaza and the 60 percent of the West Bank controlled by its military. But while the Israelis are evidently more concerned than the Americans or Europeans, Benjamin Netanyahu is unlikely to budge more than he already has. Israel, he seems to really believe, is doing all it can to repair Abbas’s broken economy but the Palestinians won’t utter a word of thanks. "Abbas did not say anything about what Israel did," he complained recently, referring to last month's release of revenues. “What did Arab states do for him lately?”

It was a curious choice of words at the time. An infusion of cash from Saudi Arabia weeks earlier was the only thing standing between the PA and fiscal calamity. Riyadh provided $100 million in direct budget assistance in August, which was 100 times more than the next-highest donor. The otherwise habitual failure of Arab regimes to fulfill their pledges is not a recent phenomenon; the Palestinian Authority's traditional backers hold back far less often. That is what happened in August, when the PA received nothing from the West.

The gap matters not only for deciphering Netanyahu's fuzzy math. It may also explain Abbas's hesitancy to return to the U.N. when a vote would have made the biggest impact—last month at the General Assembly. Abbas postponed—until November—just as Europe disconnected from the PA budget before he left for New York. The gap between Western and Arab aid is large compared to the previous six months (when non-Arab aid slipped below $24 million just once). In March it stood at $102 million. Over the next five months, it dropped to a low of $25,000 in August.

Diplomats in the region insist the E.U. has no plans for U.S.-style punitive measures if Abbas goes back to the U.N. “We never withheld money from them,” E.U. representative John Gatt-Rutter insisted, while an aide told me that the E.U. was not scheduled to send money until November. Europe has pledged to increase funding next year, so there’s no hard feelings. But European officials are advising the Palestinians to “be careful” about returning to the U.N. over “possible negative consequences of their decision,” says the Greek deputy foreign minister. British diplomats are also warning of serious consequences if Abbas moves forward. These warnings follow American pressure on the E.U., itself: The Palestinians risk "significant negative consequences," a U.S. memo sent to European representatives warns. 

If donor countries use the threat to discourage diplomatic moves opposed by Israel, it’s easy to see why that might be persuasive for a government that literally can't afford to keep the lights on. Palestinian officials are coming to terms with the predicament. "There is no option but to reexamine our internal sources (of revenue),” a top official says. But that's no simple task under occupation. And the Palestinians are starting to demand alternatives to Oslo-era agreements with Israel.

“The real obstacle restricting the Palestinian economy is the Israeli occupation," not the recent donor chaos, says Odeh, the PA spokeswoman. But the situation as it stands now “undermines any improvement to the situation and achievement in self-sustainability the PA achieves. The longer the status quo continues, the higher the risk we will not be able to defend these achievements.”

This is the dilemma facing Abbas as he weighs his next move at the U.N. If he succeeds, Israel is not likely to bail him out again.