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Palestinian Authority Faces Fiscal Crisis - 2004-02-29


The Palestinian Authority is under pressure to reform its finances in order to secure high levels of foreign aid. The World Bank says there has been some progress, but more needs to be done to win the confidence of the international community.

At a conference of foreign donors in Rome last year, the Palestinian Authority asked for $1.2 billion in order to alleviate its current financial crisis. The money is to help bridge the gap in revenue the authority has because of the past three years of Israeli-Palestinian violence.

The Palestinian Authority's coffers have been hard hit by Israeli military closures of Palestinian areas, and other measures aimed at halting Palestinian attacks.

Palestinian Labor Minister Ghassan Al-Khatib told VOA that donor money is needed to prevent the Palestinian Authority from collapsing. "If this Palestinian Authority is to survive this is the minimum that is needed and by the way, a little bit more than half of this sum is supposed to go to the budget deficit, in addition to other parts going to reconstruction to what has been done by the occupation and job creation projects and humanitarian projects," he says.

Mr. Khatib says that in addition to asking for these funds, the Palestinian Authority has had to take other measures, including selling shares in its mobile telephone company and borrowing from abroad. "The Palestinian Authority is selling its shares because of the economic difficulties and desperation. But more dangerous, in the last month the Palestinian Authority had to borrow from private banks in order to be able to pay the salaries of the government," he says.

These measures were necessary, despite the high levels of foreign aid, which increased in response to the start of the Palestinian uprising against Israel in September 2000.

In the years leading up to the intifada, aid averaged about $443 million. It soared to $1.2 billion in 2002, before falling back to $886 million last year, still double the previous level.

Nigel Roberts, the World Bank director for the West Bank and Gaza Strip, says this level of assistance is unparalleled. "The story of the level of assistance in the three years since the intifada is at an extraordinary high level. It is a level of something over $300 per capita. Now, according to our calculations, that is the highest per-capita aid transfer in the history of foreign aid anywhere," he says.

Mr. Roberts says that while there has been a reduction in aid, this is mainly the result of a cut from Arab League States and a smaller amount from the European Union.

But despite what he calls a significant and generous foreign donor contribution, it has not been enough to take the Palestinian Authority out of its current crisis.

Mr. Roberts of the World Bank says the assistance level of $1.2 billion currently being sought by the Palestinian Authority is reasonable, providing certain criteria are met. "Without evident commitment and progress towards tightening these systems and improving accountability, the Palestinian Authority will not get the money it needs. It is essential that it demonstrate really serious commitment to modern transparent, accountable institutions," he says.

Mr. Roberts says that very great strides have already been made under the Palestinian Finance Minister, Salam Fayyad, himself a former employee of the World Bank.

At the same time, Mr. Roberts says there are particular concerns that need to be addressed. These include the payment of the salaries of the Palestinian security forces in cash, rather through bank accounts. Under this system, the person doling out the funds is usually the local commander, who has received a pool of money and distributes it as he sees fit.

Observers say this is designed to benefit Palestinian President Yasser Arafat by making the commanders and officers feel dependent on his goodwill. But experts say the system has a huge potential for corruption.

In an interview at the World Bank offices in A-Ram in the West Bank, Mr. Roberts said this is the perception of the international community. "There are definite areas where transparency has to be improved. One that is being talked about very commonly at the moment and which the whole donor community feels very strongly about is this payment of all salaries through what is called the direct deposit scheme, in other words into people's bank accounts and not through block payments to various heads, in particular security agencies, because that is seen as a source of leakage," he says.

The Palestinian Labor Minister, Ghassan Al-Khatib, agrees this is one issue that must be resolved. "There have been some discussions between the Cabinet and some of the security forces about these payments," he says. "And we have a problem in this regard, in that one-third of the security staff, not all of them [are being paid in this fashion]. We are doing our best in order to proceed with reforms in general. One because it helps for foreign aid, and second because we need it for our purposes."

There are also other reasons for international concern. The European Union is investigating Israeli claims that some of the aid money given to the Palestinian Authority is funneled to terrorist organizations. Israeli troops raided the West Bank town of Ramallah last week and confiscated documents and money they say were linked to such groups.

At the World Bank, Mr. Roberts says there is no dissent among what he calls the reformers within the Palestinian Authority about the need for higher levels of financial accountability and transparency.

But there are other powerful forces resisting change, and unless they can be overcome experts say the increased foreign aid the Palestinian Authority needs so badly will not materialize.

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