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The Palestinian Economy in Crisis

Despite a short-term aid package by the European Union this week to avert a financial collapse of the Palestinian Authority, the newly elected Hamas leadership is scrambling to fend-off a potentially devastating economic crisis.

Some observers say the Palestinian economy began to recover last year, after nearly four years of stagnation with the election of President Mahmoud Abbas. That revived hopes for a peace settlement with Israel and the possibility of new economic opportunities for the Palestinians.

But Ehab Shanti, Director of Communications for the United Nations Development Program, or U.N.D.P., in Jerusalem, says the Palestinian economy is in shambles.

“Generally speaking, many economic indicators are very alarming. With regard to unemployment, for instance, there were points in time in which the level of unemployment reached 50 percent. It varies now between 40 percent and 37 percent, depending on the area,” says Ehab Shanti.

Border Crossings and Unemployment

For thousands of Palestinians, employment both in Israel and the West Bank, hinges on the political situation. Most analysts cite Israel’s frequent border closures with Gaza and sealing-off Gaza from the West Bank as contributing to Palestinian unemployment.

World Bank figures released last month put unemployment among people between 20 and 24 years of age at 35 percent, and 43 percent of all Palestinians live below the poverty line.

The U.N.D.P.’s Ehab Shanti says the economic situation in the Gaza Strip is especially bad.

“At certain points in the past five years, the poverty line in Gaza reached 84 percent, meaning 84 percent of the population was living on less than two dollars a day. That means, for instance, that the World Food Program has had to distribute food to almost half-a-million people in the West Bank and Gaza,” says Ehab Shanti.

Moreover, some analysts say, the Palestinian budget does not include appropriations for development projects to improve living conditions. And many of the projects funded by western donors are now on hold because of the political impasse between Israel and the Palestinians.

Hamas legislator, Mahmoud Ramahi, an anesthesiologist-turned-politician, says aid from the European Union and the United States typically goes to infrastructure and humanitarian programs, rather than to finance the Palestinian Authority budget.

“The Palestinian Authority budget is $170 million every month. They get $120 million from taxes and internal investment in our region. And they get $40 million from Arab and Muslim states. The United States didn’t pay any money for the Palestinian government budget. And the Europeans only participate with $10 million out of $170 million every month,” says Mahomoud Ramahi.

Additionally, Israel froze millions of dollars of Palestinian tax revenues after Hamas swept last January’s elections, winning 74 out of 132 seats in the Palestinian parliament.

The United Nations Office for the Coordination of Humanitarian Affairs warned this week that aid and revenue cuts to the Palestinians could lead to economic collapse.

Nasr Abdul Karim, Assistant Professor of financial economics at Birzeit University in the West Bank city of Ramallah says tax revenues, in particular, are crucial to the Palestinian economy. He adds, “We are talking about $50 million of transfers from Israel. This constitutes at least 40 percent of the total current revenues of the P.N.A.’s annual budget.”

Israel, the United States and the European Union list Hamas as a terrorist organization because it has not renounced violence and recognized Israel’s right to exist. And Israel says it will block any outside aid to the Palestinian Authority once Hamas takes over.

In an effort to make up for the budget shortfall and avert financial ruin, Hamas is seeking aid from a number of Arab and Islamic countries, including Qatar, the United Arab Emirates and Iran.

The Palestinian Authority's Budget Deficit

The World Bank warns that the Palestinian Authority is financially “unsustainable,” largely because of unrestrained government consumption and a bloated public sector. Last year, the Palestinian Authority’s budget deficit reached $800 million, $340 million of which were financed by donor contributions, according to the World Bank.

Samir Abdallah, president of the independent Economic Studies Institute in Ramallah, says the economic situation could get worse, “If donors suspend their assistance to the Palestinian budget, and if Israel continues holding our revenues, the Palestinian Authority will end up with one-third of its regular budget.”

Any cuts in aid or revenues would mean that many government employees, including security forces, teachers and medical personnel, may not get paid. This, according to Birzeit University’s Nasr Abdul Karim, would be disastrous.

“Let’s hope that this scenario will not be the case, because otherwise, the P.N.A. would be left without the money to pay salaries, meaning that 150,000 employees will not go home at the end of the month with salaries. On average, we have a Palestinian family of around six people. That means we’re talking about one million people. That will have a negative impact on the economic cycle, because you’re cutting around $90 million as salaries in an economy which is very small. Then, we will have a catastrophic situation,” says Nasr Abdul Karim.

Hamas leaders say they recognize the need not only to bridge the financial gap, but also to create jobs and fight corruption once the new government is sworn in. In the meantime, they stress that their number one priority is to find alternative funding to avert the financial collapse of the Palestinian Authority.

Radio Sawa Jerusalem correspondent Khalil Assali contributed to this report.

This story was first broadcast on the English news program,VOA News Now. For other Focus reports click here.