Hamas and the Shrinking PA Budget

The Palestinian Authority is in a budget crunch after Hamas, a group listed as a terrorist organization by both the European Union and the United States, won January’s elections, yet refused to renounce violence or recognize Israel. This prompted a suspension of hundreds of millions of dollars in aid payments. Iran and Arab countries vow to make up the difference, but experts question the reliability of such pledges.

April 21, 2006 1:17 pm (EST)

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Palestinian Territories

Budget, Debt, and Deficits

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What is the Palestinian Authority’s budget shortfall?

The Hamas-led Palestinian Authority (PA) is broke and deeply in debt. Almost all funding for the Authority’s operating budget, about $1.5 billion to $1.7 billion annually, came from foreign aid, primarily from the United States and Europe. With those sources cut off—and Israel withholding monthly customs duties that had been paid to the PA before Hamas took charge—the Authority has almost no sources of funding. In addition, the PA is saddled with $1.7 billion in debt.

The PA says it needs some $170 million per month to meet its financial obligations, including $115 million to pay the salaries of thousands of government employees. These include teachers, police, and members of the bloated Palestinian security forces, which have been plagued by cronyism and corruption. The PA collects only about $34 million per month from taxes and other charges.

Which countries are withholding aid funds from the PA?

The European Union (EU) and the United States, the largest sources of funding to the PA under the former government of President Mahmoud Abbas’ Fatah party, have cut off aid to the Hamas-led government after it refused to renounce violence or recognize Israel. After an April 17 suicide bombing in Tel Aviv killed nine Israelis and wounded more than sixty, the Hamas government called the attack "justified," giving its international critics even more ammunition for their decision to cut the purse strings.

How much aid came from the EU?

The EU is withholding more than $600 million it used to give annually to the PA. This included:

  • $262 in donations from member states;
  • $85 million distributed through the World Bank;
  • $72 million for infrastructure;
  • $35 million for good aid;
  • $33 for humanitarian aid;
  • $24 for special projects; and
  • $12 million for Israeli-Palestinian integration.

Between 1994 and 2005, the EU gave 25 percent of the PA’s total foreign aid.

How much aid came from the United States?

The United States has halted payment of the roughly $420 million per year it gave to the Palestinians, most of it channeled through USAID to Palestinian NGOs. This figure included:

  • $160 million in current or planned projects;
  • $130 in infrastructure projects, including road and building construction;
  • $45 million in direct assistance to the PA;
  • $20 million for private enterprise development;
  • $17 million in political support programs;
  • $13 in civil society development;
  • $10 million in judicial reform programs;
  • $7 million in vocational training; and
  • $4 million for community policing.

Between 1994 and 2005, the United States gave 17 percent of the PA’s total foreign aid. Now, however, in addition to cutting off aid, the U.S. Treasury Department has banned U.S. nationals from doing business with the Hamas-led PA.

How much is Israel withholding from the PA?

Israel controls a significant portion of the PA economy both directly and indirectly. Israel collects duties on foreign imports headed for the Palestinian territories and charges value added tax (VAT) on Israeli goods and services headed for those areas. These totaled about $75 million per month in 2005, according to the Israeli Ministry of Finance. Out of this figure, Israel withholds money to pay the PA’s water and electricity bills, which Palestinians have refused to pay for years to protest Israeli occupation. Israel withholds about $15 million each month to cover these bills. That leaves about $60 million that Israel would normally pass along to the PA; however, since the Hamas government was elected, Israel has been withholding this revenue.

In addition to withholding tax money, Israeli roadblocks and other restrictions have prevented thousands of Palestinians from working in Israel. Before the second intifada began in 2000, 22 percent of employed Palestinians worked in Israel or Israeli settlements. By 2005, that figure had dropped to 10 percent of employed Palestinians, who earned 12 percent of all Palestinian income. Security restrictions have put these incomes in jeopardy, adding to the territory’s dire straits: The PA has 22 percent unemployment, 43 percent poverty, and 15 percent ’deep poverty,’ where people cannot meet their subsistence needs, according to Elizabeth Young of the Washington Institute for Near East Policy.

Where is the PA currently getting funds?

In February the EU approved an emergency aid package of $140 million to keep the PA from collapsing. This included funds to aid the poor and pay for salaries, electricity, and other energy costs. The United States is also continuing to give humanitarian aid to Palestinians, donating $245 million for food programs, health, bird flu prevention, education, and refugee aid. However, both U.S. and EU relief funds will be routed through UN agencies to prevent it from reaching the Hamas government.
Otherwise, the Arab world has vowed to help Hamas. Syria is soliciting its people for donations to the PA that would be deposited in communal bank accounts, Iran and Qatar each promised to give the PA $50 million, and other Gulf countries have also promised to help.

Russia has promised to help the PA, with Prime Minister Sergei Lavrov pledging emergency aid in April. Some experts say Russia is concerned about corruption and misuse of the money, and will insist that it is channeled through international non-governmental organizations instead of given to Hamas directly. There is as yet no timetable provided for how or when the money would be turned over. Experts say the recent pledges from Saudi Arabia, Qatar, Iran, and Russia together amount to about $202 million—enough for about six weeks of salary needs for the PA.

Are the countries likely to honor their pledges?

Considering historical precedent, experts say no. Members of the Arab League promised the PA $55 million per month in 2002, but Saudi Arabia is the only country that has paid its part of the commitment regularly. Kuwait and other Persian Gulf countries have paid, but not the entire amount they promised, and other Arab League nations like Algeria paid once or twice, or not at all. And experts say donations from other Muslim nations came with their own strings. Contributions from Arab countries "weren’t necessarily tied to need, but more about gaining influence and jockeying for position with other Arab leaders," says Edward Sayre, an assistant professor of economics at Agnes Scott College and an expert on Palestinian labor markets. "It had very little to do with PA needs and wants." Members of the Arab League have urged Hamas to endorse an Arab peace initiative unveiled at an Arab League Summit in Beirut in 2002 that would recognize Israel in return for Israeli withdrawal to the 1967 borders.

How long will the PA economy be able to last under these conditions?

Not long, experts say. Government workers haven’t been paid since February, and there is no clear sense of how or when Hamas leaders will be able to pay them. The PA economy is currently being sustained by remittances and social networks in which one working member of a family supports multiple relatives and friends. But unless Iran or a wealthy Arab country undertakes to support the PA for the long term, the PA is likely to collapse. "It can’t possibly continue at this level," Sayre says.

More on:

Palestinian Territories

Budget, Debt, and Deficits


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