Palestinian Authority Prime Minister Salam Fayyad. Photo: wiki commons.

The Palestinian Authority is facing a severe financial crisis, according to an executive summary recently submitted by the Israeli government this past September to the international Ad Hoc Liaison Committee (AHLC), for assisted Palestinian development, in New York. The report showed that although a shortfall in international donor aid has played a significant role in the current PA fiscal crisis, overspending in the implementation of the 2011 PA budget has also contributed to financial troubles.

Israel’s report, which is available on the Israeli Ministry of Foreign Affairs (MFA) website, indicates that the overspending occurred due to the PA’s disbursement for development expenses–for which no funds were available-at the expense of recurrent expenditure. During 2012, the budgetary goals were not met in the first half of the year, and were built upon financing gaps of more than $150 million. “The public finance management system’s role in the current crisis may undermine its track record as a system that meets the requirements of a well-functioning state,” the report stated.

In addition, the PA has been unable to tap the local banking system to finance this shortfall, having reached its upper credit limit of $1.2 billion.

Consequently, Israel has taken measures to support the stability of the Palestinian economy and help the PA successfully manage its financial predicament. In two instances, Israel transferred advance payments of salaries to PA employees when the Palestinian Authority faced a cash flow crisis that prevented the government from paying workers.

In July, Israel transferred an advance payment of NIS 180 million to the PA, in order to assist the PA with timely payment of salaries by the eve of the Muslim holiday of Ramadan. Thanks to the payment advance, the Palestinian Authority was able to pay most salaries before Ramadan, instead of delaying or staggering employee salaries which was the original course of action.  During that period, the PA also received $100 million from Saudi Arabia and $25 million from Iraq, in aid.

In addition, on September 11, 2012, Israeli Prime Minister Benjamin Netanyahu ordered the transfer of NIS 250 million as advance payment of PA tax revenues collected by Israel.

Israel has also taken on other methods to assist the PA in reducing unemployment including increasing the number of working permits for Palestinian employees. In 2012, Israel added 10,000 working permits. To date, there are 46,450 permits which have been approved, of which 34,118 are being used. Approximately 32,000 Palestinians currently earn their living in Israel and 27, 750 Palestinians work for Israeli employers in Judea and Samaria.

On average, a Palestinian worker who is employed by an Israeli in Judea and Samaria, or one who works in Israel, earns twice the salary paid by a Palestinian employer. Income from work in Israel and from Israeli employees accounts for 23% of total wages for Palestinians living in Judea and Samaria.

In other areas, Israeli Minister of Finance, Dr. Yuval Steinitz and PA Prime Minister, Dr. Salam Fayyad worked on arrangements this past summer for a more efficient transfer of goods between Israel and the Palestinian Authority as well as related tax procedures. These arrangements included mechanisms that better facilitate the movement of goods between both sides and support the reduction of illegal trade and tax evasion, in order to enhance the Palestinian tax system and the PA’s economic base.

The report concluded that in order for the PA to overcome its current economic instability, it would be critical for the PA to continue implementing institutional and fiscal reforms. The report also suggests that donors continue with the constant flow of aid, “and to increase the scope of such aid, particularly from Arab donors.”

Israel will continue to assist Palestinian financial stability by supporting the PA in areas of finance, trade, and employment.