Palestinian Authority Economy Minister Abeer Odeh and US Assistant Secretary of State for Economic and Business Affairs Charles Rivkin will meet Sunday in Ramallah for talks on developing the PA’s economy. At this point, the PA simply cannot pay its bills and is facing serious problems paying its government employees, from teachers to security forces. According to Trading Economics, in 2014 the PA recorded a Government Debt to GDP rate of 17.30% of the country’s Gross Domestic Product. Government Debt to GDP in the PA has averaged 18.92% from 1995 until 2014, reaching an all time high of 26.36% in 2007 and a record low of 2.93% in 1995.
The economies of the PA and Gaza strongly depend on their relationship with Israel, so that when the Israelis feel safe to permit documented (and many undocumented) Arab workers into their country, the Arab economy improves. And when there’s a war or an intifada, the Arabs go without.
The Palestine Monetary Authority (PMA) most recent report, from 2014, shows high and rising levels of unemployment, which continued to be one of the main challenges to the economy. In 2014, it rose to 26.9%, compared to 23.4% in 2013. A main contributor was an exceptionally expanding rate in Gaza Strip, where unemployment reached 43.9%, compared to 32.6 percent in 2013, while the same rate declined in the PA from 18.6% to 17.7% during the same period. This rise in unemployment did not stop nominal daily wages from rising across different regions. Yet contradictory inflation trends have created discrepancies in real wage growth, as while real average daily wage for workers in the PA, and Israel and the Jewish communities of Judea and Samaria improved by 0.9% and 5.6% respectively, real wages in Gaza declined by 1.5% during 2014.
The PA Arabs’ dependence of Israel was made all too clear this past winter, when The Israel Electric Corporation (IEC) announced the PA and individual Arab municipalities have racked up a debt of close to half a billion dollars which the company could no longer absorb. The debt was split about $400 million to $80 million between the PA and the cities respectively.
In April, the IEC reached a temporary agreement with the PA to put an end to the temporary power cuts it had been imposing on a succession of municipalities, in exchange for paying off a small portion of the overall debt. Meanwhile, the Arab-run Jerusalem District Electricity Company, which owes the IEC $371 million out of the debt, sued the IEC in Israel’s High Court last April, saying the IEC’s behavior constituted “collective and disproportionate punishment” and showed “blatant and harmful disregard for a public that pays its electricity bills regularly.” It also suggested the IEC’s power cuts compromised basic consumer rights to access an essential resource.
“I don’t know of any company that would agree to do nothing about a 1.74 billion shekel ($450 million) debt owed by another company,” IEC chairman Yiftah Ron Tal said at the time. “We weren’t left with any choice. We’re limiting electricity in a proportionate way.”
But the High Court of Justice paid no attention to the complaints of the Israeli CEO, and issued an interim injunction on prohibiting service cuts to the eastern Jerusalem Arab power company.
IEC responded to the ruling with an angry statement: “The Israel Electric Corporation respects the High Court ruling but demands the issue over the growing debts of JDECO which reach 1.4 billion shekel ($360 million) be resolved quickly. JDECO debts continue to grow to an astronomic figure; like any other business, it is the legitimate right and the responsibility of IEC to take the necessary measures to resolve a problematic debt which has been a burden for all Israeli electricity consumers.”
Israel’s ambivalence about collecting the debt from the Arabs in both Judea and Samaria and eastern Jerusalem and Gaza has produced a reluctant and ineffective method of getting the money from the taxes and VAT Israel collects on Arab wages and products. As a result, Israel was rebuked this month by the World Bank for ruining the PA economy by, essentially, withholding money Israel is rightfully due.
The new World Bank report estimates that the Palestinian Authority is losing $285 million in revenues annually under the current economic arrangements with the Government of Israel. The report states that these revenues could significantly ease the Authority’s fiscal stress. As was to be expected, there is no mention in the condemning report of the half billion dollars in free power Israel has poured into the PA.
“If revenue losses are mitigated, this can reduce the 2016 fiscal deficit to below $1 billion, and narrow the expected financing gap by more than 50 percent,” Steen Lau Jorgensen, World Bank Country Director for West Bank and Gaza said in a press statement.
In other words, if only Israel agreed to take the half billion dollars from Israeli power consumers and let the PA Arabs continue to receive free electricity, an Arab economic miracle would be just a matter of time.
The report also cites irregularities on Israel’s part in conducting revenues clearance, which have not been systematically implemented. The revenue sharing arrangements, outlined by the 1994 Paris Protocol, through which the Government of Israel collects VAT, import taxes and other revenues on behalf of the Palestinian Authority, and shares them on a monthly basis, have not been systematically implemented.
The majority of the estimated fiscal loss results from tax leakages on bilateral trade with Israel, and undervaluation of PA imports from third countries. In other words, the Israelis have been running a messy tax and payment system, as well as a messy debt collection system.