by Massoud A. Derhally - The Palestinian economy is crumbling. The standard of living in the West Bank and Gaza strip has incrementally worsened since the coming of Hamas to office last March after winning a landslide victory in January 2006 against the Fatah party of Palestinian president Mahmoud Abbas (aka Abu Mazen).

The economy was already feeling the crunch as a result of a five-year intifada that highlighted the inefficiencies of the government and illustrated how dependent the Palestinians were on external help in addition to being at the mercy of Israeli decisions to keep border crossings closed or open to international traffic.

The Palestinian Authority’s financial condition a year ago was in tatters with a US$69m deficit in its budget for the month of January 2006 alone, relying on aid from the European Union, the World Bank, and the US, in addition to other countries and organisations that contribute just over US$1bn annually.

In 2005, the PA, which employs close to 150,000 people, had a monthly deficit of US$57.1m. That figure increased to US$120m and subsequently increased the total debts of the PA to above US$1.3bn.

But then the US and EU cut off aid in the wake of the Hamas victory in aid to the PA (US$600m), and Israel’s withholding of US$50-60m in tax revenue — tightened the noose around the small pockets of the economy that were functioning.

The US barred American citizens from dealing with the PA and, as a result, financial institutions and banks became wary and subsequently refused to deal with anything Palestinian.

As a result, the Hamas led PA government flirted momentarily with Tehran and tried to seek alternative sources of funding to solve its cash flow problems. It managed to secure some funding from Arab states, namely Saudi Arabia, Kuwait, the UAE and Qatar.
Hamas’s efforts to alleviate its cash flow problems did not bear fruit and even in instances where Hamas officials tried to smuggle suitcases of cash back into the territories, they were detained.

The Quartet of Middle East mediators (the United States, the European Union, the United Nations and Russia) set three conditions for easing the aid embargo demanding Hamas recognise Israel, renounce violence and abide by interim peace deals.

But Hamas was defiant and the situation worsened in June. The cutting off of aid in addition to then an attack by militants linked to the Islamist movement on an Israeli military outpost on June 25, that killed two soldiers and the capturing of another, resulted in a wide scale Israeli offensive that has not only deepened the crisis, but created a humanitarian epidemic that has served to exacerbate the existing political malaise among Palestinians and increase the cycle of violence.

“The consequences of isolation are enormous," according to Mouin Rabbani of the International Crisis Group. “If you go back to 10 years ago, 1996 and 1997, if your employment was with the Palestinian Authority people would kind of feel sorry for you because it was considered one of the lower paid jobs around, especially if you were in lower level civil service and security forces. It wasn’t on the scale of available employment when compared to working in the private sector and the non-profit organization sector in Israel or abroad. It was considered the least valuable form of employment or the least rewarding financially,” explains Rabbani.

“We were also in a reality where all these other alternatives were gradually being closed off so that the PA was quickly becoming the largest employer in the occupied territories, particularly in the Gaza Strip. Given what has happened in the last 6 years and the huge rise in unemployment and poverty, although salaries have gone down, now if you are lower in the rungs of the PA instead of feeling sorry for you, people consider that you are lucky, because at least you have a stable source of income or at least you did until April 2006,” he adds.

Rabbani says what’s important to recognize now is that as a result of the devastation and collapse of the other alternatives to public sector employment, you now have a situation where at least one third of the population of the occupied territories is directly or indirectly dependent on employment by the PA. That has a multiplier effect. The situation in the 1980s and 1990s when Israel first began imposing closures, basically meant that the economy in the Gaza Strip thrived or withered according to the ability of the Palestinian labourers to work in Israel and bring their pay check home.

“We now have a roughly similar equivalent where you have substantial sectors of the economy that stand or fall with the disbursement of PA salaries and if you have a situation where salaries are not being made for six or more months, it has a huge knock on effect, not only on the employees and other family members and dependents,” explains Rabbani.

In July, alarmed that the situation was becoming dire in the Palestinian territories, the EU decided to provide food aid that was channelled through United Nations agencies. In September the World Bank published a report in which it drew attention to what it said was the “worst year in the Palestinian economic history.”

“We are now facing a severe economic crisis in Gaza and the West bank – one that risks reversing the combined efforts of the past 13 years towards a sustainable economy,” A. David Craig, the World bank’s director for the West Bank and Gaza Strip said in the report.

“If the current situation continues throughout 2006, this may be the worst year in the Palestinian economic history,” according to the report. “The average Palestinian’s personal income will fall by 40% and 67% of the population will fall into poverty.” The poverty rate according to the Bank is estimated to reach 74% by 2008 if the present situation continues. The poverty rate was 44% in 2005.

A recent report by the Democratic Worker’s Rights Center in Palestine and the Global Policy Network says a total of 2.4 million people live under the poverty line and that per capita income is less than 8% of Israeli per capita income. The average monthly household income has declined from US$644 to US$343 and the individual monthly allocation is not more than US$1.80 per day.

According to the most recent report by the United Nations Conference on Trade and Development (UNCTAD), the average Palestinian per capita annual income is about US$1000. The report says the poverty rate is currently 66% and rising in line with the estimations of the World Bank. “Households have exhausted coping strategies and are becoming heavily indebted, with 65% depending on informal borrowing to subsist,” says the report.

“For the moment there has been a plunge, quite a drastic plunge in terms of living standards in Palestine. It’s also not universally felt. It’s in large pockets and there is a shock throughout the economy and everybody feels it up the production and down the consumer chain,” says Raja Khalidi, coordinator of UNCTAD assistance to the Palestinian People Unit in Geneva.

“In terms of the economic development side of things this is yet another shock caused by external [forces] coming from outside the economy. It shows the vulnerability and the need to build future safeguards against those shocks. But it also shows resilience of communities, of factories of businessmen, entrepreneurs, women, and civil society and of institutions, which is remarkable.”

“There are new shocks affecting the economy that it has never dealt with before, the most interesting shock is the one I would refer to as the noveau povre as opposed to the noveau riche of the Palestinian Authority of the civil service. These are people who were able to get by and live a dignified life on a monthly salary, but the moment that three to four months of that were no longer on the card these people have actually become very poor. This an important and worrying shock because the civil service is not just the Fatah people but a whole range and spectrum of Palestinian society,” explains Khalidi.

UNCTAD estimates real per capita gross national disposable income to decline to about US$1,200 per person in 2007, a level not seen for a generation, if the level of international aid is reduced by 30% per annum in 2006-2008. “The cumulative losses over this period are estimated at US$3.5bn in potential GDP and 328,000 lost job opportunities. If aid declines by 50% then job losses are estimated to be 530,000.

“The economy of the occupied Palestinian territory is on the verge of collapse…Projections point to unprecedented unemployment, poverty and social tensions,” warns the UNCTAD report.

An important dimension of the isolation, according to Khalidi and the studies cited in this article is how trade has been impacted. In addition to the drying up of aid from donor nations and Israel withholding Palestinian government tax revenue, Palestinians have no umbilical chord to the outside world. The newest and most difficult aspect of the isolation though is the effect on the civil services, which inherently affects the livelihood of 750,000 to a million people who are dependent on civil servants’ incomes.

But government employees not getting paid are the most obvious cases, less obvious are the segments of the population that were dependant on government assistance, like hundred of thousands of unemployed people who are no longer receiving some form of unemployment compensation from the government.

This is in addition to other welfare programs that are not getting funded as well. A recent poll by a British firm and the Palestinian Economists Association found 75% of PA civil servants cannot make ends meet and 22% wish to emigrate.

In the wake of mounting international concern, the Quartet seems to have lowered its demands. The idea of a national unity government comprising Fatah under the leadership of Palestinian president Abu Mazen and Hamas, would go some way in assuaging some of the Israeli and US concerns but the prospect of such a government seem dim. Hamas is open to an extended hudna or ceasefire with Israel, but it won’t recognise its right to exist.

Munib Masri, a Palestinian billionaire is worried and believes the present impasse can only be overcome through such a government. “The situation is very critical and what we need is that Abu Mazen should say I believe in a technocrat government to alleviate the problem. You cannot be in the government without respecting previous agreements…and Hamas has technocrats. If you bring all the factions then you could create a unity government,” says Masri.

“The business community is doing very badly. It’s very terrible. We are passing through the worst situation because people cannot live. For six months people are getting paid very little and they cannot continue. I am worried about education, the teachers need money to go from place to place and they don’t have the money and people cannot go to schools.”

Khalidi of UNCTAD agrees the present vacuum is extremely ominous. “What’s more important than how much financial assistance is the government that you need to have in place. The government is not capable of providing the most basic services, which it cannot do if people are not getting paid salaries. International assistance has to go to ensuring the reopening of the PA and starting with its social services, in particular with education.”

Salam Fayyad, formerly a Palestinian finance minister, and a World Bank and IMF official, believes that Israel’s ability to manipulate the Palestinian economy is paramount to having a contiguous Palestinian economy and that a resumption of international aid alone will not be enough. “An increase in aid is not enough to offset the effect of withholding of money by Israel. If there is a resumption of aid and Israel releases the money then the impact on the economy is reversible. It will take some time," he argues.

“The impact is very deep,” continues Fayyad. “There is rapid poverty everywhere. It’s not anecdotal. Not anymore.”

Source: ITP