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The rise in fuel prices and the delay of Salam Fayyad government in paying salaries were the fuse that sparked the street protests in the West Bank (WB), demanding that the government be dissolved and the Prime Minister dismissed. There were also other demands, among them the cancellation of the “Paris Protocol.”

Yet the Palestinian financial crisis is deeper and much more serious than that; it manifests itself at five levels:

1. The annual loss in the GDP.

2. The accumulated debt with interest.

3. The current deficit in the budget of the Palestinian Authority (PA).

4. “Crisis by contagion;” factors that affect the Israeli economy affect the Palestinian one.

5. “The reserve crisis,” deriving from Israel’s control of the Palestinian economy.

Solutions came in the form of tactical measures designed to prevent the eruption of the crisis and the collapse of the PA. They were designed to treat some of the symptoms while preserving its essence represented in the occupation and its policies. This meant that, sooner or later, the crisis will erupt again.

What Has Happened?
A Renewed Crisis

The Annual Cost of the Occupation to the Palestinian Economy

The Five Crises of the Palestinian Economy

The Palestinian National Consensus That was Almost Formed

The Possible Scenario

 What Has Happened?

The WB has witnessed mass protests because of the economic crisis, manifested in the measures mentioned above. Some tried to place the blame for the crisis on the Paris Protocol, concluded between the PA and Israel in 1994, which points the finger at the occupation as the source of the crises, the simplest of which was price rise. But the public was not made aware of the deepest crisis, that of public finance, because the PA provided for it tranquilizers, turning it into a time bomb.

The government’s delay in paying one month’ salaries seemed insufficient to describe the crisis as unprecedented. For such delay in salaries had occurred more than once in the past, and for more than one month. Thus the question becomes: if the crisis is not about delay in salaries or high prices, however important these are, what then is its nature, magnitude, and possible solutions?

What we saw during August and September 2012 is a mere repeat of what had taken place in August and September 2011 of financial blockade, before and after heading to the UN causing budget deficit. Fayyad tried to compensate partially for that through tax hikes and austerity measures. In protest of this policy, people united against it and banged empty pots and pans in the streets, so it fell through.

The difference between the crisis in 2011 and that in 2012 is that the 2011 protests were directed against the PA, which backed down, calming the pots and pans as well as the throats. Whereas the 2012 crisis was imported from Israel, which, if it had wanted to back down, would have done so in the face of its citizens’ protests against the rise in prices.

 A Renewed Crisis

There was also another “unprecedented” matter in 2012 when compared to 2011. When some of the PA’s resources dried up at the end of 2011, it was compelled to borrow more from banks and the private sector! This caused the erosion of the PA’s ability to borrow in 2012, in comparison to its credit-standing in 2011.

During the last few years, the PA applied the policy of “licking the file,” as the balance of its budget was dependent on donors’ promises. When these failed to pay, the PA used to resort to borrowing temporarily from banks; using as cover, the expected funds from the donors. When these funds did not materialize, the PA’s debts became permanent, which meant added expenses in compound interests.

When the donor countries’ credibility toward the PA drops, it engenders a parallel drop in the PA’s credibility and erosion of its ability to borrow under the guarantee of the donors’ funds. On the other hand, even if the banks were sympathetic to the PA’s circumstances, there are technical standards that cannot be ignored. Furthermore, the capabilities of local banks do not allow them to meet all the PA’s demands.

When we speak of an unprecedented financial crisis, we are not speaking of one confined exclusively to 2012; but of a series of crises, starting in 2008 and up to 2012. These started with a debt of $1.5 billion, according to the prime minister’s figures, and $2.2 billion according to the data of the Palestinian Economic Council for Development and Reconstruction (PECDAR). Thus, we are talking about a $2.5–3 billion debt in 2012, keeping in mind that the expected deficit amounts to about one billion dollars, according to Fayyad’s estimates.

This reality has a negative cumulative nature; because unstable public finance, and feeling that the Authority is bankrupt create a negative effect in every direction, starting with lowering credit and security to declining productivity and credibility. The status of financial bankruptcy is more structural than raising prices, to which we shall return. First, we must expose another economic disaster, without which we would not have a financial crisis, a need for donors’ money or loans, or a rise in prices by contagion.

Between the banging of pots at the beginning of 2012 and the honking of car horns in September 2012, in protest of fuel prices, a real disaster was suppressed, that of public finance. This crisis was planned abroad and designed to end in financial bankruptcy followed by political bankruptcy, causing a bigger disaster. We mean by that the negative cumulative economic effect of the occupation since 1967, which succeeded in establishing a false reason for the financial crisis and a false outcome of the occupation, rather than the real ones.

Comments on the crisis usually touch on secondary matters, such as poor implementation of economic agreements with the occupation. They do not go into the effect of the occupation itself or the reason why the Authority needs help. In addition, the Palestinian small GDP does not allow tax deduction commensurate with the Authority’s expenditure. We note here that some people attach the attribute of “begging” to Palestinians, forgetting that there would not be Palestinian begging had there not been Israeli theft of Palestinian resources.

    The Annual Cost of the Occupation to the Palestinian Economy

There is a number in circulation that says that the annual loss of the Palestinian economy caused by the occupation amounts to $6.8 billion, that is, more than the 2012 GDP, estimated at about $6 billion. This means that for every penny that the Palestinian produces, he loses its equivalent because of the occupation. Saving the wasted GDP would provide the national income with an equal amount. It also means providing the Authority with an income tax in the amount of about one billion dollars annually, which is equal to the promised foreign aid.

Anyone can estimate the size of the Palestinian economy’s annual loss as he pleases. However, a correct estimate can be reached if a correct standard was used according to which loss is calculated. This requires deducing the the Palestinian GDP projections, on the basis of which we can deduce the difference between it and the actual GDP.

A methodical rule can be applied, which is to take the population number as a basis for estimating the GDP of the PA as compared to Israel’s. In 2011, Israel had a population of 7.8 million, with a GDP that exceeded $244 billion. If the two GDPs, the Palestinian and the Israeli, were equivalent, then 4.17 million Palestinians, representing 53.2% of Israel’s population, must produce $130 billion, equal to 53.2% of the Israeli GDP. This is because the WB and the Gaza Strip (GS) have been run by Israel for the last 45 years. So we can assume that the two GDPs would have been close had they been subjected to the same positive development.

Accordingly, it can be said that the projected Palestinian GDP is $130 billion, i.e., 22 folds of the real GDP of about $6 billion or 4.6% of its projected value. This means that the Palestinian GDP loss, due to low productivity, equals $124 billion annually.

To avoid speaking about the difference in production conditions in Israel and assume there is difficulty in their being available to Palestinians, we give another example, that of Lebanon. It has a population similar in size to that of the PA territories and a GDP of $45 billion; that is, seven times the Palestinian GDP. Thus, the PA suffers an annual loss of $40 billion.

   The Five Crises of the Palestinian Economy

We are facing five levels of the crisis, arranged by order of gravity. First: a structural crisis that causes annual losses in the GDP. Second: accumulated debt crisis with its interests. Third: the current deficit crisis in the Authority’s budget. Fourth: “Crisis by contagion;” meaning that any negative change that affects the Israeli economy affects the Palestinian one. Fifth: “the reserve crisis,” caused by Israel’s control of the Palestinian economy’s taps in the service of its upper policy.

What happened lately falls within the scope of the two lesser crises, the current deficit crisis and the crisis by contagion, i.e., the rise in prices. This has obliterated the two most important structural catastrophes, low productivity and the small GDP, as well as the enormity of public debt.

Thus, attention was focused on the price rise crisis; more precisely, on fuel prices, as well as on the same luxury goods whose prices Israel had raised in order to finance some of its emerging expenditures, without ever reaching out to funds designated for security and settlement activities, and without affecting the lives of its less fortunate citizens careless for the price of fuel, cars or luxury items.

The above explains the limited number of those who participated in the Israeli demonstrations, estimated at few thousands. The same goes for the Palestinians, for the participants were mainly taxi drivers; added to them some demonstrators with a political motive, who saw in the demonstrations an opportunity to settle an account with Fayyad. However, the compass pointed to a reason for the price rise, namely the “Paris Protocol,” linking the price levels in the PA territories of goods in general, and fuel in particular, to their equivalents in Israel.

    The Palestinian National Consensus That was Almost Formed

For a moment, things seemed as if the price crisis was opening the door of the “Paris Protocol.” Proof of this is the fact that the PA asked Israel to reconsider it, thus opening the door wide for confirming that the occupation is the cause of the structural economic crisis; not only according to what those who oppose the PA say but also to what the PA economic elite say, represented by: Dr. Fayyad, the Prime Minister; Dr. Muhammad Ishtayeh, President of PECDAR; and Dr. Muhammad Mustafa, Chairman and CEO of Palestine Investment Fund (PIF).

In a bright historic moment, a Palestinian national consensus was almost formed, placing the whole issue, and from its roots, on the table under consideration. Yet some realized the gravity of the moment, and that the gathering clouds in the horizon will not rain political submission. They will rather launch a storm of national awakening of dignity. This prompted them to quickly calm the situation by taking the now well-known measures!

In few days, what was months before impossible became possible, and all closed doors opened!

On 13/9/2012, al-Hayat Newspaper said that Israel was deeply concerned about the PA financial crisis evolving to the point of collapse, resorting to unilateral moves, an outbreak of a third Intifadah, or to descending into chaos. Due to these concerns, Israel made an urgent request to the American administration and the European Union to transfer hundreds of millions of dollars to the PA to save it from collapse!

So once again facts confirm that Israel holds in its hands the decision to open or close the tap of foreign aid to the PA, to prevent a blowup and not to solve the problem; that is, to give a tranquilizer to an ongoing problem and leave four structural fatal problems unresolved.

The recent experience was a remarkable opportunity to bring the problem to light. It requires the Palestinian economic elite to take advantage of it intellectually, and form a vision that receives national unanimity on a new political course. This course must make “ending the occupation” the lone title for a solution. Otherwise, there is only “licking the file” and living a temporary life, awaiting collapse or a blowup.

       The Possible Scenario

At the conclusion of this assessment, we try to foresee possible scenarios. So we point out the following expectations:

-The normal reaction of the PA and the Quartet’s members, foreign and Arab, was to try to prevent the explosion of the crisis through tactical calming measures, thus treating the symptom and not the disease. And that what we included in the title of this assessment: treating the symptom and keeping the disease! There was concurrence between the different parties on the necessity to provide aid; but how about the disease itself represented in more than one level of the Palestinian economic crisis? This includes a semi-bankrupt public finance and a society with an inferior productivity, as we had pointed out.

-Unlike previous times, a Palestinian consensus began to form, which included PA’s leaders and the official economic elite, represented by Drs Fayyad, Ishtayeh and Mustafa, that the cause of the crisis is political. This leads to referral to the Paris Protocol, then to the Oslo Agreement, and then to the occupation. With the result of talking about abrogating or amending the Paris Protocol, until coming to the Oslo Agreement, regarding which it has been said lately that the PA is thinking about its cancellation.

-To reach such ends, we must provide the necessary conditions by elaborating “a vision and a policy to cancel Oslo.” This extremely crucial step that rises to the level of re-correcting history needs creating a national consensus of an existentialist nature around it. If the Palestinians achieved this consensus, practical steps become possible. Not only they would regain their internal unity, but also their normal standing in determining what they want from others, instead of letting others decide on their behalf. They would no longer stand under the Quartet’s ceiling, which is under the American ceiling, which has always been consistent with what Israel wants.  

Al-Zaytouna Centre thanks Dr. Hussein Abu al-Naml for authoring the original text on which this Strategic Assessment was based.

The Arabic version of this Assessment was published on 25/9/2012