Palestinian Authority unable to pay salaries, even as it pursues statehood

The Palestinian drive for non-member state status at the UN could trigger Israeli economic retaliation that would end the viability of the Palestinian Authority.

While Palestinians prepare for an upgrade to non-member state status at the UN late this month, small businesses in the occupied West Bank are sliding towards the abyss due to a fiscal crisis that economists say threatens the very existence of the Palestinian Authority.

As a result of a dramatic drop off in foreign donor funding, the authority has been failing to pay on time in recent months its 170,000 employees, whose salaries directly support about a quarter of the West Bank and Gaza Strip population. And sometimes, as happened when October salaries were finally disbursed Sunday, the PA makes only partial salary payments.

Economic hardship in the Palestinian areas, where growth is subject to the vagaries of the ongoing conflict with Israel and the vicissitudes of Israeli strictures on movement of people and goods, is nothing new. But now the PA salaries, which previously formed the safety net, have become uncertain and economists warn the shortfalls could stoke social instability. 

''The salaries are the most important single factor deciding the level of poverty.They are like a monthly blood transfusion to our economic body,'' explains Hisham Awartani, an economist at An-Najah University in Nablus.

The outlook for PA wages in the coming months appears stormy at best. The PA faces a $260 million financing shortfall, a lot more than its monthly wage bill, according to the World Bank. With uncertainty about when and how much employees will be paid rippling through the economy, Palestinian economists, joined by the World Bank, fear social unrest, citing a week long outbreak of protests in September over the rising cost of living and a hike in fuel prices. The demonstrations forced the government to roll back the price increase.

And the already grave situation will become a lot worse if Israel, in retaliation for the UN move, suspends transfers of VAT and customs revenues it collects on behalf of the PA. Israeli foreign ministry spokesman Yigal Palmor says this is under consideration.

Woes felt on the street

The ripple effect of salary non-payment, combined with a slowdown in economic growth, is evident across the West Bank, including at Ali Bodie's butchery shop on the road from Bethlehem to Hebron.

''The salaries problem impacts me 100 percent,'' says Mr. Bodie, who wears a white skullcap and offers his visitor a watery cup of coffee ''There's a great drop in the number of customers, and people who do buy, buy half a chicken instead of a whole one,'' he says.

At a furniture store across the street, owner Khader Jadallah says PA employees are failing to meet their monthly installment payments.

''I'm thinking of closing,'' he says in his empty showroom. ''People aren't buying furniture, it's finished.'' A few stores away, mechanic Ali Abdul-Qadr Sidr says the salary disruptions are even causing people to delay changing their oil. ''I tell people they need an oil change but they say I can't, I have no money. So they delay for a month. They will destroy their cars by not changing the oil.''

The PA is trying to keep up business as usual but there is deep concern. In his offices in al-Bireh, near Ramallah, Palestinian Monetary Authority governor Jihad al-Wazir fine tunes the banking system in a bid to keep unrest from surging. On Sunday, after the finance ministry announced it would pay employees up to 2000 shekels as a salary installment, he signed a circular to banks preventing them from taking all that amount as debt on mortgage payments workers owe the banks.

''I am signing that a bank can only deduct 35 percent of this salary installment for mortgage payment,'' he told the Monitor in an interview as his aide waited for the document. ''Otherwise people won't have money left over for their daily expenses and my expectation is that if that happens, there will be demonstrations in the streets."

Foreign help not coming

Al-Wazir, the US-educated son of Yasser Arafat's deputy Khalial al-Wazir, who was assassinated by Israeli commandos in Tunis in 1988, says the current crisis is the most serious the economy has faced since the launch of self-rule in 1994.

''In the past there were avenues to compensate for the deficits and these avenues have been depleted. I am referring to the avenues of borrowing from the banking system and taking from donors here and there.In the past when the Arabs wouldn't pay, the Europeans did and when the Europeans didn't pay the Arabs or Americans did. But now all iterations in the matrix have been tried and all of them are depleted.''

Foreign donations have dropped from $1.978 billion in 2008 to $983 million in 2011, with Arab, EU and US contributions all falling, according to the World Bank. The US had pledged $200 million for 2012 but the money has not materialized, the bank says.

The World Bank said in a report published in September that the way to ease the crisis is for donors to increase their funding as a short term solution and for Israel to lift strictures on the Palestinian economy, which it says are needed for security reasons. These would include allowing the development of the majority of the West Bank that is under full Israeli control known as area C, so as to boost the private sector. The Bank also says the PA needs to continue with reforms that will cut spending, including civil service reform.

According to the World Bank, the tax transfers account for 70 percent of revenues for the PA. Witholding them will mean that ''the Palestinian Authority definitely cannot continue and that there is an Israeli economic war against the PA,'' according to Samir Abdallah, director of the Ramallah-based Palestinian Economic Policy Research Institute.

Mr. Palmor, the Israeli foreign ministry spokesman, counters that the Palestinian UN upgrade marks a sharp turn away from the path of bilateral negotiations. ''If they breach blatantly the whole framework of the Israeli-Palestinian relationship than there is no way back and Israel will do whatever it sees fit. He who burns bridges should not complain about not being able to get to the other side,'' Palmor says.

In Ramallah, Amjad Rizeq, who employs two workers for his door installing business, says that he has not been able to pay them their salaries during the last three months. ''The workers in the authority get only part of their salary and they want to use it for food not doors. The whole economy is bad. Hopefully there will be an improvement and I can pay them. What can we do?''

Awartani, the an-Najah university economist, asks: ''Can the authority survive the crisis? It's an open question. If you know the answer tell me.''