Palestinian Authority financial crisis deepens as Trump’s ‘deal of the century’ looms

The Palestinian Authority is in crisis, and its worst financial emergency in years is making headlines across the globe.

Largely sustained by donor funding, the Palestinian government has suffered major blows over the past year after the US, its biggest donor, gutted all of its aid projects and slashed funding for UNRWA and other agencies.

In February the PA was dealt with another potentially fatal blow. Israel refused to release the full amount of VAT tax — totally $190 million –it collects for the PA on imports bound for the occupied territory.

The Israelis had decided to enforce a $10 million per month deduction, meant to represent the amount paid by the PA in the form of pensions to the families of political prisoners and Palestinians killed by Israel. It’s a recurring issue that has been a thorn in the side of the PA for years.

But despite its dire need for the tax revenues, which make up more than 60% of the PA’s budget, the PA has refused to accept the “incomplete” revenues.

Its reasons were twofold: first, it was a symbolic gesture. The issue of prisoners and “martyrs” is one of the most sensitive in Palestinian society.

Thousands of Palestinians have been imprisoned by Israel, or have relatives who have been. Similarly, thousands have relatives who have been killed by Israel over the years. As a result, countless families rely on their pension from the PA to survive.

“Abbas is in a very difficult place. This tax issue is having a huge financial strain on PA,” Palestine Policy Fellow at Al-Shabaka, Dr. Yara Hawari, told Mondoweiss.

“But it’s very difficult for Abbas to back down on this, because prisoners are such an important part of public opinion in Palestine. It will be really difficult for him now to turn around and accept the deal,” Hawari added.

On the other hand, PA officials have expressed fears that if they capitulate to the Israel’s demands, it will pave the way for the Israeli government to use “financial blackmail” whenever they want something out of the PA in the future.

Haaretz reported that in one private meeting between Abbas and his officials, the President expressed concerns that if he were accept the post-deduction tax transfers “then Israel will exploit every opportunity to make more unilateral deductions. That’s why there will be no such situation and Israel will have to reverse its decision and return the money in full.”

And while Abbas’ government has employed a series of austerity measures over the past few months and managed to secure emergency funding from the Arab League, analysts like Hawari say those are only short-term solutions.

Widespread salary cuts to public servants, coupled with already high rates of poverty and unemployment, few prospects of free and democratic presidential elections, and the unveiling of the widely unpopular American “deal of the century” around the corner, will only exacerbate the already dire situation of Abbas and the PA.

“The collapse of the PA is definitely something we could see happening, especially if this financial and political situation worsens,” Hawari said.

‘Israel needs the PA’

In the midst of the crisis, top Israeli government officials have held several meetings to discuss plans of action in the case of escalation.

Israeli media has reported several instances of meetings between Prime Minister Benjamin Netanyahu and his Finance Minister Moshe Kalon to discuss what would happen if the situation spiraled into a full blown collapse of the PA’s financial systems.

A crippled Palestinian economy, analysts say, could lead to widespread protests in the occupied West Bank, which would mean a destabilized security situation for Israel.

While Dr. Hawari told Mondoweiss that she doesn’t foresee and major civil protests happening in the West Bank, Netanyahu is still sitting in a tough position, almost equal to that of Abbas.

“At this point, Netanyahu can’t back down from this,” she said, “he has election promises that he has to keep. All eyes are on him to be a strongman as he forms his new government.”

But at the same time, Hawari says its in Netanyahu’s best interest to maintain a stable Palestinian security force, who are of course funded by the PA and the tax revenues it receives.

“Israel relies very much on the Palestinian security mechanism and coordination with the PA.”

Human rights advocate and Palestine political analyst Dawoud Yousef expressed similar sentiments to Mondoweiss, saying that Israel “will never let the PA collapse.”

“I think it would take a really extreme turn of events for them to allow that,” he said.

The establishment of the PA in the 1990’s, Yousef said, gave the Israeli a way to “outsource the occupation.”

“Prior to the PA, Israel was expected to at least have a hand in providing basic services to the occupied population as is stipulated under international,” he noted.

“But with the PA, and especially Abbas’ PA, they were able to almost wash their hands of providing services to the bulk of the Palestinian population,” Yousef continued.

With the survival of the PA in “the interest of all of the powers that be”, Hawari anticipates that if the Abbas’ government doesn’t soon succumb to increasing political pressure from Israel, surrounding Arab countries, and the US, a “huge bailout” could be on the horizon.

“These leaders will be too concerned about a potential power struggle that could ensue if the PA were to collapse,” Hawari said. “So I think there will have to be a bailout if that scenario is to be avoided.”

What would happen if the PA collapses?

While both Hawari and Yousef agree that it is extremely unlikely that Israel and regional powers would allow the situation to escalate to the point of the PA imploding, Mondoweiss posed the question to both analysts: what if if the situation worsens beyond repair?

“When we talk about the dissolution of PA, we can talk about an idealistic, controlled scenario where Palestinians themselves are the ones deciding to dissolve the PA, to consolidate the PLO, and thinking of a better national strategy,” Hawari said.

But that scenario, she said, is highly unlikely.

“While I’m confident that Israel would never let it get that far, a collapse of the PA, along with the Kushner plan, could very much result in annexation in parts of Area C of the West Bank,” Yousef told Mondoweiss.

The idea of annexation was brought to the forefront during the most recent Israeli election cycle, with Netanyahu making promises of “extending Israeli sovereignty to Judea and Samaria.”

Though top Israeli security officials have repeatedly warned against annexation, Hawari believes that now, more than ever, Netanyahu is “beholden” to his increasingly right-wing base.

“Trump has essentially already given Netanyahu the greenlight on annexation,” Hawari told Mondoweiss.

When asked what potential annexation could look like, both Yousef and Hawari noted that it’s not going to happen at once.

“It’s not going to be dramatic, it’s going to happen in a gradual way, with a series of small measures over time that culminate in annexation,” Hawari said.

American pressure continues

The most likely scenario to come out of the current crisis, Hawari and Yousef say, is an increasing pressure on the PA to, essentially, do what they are told — as evidenced by the American foreign policy in the region over the past year, the EU’s attempts to convince PA leaders to accept some form of partial tax revenues, and most recently, the US-led “economic workshop” to be held in Bahrain next month.

“The Americans are trying back the Palestinians into a corner,” Yousef told Mondoweiss. “These two things overlap: the PA doing what the Americans want and doing what the Israelis want.”

By dangling large-scale financial investments and the prospect of economic prosperity in the face of the Palestinians through the Bahrain conference, the Americans are using the PA’s financial crisis to pressure them into accepting Kushner’s peace plan.

With regional superpowers Saudi Arabia and the UAE already on board with the June conference, the pressure will continue to mount on the PA, who have pledged to boycott any American-led negotiations, which they say are “dead on arrival.”

“The deal of the century is going to be telling if and when it’s released,” Hawari told Mondoweiss.

“The Palestinian political leadership is going to have to make some really tough decisions, and it’s only going to get harder to continue to maintain its legitimacy under the current circumstances.”

While Hawari doesn’t anticipate any US peace proposal to include much in terms of justice for the Palestinians, she expressed hope that the unveiling of Kushner’s plan would force European powers to get off the sidelines and play a more direct role in presenting fair and just solutions to the conflict.

“At this point in the game, the EU shouldn’t be given a free pass in their role in all of this,” she told Mondoweiss. “I don’t think the ‘sit and wait to see what happens’ policy is a smart one.”

“Now is the time to forget about Oslo, and prioritize Palestinian rights over trying to develop a peace framework.”

Correction: A previous version of this article referred to Dr. Yara Hawari incorrectly as Dr. Yara Harawi.