Palestinian Authority faces cash crunch, raising risk of unrest

RAMALLAH, West Bank — Grappling with a $100-million monthly budget deficit, the cash-strapped Palestinian Authority is struggling these days to keep the lights on.

Until an emergency bank loan late last month enabled the Palestinian administration to temporarily stave off creditors and suppliers, its Israeli electricity provider was threatening to cut power to parts of Ramallah, Bethlehem and other West Bank cities.

“The problems are becoming more entrenched,” said newly appointed Finance Minister Nabeel Kassis, who spends most of his time trying to scrape together enough cash to pay the monthly bills and salaries. “I don’t like to call it juggling. I call it management. So far we have managed to get through, but in the second half of the year we could be in very bad shape.”

Almost throughout its 18-year existence, the Palestinian Authority has been dogged by financial woes but has always managed to squeeze by, often at the last minute. Now, it appears headed toward the brink again as its leaders warn of the most severe cash crunch they’ve ever seen.

Some unpaid employees of government contractors have gone on strike and more could follow if salaries are not paid. At least one supplier went bankrupt after the government failed to pay its bill.

Over the last week, thousands of Palestinians hit the streets in several cities to protest the rising price of food and fuel, directing most of their anger at the government.

“We are fed up,” said taxi driver Atta Hameidi, who took part in a demonstration Thursday over fuel prices. “I fill my car with gas and hardly have anything left. How do I feed my children and put them through school?”

For two years, Palestinian banks lent money to help keep the government afloat, but now they are turning off the spigot, worried they’ve become too vulnerable should the Palestinian Authority default.

And international donors have slashed their support from $2 billion in 2008 to less than $1 billion this year, of which only half has been delivered.

“This time the problem is more serious and more widespread because the options that were available before to solve the crisis are no longer available,” Birzeit University economist Nasser Abdul Karim said, referring to the tapped-out bank credit lines.

The crisis threatens to bring down the Palestinian economy just as it is beginning to recover from a 10-year slump. More than ever, Karim says, the government is the economic engine behind growth in the West Bank, rather than the private sector, which remains reluctant to invest amid the Israeli occupation.

The Palestinian Authority’s burgeoning budget in recent years made it the most important employer and purchaser of goods and services, accounting for at least one-third of the gross domestic product, Karim estimated.

Tens of thousands of government employees now have mortgages, once rare in the West Bank, collateralized by their government salaries.

“What will happen to the economy if suddenly that spending slows down?” Karim asked.

Ripples are being felt at places such as Makassed Hospital in East Jerusalem, a semiprivate facility that treats many Palestinians whose healthcare is covered by the government. Staff members went on strike last month after not receiving their salaries. Hospital officials blamed the Palestinian Authority, which they say owes them $6 million.

“We owe money to our own suppliers, and unless we pay them, they will stop supplying our hospital with what we need,” hospital director Bassam Abu Libdeh said.

Finance Minister Kassis says that officials are is trying to make partial payments to as many vendors as possible, but that there is not enough cash.

The cause of the latest crisis is the drop in foreign aid. In the 1990s, the Palestinian Authority relied on international assistance only for development projects such as new roads, depending on taxes to cover the rest of its expenses. Today foreign aid is needed to support more than one-third of the administrative budget, including salaries for nearly 150,000 people in the West Bank and the Gaza Strip.

The United States accounts for nearly 40% of the about $500 million in foreign aid that has been pledged but not delivered this year. The payment has been held up by Rep. Ileana Ros-Lehtinen (R-Fla.), chairwoman of the House Foreign Affairs Committee. She has criticized the Palestinian Authority for its bid last year to win membership in the United Nations and its moves to reconcile with rival Palestinian group Hamas, which rules the Gaza Strip and is labeled a terrorist organization by the U.S. and Israel.

The rest of the missing international aid was pledged by Arab states.

The Palestinian Authority has pleaded with the international community for help and has tried to trim costs by freezing salaries, reducing travel and cutting purchasing. But it is reluctant to lay off workers or cut pay. And as the recent protests show, austerity measures could bring into the streets large numbers of Palestinians, who thus far have remained on the sidelines during the “Arab Spring” movement.

“People are already poor and everyone turns to the government because there is no alternative,” Kassis said. “You can’t ask someone earning $1,600 a year [the per capita income in the Palestinian territories] to live on less.”

He said the real problem is the Israeli occupation of the West Bank, which has stifled private investment. The Israeli military controls borders, airspace, natural resources and the movement of goods and individuals.

Ties between the West Bank and Gaza, which traditionally engaged in substantial commerce with each other, have been severely restricted since Hamas seized control of the coastal strip in 2007. A recent study estimated that the occupation and Israeli restrictions on the movement of people and goods between the two Palestinian zones cost $7 billion a year in lost revenue.

“It’s the obligation of the international community to either help us with the financial situation or help us end the occupation,” Kassis said. “Then we’ll take care of ourselves.”

edmund.sanders@latimes.com

Special correspondent Maher Abukhater in Jerusalem contributed to this report.