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Palestinian Authority has cash crunch amid statehood drive

Palestinian banks, which lent the authority about $200 million to cover shortfalls, have stopped making new loans. Donations from the Arab world have plummeted.

August 13, 2011|By Maher Abukhater, Los Angeles Times
  • Palestinian Authority Prime Minister Salam Fayyad holds a news conference in Ramallah last month.
Palestinian Authority Prime Minister Salam Fayyad holds a news conference… (Abbas Momani, AFP/Getty…)

Reporting from Ramallah, West Bank — A year ago, Palestinian Authority employee Fida Jiryis took out a $100,000 mortgage to purchase an apartment in Ramallah, one of thousands of first-time Palestinian home buyers to benefit from a recent push to improve the West Bank economy in preparation for eventual statehood.

But several weeks ago, the 36-year-old copy editor sold her property in a panic when the Palestinian Authority cut June salaries by half and warned that it would be unable to meet July's payroll at all. Though the authority eventually paid full July salaries after workers threatened a general strike, officials say future paychecks remain at risk.

"I became very insecure," said Jiryis, who, luckily, broke even on the sale. "I quickly put my apartment up for sale because I can't count on my salary arriving on time, or even at all."

After earning international praise over the last two years for its financial reforms, the Palestinian Authority is facing its worst cash crunch in years, just as it hopes to prove to the United Nations that it deserves recognition as an independent state.

Palestinian banks, which lent the authority about $200 million to cover shortfalls, have stopped making new loans. Donations from the Arab world have plummeted in recent months.

To conserve cash, the authority, which is facing a $35-million monthly shortfall, said it will have to slash yet-unspecified expenditures and services.

In response to possible salary cuts, anxious public employees, including 80,000 security personnel, are threatening to walk off the job if not paid. Banks that once rushed to make home loans to authority employees have begun rejecting applications from government workers as too risky.

Polls show that Palestinians are now more concerned about jobs and the economy than they are about peace talks with Israel.

"Due to the continuing severity of the financial situation, paying the full [July] salary will restrict the Palestinian Authority's ability to meet other needs for the coming months," Palestinian Authority Prime Minister Salam Fayyad said during a recent news briefing. For Fayyad, a former World Bank official who has been praised for reforming Palestinian institutions, the crisis presents the biggest threat yet to his reputation in the West as a financial expert.

The cash crunch is a reminder of the authority's heavy reliance on foreign aid, which accounts for about half of its more than $2-billion annual budget.

This year, the authority has received about $331 million from donor countries, compared with about $500 million at the same point last year.

Aid from Arab nations was above $500 million in both 2008 and 2009, but dropped to half that level last year. So far this year, it has dropped to about $79 million. Fayyad says the failure of these countries to live up to their pledges has spurred the crisis.

Arab governments have given no reason for the decline, but with the "Arab Spring" spreading through the region, countries such as Saudi Arabia have increased their funding of nations such as Jordan and Bahrain to help keep their rulers in power.

Saudi Arabia recently donated $30 million to the Palestinian Authority, but Fayyad says he needs 10 times that amount to help the authority stay afloat.

Meanwhile, some lawmakers in the United States, which donates about $200 million a year in direct budget support to the Palestinian Authority, are threatening to cut off financial assistance if the authority proceeds with plans to create a unity government with Hamas, which rules the Gaza Strip, or seek formal statehood recognition from the U.N. in September. The U.S. considers Hamas to be a terrorist organization, and the Obama administration has said that the Palestinian initiative at the U.N. threatens to undercut direct negotiations between Israelis and Palestinians.

Palestinian economist Nasr Abdul Karim criticized the authority for failing to better manage its finances and live within its budget. "The government's overspending since its inception and the heavy reliance on foreign aid without taking into consideration the conditions around us have led to the situation we are in now," he said.

He warned that public discontent with the Palestinian Authority over its financial situation might weaken its argument that it is ready to function as a state. But he said theWest Bank's economy would never thrive as long as the Israeli occupation continues to hinder free development and trade.

"The economy will continue to suffer as long as the political situation is not resolved … no matter what we do," Karim said.

Abukhater is a special correspondent.

Times Jerusalem bureau chief Edmund Sanders contributed to this report.

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