TWN Info Service on Health Issues (March 07/05)

29 March 2007

Palestinian economy suffers under sanctions

Palestinians living under sanctions imposed by Israel, the US, and the European Union have been badly hit in the last one year. The article below describes the impact of sanctions on the Palestinian economy and ordinary Palestinians.

It is reproduced with permission from South-North Development Monitor (SUNS) #6220, 28 March 2007.

With best wishes
Evelyne Hong

Finance: Palestinian economy tumbles under sanctions

By Emad Mekay, IPS, Washington, 26 March 2007

Under an economic embargo spearheaded by Israel, the European Union and the United States, the Palestinian economy shrank by five to 10% in 2006, after having experienced a modest recovery for the previous two years, an international report found Monday.

"It is obvious that 2006 has been a difficult year for the Palestinian economy and the population," said the joint study by the World Bank and the International Monetary Fund (IMF).

Still, it says that stronger-than-expected official and private inflows of aid, which went mostly to the Western-backed Palestinian President Mahmoud Abbas, helped prevent a much sharper decline in incomes and consumption in 2006.

While moderating the overall decline, the average real per capita Gross Domestic Product was still almost 40% below its 1999 level.

The report said that the economy saw a large regression in investment, from an already low level, leading to what the study described as a "further hollowing out of the Palestinian economy" and an increase in its dependency on foreign assistance.

Palestinians have been living under international sanctions imposed by Israel, the United States and the European Union for voting for the Islamic Resistance Movement, known by its Arabic acronym Hamas, in January 2006.

International donors whose funds sustained the Palestinian Authority for much of its life cut off their aid, effectively bankrupting the Hamas-led authority.

The World Bank estimates that $1.1 billion of the PA's budget in 2005 - about half of the total before the Hamas win - came from foreign donors.

Hamas says that it will continue to fight Israel as long as it occupies Arab land. However, following their win, Hamas officials offered Israel a one-year extension of a current truce with the Jewish state.

Both the United States and Israel classify Hamas as a terrorist organisation and have insisted that the group renounce violence to lift the sanctions.

The Hamas win further aggravated tensions with Israel, leading in June to the re-occupation by the Israeli military of Gaza after the kidnapping of an Israeli soldier.

Israel intensified its restrictions on movement and access during 2006, particularly in Gaza, which severely limited the flow of goods and people. Israel also detained several Hamas ministers and members of parliament, nearly crippling the government's ability to function.

The report notes that since March 2006, Israel has withheld most of the indirect taxes - so-called clearance revenues - that it collects on behalf of the PA, thus contributing to the severe fiscal crisis.

The report said that the Israeli military hits on Palestinian infrastructure brought local production to its knees.

"Production has been lost due to outright destruction of physical infrastructure and assets, or dampened by the numerous (Israeli) closures and checkpoints, the shortage of funds to finance government spending, as well as by the increased uncertainty about the Palestinian territories' prospects," says the report.

In another report also released Monday, the IMF said that the Palestinian government was confronted with a harsh fiscal crisis in 2006 as resources to fund the government's recurrent expenditures fell by more than one-third compared to the previous year.

Government employees received on average only about 50-55% of their regular incomes.

This happened despite a strong increase in external support, forcing a major contraction of expenditures.

Most donors refrained from providing direct financial assistance to the PA government and chose to use channels that bypassed the Hamas-led authority.

Foreign financing to support budget operations reached almost $750 million in 2006, more than double the amount received in 2005.

But most of the funds were channeled through President Abbas, who Washington and Israel favour to lead the government, and to Hamas rivals.

Israel says that it gave Abbas $100 million, keeping $475 million belonging to the Palestinians.

Yet the report says that internal political difficulties and infighting between Abbas and Hamas only compounded the situation for ordinary Palestinians over the last year.

The Fatah faction, led by Abbas, fought with Hamas over power, which often resulted in violence and added to the hardships of the Palestinian people, among the poorest in the world, as has been extensively reported by various UN agencies and non-governmental organisations.

The two factions formed a coalition government last month with Saudi patronage.

The Palestinian poor were hit the hardest, since low-income households typically depend more on government assistance.

Low-income households will have fewer, if any, assets left to sell, and have little or no access to bank or other financing, predicted the report.

The World Food Programme and the Food and Agriculture Organisation recently warned that rising unemployment and poverty were threatening food security, leaving many households totally reliant on outside assistance.

The United Nations recently reported that it was only through increased humanitarian aid and strong solidarity among Palestinians that the poor managed to avoid starvation in 2006.

The report concludes that a robust international effort is needed if the economy is ever to regain its balance.

"Strong adjustment will be needed to put government finances on a sustainable path, but sizable external support will remain needed in the adjustment period. A strong economic recovery would greatly assist the adjustment process," said the IMF.