Descent into despair

With donors cutting off aid while unemployment rises and inflation rockets, the prospects for Palestinians have never looked so bleak. Massoud A. Derhally reports on the growing crisis.

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By  Massoud A. Derhally Published  April 23, 2006

|~|53281260-200.jpg|~|Desperate: The plight of Palestinians has worsened since the suspension of US and EU aid to the Palestinian Authority.|~|With donors cutting off aid while unemployment rises and inflation rockets, the prospects for Palestinians have never looked so bleak. Massoud A. Derhally reports on the growing crisis. They never expected to win the elections last January. But they did, and Harakat al-Muqawamah al-Islamiyah, better known as Hamas, is now in an unenviable and perilous position. Having inherited control of the corrupt and nepotistic Palestinian Authority, (previously run by the Fatah organisation of Yasser Arafat and Mahmoud Abbas, aka Abu Mazen), the Islamist movement cannot afford to revel in its landslide victory given the financially precarious position both it and the Palestinian economy are in. There is no direct and simple answer to explain the overall state of the PA or the Palestinian economy today. The current situation and the implications of what is fast becoming a financial crunch is a multi faceted problem, just like the protracted and multi-layered Israeli-Palestinian conflict. It’s rooted in the PA having been largely been dependent on aid from donor nations, mainly the US and EU, international institutions, in addition to revenue that is collected on its behalf by Israel in the form of customs tax as part of bilateral agreements between the two entities. There is also the political dimension of the problem, which cannot be separated from economic realities on the ground. Since the five-year intifada or uprising broke, the Palestinian economy has contracted, and its infrastructure, by extension, has sustained the brunt of Israel’s closure of its borders to thousands of Palestinian workers. This not only has caused the loss of remittances to some 150,000 workers, but also translates into “unacceptable” unemployment rates that have reached as high as 50% in some areas, according to the World Bank. “Today’s Palestinian economy still operates at well below its potential, with real GDP per capita almost 30% lower than in 1999, at the pace of economic growth witnessed since 2003, pre-intifada per capita income levels would only be restored by 2010-12. The inability of the Palestinian economy to fully use its productive potential is first and foremost the result of restrictions on the movement of people and goods,” says a World Bank report. That report was published a month before Hamas came to the fore, when 77% of Palestinians voted the Islamist organisation in. This was largely because of growing scepticism towards the PA and exasperation with living standards in the territories, where more than half of the population live on less than US$2 a day. But unfulfilled expectations and unrealised dividends from years of peace talks with Israel also had their effect. As the World Bank says in its report on the Palestinian Economy, “sustained economic growth in the West Bank and Gaza is a vital part of the process of political normalisation,” and the “continued economic stagnation itself imperils Israeli security.” “The situation is very, very difficult. The private sector is worried. People are not telling the truth and the whole world is falling into Israel’s hands. Our problem is a political problem,” adds Munib Masri, a prominent Palestinian billionaire and successful businessman. Should the political status quo remain unchanged, or things worsen, the economic situation is unlikely to improve. In 2005, the PA, which employs 140,000 people, had a monthly deficit of US$57.1 million. That figure is now US$120 million and has increased the total debts of the PA to above US$1.3 billion. The announcement by the US and the European Union that they were suspending US$600 million in aid to the PA, and Israel's withholding of US$50-60 million in tax revenue, as a result of Hamas’s victory, has exacerbated the economic situation in the territories. Both the US and EU warned they would cut off aid in the run up to the elections in the hope this would dissuade Palestinians from voting for Hamas — a move that has largely been characterised as a form of blackmail. Now after Hamas’ election, the US has barred American citizens from dealing with the PA and, as a result, financial institutions and banks are wary about dealing with anything Palestinian. Even the United Nations has advised its aid agencies to avoid contact with Hamas’s political leaders. The aid is now drying up, which hardly bodes well for America’s attempts to encourage democracy in the Arab World and to sway Arab opinion. In his first interview since leaving office, Salam Fayad, the former minister of finance of the PA, lays much of the blame of the dire Palestinian economic conditions on Israel. “The worst and devastating impact is associated with the withholding of PA revenues by Israel. You are talking about somewhere between US$50-60 million a month. These are Palestinian tax revenues collected by Israel under the existing economic arrangement between the Palestinian and Israeli sides. These are PA revenues collected on behalf of the PA by Israel. The order of magnitude is very large and the most negative impact is associated with this particular measure,” says Fayad. Worth noting is that Israel has never paid the accrued interest on any of the funds belonging to the PA which it has withheld in the past or at present. As to the European and American decision, Fayad says there is a bigger and wider impact from such measures, which he explains as the announcement effect as opposed to the material effect associated with the actual withholding of money. “The announcement effect of cutting off aid is greater; it discourages backers and scares them. The Americans and the Europeans would have of course substantial material impact on the Palestinian economy but if you are looking at money going to the Palestinian treasury then the announcement effect is far greater than the actual effect,” explains Fayad. The former finance minister maintains that of the aid the US has provided to the Palestinian Authority over the past decade, only US$40 million was actually channelled through the Palestinian Treasury. “If you are looking at the direct impact on the Palestinian Authority you are looking at the impact of US$40 million in total that USAID transferred to the Palestinian Treasury,” says Fayad. “In the case of the Europeans they contributed on average about US$ 8million a month from 2001-2005. This distinction is very important between overall assistance provided and the assistance provided to the PA treasury directly. What came from the Europeans and the Americans to the treasury is small compared to the overall aid packages of the Europeans and Americans.” The recent measures, says Mouin Rabbani of the International Crisis Group, a respected think tank, are a logical extension of US policy. “It’s a bit like Cuba. They are trying to asphyxiate the Palestinian government. Washington didn’t give any direct support to the PA so if they want to cease the flow of funds to the PA then what should they do is do what they have done which is pressure the Europeans, the Arabs, their own nationals and corporations not to do business with the PA,” says Rabbani. “I don’t think the American objective here is democracy. The American objective is to see the democratically elected government unseated from power and they think that by resorting to these measures…they think that serves their objectives. It’s more than likely to be counterproductive because it leaves open two possibilities; the first is that Hamas will find alternative sources of funding for their operational costs. The second possibility is that they succeed on ceding this government and Hamas will have no choice but to conclude that the experiment of political integration and governance has failed and they should not seek a strategic transformation into a more political movement and its likely to revert to the armed struggle with the added complication that some people will be disillusioned with Hamas.” For the time being, the most recent measures to cut off aid have not dented the Islamist organisation’s resolve, or helped nudge it any closer in line with how its donor nations and Israel want it to behave. If anything, the contraction in funding and the onset of isolation has made Hamas even more defiant. Ismael Haniyeh, the new Palestinian prime minister appointed by Hamas, has shrugged off the boycott of his government, saying Palestinians could survive on olives and oil. But this ominous situation has also caused the cash strapped Palestinian government to look elsewhere for aid, namely to Arab and Muslim nations which include Iran and Syria, which are considered at the moment to be pariah states. Arab states, namely Saudi Arabia, Kuwait, the UAE and Qatar, have pledged US$130 million and Iran US$50 million. Syria, for its part, is putting together a fundraising event and Russia said it would provide emergency funding after a visit by Abu Mazen to Moscow. This money is hardly sufficient and will provide only temporary respite. “We are facing a dilemma and unfortunately the depth of Palestinian sacrifice is very bad. There is a problem yes; there is an economic crunch, there is a dilemma in the street. There is a problem and unfortunately there isn’t anyone that can bridge the points of views. There are no Arab initiatives. The Palestinian people exercised democracy and people have to respect the democratic process that brought Hamas. This is a good time for an honest broker to come and implement the road map,” says Masri. Rabbani of the ICG says the problem for the Palestinian government is two fold. On the hand, there are the Americans and the Europeans sending clear signals to their Arab allies by cutting off aid. That, he says, is going to make Arab states much more reluctant to step into the breach because they value their relationship with Washington considerably more. “There are clear signals coming from Washington of don’t help this government. You are talking about a public administration and NGOs; and international organisations are not an alternative to a functioning public administration. The only alternative to the PA is another PA. We are talking about ministries of health, ministries of education, public sanitation, and municipalities. Its’ such a broad range of daily activities by so many different departments and you can’t substitute it with one department or another,” explains Rabbani. So what next? Says Masri: “Israel is saying to the world ‘you have to consider Hamas as so and so’. Perhaps Hamas’s presence is a good bargaining tool to reach a political solution, but no one is helping. And regretfully Fatah did not join the government with Hamas though I was for it. I think the strategy was not correct. Do you want to solve the problem or do you want to gain power? I think they should have worked together as the main issue is the occupation. If they considered the main thing as the occupation then they could have worked on a coalition government and agreed politically.” Masri believes a possible solution to some of Hamas’s problems is to form a national government that will bring in some technocrats. “They have to agree that we are passing through difficult times and everybody has to compromise,” says Masri. What could make a difference is if there is a coalition government where Fatah joins the government, and there is a different prime minister who is neither Fatah nor Hamas and the PM announces that the government is bound by the political decisions of the PLO. That might be something that Hamas could live with. That might be something that would be seen as sufficient flexibility by those that are boycotting the PA. But there is also the question whether Fatah would be willing to do this or whether Fatah is more eager to see international sanctions on a Hamas led PA. With such a grim picture, why then, some ask, doesn’t Hamas soften its stance? Rami Khouri, a commentator at the Daily Star says the existential crisis is about more than money. “When you look at Hamas, or Hezbollah or Iran these guys are operating in the context of resistance. Hamas is resisting obviously the Israeli occupation, but they also see themselves as resisting Western American led hegemony. You can only analyse them in that context. You cannot analyse them in the context of a company that has run out of money that needs an overdraft or a loan. They don’t operate according to normal principles,” explains Khouri. Defiance and resistance have always been and continue to be the currency in which Hamas deals. “What Hamas is going to do is use the Israeli-Western pressure on them to try and get political capital out of this. All of the games they have played over the years have been based on the will to resist, sacrifice and pay the price. Resistance and paying the price and even being killed is the root to their credibility because it has brought the kind of results. It’s a very delicate transitional moment,” says Khouri of the Daily Star. The question now is what is the balance between Hamas’ practical, pragmatic sense of needing to govern and their political sense of needing to resist the Israelis and now the Americans and Europeans. There is no clear answer yet to this question largely because this is new ground and Hamas has largely been untested in such a situation. What is certain is that they are running into huge contradictions very quickly that they now have to answer, in terms of what they do when Islamic Jihad fires rockets at Israel or orchestrate gruesome suicide attacks? Hamas’s has derived much of its credibility and continues to do so, by its ability to respond to the real and tangible needs of the Palestinian people. Those needs are both practical and emotional. But Hamas now has to manage this balance between the practical realities of funding the government and the political satisfaction that they and the Palestinians get from tightening their belts and resisting Western pressures. That, says Khouri, is “just in the beginning of this process now.” Further American pressure and drying up of funds will most certainly deepen the present crisis. As things deteriorate some particularly in Europe may begin to get second thoughts or others and the Russians are perhaps an indication of this, will step into the breach to keep things from falling apart, predicts Rabbani. Another scenario could mean that Hamas manages to fund its basic operating costs despite the sanctions that are being imposed. A more dire picture is one where everything collapses because of the absence of alternative sources of funding. At this point there are too many variables to make an accurate prediction. “It is very difficult for me to see a way out of this impasse. It’s a difficult position we are all in. You are talking about massive economic decline with all of these measures and its not going to be long before it is felt and felt widely. It will substantially raise the poverty and unemployment ratios and result in a major economic downside,” says one former senior Palestinian Authority official, speaking on condition of anonymity. “What is really at stake here is not only the economic and financial decline, what is at stake is also serious political risk associated with the status quo, because practically what you are looking at is an alibi for the possibility of continuing unilateralism by Israel. “What is happening currently is that the Israelis are doing whatever they want. There is a dangerous political situation and the Israelis are not going to wait. They have been working on this unilateralism for a while and they are going to continue and finish what they started.” ||**||

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