The Palestinian Authority’s Dire Financial Straits – Decades of Israeli occupation and restrictions on the Palestinian economy make sovereignty practically impossible

By Dr. Naser Abdelkarim

The destruction of Gaza before the eyes of the world has underlined, in a dramatic and brutal manner, the extent to which the conditions of Palestine’s existence hinge on the whims of the Israeli occupation. Although the current war may be unprecedented in terms of scope and duration, it fits into a long pattern of Israeli control over Palestinian political and economic sovereignty. Indeed, the Palestinian Authority (PA), established in the 1990s as the institutional precursor to an independent Palestinian state, remains a deformed state at best, with its finances — crucial to any project of national sovereignty — strictly controlled by Israel.

The Palestinian economy is closely bound up with political events and policy choices made almost exclusively within Israel. Movements of labour, goods, and trade are heavily shaped by the fact that Israel controls all points of entry and exit to the Occupied Territories. The PA’s fiscal well-being depends on a complicated combination of grants and Israeli-imposed restrictions on the Palestinian economy. Moreover, the Paris Protocols and the Oslo Accords put in place a framework that subjects the Palestinian economy to extensive Israeli control, including over its arrangements for trade, customs, and excise, as well as the terms and conditions dictating the establishment of the PA itself, which severely restrict Palestine’s sovereignty over its own economic policies, resources, and borders.

The political division between Gaza and the West Bank since 2007 further complicated the PA’s finances. It had a significant impact on revenues generated from economic activities in Gaza, whether via domestic taxes or clearance revenues, especially in the first years of division. It is estimated that the contribution of Gaza to the PA’s total revenues declined by almost 50 percent, equivalent to the decline in its contribution to Palestinian GDP. At the same time, spending on Gaza continued, albeit on a smaller scale. This all set the stage for the situation the PA finds itself in today.

The task of reconstruction following this devastating war, both in Gaza itself but also across the West Bank where Israeli attacks have escalated significantly, will prove immensely costly, and there is no reason to think that Israel, as the occupying power, will be inclined to help the PA shoulder those costs. As long as the Palestinians are denied control over their economy, national sovereignty will remain an impossible proposition.

Situational Constraints on the PA’s Finances

The PA’s ability to generate revenue by taxing trade as well as via domestic commerce and natural resource utilization faces several limitations, mostly imposed by the agreements with Israel made in the 1990s. These include situational limitations such as access restrictions, as well as systemic constraints imposed by recurrent and ongoing closure policy of military checkpoints. They include:

• Economic activities that could potentially enable the PA to generate funds are vitally dependent on the Palestinians’ ability to trade and move, both of which are severely hampered by multiple Israeli restrictions. This is relevant given the size and diversity of an economy’s tax base, which has a significant impact on the potential for generating revenue sustainably.
• One of the PA’s major fiscal constraints stems from limited sovereignty over its own territory and resources. A large portion of the West Bank (especially the resource-rich Area C) is under direct Israeli civil and/or military control, in addition to continuous settlement expansion and recurring settler aggression against the local population. This control imposes several constraints on Palestinian access to natural resources, especially land and water, which in turn limits the potential revenue from these resources. This structural limitation has led to substantial fiscal dependency on foreign aid and external sources.
• Another major constraint on PA fiscal independence is Israel’s recurring withholding of clearance funds. Authorities cite several reasons for doing so, the most recent being due to the PA’s financial support for families of prisoners and “martyrs”, which had already created a significant financial burden.
• Furthermore, there are certain internal constraints on the finances that are available, some of which are a direct result of the need for external sponsorship. The PA’s chronic budget deficit, the size of the Palestinian public sector, and the misalignment between political sovereignty and fiscal as well as economic independence are factors that shape Palestinian policymaking in this regard.

These budgetary constraints are so severe that they turn even the most basic government spending into a significant challenge. Moreover, any variation in the scale of recurrent Israeli constraints has the potential to trigger a new financial crisis for the PA. Such crises, in turn, can only be resolved by borrowing funds. As a result, periodic borrowing has become a quasi-permanent feature of the PA fiscal deficit. Given these circumstances, the constraints imposed by Israel represent a critical policy challenge, one that must be resolved should Palestine have a future in the wake of any possible ceasefire in Gaza.

The Status Quo

To develop a more complete picture of the PA’s fiscal performance, it is useful to look closer at financial statistics and trends over the 2019–2023 period, including revenue, non-revenue financing, expenditures, as well as arrears and public debt. Statistics over this period show that the Palestinian economy as well as the PA’s fiscal position weakened due to a number of factors. The first factor was the Israeli decision in late 2019 to start withholding around 50 million shekels (roughly 12.5 million euro) of clearance revenue, equivalent to the salaries and allowances paid to prisoners, martyrs, and persons wounded in struggling against Israeli occupation. The second was the COVID-19 pandemic. The third factor was the sharp decline in international aid, particularly budget support.

The composition of total revenues and grants collected by the Palestinian Authority over the period 2019–2023 is illustrated in the table below. This represents the portion of income sources generated from domestic revenues, clearance revenues, grants, and donations. Aggregated income denotes actual monies collected rather than provisions for which the receiver anticipates collection. The statistics in the table provide a quantitative look at the PA’s inflows. The rate at which domestic and clearance revenue changes from one year to the next can offer qualified insights into the PA’s fiscal and economic development.

Table 1: Breakdown of PA Total Net Revenues, Domestic Revenues, Clearance, and Grants (2019–2023) (Million USD)

Income Type	2019	2020	2021	2022	2023
Total net revenues and grants	3,782.7	3,990.3	4,546.1	5,029.9	4,715.7
Total revenues	3,428.8	3,610.0	4,315.9	4,921.7	4,369.7
Gross domestic revenues	1,209.6	1,210.0	1,539.0	1,775.5	1,639.3
Tax revenues	763.3	737.4	994.9	1,146.8	1,074.7
Non-tax revenues	355.7	374.6	402.5	458.1	433.3
Gross clearance revenues	2,219.2	2,399.9	2,776.9	3,146.2	2,730.4
Grants and donations	492.1	464.1	321.4	344.8	357.6

Source: Palestine Ministry of Finance, Palestine Monetary Authority

 

Clearance revenues — including VAT applied to imports into the Occupied Territories (either directly from or through Israel, given that Israel controls all Palestinian borders), purchase taxes, custom duties, petroleum taxes, and income taxes from Palestinians working in Israel and Israeli settlements — form a significant part of the PA’s revenues, around 67 percent. Israel collects these taxes and then transfers the funds to the PA Ministry of Finance on a monthly basis through a process called the “clearance mechanism”.

Yet the PA has encountered many problems in dealing with Israel in this regard. One of the key technical problems encountered lies in what may be called “information asymmetry”, as the relevant Israeli authorities often decline to share full tax data with their Palestinian counterparts. This is in addition to the more serious problem of “politicizing” clearance revenues, i.e. withholding them with the aim of putting pressure on the Palestinian economy and fiscal space.

Analysis of these revenues over the years shows they increased slightly between 2019 and 2020, despite the pandemic and resulting fluctuations in global trade. In 2021, as economic activity gradually returned to normal and supply chains began to stabilize, clearance revenues increased from 2,299.9 to 2,776.9 million US dollars. The upward trend continued until 2022, but was curtailed by the economic instability as a result of the war in the Gaza Strip and subsequent withholding of clearance funds as a punitive measure following the PA’s refusal to stop disbursing allocations to the Gaza Strip. The average amount of revenues withheld is estimated at around 300 million shekels (75 million euro) per month, around 40 percent of the PA’s total clearance revenues.

 

As can be seen in Table 2, there was significant improvement in the PA’s current account balance between 2020 and 2022. This was driven by increased external financial support, a rise in clearance revenues, and enhanced domestic revenue collection. These factors collectively turned the current balance from a large deficit to a substantial surplus — in 2019, the PA had a negative current balance of 369.5 million dollars. The budget deficit deepened further to 428.7 million dollars in 2020 as a result of the impact of the pandemic on the Authority’s finances. In 2021, it turned into a surplus of around 189.6 million, which increased significantly to 527.0 million in 2022. In 2023, the balance remained positive but decreased to 336.5 million compared to the previous year due to the war in Gaza.

External financial support has played a crucial role in transforming the PA’s financial situation since 2021. The impact of support was particularly evident in 2022, resulting in a clear surplus in the financing budget. To illustrate, in 2019 the PA required 77.3 million dollars to cover the budget deficit. In 2020, the requirement increased to 133.4 million, before flipping negative to 342.9 million in 2021 as a result of external budget support. The balance after external budget support continued showing a surplus in 2022 and 2023.

It thus can be said that despite the improvements in the current balance, reliance on external support remains a key factor in maintaining the PA’s budgetary stability. As with economic reliance on Israeli whims, this reliance on generally conditioned aid has diminished the PA’s sovereignty and limited its ability to act in Palestinians’ best interests.

Table 2: Fiscal Balance and Budgetary Gaps (2019–2023) (Million USD)

Balance/Gap	2019	2020	2021	2022	2023
Current balance	-369.5	-428.7	189.6	527.0	336.5
Overall balance (including development expenditures)	-569.5	-597.5	21.5	348.9	121.6
Balance after external budgetary support	-77.3	-133.4	342.9	693.7	479.2
Financing budget	77.3	133.4	-342.9	-693.7	-479.2

Source: Palestine Ministry of Finance, Palestine Monetary Authority

Ongoing Fiscal Challenges amidst the Gaza War

The war in Gaza has presented the PA with fiscal challenges on two different fronts. The war has generated serious political and security challenges, while also contributing to immediate fiscal challenges by increasing demands on the health, security, and other social sectors. It has also increased the PA’s political vulnerability. The crises facing the PA since the start of the war have developed beyond a fiscal and economic challenge alone into a crisis of liquidity.

Generally speaking, the PA’s financial crisis was significantly exacerbated by the aggression in the Gaza Strip in 2023, due both to factors that directly affected the Authority’s finances as well as challenges that affected the Palestinian economy as a whole. These included:

• The sharp contraction in the Palestinian economy.Palestinian GDP declined by 33 percent (over 80 percent in Gaza, 22 percent in the West Bank). This was followed by a significant increase in unemployment rates, reaching 74 percent in the Gaza Strip and 29 percent in the West Bank. Economic activities also declined as a result of the closure or destruction of most commercial establishments in the Gaza Strip, which led to the Palestinian economy losing about 2.3 billion dollars during the first four months of the war alone. The activities of a large percentage of establishments in the West Bank also declined. This led to huge losses, and many businesses were forced to stop work temporarily or even permanently.
• The cessation of Palestinian employment in Israel. The closure of crossings and the cessation of granting work permits to Palestinian workers led to a huge decline in Palestinian employment in Israel and Israeli settlements. The total number of Palestinian workers in Israel (with or without permits) is estimated at 200,000, earning around 1.3 billion shekels (some 322 million euro) per month — a huge amount of liquidity inflows into the PA economy. The loss of jobs in Israel also pushed unemployment and poverty to unprecedented levels, which in turn led to a decline in income tax revenues as well as a sharp decline in purchasing power for a large segment of the population, further negatively affecting both local production and imports. This triggered a dip in the PA’s revenues due to the significant decline in taxes and fees collected on these activities.
• Huge losses incurred by the private sector. The tourism sector — including hotels, resorts, restaurants, and others — was deeply affected, especially in cities such as Bethlehem. The registration of new companies also declined significantly, leading to a decline in fees and taxes. This was accompanied by an increase in inflation and a significant rise in prices, as the consumer price index rose by 6 percent in 2024, eroding purchasing power for Palestinian families and increasing poverty levels.
• Ongoing withholding of clearance revenues by Israel. Since 7 October 2023, clearance revenues have declined to 100 million dollars per month on average, compared to 200 million before the war. This led to an increase in the PA’s budget deficit and aggravated the liquidity and financial crisis, forcing the Authority to borrow from banks and postpone payments to suppliers of goods and services, which in turn increased public debt and arrears to the private sector.
• Adecline in foreign aid. Foreign aid has witnessed a continuous decline over the past years, exacerbating the funding crisis for social programmes and basic services. Foreign support amounted to less than 3 percent of GDP in 2023, compared to 10 percent in 2013 and over 25 percent in 2008. This long-term decline highlights the growing reliance on domestic revenues and the PA’s vulnerability to external financial fluctuations, which has affected the government’s ability to provide services, fund social programmes, and support individuals and facilities affected by Israeli aggression in the Gaza Strip and the West Bank.

In conclusion, the PA economy has bled heavily over the past year, resulting in a severe shrinkage of its fiscal space. There is a serious and growing concern that the PA may not be able to meet its obligations vis-à-vis Palestinian constituencies in a year or so should the war in Gaza not end and international aid not increase to the level of 2014 at least. Nevertheless, the probability of an outright collapse is remote at least in the short term, simply because the international community recognizes the huge risks such a collapse would pose for the stability of the whole region, if not the globe.

Charting a Path beyond Physical Occupation and Fiscal Dependency

Without an end to the war in the Gaza Strip, it is hard to imagine any positive change in the Occupied Territories. A renewed ceasefire would at least allow the free flow of humanitarian aid and, eventually, the reconstruction of Gaza. But even if the fighting ends and reconstruction begins, fundamental changes are needed if a sovereign Palestine is ever to emerge on the territory that Israel has illegally occupied for over 60 years.

It is practically impossible for the Palestinian Authority to consolidate sustainable finances under the prevailing geopolitical and economic circumstances. This is becoming more evident as the war on Gaza escalates further, not to mention the severe restrictions applied by Israel on trade, labour mobility, and fiscal conditions in the West Bank. The PA’s dependence on clearance revenues and the unpredictable nature of Israeli deductions create persistent fiscal instability. This structural fiscal imbalance has resulted in increasing public debt and arrears to the private sector, thereby reducing fiscal manoeuvrability and increasing the risk of financial distress. Moreover, the reliance on declining external aid to bridge deficits has compounded the fiscal crisis and exacerbated the PA’s debt burden, which reached 7 billion US dollars in April.

Given the dire state of the PA’s finances and the situation in Palestine overall, international donors, whether countries or institutions, should resume PA budget support and consider activating what is called a “Fiscal Safety Net” to avoid total collapse. Reforms of PA fiscal policy on both sides (taxation and spending) are necessary, and indeed long overdue, but an insufficient condition for achieving full economic recovery and fiscal sustainability. Ultimately, the fundamental precondition to enhancing the PA’s fiscal sustainability and reducing its economic dependency on Israel, thereby preventing its financial and economic collapse and the far-reaching consequences associated with such a collapse, is an end to the occupation and the establishment of a fully independent, unified, and economically viable Palestinian state in accordance with international law.

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Dr. Naser Abdelkarim is Assistant Professor of Financial Economics at the Arab American University in Ramallah, Palestine. He has authored dozens of policy and research papers in the areas of finance, development, and governance.