Why the West Bank is on the verge of economic collapse

The occupied West Bank is struggling mightily. The deck is stacked against the Palestinians, and Israel holds all of the cards. (photo)

The West Bank’s economic crisis is closely tied to Israel’s whims and oppressive policies, and the Palestinian Authority’s reliance on Israel.

by Qassam Mouaddi, reposted from Mondoweiss, July 11, 2024

Last week, Palestinian Authority Prime Minister Muhammad Mustafa announced that the Israeli Finance Ministry had released a part of the customs money that it had withheld from Palestinians for months under the order of its hardline Finance Minister, Bezalel Smotrich.

The amount transferred was reported to amount to $260 million, equivalent to the Palestinian customs money Israel collected on the PA’s behalf for the months of April, May, and June. But even that amount included an important deduction: the share of the Gaza Strip in the customs revenue, the social welfare reserved for the families of martyrs and political prisoners, and the PA’s debts to Israel. Meanwhile, the World Bank decided to dramatically increase its annual aid to the PA from $70 million to $300 million, according to an announcement by PM Mustafa last week.

The reason for this sudden influx of money and the reversal of the Israeli Finance Ministry’s punitive measures against the PA is clear to most observers: the Palestinian Authority is on the edge of an economic meltdown. If it happens, this will likely also trigger the collapse of the PA as a governing authority.

Expectations of such a scenario have been increasingly voiced in recent months, including by the World Bank, as the ongoing economic crisis in the West Bank has been accentuated by Israel’s economic sanctions against the PA since October 7. Smotrich, a pro-settlement hawk, sees the PA as an impediment to the ultimate Israeli goal of settlement expansion in the entire West Bank, despite the PA’s security coordination with Israel.

But the right-wing Finance Minister still agreed to ease some of the sanctions. The reason he did this, according to an unnamed Western diplomatic source quoted by al-Araby al-Jadeed, is that the transfer was part of an agreement between the U.S. and Israel. Israel would release the withheld customs money, and in exchange, the U.S. would allow Israel to “legalize” four Israeli settlement outposts in the northern West Bank (notably, Israel already started this legalization process a year ago under Netanyahu’s right-wing government). Moreover, just last week, Israel announced the single largest Palestinian land grab in over 30 years, seizing 1,269 hectares of land in the Jordan Valley region.

Yet even the partial loosening of restrictions on withheld customs money to the PA doesn’t come close to solving the PA’s economic crisis. Israel’s economic sanctions have forced hundreds of thousands of Palestinian public sector employees to survive on little to no salaries for months on end, while Israel still maintains its revocation of work permits for the some 100,000 Palestinian laborers who used to work in Israel and in Israeli settlements before October 7.

These measures have crippled the flow of money in the West Bank, leading to an inflation of prices and pushing hundreds of thousands of families into poverty.

The economic crisis is also compounded by the deep political instability brought about by the PA’s inability to shield Palestinians from violent Israeli raids, daily arrest campaigns, and assassination missions in Palestinian population centers. Many observers are seeing the writing on the wall, concluding that an economic meltdown or a political explosion are likely to shake the West Bank.

What Smotrich really wants

“Palestinians in the West Bank have been expecting the bare minimum from the PA — just to be able to provide regular salaries and some law and order,” Zayne Abudaka, a Palestinian economist, activist, and entrepreneur, tells Mondoweiss. “But the fact that the PA relies so much on an income that can be withheld by Israel makes it unable to do the minimum expected from it. This increases social pressure in the streets.”

“In the long run, the situation will get out of control, but I don’t believe either Israel or the U.S. will let the PA fall,” Abudaka says. “The PA is an important part of the economic system enabling business in the West Bank and maintaining security control, and even Smotrich, who withholds the customs money, knows this.”

Smotrich is not only the Minister of Finance. He also holds ruling powers over Palestinians through his control of the Civil Administration, the Israeli governing body ruling over most of the West Bank. His intention is to see the downfall of the PA and to bring the entire West Bank under Israeli rule. In April, Smotrich called for the overthrow of the PA, calling it “a direct danger to the state of Israel.” Since then, a leaked plan tied to the minister reveals that he intends to annex over 60% of the West Bank — the lands known under the Oslo Accords as Area C — to Israel proper.

But Abudaka believes that much of Smotrich’s rhetoric is bluster. “Smotrich can make big statements about bringing down the PA, but eventually, when he releases some of the PA’s money and gets U.S. approval to legalize four or five outposts in the West Bank in exchange, that shows it is exactly what he was looking for from the beginning,” Abudaka tells Mondoweiss. “At the same time, 20% of Palestinians who were working in Israel before the war said that they continued to work in their previous workplaces because Israel needs the Palestinian workforce to keep the Israeli economy going.”

At the same time, Abudaka believes that the economic strangulation of the West Bank creates social and political pressure on the PA. “Such a situation can push the PA over the edge,” he adds.

Yet the crisis on the ground continues to grow. According to a poll conducted in April and May by an independent Palestinian think tank, 47% of Palestinians in the West Bank said that their families had been significantly affected by the economic situation, and 65% said that they felt the impact in the rise of food prices.

According to Eid Abu Munshar, the coordinator of Shabab al-Kheir, a volunteer-based initiative that distributes food parcels and hot meals to families in need in Hebron, “the number of families in need in the city has increased from 120 before the war to over 500 in July.”

“During the Eid al-Adha feast in mid-June, we weren’t able to cover all the requests for help with food packages,” Abu Munshar tells Mondoweiss. “We were able to distribute less than 100 food packages out of the more than 500 we had planned due to a severe drop in donations.”

“We rely entirely on local donations from the community,” he clarifies. “And many of our donors have themselves turned into the needy families who require assistance, especially [government] employees and workers.”

This has all led to a dramatic drop in spending in the West Bank, which in turn has led businesses to suffer. Abu Munshar confirms that local merchants in Hebron “have been struggling to keep their business running.”

“One of the cases is a family with seven children, where the father was an experienced worker in Israel who earned enough to donate to our initiative,” he continues. “He hasn’t worked a single day in Israel since the beginning of the war, and the family revenues dropped so severely that they struggle to even secure food and to pay for basic life expenses.”

“Another case is a family whose breadwinner is a government employee. He hasn’t been regularly paid for months, and now he can’t even look for odd jobs because he was arrested by the occupation forces, leaving his family without an income,” he adds

Even employees in the PA’s security forces have not been spared the economic crisis. Mondoweiss spoke to an employee in the security forces in Ramallah, who asked not to be named. “I have been relying on side jobs for months now,” he says. “And we rely more on my wife’s income now, as she is an employee in the private sector.”

“The only time in the past year and a half that I received a full salary was in March of 2023, and for the rest of the months I receive a 50% or 60% payment, and sometimes an 80% payment,” he continues. “There is always a sentence on my salary slip that says that the government owes me the rest of the money, to be paid when funds are available. The only thing keeping employees quiet is this sentence on our salary slips.”

Saving the status quo

According to Abudaka, “PA salaries account for around 30% of the West Bank’s total salaries, while workers in Israel generate around 40% of the West Bank’s total salaries, making these two sectors the backbone of the West Bank’s economy.”

“This makes any crisis in their income into a general crisis in the rest of the economy,” he explains.

“The reason for this is the attachment to Israel’s economy. And it’s a one-way relationship, where the West Bank is a free market for Israeli production, and the development of any Palestinian productive sector is very restricted by the economic accords the PA signed with Israel [in the 1990s], mainly the Paris economic protocol,” Abudaka says.

The PA itself relies on between 50% and 60% of its budget on the taxing of consumption through a 16% VAT rather than taxing income, Abudaka says, which is a product of the nature of the political system. “To tax income and create some kind of equity would need a political situation where there is effective oversight and accountability, which in itself needs some level of citizen participation,” he explains. “And that needs a functioning parliament and elections.”

Abudaka believes that even within the restrictive parameters of the Paris Protocols, the PA could have invested in more productive sectors. “But they took the easy path and went along with the political status quo, which is to rely on a consumption economy,” he states.

“The solution to this economic and social problem is not an economic one, but a political one — ending the occupation,” Abudaka says. “By opening the space for citizen participation in economic decisions, or maybe holding elections, some of the social pressure might be diffused.”

But Abudaka believes that the time has passed for any systemic structural change to the PA. “Structural changes should have been done in times of stability,” he explains. “But now, the only thing that can be done is to strengthen the system to survive a possible social upheaval.”

The Israeli genocide in Gaza continues unabated with no vision for how the war would wind down, generating a political crisis in Israel that provides Smotrich with the cover he needs to eat up the rest of the West Bank. The U.S. gives Smotrich what he wants in exchange for a fleeting restoration of the economic status quo ante, and the World Bank can rush in to further bolster the financial sector in the West Bank. But all this amounts to little more than a morphine shot, allowing the PA a temporary respite before a potential collapse.

Qassam Muaddi is the Palestine Staff Writer for Mondoweiss. Follow him on Twitter/X at @QassaMMuaddi.

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