Palestinians fear economic collapse as Israel moves to withhold tax revenue

Draconian measure from far-right Finance Minister Smotrich risks destroying Palestinian economy, experts warn

Fears of an economic crisis are mounting in Palestine. Import tax revenue collected by Israel constitutes more than 60 per cent of Ramallah’s income. AFP

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Israel's far-right Finance Minister Bezalel Smotrich has reopened a long-standing economic battle between his country and the Palestinian Authority, announcing this week that he would withhold tax revenue Israel collects on behalf of the PA.

The move comes in response to Norway, Spain and Ireland saying they will recognise a Palestinian state.

Mr Smotrich said he and other ministers were seeking "harsh punitive measures against the [PA] for its unilateral actions against Israel, including its pursuit of unilateral recognition".

But US Treasury Secretary Janet Yellen said on Thursday that the decision "threatens economic stability in the West Bank".

The Palestinian import tax revenue that Israel collects constitutes more than 60 per cent of Ramallah’s income. Withholding the funds is a potentially existential blow to the PA, which has faced severe economic pressure since the start of the Gaza war.

Israel holds the revenue as part of the 1994 Paris Protocol, signed by the Palestine Liberation Organisation and Israeli authorities.

Palestinian officials have long accused Israel of exploiting the arrangement, which give the country the power to exert significant pressure on the Palestinian economy. The protocol was also agreed on as part of a transitional set of measures that was supposed to end in 1999, in a framework put in place on the path towards the establishment of a Palestinian state.

US National Security Adviser Jake Sullivan sharply criticised Mr Smotrich’s move, saying he thinks it is “wrong on a strategic basis because withholding funds destabilises the West Bank [and] undermines the search for security and prosperity for the Palestinian people, which is in Israel’s interests”.

Many Israeli politicians, particularly on the far right, say Israel should not give the funds to the PA, which it accuses of supporting terrorism.

In January, Israel’s cabinet approved the transfer of frozen Palestinian tax funds, as part of a new arrangement for the money to be held by Norway in a trust fund.

In the run up to the deal, Israel demanded that none of the revenue be sent to Gaza, but only to the occupied West Bank, which a growing number of western nations and Israeli security officials said was on the brink of collapse. Such an eventuality is widely considered a significant risk to Israel, as well as Palestinians.

Since the outbreak of the Gaza war in October, the PA, a major employer in the West Bank, has struggled to pay employee salaries in full.

Leading Palestinian businessman Samir Hulileh told The National that Mr Smotrich’s announcement is an “amateur declaration by an ideological minister of finance who doesn’t recognise the [dangerous consequences for] Israel, the Palestinian Authority and the stability in our relationship".

Mr Hulileh described the decision to withhold the money as “blackmail” and said it was in “complete violation of an international agreement signed and sponsored by the Americans, the Russians and the UN”.

“This Israeli government doesn’t want political and economic stability in the West Bank, because that means [the PA] has legitimacy,” he said. “They prefer another Hamas in the West Bank so they can copy what they have done in Gaza through different means.”

The PA also now faces the threat of Israel ending a waiver on July 1 that allows Israeli banks to work with Palestinian banks.

The arrangement is crucial for paying PA salaries and makes it possible to import essential goods and utilities from Israel into the occupied West Bank.

Ms Yellen warned on Thursday that the move risks creating a "humanitarian crisis".

Mr Hulileh said the decision would also affect Israel. “Palestinians have to be prepared for the prospect [of the ending of the waiver] immediately, but Israeli exporters would also be paying a dramatic price, as well as the Israeli government itself which supplies water, energy and fuel to the Palestinian Authority to the cost of about $1 billion annually," he said.

“Palestinians import from Israel $5.5 billion in goods and export $1.3 billion. If you don’t have a banking system, you have to have a cash system, which most governments hate given the risk of money laundering and other reasons.

"Palestinians would have to redirect trade away from Israel and instead through Jordan using dollars or Jordanian dinars – forget about the Israeli shekel and the Israeli banking system.”