ISRAEL AT WARA dangerous disengagement: the PA has no economic alternative to the Israeli market
ISRAEL AT WAR
A dangerous disengagement: the PA has no economic alternative to the Israeli market
The economy in the West Bank is almost entirely dependent on Israel, from Israeli transfers of funds to 150,000 Palestinians employed in Israel.
The calls heard from Israeli government officials to completely end the employment of Palestinian workers in Israel and to halt the transfer of tax revenues to the Palestinian Authority (PA) have significant economic and security implications. This is especially true if Israel’s economic disengagement from the PA were to occur all at once, due to the Palestinian economy's dependence on the Israeli market. In 2022 alone, 72% of Palestinian trade was with the Israeli market.
If these steps are taken in a planned and gradual manner, while looking for alternative solutions, this plan may ironically find support from the Palestinian leadership, which has been calling to reduce economic ties with Israel for political reasons for years. Even without a complete severing of ties, it is not in Israel's interest to continue the economic relationship it had with the PA until October 7.
One of the most significant aspects of Israel’s economic relationship with the PA is employment. The shortage of job opportunities in the local market forces Palestinians to seek work in Israel (including in settlements in the West Bank). In 2022, one in every five Palestinians from the West Bank worked in Israel. In the Israeli market, the average monthly wage can reach 5-6,000 NIS ($1,200-1,500) or more, which is at least four times the average wage in the Palestinian territories.
Prior to October 7, at least 150,000 Palestinians reportedly worked in the Israeli market, some without legal permits. Though it is difficult to estimate the aggregate income of Palestinian workers in Israel, according to 2019 estimated to be about $2.5 billion - close to 20% of the West Bank's GDP that year. In the years prior it was reported to be even greater.
In 2019, the unemployment rate in the West Bank was 15%, and excluding employment in Israel would make this figure significantly higher. About 65% of workers in the Palestinian territories are employed in the private sector, but around 30% of them earn less than the minimum wage. Ending employment in Israel could have a negative impact on the security situation in the West Bank in the short and medium term. Past research has shown that 99% of those employed in Israel are young men, usually with basic education and less than 12 years of schooling. Closing the door to the Israeli market for this demographic could create severe internal unrest that would also affect Israel.
According to the 1994 Paris Agreement following the Oslo Accords, which outlines economic relations between Israel and the PA, Israel is committed to transferring funds to the PA, which it collects as customs and taxes on goods entering through Israeli ports, as well as on Palestinian foreign trade. In recent years, due to a decrease in support from donor countries, these funds have become a central source of revenue in the PA's budget.
Domestic contributions to the PA budget have declined. In 2008, for example, foreign aid accounted for 27% of the Palestinian GDP - approximately $2 billion. But in 2021, the figure dropped to below 2% (less than $190 million for the entire year). In 2022, foreign budgetary assistance increased slightly to around $250 million (less than 3% of the GDP), but it remains at a low level. This significant decline is due to the halt of assistance from key contributors to the PA, including the European Union, the World Bank, Saudi Arabia, and the United States.
As a result, the transfers from Israel have become the central pillar of the Palestinian budget. According to estimates, of an annual Palestinian budget of approximately $5 billion, Israeli transfers account for 60-70% of it. The complete cessation of funds from Israel will leave the PA in a dire financial situation unless alternative sources are offered, which are not currently on the horizon.
However, it's important to note that the Palestinians' reliance on transfers from Israel is part of a broader issue of weak economic performance by the PA. The PA needs around $150 million per month to pay its employees. Its tax collection mechanism, while improved in recent years, requires improvement. The monthly tax collection by the PA reaches about $60 million, with only 30% of taxpayers in the West Bank actually paying, according to World Bank estimates. If Palestinian employment in Israel ceases, the chances of the PA significantly increasing tax collection are considerably reduced.
The PA does not collect taxes in the Gaza Strip (Hamas did so until October 7) or in East Jerusalem. However, more than a third of its budget is allocated to these two areas, primarily for wage expenses, various allowances, and payments for electricity supplied from Israel. The PA claims that its planned expenses in the Gaza Strip alone reached $1.7 billion in the past year.
