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The Palestinian financial reforms: A national requirement, but not enough without ending the Israeli obstructions

The Palestinian financial reforms: A national requirement, but not enough without ending the Israeli obstructions
Meeting of the Ad Hoc Liaison Committee meeting in New York. (WAFA Images)

By Jafar Sadaqa

RAMALLAH, Wednesday, September 28, 2022 (WAFA) - The Palestinian government's satisfaction with the donors' meeting this time, which was held in New York on September 25, on the sidelines of the United Nations General Assembly, was evident.

The source of Palestinian satisfaction with this meeting, in which 30 countries and international institutions participated, was the participants’ approval and welcome of the seriousness and depth of the financial reforms that the Palestinian government had begun to implement, which was one of the three recommendations of the meetings of the Ad Hoc Liaison Committee (AHLC) coordinating international aid to the Palestinian people, in addition to demanding that Israel removes the restrictions it imposes on the Palestinian economy, or at least ease them, and calling on donors to increase their aid to the Palestinian Authority.

The reforms that the Palestinian government has brought to the AHLC meeting, according to the Prime Minister’s Adviser for Planning and Aid Coordination Stephan Salameh, are divided into three main areas: reducing the bill for public employees’ salaries, reforming the health system that would lead to reducing the bill for medical transfers abroad, and finally addressing net lending, which is an item on the public expenditures caused from Israel's deductions from the tax clearance in lieu of services provided by other parties, such as electricity companies and municipalities, and turned into a debt owed by these parties for the benefit of the government.

In the details of the reform plan, the government plans to reduce the salaries bill, which amounts to $200 million per month, by 25% until the end of this year, to reach 50% by the end of next year. It is a step that Finance Minister Shukri Bishara believes has become necessary to prevent the collapse of the Palestinian financial system, saying, “The situation cannot continue while salaries and semi-salaries consume 100% of the public revenues. This is not possible."

The semi-salaries are allowances paid monthly and regularly to categories of non-employees, specifically the families of martyrs, wounded and prisoners. But these will not be affected according to assurances issued by the Palestinian Authority at all levels.

But how will the salary bill be reduced?

There are many measures revealed by the Minister of Finance to “purify salaries from impurities,” such as undeserved bonuses and allowances. But the cornerstone of this reform is to refer relatively large numbers of employees to retirement.

The Minister of Finance explained that most of the reduction in the salaries bill this year (30%), will come from referring a number of employees to voluntary retirement (at their request), provided that this procedure will be expanded next year to the compulsory retirement for another batch of civil servants and members of the security services.

The total number of Palestinian Authority employees is currently about 140,000 civilians and military, and it is not known yet the number expected to be referred to retirement, voluntary or compulsory, which may exceed 30,000 employees.

According to the Palestinian Minister of Finance, the process of referring to retirement will be accompanied by a near-total cessation of employment, with the exception of the health and education sectors, addressing the file of inactive employees, cutting down on the day and contract employment, and stopping unjustified bonuses and promotions.

With regard to net lending, Finance Minister Bishara confirmed that the government's effort is now focused on reducing this item.

Net lending in the first half of this year amounted to $373 million, significantly exceeding the government's budget estimates of $229 million.

Bishara also confirms that the government is determined to address the draining caused by medical referrals to places outside the health centers, considering that achieving this goal "needs a comprehensive treatment of the health system in order to improve services within government health centers and build a more just health insurance system."

The Palestinian Ministry of Health is forced to transfer patients who cannot get treatment in its centers to private sector hospitals, or other countries, including Israel, which drains hundreds of millions of dollars annually from the public treasury.

The cost of medical referrals from the Palestinian Ministry of Health amounted to about $300 million in 2021, which constituted about 30% of the total operating expenses of all ministries.

However, the Palestinian government, despite the start of this ambitious plan for financial reform, is always keen to stress that the main cause and base of the chronic financial crisis it is experiencing and the accumulated deficit in finance is the Israeli measures that obstruct the development of the Palestinian economy and its continuous violations of bilateral agreements, especially the Paris Economic Protocol regulating the economic relationship between the two sides, and the uneven implementation of its provisions.

The Palestinian Authority says that there are three financial files that are pending with Israel, the most prominent of which are funds that were unilaterally deducted from the Palestinian clearinghouse, in contravention of international agreements and laws, in exchange for the allocations the Palestinian Authority pays to the families of martyrs, wounded and prisoners. The cumulative total of these deductions from 2019 amounted to about $550 million. In addition to the lack of transparency in calculating the value of the clearing, the amounts the Palestinians pay as fees at the international crossings, and the commission Israel tax on collecting taxes in favor of the Palestinian Authority.

The Palestinian Ministry of Finance says that addressing these files would save the public treasury at least $500 million annually, which would reduce the public budget deficit to less than half.

The Palestinian government hopes that the reform plan that it has begun to implement will convince donors to reinject aid into the Palestinian public treasury, which has witnessed a significant decline during the past three years and has become less than 30% of its level in 2013.


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