NEW YORK, Thursday, September 26, 2019 (WAFA) – The Paris Economic Protocol signed between the Palestinians and Israel in 1995 has become a key source of hindrance to economic sustainability in Palestine and therefore there is a crucial need to amend it, said Minister of Finance Shukry Bishara in New York.
Speaking at a meeting for the Ad Hoc Liaison Committee of donor countries, which opened its meeting in New York last night, Bishara accused Israel of taking a series of financial steps against the Palestinian Authority, the latest of which was the deduction of $12 million every month from the Palestinian clearance tax revenues.
“Just in the course of the last 8 years, Israel has charged us through - what are effectively diktats - $3.5 billion relating to health services, water, electricity, sewage, and a variety of other commissions,” he said, without providing the Palestinians “with a single invoice outlining the basis of such charges,” and has withheld revenues which exceed $700 million on an annual basis.
“When in February Israel started to deduct an additional $12 million a month i.e. $144 annually from our own resources; this - for us, was an ultimate transgression which made it no longer possible for us to endure the present state of affairs,” said the finance minister, warning that “this round of financial confrontation with Israel contains all the hallmarks of an existential threat to the Palestinian economic and institutional edifice.”
Bishara stressed that this situation “has made it abundantly clear that the only choice left for us is to seek an end to Israel’s grievous practices through recourse in a formal arbitration process.”
He added: “And beyond the current standoff, the crucial need to amend the Protocol is a factor common to all conceivable scenarios affecting the future of Palestinian-Israeli economic relations,” stressing that “we are at a crossroads. And the time to act is now.”
Bishara started his address by making general opening remarks around three subjects: The Palestinian Authority’s financial performance, performance during the past seven months, since the start of the financial standoff with Israel, and the economic and financial relationship with Israel within this context.
“Most of you would know that our core strategy during the past 6 years has been: First, to reduce, and eventually to eliminate the chronic budget deficit; to gradually direct resources to the financing of development, and shed unwarranted financial burdens, while adopting effective fiscal policies to leverage revenues, and second, it has been to prepare the Palestinian economy for the scenario of a drop in international aid, through enhancing the ability to rely on organic revenues,” he said, adding:
“By 2018, we were well on our way to achieving these strategic imperatives.
“By way of example, our gross revenues in 2013 - which stood at $2.3 billion – rose to become $3.8 billion by 2018 --- an increase of 65% over a six year period.
“In parallel, we have exercised rigorous cost control over expenditures, holding operating expenses cumulatively at below 10% during the 6 year period, whilst working to debulk the public sector headcount.
“The result of these policies has been a tangible shrinking of the budget deficit -- from 12% of GDP in 2013 down to 3.5% in 2018 --- of course, in both cases, after aid.
“And as predicted, donor aid throughout the period has systematically fallen from prior levels of over $1.2 billion in 2013 to just about $450 million in 2018.
“We are now witnessing a further decline, which we believe will bring total aid for the full year of 2019 to no more than $350 million. This is approximately 2.5% of GDP when compared to the prior level of 10%.
“Despite negative developments in the level of aid, we have kept public sector borrowing at its 2013 level of $1.3 billion --- approximately 10% of GDP and less than 17% of total outstanding credits offered by the Palestinian banking sector which is comprised of 22 banks.
“In a landmark move in 2016, we released liquidity into the market by reducing tax rates, bringing personal and corporate income tax down from 20% to 15%.
“This decision has helped us broaden the tax base, with an effective increase in the number of compliant tax payers by more than 40%.
“Furthermore, we are engaged in an effort to further calibrate our tax regime making it more closely aligned to social and economic realities in Palestine. We expect we shall be able to unveil our program by the end of this year.
“And in absence of a lender of last resort, nor any liquid capital market mechanisms, we have introduced at the MoF in 2016 a short-term treasury bill program dedicated exclusively as a means of payment to the private sector. This product has served to stem the tide of arrear accumulation while injecting significant liquidity into the market.
“From the inception date of the program we have already issued about $900 million worth of treasury notes, all of which were redeemed on their precise maturity dates.
“I do not want to belabor you with more statistical details, other than to say that based on an assumption of ‘business as usual’, the shadow budget - which we are running in parallel with the emergency budget - points to a deficit that shall not exceed 4% by year end ---Notwithstanding the continued drop in aid.
“I’ll move now to the 2nd subject --- how have we performed during the last 7 months?
“During our last meeting, as you will remember, we discussed at length the underlying factors that have propelled us to the present standoff.
“I’ll be happy to provide any additional clarifications regarding this issue during our discussion later on.
“However, in a nutshell, the immediate consequence of the financial confrontation has resulted in our having to forego over 60% of our governmental revenues --- essentially those that are generated through the customs and tax refunds that Israel owes us.
“Therefore, as of February we had little choice but to adopt an emergency budget--entirely based on a cash-rationing approach.
“The assumptions and operating rules under which the emergency budget was carried out during the past 7 months are:
“Tax and customs refunds from Israel (which constitute 60% of our revenues) will drop to nil.
“Revenues that are levied by us directly shall decline by 20% owing to the automatic headwinds that would arise in the economy.
“No offsetting increase in international aid is to be counted on.
“We have frozen all personnel hiring and postponed all acquisitions of property and other fixed assets.
“We have placed on hold development programs - except those that have to be carried forward.
“To fund the inevitable gap we had to increase domestic borrowing for a minimum period of 6 months.
“The PA undertakes to do whatever is possible to protect the marginalized and the socially vulnerable segments of society.
“Whilst extremely challenging, the delivery in key areas has been as follows:
“We have paid over 60% of the total public sector wage bill in a timely manner.
“We have paid 100% of the salaries of low-wage earners. These constitute approximately 55% of all public sector employees.
“We have aligned wage payments in Gaza and the West Bank and have consequently increased the budgetary transfers to Gaza from a pre-confrontation level of $95 million, to now $107 million a month.
“In order to honor these obligations, and as mentioned earlier, we had to put in place a syndicated borrowing facility from the local banks, in an amount of $500 million. This has raised our obligations to the domestic banking sector from $1.3 billion---1.8 billion ----- which is an increase from 10% of GDP to around 14% of GDP.
“Moving forward however, it is worth noting that we are determined not to increase our domestic borrowing to avoid pressuring the banking systems’ liquidity.
“We have also honored all debt service obligations to the banking system including the redemption of all treasury bills that fell due during the past 7 months.
“Social welfare cash payments were all paid in a timely manner.
“All in all, and through a combination of planning and effective follow-through on national priorities ----- I believe that we have, so far, averted the worst.
“Today, you will ask… but for how long? The answer is simple.
“It all depends on what the future of the economic and financial relationship with Israel holds for us.
“Which brings me to the 3rd important point essential for today’s discussion.
“Ladies and gentlemen, it is not an exaggeration to say that this round of financial confrontation with Israel contains all the hallmarks of an existential threat to the Palestinian economic and institutional edifice.
“At the same time, it is also a historical chance for all of us to engage - once and for all –in a profound effort to revise, renegotiate, and reset the terms of the Paris Protocol.
“This Protocol as we know it, like the umbrella agreement of the Oslo accords, was intended to be a transitory five year arrangement. Now, past its 25th year, it has for too long outlived its merits ---- it has become a key source of hindrance to economic sustainability in Palestine.
“What is financially at stake has dramatically changed.
“Economic realities between the Palestinian economy and Israel’s have become drastically different.
“Israel’s economy has grown from under a $100 billion economy back in the mid ‘90s, into an economic powerhouse of $360 billion GDP in 2018, while ours is stuck at on or around $14 billion.
“Israel’s income per capita now stands at $35,000, while in Palestine it is a mere $2,800.
“Given such flagrant discrepancies, our economy can no longer be fully subordinated to that of Israel’s through the present constraints of the Paris Protocol Framework.
“And to make matters worse, Israel has, over time, enforced multiple, unilateral, abusive practices. These include unjustified charges, and the withholding or concealing of major portions of tax and fiscal revenues that must be ours.
“To illustrate the magnitude of the amounts which are at stake:---
“Just in the course of the last 8 years, Israel has charged us through - what are effectively diktats - $3.5 billion relating to health services, water, electricity, sewage, and a variety of other commissions.
“However, cynically, and in most cases, Israel has not even dignified us with a single invoice outlining the basis of such charges.
“Israel in parallel, has withheld or denied us revenues which exceed $700 million on an annual basis, in just 8 among many outstanding and unresolved issues.
“As you know, we have time and again pleaded with Israel to make efforts to redress the situation, but simply to no avail.
“Therefore, when in February Israel started to deduct an additional $12 million a month i.e. $144 annually from our own resources; this - for us, was an ultimate transgression which made it no longer possible for us to endure the present state of affairs.
“And it has made it abundantly clear that the only choice left for us is to seek an end to Israel’s grievous practices through recourse in a formal arbitration process.
“And beyond the current standoff, the crucial need to amend the Protocol is a factor common to all conceivable scenarios affecting the future of Palestinian-Israeli economic relations.
“Ladies and gentlemen, we are at a crossroads. And the time to act is now.
“I would therefore like to believe that the international community shall not merely sympathize with our position, but will proactively support us in our endeavors.”
M.K.
