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Hamas and the Fiscal Crisis in the PA

April 18, 2006

Three months have passed since the elections for the Legislative Assembly and Hamas is gradually assuming control of the institutions of power in the Palestinian Authority (PA). Omar Abdel-Razeq, the in-coming finance minister, has already granted a number of interviews to the world's media. His main concern is the empty, which he has inherited. Andhe sees the situation is far worse than anticipated.

In his explanations, Abdel-Razeq is not clear as to what has caused the crisis nor precisely how it should be resolved.

Certainly, the EU, Norway and others have ceased their direct contributions to the PA, at least until Hamas recognises Israel and desists from violent actions against her citizens. The sums involved amount to at least $100 million. Further, Israel is withholding taxes and excises collected under the Oslo Accords, valued at around US$50 million per month. (Humanitarian aid is still being maintained.)

Similarly, for all the promises of Arab leaders at Khartoum in March, and despite the recent announcements from Iran and Qatar, Arab countries have yet to come up with significant donations. More pointedly, there has been no confirmation as yet that the pledges have been converted into actual donations.

Yet, the withdrawal of external contributions is not the cause of the problem. These contributions are designed to help alleviate an existing issue. For neutral and concerned analysts, the World Bank offers a better understanding of the situation. Back in November 2005, it quietly reported that:

"The PA has created a serious fiscal crisis for itself with salary expenditure essentially out of control."

The Funding for Peace Coalition (FPC) has identified four areas of fiscal irresponsibility, which have contributed to the crisis.

  • A 13 - 20% wage increase, approved in the run up to the Palestinian elections, which the IMF considered a "substantial breach of the Wage Bill Containment Plan".


  • The inclusion of numerous military factions, particularly the Al-Aksa Martyrs, in the PA payroll. According to the IMF, at least 4,000 so-called militants have been added, the very kind of people, which the FPC identified in August 2004 as having been involved in violence against citizens. The IMF has concluded that eight to ten thousand security personnel can be defined as "non-performing".


  • The payment of various forms of "terrorist insurance" from PA budgets.


  • Ongoing corruption, which has led to a further 'diversion' of resources from their intended destinations.

EU foreign policy chief, Javier Solana, is in a key position to provide a strategy for the Palestinians. A document from the EC in March, and also reported on by the Financial Times, noted that if current arrangements were left in place, Hamas would be able to access around half of the European annual donations, approximately $300 million. For Solana, that is a lot of leverage finally to drag Hamas and the Palestinian militants back into the peace process.

The following is a summary of the financial crisis facing Hamas, as reported in the "Financial Times on 16th April 2006.

http://news.ft.com/cms/s/c232c378-cd7f-11da-afcd-0000779e2340.html

Fiscal gloom greets new Hamas finance minister

By Harvey Morris in Ramallah

Hamas has inherited a worse economic situation in the Palestinian Authority than it had imagined, with no hidden stores of funding to avert a looming fiscal crisis, according to Jihad al-Wazir, acting finance minister in the PA's previous Fatah government.

Mr Wazir remained at his desk in Ramallah until the weekend, briefing Omar Abdel-Razeq, his Hamas successor, and signing cheques on the PA's dwindling current account.

He has been running the authority's precarious finances since December, when Salam Fayyad, his reforming boss at the ministry, quit to run as an independent in the January elections that brought Hamas to power. That has meant juggling post-dated cheques, wheedling loans from banks and encouraging local businessmen to pay their taxes in advance.

"When the new minister arrived, I briefed him for a couple of hours and then reached in my pocket for my hypertension pills," said Mr Wazir. "I told him: 'You'll be needing these'."

The most important donors to the PA, including the European Union, have frozen direct funding to the Hamas-led government and, despite some aid from the Arab world and a promise of an unspecified cash injection from Russia, there has been no flood of alternative funding to compensate for the millions of dollars a month withheld.

After the fiscal reforms undertaken under his and Mr Fayyad's tenure, Mr Wazir said there were few areas in which further savings could be made. He said Hamas had mistakenly believed its own campaign rhetoric that, by ending alleged corruption, it could reverse the PA's economic fortunes.

"Hamas came in thinking there would be a windfall once it ended corruption," he said. "But Dr Fayyad did a great job with his reform programme. The single treasury account he created helped to end corruption."

He said the new government had also over-estimated the pot of wealth in the privately run Palestine Investment Fund that Mahmoud Abbas, the PA's Fatah president, has placed under his personal control. He said it was worth a fraction of its estimated $1.4bn (1.2bn, 805m) valuation.

"These are paper values. Most of the assets in the PA are now non-performing - such as the casino at Jericho," he said. "Also, for practical reasons, we can't suddenly sell off our shareholdings. If we liquidated our stock in [Egyptian telecoms company] Orascom, the Cairo stock market would go through the floor."

He said that what was left in the investment fund had been used as collateral to raise loans.

After he had taken over the ministry, Mr Wazir said, he had cut fuel subsidies, slashed public sector overtime and other costs, lowered the retirement age and rejected plans to expand the security forces by 18,000. The belt-tightening had led to death threats and attacks on government offices.

He also cut the PA's debt burden from $780m to $640m. "I used some money from donors to pay the banks. If you don't pay the local banks you could create a banking crisis."

Mr Wazir blamed donor countries for contributing to the looming crisis and said the US was largely responsible for a surge in security force numbers last year that swelled the PA's wage bill.

He said General William Ward, the US military co-ordinator in the region, was responsible for the policy. "While the World Bank was talking about fiscal restraint, Gen Ward was talking about the need to hire security personnel."

Donors had been too quick to boycott the new Hamas government without pondering the consequences, Mr Wazir claimed. It was also unrealistic to switch from direct aid to humanitarian assistance and expect the system to survive.

Since Israel suspended monthly payments of about $50m in tax receipts it collected on behalf of the PA, he said the Treasury was down to about $30m in domestic revenue plus whatever international assistance was still forthcoming to meet a monthly budget that amounted to $116m in salaries alone.

"Hamas expects support to come from the Islamic and Arab world. From our experience, we know better."

Iran had offered $50m to the PA to fill gaps left by western aid cuts, Manouchehr Mottaki, Iran's foreign minister, said yesterday. "The Islamic world should help the Palestinian government to overcome its current problems," he said.


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