Palestinian Authority, in Cash Crunch, Seeks Funding

Only an immediate, massive infusion of cash from the international community can save the faltering Palestinian Authority from going broke in April, Palestinian officials and independent analysts warn.

At an emergency session of donor countries scheduled April 3 in Washington, the World Bank intends to “present the facts and alert the donors to the situation,” said Odin Knudsen, the bank’s representative for Gaza and the West Bank.

The authority “will be running out of money . . . sometime in April,” Knudsen confirmed recently. He said only the arrival of $36 million in donations pledged by several states in November will stave off bankruptcy. Even if those donations arrive immediately, the authority will run out of money by May, Knudsen said.

The political consequences of failing to make its payroll would be devastating for the struggling self-governing authority, said Samir Abdallah, director of economic projects for the Palestinian Economic Council for Development and Reconstruction.

“We have now about 19,000 in the police force and 29,000 civilian employees,” Abdallah said. “Imagine what would happen if you leave these people and their families without income. The whole economy would collapse.”

Donor nations had hoped that the Palestinians would be financing most of their operating costs through tax collections by April, Knudsen said. But the World Bank now believes that the Palestinians will need foreign aid to cover operating costs at least through the end of 1995, he said.

The World Bank will try to persuade donors to increase their contributions at a second meeting, scheduled for mid-April in Paris. It also hopes to persuade the authority to control a budget that keeps growing as the authority hires more police as well as civilian employees, mostly in the education and medical fields, Knudsen said.

Palestinian officials acknowledge that they have been slow to get their tax-collecting apparatus in working order and that they have made mistakes in budgeting. But they say they are learning from their errors.

“I hope at the end of the year we’ll be able to cover our deficit,” said Ahmed Korei, minister of economy in the Palestinian Authority.

“The problem is that we made a mistake. We created high, high expectations when the peace accord was signed that there would be jobs, there would be development. We see now that this is a long process, a difficult and complicated process,” Korei said.

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Persuading donors that they should keep footing the bill for everything from police salaries to telephone bills while the authority learns its painful lessons will not be an easy task, Knudsen said.

“Their expenditures are growing quite rapidly. The police salaries alone cost $90 million annually,” Knudsen said. “The donors prefer to finance investment projects. They do not like to finance expenditures and salaries, what we call invisible aid.

“There are many ifs,” Knudsen said, that make it hard to say when the Palestinians will be self-sufficient. Much depends on the pace of their on-again, off-again peace talks with Israel, on their ability to streamline their bureaucracy and on their willingness to shift services to the private sector.

The authority’s operating costs are about $30 million a month, but it is collecting only about $6 million a month in taxes, according to a report by Peace Watch, an Israeli organization that monitors Palestinian and Israeli compliance with the 1993 peace agreement.

Although donor countries had pledged to deliver $720 million to the Palestinian Authority in 1994, only $275 million materialized, the group said.

Of that, $200 million helped cover the operating costs of the Palestinian Authority in 1994 and only about $75 million went into development projects, Peace Watch said.

Knudsen estimates that between $90 million and $100 million went into development, but he agrees that the bulk of donations were used for operating costs.

“There is no reasonable expectation that the Palestinian Authority will find a way to pay its expenses in the foreseeable future,” said Dan Polisar, a research assistant with Peace Watch.

In a Jerusalem news conference last week, Peace Watch painted a harsh picture of the authority’s financial condition. The group accused the authority of spending more to ensure the PLO’s continued grip on power in the territories and in refugee camps in neighboring Arab states than to improve the daily lives of Palestinians in the West Bank and Gaza Strip.

But Knudsen said the picture is more complicated. The authority’s ability to collect taxes has steadily improved, he said, and in January it collected about $9 million. That amount plunged in February, however, after Israel banned West Bank and Gaza laborers from working in Israel.

The ban profoundly damaged the authority’s ability to collect taxes and to jump-start Gaza’s moribund economy, Knudsen said.

Israel banned Palestinian workers, produce and goods from entering Israel after two Palestinians from Gaza carried out a suicide bombing attack inside Israel on Jan. 22.

The move deeply affected Gaza, where Israel remains the single largest source of employment.

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“We have just one positive sign that can offset the negative points” of the Palestinian economy, Abdallah said. “That is a mini-building boom, and even that is now slowing. That is the only source of new employment in the territories.”

Abdallah said the Palestinian economic council hopes to begin several development projects soon in the West Bank, but he agreed that it will be months, if not years, before the Palestinian economy develops enough to free the Palestinians from dependency on donations.