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As Israel threatens power cuts, how can Palestine pay its bills?

aljazeera– The Palestinian Authority’s finances are at a “breaking point”, a United Nations official warned on October 20th. But that didn’t stop Israel’s state-owned electric company from reportedly threatening a week later to cut power to the occupied West Bank if the PA didn’t pay $120m in overdue bills.

The threat to plunge Palestine into darkness is a recurring one, but it has renewed focus on the increasingly dire state of the PA’s books, and the role Israel continues to play in further hobbling the occupied West Bank’s already crippled economy when it can least afford it.

Like all governments, the PA has had to contend with the economic fallout of COVID-19. But analysts are quick to note that the pandemic only worsened long-standing structural issues stemming from the decades-long Israeli occupation and a reliance on foreign aid.

“This does seem like an acute crisis, but I think it is exactly in line with where the Palestinian economy has been going,” Yara Asi, a fellow at Al-Shabaka policy network, a Palestinian think-tank, told Al Jazeera.

The World Bank estimated in April that Palestine’s economy shrank 11.5 percent last year. And though it sees growth rebounding to 2.9 percent this year, that rate still implies “a near stagnation in real per capita income and worsening social conditions”, said the development bank.

In late October, Tor Wennesland, UN special coordinator for the Middle East peace process, sounded the alarm, warning that with a growing budget deficit, dwindling donor support and an “exhausted” borrowing capacity, the PA’s fiscal situation is nearing a “breaking point”.

Wennesland also rattled off some pretty stark figures: The PA’s budget deficit is expected to nearly double next year, reaching $800m, and “structural impediments” must be addressed to avert the looming crisis.

“Along with other long-standing fiscal leakages that are contributing to the financial crisis, Israel continues to deduct millions of US dollars per month from clearance revenue transfers, in response to Palestinian payments to security prisoners, their families and the families of those killed in the context of attacks,” he said.

Withholding taxes

Taxes collected by Israel on behalf of the Palestinian Authority, including customs duties, constitute a major source of revenue for the Palestinian economy – but an unstable one.

Israel often uses the fund transfers as a bargaining chip in its volatile relationship with the PA.

Most recently in July, the Israeli government announced that it will withhold $180m in Palestinian tax revenues to offset the PA’s stipends to the families of Palestinian prisoners and those killed by Israel.

Palestinians say the stipends are welfare payments, but Israel describes them as rewards for militants.

Like much of the relationship between the PA and Israel, financial ties are governed by the Oslo Accords, particularly the 1994 Paris Protocol.

The accords were meant as an interim framework for Israeli-Palestinian relations pending a final resolution to the conflict and the establishment of a Palestinian state. But they remain in force nearly 30 years later.

Asi said Israel enforces the Oslo agreement where it sees fit and violates it when doing so benefits its agenda.

“When you don’t know what the rules are and the rules are constantly changing, there is no development in that structure,” she told Al Jazeera. “You can’t plan for the next five years; you can’t even plan for the next year. So, there is no long-term capacity-building. It’s just constant infusions of cash.”

The flow of international aid to the PA has also been erratic.

Former United States President Donald Trump cut off nearly all US assistance to Palestinians, including funding for the UN Relief and Works Agency for Palestine Refugees, which tends to the basic needs of millions in the Palestinian territories.

The current US administration has restored some of the assistance, but US laws passed under Trump now prohibit direct aid to the PA.

Asi said even if fully restored, international aid is a temporary treatment and not a cure for the Palestinian economy – and only a political solution can lead to prosperity in the Palestinian territories.

Anas Iqtait, a non-resident fellow at the Middle East Institute and an expert on the Palestinian economy, outlined the issue in an article he published late last year.

“Since 1994, the Palestinian economy and the PA’s finances have been contingent on the political swings and roundabouts in the relationship between the PA on one side and Israel and international donors on the other,” Iqtait wrote.

“The PA’s lack of control over economic and fiscal resources has locked the Palestinian economy and the PA’s financial balance into a perpetual cycle of dependence on financial flows controlled by external actors.”

In 2020, the PA temporarily refused to receive tax revenues from Israel amid a push by the Israeli government at the time to annex parts of the West Bank. But the Palestinians eventually resumed coordination with the Israeli government in December and accepted the funds.

Israel captured the West Bank, including East Jerusalem, in 1967. Since then, it has militarily occupied the land, continuing to build settlements that are illegal under international law.

The Israeli government controls all ports of entry into the West Bank and sets the monetary policy for Palestinians, who use the same currency as Israel – the shekel – in lieu of their own.

‘Responsibility without authority’

Long before the pandemic, a 2014 UN report warned that the economic situation in the Palestinian territories is becoming unsustainable.

“This can be attributed to continued Israeli restrictions, increased political instability, a deep public finance liquidity crisis and a surge in local arrears and government debt, all of which have adversely affected basic government operations,” the report reads.

Jonathan Kuttab, a Palestinian-American lawyer specialising in international law, said Israel has been using the tax revenues to strong-arm the Palestinians politically.

At the heart of the issue, Kuttab said, is that Israel controls the occupied territories, but it pushes basic economic responsibilities to the PA, citing the Oslo Accords.

That was highlighted earlier this year when Israel refused to vaccinate Palestinians in the occupied territories despite its successful immunisation programme. Critics described the situation as “medical apartheid“, pointing to provisions of the Fourth Geneva Convention stating that fighting infectious disease is the responsibility of the occupying power.

Israel argued that the Oslo Accords make it the responsibility of the PA to provide healthcare in the Palestinian territories.

“We are dealing with a system that was created to serve the Israelis at the expense of the Palestinians, and the Palestinians have participated in this process, hoping that it would end up in a genuine state or sovereignty,” Kuttab said. “They gave them the responsibilities without giving them the authority.”

He said the recurring crisis over the electricity debt, which resurfaced last month, illustrates the situation – Israel skirts its responsibilities as the occupying power by making it the duty of the PA to provide power to Palestinians, buying it from Israel at a price that the Israelis set.

Kuttab noted that when Palestinians in Area C of the West Bank – which accounts for over 60 percent of the territory and is under complete Israeli military control – acquired European funding to set up solar panels to produce electricity in 2017, the Israeli military confiscated the panels and ended the project because it did not have Israeli permits.

Meanwhile, Kuttab added, people in Israeli settlements in the West Bank, unlike Palestinians in the same territory, deal directly with the Israel Electric Corporation.

“Israel has managed to find this formula where they can have their cake and eat it, where they can have full sovereignty but not responsibility in the occupied territories,” he said.

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