Published daily by the Lowy Institute

The Palestinian Authority’s quest for survival and relevance

The Palestinian Authority's decision to reduce Gaza-based salaries by 30% is a direct result of fiscal constraints. However, mounting political pressures have compounded the problem.

A protest against salary reductions for Palestinian Authority employees, April 2017 (Photo: Getty Images/Nidal Alwaheidi/Pacific Press)
A protest against salary reductions for Palestinian Authority employees, April 2017 (Photo: Getty Images/Nidal Alwaheidi/Pacific Press)
Published 13 Apr 2017   Follow @AnasIqtait

The Palestinian Authority's (PA) recent decision to reduce Gaza-based salaries by 30% was angrily received across the improvished enclave. Tens of thousands of public servants and their families took to the streets demanding the restoration of their salaries and the resignation of Rami Hamdallah, the Palestinian Prime Minister.

On the surface, the PA's move could be interpreted as a direct result of fiscal constraints. However, mounting external and internal political pressures (augmented by Palestinian division between the Gaza Strip and the West Bank) have compounded the problem beyond the fiscal paradigm.

The fiscal paradigm behind the PA's decision is twofold. First, the PA has been struggling to meet its fiscal obligations in light of declining aid disbursements from its Arab and international backers. Amid peaks and troughs, external budgetary support for 2016 and 2015 was significantly lower than 2014 and 2013, standing at around $760 million last year as opposed to more than $1.3 billion in 2013. Shrinking external support has coincided with increasing PA expenditure, which has swelled by more than 120% since 2007.

Declining aid disbursements incentivised a rising dependence on other sources of revenue. This includes the PA's existential reliance on Israeli-controlled and processed clearance revenue (including customs, VAT, and fuel taxes) as agreed in the Protocol on Economic Relations (more widely known as the Paris Protocol) in 1994. The Paris Protocol dictates that Israel collects certain revenues on behalf of the PA and transfers them to PA accounts after deducting a 3% handling charge. Israel has demonstrated previously its veritable control of these funds by halting their monthly transfer following rounds of conflict, or for political point scoring. This leaves the PA particularly vulnerable to fiscal shocks, as clearance revenue amounts to 75% of its total revenue. Locally, the PA has managed to cover only 30% of the tax base, so any notion of a social contract based on taxation seems farfetched, given current political and economic circumstances. This leaves the PA heavily reliant on externally controlled sources of revenue.

In light of this background, the PA government has attempted to trim its expenditure by eliminating bonuses for a wide segment of PA employees in the Gaza Strip, consequently reducing their net salaries by an average of 30%. But in addition to economic motivations, the decision has also been fuelled by external and internal political motives.

External donors have expressed repeatedly their unease with providing salaries to tens of thousands of non-productive PA public servants in the Gaza Strip. Following the 2007 division between the West Bank and the Gaza Strip, the PA advised tens of thousands of its public servants in the Gaza Strip to refrain from work. The Hamas government, which took over the Gaza Strip, responded with the creation of its own bureaucratic class, hiring tens of thousands of security and civil servants to govern the Gaza Strip. Meanwhile, the tens of thousands of PA-registered employees continued to receive their salaries without providing any services. External donors have been pressuring the PA to cut salaries to the non-productive labour, and have allocated funds previously dedicated to these salaries to other humanitarian causes, a move the PA is adapting to by reducing salaries for Gazan employees.

The political aspects of cutting these salaries extends to internal politics. The Ramallah-based government is sending clear signals to the Hamas leadership in Gaza to bear the responsibility of the Strip's population. Recent developments (such as the electricity crisis earlier this year and now the salary cuts) are political cards for the PA to use in pressuring Hamas to hand over the Gaza Strip as the tenth year anniversary of Hamas's takeover of the Strip approaches this June. This move could revitalise interest in the Palestinian issue, as international attention sways in favour of seemingly more imminent concerns across the region. Meanwhile, the humanitarian situation in the Gaza Strip is dire, with an unemployment rate north of 40% and 80% of the population dependent on humanitarian assistance.

The PA's attempt for relevancy in an increasingly complex region has been impuissant, thanks to crippling fiscal obligations and mounting internal and external political pressures. Yet it is Palestinians who will bear the brunt of internal political fragmentation and deteriorating humanitarian conditions.

You may also be interested in