Palestinian PM blames Arab donors for cash crisis

The Palestinian self-rule government is in "extreme jeopardy" because of an unprecedented financial crisis, largely because Arab countries have failed to send hundreds of millions of dollars in promised aid, the Palestinian prime minister said Sunday.

The cash crunch has gradually worsened in recent years, and the Palestinian Authority now has reached the point of not being able to pay the salaries of about 150,000 government employees, Salam Fayyad told The Associated Press. The number of Palestinian poor is bound to quickly double to 50 per cent of the population of roughly 4 million if the crisis continues, he said.

"The status quo is not sustainable," Fayyad said in an interview at his West Bank office.

The Palestinian Authority, set up two decades ago as part of interim peace deals with Israel, is on the "verge of being completely incapacitated," Fayyad warned. Only a year ago, he said he expected to make great strides in weaning his people off foreign aid.

The self-rule government was meant to be temporary and replaced by a state of Palestine, which was to be established through negotiations with Israel. However, those talks repeatedly broke down, and for the past four years the two sides have been unable to agree on the terms of renewing the negotiations.

In late November, Palestinian President Mahmoud Abbas won U.N. recognition of a state of Palestine in the West Bank, Gaza and east Jerusalem, overriding Israeli objections to the largely symbolic step. On Sunday, Abbas asked his West Bank-based government to prepare for replacing the words "Palestinian Authority" with "State of Palestine" in all public documents, including ID cards, driving licenses and passports.

Israeli officials declined comment, including on whether Israel would prevent Palestinians with new ID cards and passports from crossing borders and checkpoints.

The U.N. bid gave the Palestinians new diplomatic leverage by affirming the borders of a future state of Palestine in lands Israel captured in 1967, but changed little in the day-to-day lives of Palestinians.

In an apparent response to the U.N. move, Israel in December halted its monthly transfer of about $100 million in tax rebates it collects on behalf of the Palestinians. That sum amounts to about one-third of the monthly operating costs of the Palestinian Authority. Fayyad said he now only takes in about $50 million a month in revenues.

Israel has said it used the withheld money to settle Palestinian Authority debt to Israeli companies, and it's not clear whether the transfers will resume. In the meantime, the 22-nation Arab League has not kept a promise to make up for the funds Israel withholds, Fayyad said.

The head of the League has written to member states, urging them to pay the $100 million, Mohammed Sobeih, a league official, said Sunday.

Fayyad pinned most of the blame for the Palestinian Authority's financial troubles on delinquent Arab donors, saying they are "not fulfilling their pledge of support in accordance with Arab League resolutions."

European countries kept their aid commitments, he said.

Some $200 million in U.S. aid were held up by Congress last year, a sum the Obama administration hopes to deliver to the Palestinians this year, along with an additional $250 million in aid. "We have made it clear that we think the money should go forward," State Department spokeswoman Victoria Nuland said last week.

The Palestinian Authority has relied heavily on foreign aid since the outbreak of the second Palestinian uprising in 2000. It has received hundreds of millions of dollars each year since then, but has struggled to wean itself off foreign support, in part because harsh Israeli restrictions on Palestinian trade and movement have hurt economic growth.

Only a year ago, Fayyad said he hoped to increase local revenues, including through spending cuts and higher taxes for wealthier Palestinians. He even set 2013 as a target for financing the government's day-to-day operations with local revenues. However, his tax plan was met by widespread protests and modest economic growth slowed.

Now he's not even sure how he will cover the government payroll, his heftiest monthly budget item.

The Palestinian Authority employs some 150,000 people, including civil servants and members of the security forces. About 60,000 live in Gaza and served under Abbas before the Hamas takeover, but continue to draw salaries even though they've since been replaced by Hamas loyalists.

In recent months, the government has paid salaries in installments.

Fayyad said he managed to pay half the November salaries by getting another bank loan, using as collateral Arab League promises of future support. He said he can't pay the rest of the November salaries, let alone start thinking about December wages.

The Palestinian Authority already owes local banks more than $1.3 billion and can't get more loans. It also owes hundreds of millions of dollars to private businesses, including suppliers to hospitals, some of whom have stopped doing business with the government.

The crisis "has put us in extreme jeopardy," Fayyad said.

The malaise has sparked growing protests. Civil servants have held warning strikes. On Sunday, their union called for four days of strikes over the next two weeks.

Walid Abu Muhsin, a government employee who makes 4,000 shekels ($1,000) a month, said he received only $500 in November, and his bank deducted 50 per cent of that for car and home loans, leaving the father of three with $250 to live on.

"I am spending from the few savings I have," he said.

Fayyad said he's thought about quitting, but won't leave during a crisis. He was appointed by Abbas in 2007, after the Islamic militant Hamas seized Gaza by force. Hamas has received money from Iran, while Qatar last year pledged some $400 million for housing projects in Gaza.

Repeated attempts to heal the Palestinian rift have failed. Meanwhile, recent surveys suggest support for Hamas is on the rise, in part because it extracted what were perceived as Israeli concessions after a round of heavy cross-border fighting late last year.

The failure of the Palestinian Authority to deliver on many of its promises, Fayyad said, "has produced a reality of a doctrinal win" for Hamas.

He said the international community must decide whether it wants the Palestinian Authority, once seen as key to any Mideast peace deal, to survive.

"A weak Palestinian Authority cannot be an effective player if you are all the time preoccupied with making ends meet," he said.