Page last updated at 11:19 GMT, Tuesday, 21 February 2006

Palestinians 'face financial crisis'

Men outside currency exchange bureau in Gaza City
The loss of international assistance will hit an already volatile society
Palestinian leader Mahmoud Abbas says the Palestinian Authority (PA) is facing a "real financial crisis" as the new Hamas-led government faces the potential loss of international financial help.

Aid has already begun to drop off after last month's Hamas victory in the polls, with Hamas still regarded as a terrorist group by Israel, the US and the EU.

At the weekend, the authority agreed to return $50m (28.7.m) of US aid following a request from Washington, which said it did not want the money going to a government that refused to recognise Israel.

And now, to make matters worse, the Israeli government has frozen the transfer of millions of dollars in funds to the authority - a move which the UN has called unhelpful and premature.

In response, Palestinian Prime Minister-designate Ismail Haniyeh dismissed the impact of Israeli financial restrictions.

Mr Haniyeh told the BBC that Arab and Islamic states would offset a drop in Western aid, while reiterating Hamas's stance on Israel.

The head of the Arab League, Amr Moussa, says Arab governments may come to the rescue by providing money to bridge the gap.

Payment freeze

Israel's decision to block the $50m or so in tax revenues that the authority receives each month from Israel is expected to hit Palestinians hard.

Palestinian President Mahmoud Abbas said the withdrawal of funds would precipitate a "serious financial crisis" and an already volatile society could be destabilised.

GDP: $3.3bn
Population: 3.6 million
GDP per person: $934
Foreign aid per person: $469
Change in GDP per person since 1999: -38%
Poverty rate: 48%
Unemployment rate: 27%
Source: World Bank

The money helps to pay security officers, teachers and medical staff who, between them, support up to a fifth of the Palestinian territories' 3.8 million people.

The salaries of some 140,000 Palestinian Authority employees largely depend on regular money transfers from the Israeli government which are now in jeopardy.

This money is not aid, but income. It is customs duty and value-added tax, collected by Israel on behalf of the Palestinians, which is normally handed over automatically on the first of each month.

For many years the Palestinian economy has relied on using Israeli channels, where produce of the Palestinian territories, exported to Israel, is re-exported to other countries.

Under the Oslo accord, Israel is obliged to hand over the funds.

Nonetheless, Israel's acting Prime Minister Ehud Olmert has ordered a freeze on these payments. He says he will not allow "a situation in which money transferred by the government of Israel will somehow end up in the control of murderous elements".

But should the government, the Palestinians' largest employer, be forced to lay off tens of thousands of workers, it is likely to lead to increased chaos and poverty in Palestinian towns.

Budget deficit

The World Bank has warned that the Palestinian budget deficit, which reached $800m in 2005, has become increasingly sustainable.

So the loss of foreign financial support could prove disastrous.

The Palestinian Authority's core income is normally about $1bn a year, with foreign aid from the US and EU amounting to another $1bn.

The EU as a whole has given about $600m to the Palestinians every year since 2003. Nearly half of that comes from member states, not from Brussels.

Palestinian workers give aid money
Israel says the tax and customs revenues will be held in trust

Arab donors, including Saudi Arabia and Kuwait, also contribute regular sums.

Some foreign money goes towards the Palestinian Authority's payroll, but most is earmarked for particular aid and infrastructure projects and is handled by UN relief agencies or non-governmental organisations.

Continuation of that aid is now in doubt, with both Brussels and Washington calling on Hamas to renounce violence and recognise Israel's right to exist before they provide further funding.

However, even when the money comes in as planned, it is not enough. Well before Hamas' stunning election victory over the late Yasser Arafat's Fatah party, the authority was already running a monthly deficit of more than $50m and has repeatedly borrowed from banks to cover the shortfall.

All this merely serves to exacerbate the harshness of life for the Palestinian population, half of whom are below the poverty line. Palestinian officials say unemployment in the Gaza Strip is running at more than 50%.

These levels of hardship were a major factor in Hamas' electoral success.

Helping hand

For much of the international community, the organisation remains an Islamic militant group: officially classified as a terrorist organisation for the dozens of suicide attacks that it has launched on Israelis.

However, it has largely held to a ceasefire with Israel for more than a year.

And at home, while the Fatah-led PA administration has widely failed to provide health and education services, Hamas has stepped in - and has also distributed food to those in need.

Hamas has been funding these services out of its own funds.

Where that money comes from remains a good deal less clear than do the sources of the PA's funding.

In 2003, US intelligence sources estimated Hamas' annual budget at $50m. Some of it is believed to come from Palestinian expatriates, who contribute to fund-raising drives carried out through charitable foundations and associations.

Much comes from several Middle East states.

A veiled Palestinian woman walks by a wall painted with the symbol of Hamas
Hamas has a high public profile in the Palestinian territories

Hamas' links to the worldwide Islamic Brotherhood are also apparently lucrative, with other branches of the movement in Egypt, Jordan and Saudi Arabia thought to be sources of funding.

Hamas has always denied persistent reports that it receives financial assistance from the Iranian authorities.

It is also unclear whether the group receives money from the Syrian government, although some of its top leaders live in exile in Syria and Lebanon.

Whatever the provenance of its funding, it seems likely that Hamas does not have deep enough pockets to make up for the loss of international assistance to the Palestinian Authority.

Egypt is said to be advising the US to give Hamas more time and not to rush to judgment when its forms a government.

President Hosni Mubarak said in an Israeli TV interview last week that withdrawing financial support would be a mistake because it would drive Palestinians to "extremism".

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