U.S. Complicit with Palestinian Authority Budgeting Mischief

The Palestinian Authority is crying poverty again, complaining about a decrease in expected levels of foreign aid that will force Palestinians into penury or — heaven forbid — tax increases. The Palestinian public is in no mood for that, according to the Palestinian Center for Policy and Survey Research.

In a recent poll, 48% of the respondents rejected solving Palestinian fiscal problems by increasing taxes or by forcing the early retirement of public sector employees. Asked what they would do, 27% would dissolve the PA itself and 52% would enter negotiations with Israel “in order to obtain greater international financial support.” The poll notes, however, that half of those choosing negotiations would do so only if Israel agreed first to a settlement freeze and the 1967 borders.

The PA is unlikely to dissolve itself and Israel is unlikely to acquiesce. So a look at the phantasmagorical system of Palestinian budget building — and American complicity — is in order.

Last summer, the U.S. Congress withheld nearly $147 million of the planned $513 million in aid due to the Palestinian Authority’s unilateral UN statehood bid. (Another $113 million in U.S. funds for the PA security forces and $232 million for the UN Relief and Works Agency were unaffected.) Under pressure from the State Department — which enlisted the Israeli government’s help — Chairman of the House Foreign Affairs Committee Ileana Ros-Lehtinen announced that $88.5 million will be released. She retained her hold on the other $58.6 million:

I am disappointed that the administration would employ hardball tactics against Congress and threaten to send, over congressional objections, U.S. taxpayer dollars to the Palestinian Authority.

How important is U.S. aid? It amounts to about 15% of the total announced Palestinian budget and nearly 50% of all expected aid. But consider the overall state of Palestinian finances: the 2012 PA budget — produced by PM Salam Fayyad, the West’s “go-to man” for economic decision making — called for $3.5 billion in spending, $1.1 billion in aid, and showed a deficit of between $750 million and $1.1 billion (the latter figure is now the accepted one). That means the Palestinian economy is expected to generate only about $1.3 billion[1], and the PA is planning to spend three times what it produces. In real money terms then, with $1.3B in generated income and $1.1B in aid ($2.4B to spend), U.S. aid ($513 million) is almost 20% of actual spending.

Despite the U.S. designation of Hamas as a terrorist organization, some of that money goes to Hamas in Gaza. How? Hamas employs 32,000 people — about two-thirds of whom are security officers, paid out of the PA budget and not counted in Hamas’ own official spending. The United States gives the PA $200 million in “direct budgetary support”, meaning money that goes into the PA treasury unattached to contracts or other control mechanisms and that can be spent on whatever the PA thinks important – like Hamas security forces. (Or the Palestinian Broadcasting Service — which is not permitted to receive direct U.S. funding because it preaches hate and violence — but which receives money from the PA budget).

Hamas spending in Gaza is not accounted for when looking at the PA budget, but at least for 2011, there were some Hamas-provided numbers to consider. The Hamas parliament approved its own spending bill of $540 million in December 2010, of which Parliamentarian Jamal Nasser said no more than $60 million would come from taxes and fees. “The rest would come from gifts and foreign aid,” he said. (PA President Mahmoud Abbas claimed in 2011 that Iran was giving Hamas $250-500 million annually, which if true would make up the balance of Hamas’ budget, or at least make a dent in the $480 million not accounted for in the official numbers.)

Included in Hamas government revenues are the taxes and fees from tunnel smuggling, which is said to employ about 30,000 people.

This helps to explain the uproar in Gaza last week. About a year ago, Hamas announced it was cutting off fuel supplies from Israel in a burst of what may have appeared to be self-sufficiency, but which was really irritation over the fact that Israeli gas supplies are carefully monitored and can’t be siphoned off for resale in the black market. Hamas decided it was better both politically and economically to obtain its fuel by smuggling it in from Egypt through the southern tunnels. In what appears to be an effort to force Hamas’s hand in the Hamas-Fatah “unity talks,” Egypt turned off the fuel supply, sparking a crisis that has included 18-hour-a-day blackouts.

Israel has permitted fuel to be trucked in to alleviate some of the shortages, but Israel itself has been short of natural gas since the Egyptian revolution. Gas pipelines in the Sinai have been blown up several times and the Egyptian government has announced that it will stop selling natural gas to Israel, or at least will jack up the price. Under a 2005 deal, Egypt agreed to supply Israel with 60 million cubic feet (mcf) of gas per year; in 2009, that increased to 74.13 mcf. By 2010, Egypt was supplying 40 percent of Israel’s natural gas requirements. New natural gas finds off the Israeli coast will enable Israel to replace the gas sometime in 2013, but for now there are shortages that Israel has to make up. That gas Israel gave to the Hamas government in Gaza — while Palestinians rocket Israelis from the same place — is doubly costly.

Egypt is itself dependent on foreign aid. The country imports 40% of its food and 60% of its wheat, and has to pay in real money. Egyptian foreign currency reserves have dwindled, as tourism — the chief hard currency earner — has all but dried up since the revolution. According to Bloomberg, Egypt’s net official reserves stand at about $15.7 billion: somewhat more than had been predicted, but $640 million less than last month. Still, the relatively good news may help Egypt engineer a $3.2 billion IMF loan. The Obama administration is planning to turn over $1.5 billion in military aid and $250 million in economic assistance over the objection of Congress. Secretary of State Clinton has ordered a waiver of Congressional restrictions on the aid, most of which will go to U.S. defense contractors to meet military contract payments.

There are two patterns here: one ours, one theirs.

The U.S. gives American tax dollars to the Palestinian Authority over the objection of Congress, and the PA sends some of the money to Hamas security forces in Gaza, violating U.S. restrictions on aid. And the U.S. gives Egypt aid weighted heavily toward military assistance over the objection of Congress. In both cases, the U.S. goal is to maintain diplomatic leverage with important but difficult governments.

The objects of our interest, however, have interests of their own.

For the Palestinians and the Egyptians — more so the Palestinians, who have always “relied on the kindness of strangers” and have never had a functional economy — the goal of government is to find as much money as possible with as few strings attached as possible to remain in power. As long as possible.

The possibilities for mischief are endless.