Palestinian Authority: undertaking financial reforms

Published October 22nd, 2000 - 02:00 GMT

Finally — some good economic and financial news out of Palestine! Over the first half of this year two hopeful stories have come out of the West Bank and Gaza — one more administrative, the other purely economic. Since such stories don’t come along every day, they deserve a look.  

 

First the administrative — The Palestinian Authority (PA), under severe pressure both from outside donors and within the Palestinian community itself, has taken real steps toward fiscal accountability and openness.  

 

In Lisbon this past June, the PA’s international donors, represented by the so-called Ad Hoc Liaison Committee (AHLC), met with Palestinian representatives and issued a glowing commendation of what the donors called the PA’s recent “resolute implementation of vital reform measures.” The donors were referring to a series of steps the Authority has taken over the first half of 2000 to restructure its previously all-too-hazy financial institutions.  

 

Though only partially realized so far, the new measures, which stem from a decree issued in January of this year by President Yasser Arafat, represent real progress and seem solidly in place. The Arafat decree accomplished a number of things, the most important of which was to put all PA finances under one authority, a new Higher Committee for Development, and make those finances much more transparent.  

 

At first glance the HCD looks same-old same-old — it will be chaired by President Arafat and include the ministers of finance, planning and international cooperation, and economy and trade, and Arafat’s economic adviser, Mohammad Rashid. But this isn’t the whole story.  

 

Under the HCD there will be two new bodies that should provide much more financial accountability. One, the General Revenue Administration, which will manage all the PA’s revenues, except investment income, and put all such revenues into a single treasury account.  

 

This is crucial. Up until recently, tax and customs revenues that Israel collected on goods headed for the West Bank and Gaza were simply deposited into a Tel Aviv Bank Leumi account under the control of Arafat. The funds, which are considerable, were never included in the PA budget, nor was there any legislative or other oversight. Arafat simply used them as he wished. Now they are to go to the Ministry of Finance and be included in the PA’s budget.  

 

The PA also has had large funds placed in secret investments, again under no one’s authority save Arafat’s. In order to manage these investments openly and accountably, the decree established a Palestine Investment Fund, to be audited by an international accounting firm and, astonishingly, publish yearly financial reports. It also will oversee privatization of much of the PA’s investment properties.  

 

These are currently controlled by the Palestinian Commercial Services Company, a highly profitable, but super secret conglomerate, accountable only to President Arafat. According to an audit done in February by the accounting firm Deloitte Touche Tohmatsu, at the end of 1999 PCSC had holdings worth $345 million and showed profits that year of $77 million.  

 

Some of PCSC’s holdings are not so savory. They include, for example, 30 percent of the controversial Jericho casino. Gambling is un-Islamic, critics say, so why should a government whose constituents are overwhelmingly Muslim own such a place? Critics also compare the casino, open to Israelis but not Palestinians, to the gaming establishments on American Indian reservations.  

 

PCSC also owns 100 percent of the only cement company in the West Bank and Gaza. The company, being a monopoly, is highly lucrative — the company’s profits last year accounted for almost a quarter of the PCSC’s total profits. Critics constantly cite the baneful effects of monopolies on ordinary Palestinians. Why, they ask, should the PA itself be a monopolist?  

 

Before the end of 2000, the PCSC is to be dissolved. Revenues from its investments are now flowing directly into the Ministry of Finance’s treasury account, as will, down the line, profits from the sale of PA property.  

 

The AHLC calls the creation of the Higher Committee “a major reorientation of the PA’s economic and financial policies.” That it surely is. The Ministry of Finance has begun receiving income from sources no longer off the books — a major plus which should help it reduce its accumulated deficit. (It should be noted, though, that until the Lisbon meeting in June, customs revenues collected by the Israelis continued to be diverted from the Palestinian official budget and held in that Tel Aviv account. The AHLC confirms that they are now flowing into the ministry, however.)  

 

Not everything is positive. Arafat’s January decree promised to shift responsibility for paying civil servants in Gaza from the General Personnel Council to the Ministry of Finance. Doing so would allow the Ministry to get control over the large public sector work force and cut down on waste and corruption, higher in Gaza than elsewhere.  

 

For reasons best known to him, however, Arafat backtracked on the promise at the beginning of May, signing an order that prevented the Ministry of Finance from actually taking over the Gaza payments department. At Lisbon, PA representatives agreed on the need to put the Ministry of Finance in charge, but that remains to be done.  

 

On the purely economic front, things are looking somewhat better, last year being a comparatively good one. Gross Domestic Product was up 6 percent in real terms, with strong growth in construction and tourism. Tax collection was up 25 percent. Bank credit to the private sector was up 25 percent as well, an indicator that business confidence has risen. Inflation has been low; unemployment is down (10.9 percent in the first quarter of this year, compared to 13.9 percent over the same period in 1999).  

 

There was a 15 percent increase in labor flow to Israel. Much of the improved labor picture is due to the fact that 1999 saw the fewest border closures since 1993. Some 47,000 new jobs were created last year, 70 percent of them in the private sector. Workers’ wages went up almost 3 percent in real terms last year. All this is positive.  

 

But there are some negatives. According to the United Nations Special Coordinator (UNSCO), one big electricity project in Gaza accounted for most of the project investment in the Palestinian-administered territories. Otherwise, project investment was down last year. And the value of registered exports to Israel, the main export market for Palestinian products, declined in real terms, too. UNSCO is predicting a further slow-down this year.  

 

And then, never to be ignored, are the long-term fundamental facts. Only about 19 percent of the West Bank and Gaza population actually is employed, and many workers are underemployed. Average annual income is only $1,575 — a bit higher in the West Bank, a bit lower in Gaza. (The Israeli average is around $16,000)  

 

Boosting Palestinian income significantly will take much more investment and trade than we have seen, to date. — (Washington Report on Middle East Affairs

 

By Colin MacKinnon Colin, contributing editor to the Washington-based Middle East Executive Reports

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