Adam Gonn
May 2, 2011 - 12:00am

Israel's reaction to the Fatah- Hamas reconciliation continued this week as Israeli Finance Minister Yuval Steinitz threatened to withhold taxes collected by Israel on behalf of the Palestinian National Authority (PNA) over fears that Hamas may use the money to fund its actions against Israel.

Palestinian movements Fatah and Hamas announced last Wednesday an Egyptian-brokered reconciliation deal, which outlined the creation of a unity government and preparations for national and presidential elections.

Local analysts said the Palestinian economy would face dire consequences due to its dependence on the taxes, although withholding the taxes is against the international law, adding that if the U.S. also decided to suspend its aid to the Palestinians, other countries in the region would step in.


Arie Arnon from the department of economics of Ben-Gurion University said that the blow to the Palestinian economy is severe since "it's quite a significant part of its (the Palestinians') income."

According to the Oslo Accords signed in 1993, Israel collects import and export taxes on behalf of the PNA as it remains in control of the border crossings. The funds, in this case 88 million U.S. dollars, are then transferred on a regular basis to the Palestinians.

Arnon said the scale of the damage depends on how long Israel would withhold the money, as the taxes are, according to the agreement, supposed to be transferred several times per year, "the longer the transfer is suspended, the more difficult it is to deal with the effects."

"It has happened before. In the past, when such measures were taken by the Israeli authorities, the international community would step in and cover the funds," added Arnon.

When Hamas won the Palestinian parliamentary elections in 2006, Israel froze around 1 billion dollars, putting the PNA in a serious financial crisis.

"What it reveals is how the Palestinian economy is dependent on Israel. It isn't a healthy long-term relationship," Arnon said.


Hanna Siniora, co-CEO of the Israel-Palestine Center for Research and Information, believes that Israel will deliver the taxes within two weeks as it's part of an international treaty.

"It will certainly hurt the economy. And the immediate outcome is that there's no salary for 170,000 Palestinian civil servants," Siniora said, "because two-thirds of the Palestinian budget comes from these revenues."

According to the international law and the Oslo Accords, freezing the funds is "illegal," he said, "the international community would force Israel to transfer the money within the next two weeks."

Palestinian Prime Minister Salam Fayyad said Sunday in response to Steinitz's comments that the Israeli threats would not deter the Palestinians from reconciliation.

"The Palestinians have decided that their first priority for the peace process is national reconciliation. There is no going back on it, whatever the cost will be," Siniora said.


A possible end of U.S. aid to the PNA would have a different impact on the Palestinian economy, as the U.S. is not bound by any international agreement, Arnon said.

"If Americans come to the conclusion, under certain political circumstances, that they don't want to do it anymore, that would be a different story," Arnon said.

He noticed that there isn't an official statement from the U.S. government saying it's considering cutting the aid.

While the U.S. is an important contributor, Arnon said, there are others, including the European Union, which provides a large portion of the funds.

Both the EU and the U.S. list Hamas as a terrorist group and don't have any direct contact with the movement.

In case the U.S., or anyone else, decides to cut its aid, "it's the duty of the oil rich Arab countries in the region to help the Palestinians, especially after the recent political changes in the region, there definitely are a number of countries willing to step in," said Siniora.


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