Ethan Bronner
The New York Times
July 27, 2011 - 12:00am

RAMALLAH, West Bank — As the Palestinian Authority faces some of the hardest choices in its history regarding relations with Israel, membership in the United Nations and unity with Hamas, it is mired in a severe economic crisis, leading many here to a sense of foreboding and despair.

More than 150,000 state employees, whose salaries support a million people, had their wages cut in half this month. Palestinian banks have lent the government more than $1 billion and do not want to lend more. Some ministries have temporarily lost electricity because they have not paid their bills. Last week, the government ordered a reduction in the price of bread, leading to bakery strikes. Garbage is piling up.

The Muslim holy month of Ramadan starts next week; nightly family gatherings and a three-day holiday mean that spending will double. Many people already have large bank loans. September will bring bills for educational fees and school supplies; the olive harvest, when Israeli settler violence is expected to increase; and a likely diplomatic showdown at the United Nations.

“This is, without doubt, the worst financial crisis the Palestinian Authority has ever faced,” said Prime Minister Salam Fayyad, generally known for a can-do, upbeat attitude. “This could not have come at a worse time. I don’t know how this ends. I don’t have an answer.”

The immediate cause of the crisis is the failure of foreign — especially Arab — donors to fulfill promises of aid. But the budget crisis is intertwined with a diplomatic one as the Palestinians and Israelis maneuver ahead of an expected push to recognize Palestinian statehood at the United Nations in September. Different donors have opposing agendas, so the Palestinian Authority’s decisions in the coming weeks will anger one set of donors or another.

Several Arab states have pressed for unity talks with Hamas, which rules in Gaza, suggesting that donations would follow. The Israeli and American governments say the opposite — if unity with Hamas or United Nations membership proceeds, aid could be withheld.

Without enough money to pay salaries, a big concern is the loyalty of the Palestinian security forces, which have brought law and order and created conditions for stability and economic growth in the past three years.

“They need their pay, and they need to know their work is leading to the building of a state,” a top Israeli general said, speaking under military rules of anonymity. “Both of those are at risk.”

Mr. Fayyad, a former International Monetary Fund official, is viewed in the West and Israel as the Palestinians’ greatest asset. He has reduced the Palestinians’ foreign dependence and imposed fiscal austerity. But now he is under growing internal attack. “Fayyad set himself up as the guy who brings in the money, and if he can’t do that why keep him?” said a senior Palestinian official who requested anonymity but expressed a common sentiment.

In the past year, the International Monetary Fund, the World Bank and the United Nations have issued reports saying that the Palestinian Authority under Mr. Fayyad was fully prepared for statehood because of institution building and fiscal discipline.

That view is coming under scrutiny. Last month, in the journal Foreign Policy, Nathan J. Brown of George Washington University wrote: “Fayyad’s main achievement has not been to build the structures of a Palestinian state, but to stave off the collapse of those structures that did exist. An equally important achievement was his ability to persuade Western observers that he was doing much more. In the process, however, he raised expectations far beyond his ability to deliver.”

Now the Palestinians feel squeezed between both sides. “We are at a serious impasse,” said Mohammad Shtayyeh, the president of the Palestinian Economic Council for Development and Reconstruction. “We are stuck over reconciliation with Hamas, negotiations with Israel and relations with Washington. All are interrelated, and in all cases we are damned if we do and damned if we don’t. If we are not united, we are called no good; and if we are united, we are threatened.”

Israel and the United States have made it clear that unity talks with Hamas and the United Nations bid will have financial consequences. “If they take either of these bold and offensive steps, it will be very hard for us to continue to cooperate with them,” said Yuval Steinitz, Israel’s finance minister. Israel collects and delivers hundreds of millions of dollars in taxes for the Palestinian Authority. “How can we deliver the money, even if it is their money, if part is going to Hamas?” he said.

In the Republican-controlled House of Representatives, a bill is being formulated to stop aid — $500 million a year — to the Palestinian Authority if it forms a government with links to Hamas or seeks statehood recognition at the United Nations outside of talks with Israel.

This week, Saudi Arabia announced a $30 million donation to the Palestinian Authority. Mr. Fayyad said it needed 10 times that amount. By contrast, the Saudis just gave Jordan $1 billion on the heels of an earlier $400 million.

An emergency meeting of the Arab League devoted to the Palestinian crisis on Tuesday ended inconclusively.

With the state employees talking about a strike and the region facing uprisings, Palestinians are nervous. “I am afraid the current crisis will return us to chaos,” said Moawyia Sobhi Swelem, an Agriculture Ministry official. “The financial crisis is endangering all of the achievements of the Salam Fayyad government and weakening confidence in him. Our youth see what is happening around the region. The people are saying, ‘How can we make a state when the government cannot pay salaries?’

Some argue that the talk of a solvent state was illusory.

A top Israeli military official complained that the Palestinian Authority had chosen politics over development in recent decisions, notably in its handling of West Bank projects to be financed by Turkey, France and Japan. All have failed to materialize, he said, because of disagreements between the Authority and Israel over who would control the land on which the projects would rise.

The Palestinians reply that the main problem is Israel, which controls 60 percent of the West Bank.

Mohammad Mustafa, chairman of the Palestine Investment Fund, said that the Palestinian Authority had perhaps not maximized the $15 billion in aid donated to it over the years. But he expressed anger at the notion that a United Nations bid was inappropriate.

“Where else can we go?” he asked. “We are in a financial crisis, thousands of our people are in Israeli jails, we can’t cross our borders. How long can the world ask us to wait?”


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