Karin Laub
The Associated Press
November 30, 2011 - 1:00am

Palestinian President Mahmoud Abbas' government narrowly dodged a full-blown cash crisis after Israel agreed Wednesday — under intense international pressure — to resume the transfer of $100 million a month in frozen tax funds.

The episode illustrated the fragile financial foundations of Abbas' West Bank-based Palestinian Authority and the broad international consensus that it needs to keep functioning to ensure some stability, especially at a time of diplomatic deadlock. Israeli-Palestinian talks on the terms of a Palestinian state seem unlikely to resume before next year's U.S. presidential election and an Israeli vote, possibly in 2013.

Israeli Prime Minister Benjamin Netanyahu suggested Wednesday that he might stop the monthly transfers again if the Palestinians take more steps to bypass negotiations and seek U.N. recognition of a state of Palestine. That could embroil Netanyahu in another embarrassing political zigzag.

Netanyahu decided only a month ago to freeze the transfers in retaliation for the Palestinians' successful quest to join UNESCO, the U.N. cultural agency, as part of their recognition bid. Netanyahu reversed himself and agreed to the cash transfers after coming under what a Western diplomat said was "massive" pressure.

Palestinian Foreign Minister Riad Malki said Wednesday that the Palestinians are determined to keep pushing for full U.N. membership for Palestine, but suggested a decision on the next stage — how to get around a deadlocked Security Council — might take time.

There are also indications that Abbas may put the U.N. bid on hold at least until the end of January, to allow another mediation effort by the "Quartet," the United States, the United Nations, the European Union and Russia, to play itself out.

For Abbas' prime minister, Salam Fayyad, the Israeli decision to resume the transfers came just in time. He said earlier this week that without the money, he would not be able to pay the upcoming salaries of some 150,000 civil servants and members of the security forces, due in the first week of December. The public sector salaries support about 1 million Palestinians, or nearly one-third of those living in the West Bank and Gaza.

The Palestinian Authority relies on hundreds of millions of dollars a year in foreign aid, including for operating costs, such as the salaries, and development projects. In 2011, Fayyad had a proposed budget of $3.2 billion, including $1.7 billion to cover the payroll. He sought nearly $1 billion in foreign support, but funding fell short, in part because of failure of some donors, including Arab states, to fulfill their pledges.

Trying to make up for the shortfalls, the Fayyad government took loans from banks, but had reached its borrowing limit by the time Israel announced last month that it was freezing the tax transfers, which amount to about $100 million a month.

The funds Israel collects, as part of interim agreements from the 1990s, include customs and value-added tax on imports that come through Israeli ports but end up in the Palestinian areas.

Fayyad and other Palestinian officials said Wednesday that Israel did not have the right to freeze the transfers of money it owes the Palestinians. "It should be described as state piracy by Israel against the Palestinian people," said Malki.

Quartet envoy Tony Blair struck an unusually sharp tone Wednesday in urging Israel to make sure the money is transferred regularly from now on. "Withholding these funds only benefits those who oppose peace and Israeli-Palestinian cooperation," he said.

Critics in Israel have noted that the funds help pay for Abbas' security services that have been lauded for successfully preventing attacks on Israeli civilians by Palestinian militants.

The brief crisis over the transfers highlighted the financial vulnerability of the Palestinian Authority. It is by no means certain foreign aid will continue to flow at the current level, considering the diplomatic paralysis and global financial crisis.

In the past, aid was seen as part of a twofold approach — the donors, key among them the EU, give money to help build the institutions of a Palestinian state, while international mediators, led by the U.S., try to prod the sides to a peace deal.

With diplomacy stalled, a new aid framework will have to be worked out, said a diplomat in the donor community who spoke on condition of anonymity Wednesday because he was not authorized to discuss the ideas with reporters. Most likely the emphasis will now be on development projects, he said.

In Berlin, a Foreign Office official said Germany does not plan to reduce aid to the Palestinians. Germany is also not aware of any EU plans to cut funding, since the Palestinians are in such dire need of support, he said on condition of anonymity, in line with Foreign Office policy.

Netanyahu's office said Wednesday that he decided to release the money because the Palestinians appear to have suspended their "unilateral moves" — a reference to the United Nations campaign. It said the decision would be "reassessed" if the Palestinians resume these steps.

A day earlier, Abbas insisted that the Palestinians were still pressing ahead with their U.N. initiative.


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