The Palestinian Authority: Facing Genuine Financial Crisis or Not?

Children are begging on the streets. The medical system is on the verge of collapse. The Palestinian Authority appears to be facing a humanitarian crisis of major dimensions – presumably because donors have decided to withhold funds from a belligerent Hamas-run government that refuses to recognize Israel’s right to exist or to foreswear terrorism

Unsurprisingly, the story is actually far more complex than this.

From numerous sources have come reports that Abbas has control of a fund known as the Palestinian Investment Fund, from which some $200-300 million might be drawn in order to prevent a crisis until perhaps July. Details are murky. The unconfirmed and likely erroneous assumption has been that Abbas is blocking release of these funds to weaken Hamas, with which he is doing battle.

The Palestinian Investment Fund (PIF) was established in 2002, when Salam Fayyad, appointed as PA Finance Minister to combat corruption, seized control of a portion of Yasser Arafat’s ill-gained assets, located in the Palestine Commercial Services Company (PSCS), and placed them in a new more transparent fund. PIF’s purpose was long term investment for the PA, not the funding of PA budgets, and it supposedly operated on the straight and narrow. The fund was run by a Board of Directors appointed by the cabinet and headed by the Finance Minister.

At one point, the Fund’s managing director was Muhammad Rashid, Arafat’s point man in financial matters. His presence does somewhat undercut the perception of this as a transparent fund; Rashid is not known for walking the straight and narrow. There are suggestions that to this day he is in possession of critical information about the Fund.

In January 2006, after the Hamas victory in the legislative election and before the new government was sworn in, there came an announcement from Abbas’s office that he had assumed direct control of certain elements of PA administration, wresting them from the oversight of the cabinet. One of the things he allegedly gained control of was the PIF. What can be readily ascertained is that the Fund, worth roughly $1 billion dollars, is not controlled by the new Hamas Finance Minister, Omar Abdel-Razeq, who does not sit on the Board of Directors.

But while Abbas has appointed the current Board of Directors of PIF, it is not certain that he truly controls the Fund. Highly reliable sources indicate that Abbas may not be able to arrange the release of money from the PIF.

Muhammad Mustafa, current CEO of the Fund, says PIF has “nothing to apologize for,” since in the last six months it has already transferred something close to $300 million to the PA. A good percentage of the Fund is collateral against loans and cannot be utilized. Were the remaining $200 million in assets to be liquefied, it would be “to the long term fiscal detriment of the PA.” His implication is that no more will be forthcoming.

This state of affairs, however, is not the crisis it appears to be. Contacts with solid information regarding the machinations of the Palestinian Authority – all of whom have chosen to speak off the record – have described the current PA fiscal crisis as political or “artificial” in nature. Mustafa seems to agree.

While Abbas may not be able to access PIF monies, there actually are other PLO holdings he would be able to draw upon – holdings of a magnitude far greater than what he might have taken out of PIF. What is more, Abbas is not declining to draw on these funds because he wishes to weaken or control Hamas. Hamas’s involvement here is peripheral: Abbas’s fiscal problems predate the election.

The Palestinian Authority, until recently, was receiving more money per capita from the international community than any other political entity. Working with a welfare mentality, it was, to seriously understate the matter, complacent about its failure to use all international donations for legitimate expenditures or to provide accountability.

The PA carefully nurtures an image of poverty and need among its people. Indeed that need is real at one level. A December 2004 World Bank report, however, indicated that “55% of those who receive emergency assistance are not needy.”

Large sums within the PA have been diverted for illicit purposes that are exceedingly likely to include terrorism. In February, PA Attorney General Ahmed al-Meghami reported that he had uncovered the theft or misuse of $700 million within the PA and suspected that billions were involved. Meghami identified 50 cases of administrative and financial corruption. PA controlled oil, tobacco and broadcasting corporations are involved; in one instance payments of $4 million in PA funds was made to a pipe factory that existed only on paper.

During the years when these irregularities were commonplace, international money – most notably European money – continued to flow to the PA. There was no need for fiscal accountability; it was not demanded.

OLAF, the European Anti-Fraud Office of the European Commission, conducted a two year investigation into European Union assistance to the PA budget. In March 2005, they released a report indicating that there was “no conclusive evidence” of European money underwriting armed attacks or unlawful activities. However, the possibility of misuse of funds existed because “the internal and external audit capacity in the Palestinian Authority is still underdeveloped.”

Quite simply OLAF confessed to being unable to track where money sent to the PA ended up. This report, however, did not generate movement within the EU to terminate funding until there would be accountability. The response was to the flip side of the report: It was reassuring to the Europeans that there was nothing proved regarding the use of their money for terrorism. The European Commission wrote that “the EU contribution helped to alleviate poverty,” and EU donations – hundreds of millions was being provided annually – continued to flow to the PA, via a designated fund in the World Bank.

The Palestinian Authority got the message. European money was something to be depended upon. That is, until late last year.

In November 2005, Nigel Roberts, World Bank Country Director for the West Bank and Gaza, wrote in a report:

“The PA has created a serious fiscal crisis for itself with salary expenditure essentially out of control.”

With this, we come to the heart of the matter. It is the ostensible PA inability to meet payroll that we are reading about now – the failure of PA employed persons to receive salary that is allegedly engendering the current crisis. But, as Nigel Roberts indicated, this is a crisis that was in the making for some time.

According to a report by the International Monetary Fund (IMF), in 2004 PA authorities agreed to a Wage Bill Containment Plan; this was designed to address its fiscal deficit by establishing a set of regulations that would, among other things, limit personnel recruitment and salary increases for the years 2004-2006. However, this agreement was seriously abrogated. In July 2005, salaries for civil servants were increased by 15- 20%. A month later, a new salary scale for security personnel resulted in increases of 30-40% for those security personnel on active duty. According to the IMF report, the wages of those in the employ of the Palestinian Authority then exceeded the wages of those Palestinians working in Israel, and far outstripped the average wages in the West Bank and Gaza.

Among those receiving salaries from the PA were those in prison in Israel for “service” to the cause. The Palestinian minister for prison affairs, in September 2005, gave an interview to Al-Hayat Al-Jidida, in which he explained that $4 million was allocated monthly for persons arrested by Israel.

Additionally, terrorist factions, most notably the Al Aksa Martyrs’ Brigade, have been co-opted into the PA security forces and are on the payroll as well. The IMF estimates that some 4,000 “militants” have been added to the payroll, and that eight to ten thousand security forces can be defined as “non-functioning.”

None of this has sat well with the World Bank, which was looking for markers of fiscal responsibility. In the months immediately prior to the election, it began to hold back EU funds. This was the beginning of Abbas’s fiscal troubles.

There was some expectation in financial circles that the PA was spreading its largesse in order to influence the election and would get its fiscal act together after the election. It was thought likely that funding would resume. But then, with the election and the rise of Hamas, funding was suspended (not cancelled).

Should Abbas now draw on the considerable resources that are reported by knowledgeable sources to be available to him, he would be demonstrating a self-sufficiency that would give the Europeans pause. As he wishes to secure EU funding for the PA payroll, he prefers to sustain the sense of fiscal crisis.

There is a reasonable likelihood that Abbas will achieve what he is after. The EU has expressed interest in a proposal by French President Jacques Chirac that donations be channeled through an administering agency, likely the World Bank, to cover PA payroll. Funds would be placed directly in the bank accounts of recipients, totally circumventing PA administration. Ultimately other donors might participate as well.

The World Bank has warned, in a report just released on May 7, that this is not a simple panacea. Approval by the PA would be necessary, and it seems highly unlikely that it would approve “political conditionality” – there would be no vetting of recipients. In addition, selective funding to specific blocs of employees (i.e., to teachers and health care professionals but not security forces) is considered by the World Bank to be unwise as this would lead to unrest and anger directed at those who administer the program. What this potentially means is that, in the interests of averting a humanitarian crisis, the donors might end up also assisting persons with terrorist connections.

Roughly $10 billion in direct and indirect aid has been provided to the PA since 1993. A major PA figure, Mohammed Dahlan, told The Guardian, in August 2004, that a total of $5 billion in international donations “have gone down the drain and we don’t know to where.”

Arafat’s personal wealth was estimated at $3.1 billion. At his deathbed, his wife, Suha, and Fatah higher-ups battled over this fortune. The exact whereabouts of what remains of that money, as well as Mahmoud Abbas’s access to it, are closely guarded secrets.

Are more millions about to be given to alleviate PA hardship by an international community reluctant to ask hard questions?

The European Union Information Officer located in Jerusalem, who declined to allow her name to be used, states that she has no knowledge of PLO funds that might be drawn upon by Abbas and no knowledge of any investigation the EU might conduct into this matter.

The Information Officer at the American Embassy in Tel Aviv regretted that he had nothing definitive to say on behalf of his government with regard to this situation. Queries to the Canadian media relations person for foreign affairs, in Ottawa, have gone unanswered.

END

Arlene Kushner, an investigative journalist who lives and works in Jerusalem, is Senior Fellow with the Center for Near East Policy Research, for whom this research was done. She is the author of Disclosed: Inside the Palestinian Authority and the PLO.