Ramallah, Palestinian Territory
Palestinian Authority Prime Minster Salam Fayyad is determined to wean his government off reliance on foreign assistance and tax transfer from Israel - and one way he aims to do that is by collecting more taxes from Palestinians.
Fayyad made his plans clear at an investor conference in Ramallah this week, where he asked businesspeople to voluntarily delay investment tax credits they are entitled to for three years to help the PA pay its bills.
"We are not saying that that the government will rescind these benefits but that the business sector should act voluntarily," Fayyad said at a conference sponsored by the Palestine Exchange on Monday, terming it a patriotic act. "It's a message of empowerment for the national economy, to deliver a message that the Palestinians don't just give speeches."
The PA is facing a massive cash crunch. Angry that the PA won membership last month in the United Nations Educational, Scientific, Cultural Organization (UNESCO) and that it is now trying to forge a national unity government between the Fatah and Hamas movements, Israel began withholding taxes it collects for the PA that pay for more than two thirds of the PA's spending.
Meanwhile, foreign donors, facing fiscal crises of their own, have not come through with promised aid while a slowing Palestinian economy has reduced whatever taxes and fees the PA collects. The International Monetary Fund (IMF) estimates the economy of the West Bank, which the PA rules while Hamas controls the Gaza Strip, grew at just a 4 percent annual rate in the first half of this year, half its 2010 pace
Fayyad said the PA is also in the process of overhauling the tax code with the aim of increasing collections and making it more progressive by taxing the richer more. On the expenses side, Fayyad is trying to cut the PA's bloated budget, which pays the salaries for 150,000 state employees serving a population of about 3.8 million.
Fayyad raised the possibility of renegotiating the 1994 Paris Protocols that govern economic relations between Israel and the PA, saying the current agreement gives too much power to Israel. Among other things, the agreement allows Israel to collect customs revenue on Palestinians imports as well as value-added and income taxes paid by Palestinians working and shopping in Israel, which it then transfers to the PA.
"There are flaws in it and many components that should be redrafted under the same framework or under another framework to be fairer to the Palestinian side," Fayyad said referring to the protocols. ''It is unacceptable that government of Israel has the right to withhold our funds because of any choices we make on national and political domain."
In fact, Israel has on at least four occasions withheld tax revenue from the PA, including in response to a wave of Palestinian terror attacks in 1997, the outbreak of the Intifada in 2000 and the election of Hamas in 2006. It suspended them again last spring after Fatah and Hamas first announced national unity talks. Hamas rejects any peace process and from its base in Gaza has staged repeated rocket attacks on Israel.
Israel has called the UNESCO bid, which is part of a wider Palestinian statehood drive in the UN, a unilateral act in breach of the two side's 1993 Oslo Accords. "It's no less dangerous to Israel than the terror that occurred under the reign of former PA chairman Yasser Arafat," Israeli Finance Minister Yuval Steinitz said last week. "We're talking about the complete betrayal and elimination of the idea of peace."
Israel has so far rejected requests from the U.S., the UN and others to restore the funds. But Fayyad insisted that Israel has no right to act. ''Israel has continually violated the protocol. There is no basis for the right Israel has granted itself,'' he told the Ramallah conference.
UN Middle East peace envoy Robert Serry on Monday warned the UN Security Council that freezing the transfer of tax revenue undermined the PA's state-building gains and the development of the security forces upholding law and order in the West Bank. "Withholding this level of funding would cripple any government, let alone an authority under occupation," Serry said.
As the Palestinian economy has recovered and Fayyad has undertaken a drive to make the PA run efficiently and corruption-free, the Palestinians have grown increasingly reliant on the tax transfers, making them more vulnerable to a cutoff. Transfers doubled between 2006 and 2010 to $1.3 billion. The PA's domestic tax take last year was $745 million.
This year the dependency has grown, with domestic revenues slated to fall slightly while tax transfer - if they are delivered - will grow by some $200 million, according to an IMF projections made in September. The PA's 2011 budget is about $3.2 billion.
The PA is overhauling its tax administration, with the aim of expanding its tax base and preventing evasion. A single tax collection agency has been created and taxpayer records are being computerized and staff trained. Municipal property taxes are being more widely imposed. Thirty-seven municipalities out of 107 municipalities in the West Bank were levying taxes as of June and the aim is to increase that to 52 by the end of 2011.
In another way to boost funds available, besides borrowing from local banks, the PA is even considering issuing Treasury bills in 2011 by securitizing its debt to the Palestinian Monetary Authority. This would be a first step toward the gradual development of a Treasury bills market.
The central bank plans to issue $50 million of Islamic debt this year, Jihad Al-Wazir, governor of the Palestine Monetary Authority, said in an interview with Bloomberg Television in September.
Despite all the efforts, Fayyad conceded that the PA's financial crisis would continue into 2012 "at least," even if Israel resumes tax transfers. He estimated the PA will need external assistance of between $950 million and $1 billion.
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