By Massoud A. Derhally
Nabil Kassis says IMF has not received request from Israel over $100m bridge loan for PA
Economic growth in the West Bank and Gaza Strip will slow and the Palestinian Authority - faced with its biggest-ever financial crisis - will be unable to pay the salaries of thousands of its civil servants because donor countries have yet to honour their pledges, Palestinian Finance Minister Nabil Kassis has said in an interview with Arabian Business.
The Palestinian Authority (PA)’s projected fiscal deficit has widened to $1.3bn as a result of a shortfall in expected revenues and donor Arab and international countries not honouring their commitments in time. That has left a gap of about $500m for the PA to pay bank loans the governing body had to take out to cover employee salaries, dues to the private sector and utility bills. The salaries of 160,000 civil servants account for more than half of the PA's budget.
The authority has reached its borrowing limit from Palestinian banks and needs the money immediately, Kassis said.
"The fundraising target was $953m,'' said Kassis, who replaced Prime Minister Salam Fayyad as finance minister. "We received pledges that are supposed to cover that amount, but not all these pledges were honoured. So far we've received less than half that amount."
The budget deficit, which accounts for 12.5 percent to 13 percent of gross domestic product, has increased because some of the PA's projected revenues did not materialise locally, he said.
"We're talking about expectations from combating tax evasion and compliance with the income tax law,'' Kassis said. "There was some improvement but it did not materialise and this means the deficit goes to over $1bn. We are trying to limit that during the rest of the year by cutting down on expenditures."
The PA is now targeting a deficit of $1.2bn, Kassis said.
Asked when the authority needs to have the funds, Kassis said: "Now, immediately we need $500m."
However, the finance minister added that lay-offs would not take place if the money wasn’t received in time.
"We don't fire people because we can't pay them at the Palestinian Authority. People will just not get paid right now," he said.
Israel recently asked the International Monetary Fund for a bridge loan of $100m dollars that it planned to transfer to the Palestinian Authority to help prevent its financial collapse, but the IMF turned down the request because it did not want to set a precedent of borrowing money on behalf of a non-state entity, Israeli daily Haaretz reported this week.
"What I can tell you and the only thing that I can tell you, is that the finance ministry asked the International Monetary Fund about this matter, and they said they have not received any formal request from Israel to that effect,'' Kassis said when asked about the matter.
The fiscal situation of the Palestinian Authority remains "very challenging," the IMF said in a report in May.
Israel has regularly withheld the taxes it owes to the Palestinians. In October and November 2011, Israel refused to transfer about $200m in taxes collected during a period when the Palestinians bid for full membership at the United Nations.
"They are paying monthly clearance revenues amount to about $120m every month,'' Kassis said, when asked if Israel was withholding money owed to the PA. "This is our money. They collect it on our behalf and give it to us. Sometimes they withhold it for political reasons and recently they have been paying it. Of this clearance revenue they collect from the top of it the so-called net lending debts that accrue because of unpaid electricity, health and water bills. They skim it from the top and we get the rest."
Palestinian economic growth declined in the first quarter, and as a result growth this year is likely to be less than expected, at between 5 percent and 8 percent, Kassis said.
The minister stated that the projected increase in GDP was "hardly enough to meet population growth”.
The economy grew about 9.9 percent last year and 10.5 percent in 2010, according to the IMF. Unemployment in the West Bank increased to 20.1 percent in the first quarter of 2012 and in Gaza it reached 31.5 percent.
Kassis said that he hoped pledges would be honoured as soon as possible.
"We are now nearing the month of Ramadan and then you have the Eid holidays followed by the beginning of schools. This is the season when expenditures are high and the need for people to receive their salaries is very crucial,'' he said.For all the latest banking and finance news from the UAE and Gulf countries, follow us on Twitter and Linkedin, like us on Facebook and subscribe to our YouTube page, which is updated daily.