The World Bank warned of a looming financial crisis for the Palestinian Authority brought on by a ballooning wage bill as Israel snubbed US calls to unblock funds owed to its neighbours.
Last week's election victory for the radical Islamists of Hamas, political novices classified as terrorists by the United States and European Union, had already raised fears about the donor-dependent economy.
The World Bank report underlined the implications for a Hamas-led government if Western powers curtailed aid payments by detailing how nearly half of an 800 million dollar budget deficit last year was financed by foreign donors.
‘The PA's fiscal situation has become increasingly unsustainable mainly as a result of uncontained government consumption, in particular a rapidly increasing public sector wage bill, expanding social transfer schemes and rising net lending,’ said the report on Thursday.
‘In 2005, the PA's budget deficit reached about 800 million dollars of which around 340 million dollars was financed by donors in the form of direct budget support.’
Former finance minister Salam Fayad, who stood down to run in the election as an independent MP, won widespread praise for implementing a package of reforms but he was infuriated when big pay rises for the security services were approved behind his back.
The World Bank said the budget deficit had the potential to destabilise the government.
‘Unless addressed promptly, deficits of this magnitude will compromise the prospects of rapid recovery by destabilizing the PA's operations and by reducing the public and private resources otherwise available for productive investments.’
Outgoing Palestinian economy minister Mazen Sunukrot acknowledged that there had been ‘some technical problems’ but added that the government had been in contact with the World Bank on Wednesday to assure its continued ‘commitment to the basic fundamentals of international finance.’
Israel has given the Palestinian government an added headache by sitting on around 50 million dollars in customs duties, which should be paid on the first of the month, on the grounds that it wants to ensure that it does not end up in the hands of ‘terrorists.’
Foreign Minister Tzipi Livni said Wednesday Israel would take ‘a few days’ to screen the funds, a line at odds with the United States and European Union which have threatened to cut aid if Hamas does not renounce violence and recognise Israel but agreed to continue financing the Palestinian Authority for the moment.
A State Department spokesman made clear that Washington wants Israel to unblock the funds owed to the Palestinian Authority whose moderate president Mahmud Abbas is highly regarded in the United States.
‘The issue here is: How do you support President Abbas in his efforts in this interim period, which ... could last anywhere from two to three months?’ spokesman Sean McCormack said.
‘The Palestinian Authority has certain needs in terms of budget support, paying salaries.’
A senior Israeli government official however maintained its refusal to hand over the cash immediately.
‘We will not unblock these funds until we can be sure that they will not be used to finance a government made up of terrorist elements,’ a senior official in the prime minister's office told AFP.
Sunukrot said Israel had no right to withhold money that was due to the Palestinian Authority under the terms of bilateral agreements.
‘What Israel has done is illegal because we are still committed to the economic agreements with Israel,’ he told AFP.
Cabinet colleague Mohammed Shtayyeh, the outgoing public works minister, also slammed the Israeli stance.
‘This money is not a gift from Israel. It is rightfully the Palestinians,’ he said.