As of September 2012, the Palestinian Authority faces a severe fiscal crisis, with substantial arrears owed to the private sector and suppliers. Israel has taken a series of measures reflecting the common interest to support PA economic stability and help the PA manage the fiscal crisis successfully.

 Report of the Government of Israel to the Ad Hoc Liaison Committee (AHLC)


Open publication

Executive Summary

The Government of Israel continues to view the bilateral track with the Palestinians as the only way forward to a sustainable solution, based on two states for two peoples. Israel calls once again for the renewal of bilateral dialogue in order to achieve this goal.

As of September 2012, the PA faces a severe fiscal crisis, with substantial arrears owed to the private sector and suppliers, NIS 617 million in debt to the Israel Electric Corporation, and difficulty meeting salary payments. The economic slowdown in the West Bank (5.4% growth rate) poses a major challenge to continued PA financial and institutional stability.

While the present Palestinian fiscal crisis was caused by a shortfall in donor aid, there was also overspending in the implementation of the 2011 budget, as demonstrated by the PA’s disbursement for development expenses, for which no funds were available, at the expense of recurrent expenditure. In the first half of 2012, budgetary goals, which from the outset were projecting financing gaps of more than USD 150 million, were not met. The public finance management system’s role in the current crisis may undermine its track record as a system that meets the requirements of a well-functioning state.1

Israel has twice taken upon itself to transfer advance payments to the PA in order to facilitate the timely payment of salaries to PA employees. These Israeli measures reflect the common interest to support PA economic stability and help the PA manage the fiscal crisis successfully. They are part of the following significant measures taken by Israel since the beginning of 2012:

* Following the last AHLC meeting in March 2012, Israel appealed to the IMF to support Prime Minister Fayyad’s call for special IMF assistance. Thus far, the IMF has not managed to find a way to make IMF resources available to the PA.

Development of the Gaza Marine gas field will generate revenues that could contribute dramatically to Palestinian fiscal sustainability. After discussions between PM Netanyahu and Mr. Blair, following an approach by the Palestinian Authority, Israel confirmed its intention to engage in a meaningful discussion with the aim of developing the Gaza Marine gas field. In this context, official letters were submitted and meetings took place between Israeli representatives and the Palestinian leadership. These were followed by initial negotiations between the relevant parties regarding the development of the Gaza Marine gas field.

* On July 31, 2012, Israeli Minister of Finance, Dr. Yuval Steinitz, and PA Prime Minister, Dr. Salam Fayyad, concluded arrangements for the transfer of goods between Israel and the Palestinian territories and related tax procedures. These arrangements introduce mechanisms that better facilitate the movement of goods between Israel and the Palestinian Authority, and support efforts by both parties to reduce illegal trade and tax evasion. They will enhance the Palestinian tax system, thereby helping to strengthen the economic base of the Palestinian Authority.

* On September 4, 2012, an agreement was signed between Malam2 and the Palestinian Authority Customs and Excise to lay down the technological interface needed to share computerized customs information.

* In order to assist the PA in the timely payment of salaries on the eve of Ramadan, in July Israel transferred an advance payment of NIS 180 million to the PA.

* On September 11, 2012, due to the Palestinian financial crisis, Israel’s PM decided to transfer NIS 250 million as advance payment of PA tax revenues collected by Israel.

In order to help the PA reduce the level of unemployment, since February 2011 Israel has increased the number of working permits for Palestinian employees in Israel by 40%, reaching 41,450 permits. At present, almost 32,000 Palestinians earn their living in Israel and 27,750 Palestinians work for Israeli employers in the West Bank. This Israeli measure contributes directly to improving the economic reality for thousands of households in the West Bank.

In order to facilitate trade, Israel continues to improve the commercial crossings – upgrading the infrastructures, streamlining procedures, shortening passage time and reducing the cost of transporting goods from the West Bank into Israel and to Israeli ports. Israel continues to cooperate with the PA, increasing the number of permits for businessmen who travel frequently in and out of the West Bank, to and via Israel. Israel has also adopted special procedures to ease the transfer of goods. An upgraded passenger terminal at the Allenby Bridge commenced operations in September 2012, aiming to improve services offered to Palestinians and visitors to the West Bank.

Trade between Israel and the PA declined by about 7% compared to the first half of 2011, totaling USD 2.2 billion compared to USD 2.38 billion in the first half of 2011. Palestinian purchases from Israel accounted for approximately 65% of total Palestinian purchases in the first half of 2012, a drop of approximately 2% compared to the previous year.3

Tax revenues transferred by Israel to the PA4 increased by 4.55%, totaling NIS 2.75 billion5. A higher volume of commercial goods was shipped from the West Bank to Israel via the land crossings. In the first half of 2012, there was a 34% increase in the movement of commercial goods via the Allenby Bridge.6

Israel, for its part, continues to cooperate with the PA and the international community in order to provide the necessary conditions for economic and financial stability.

Israel continues to reduce the number of checkpoints, which are normally open, to ensure that traffic flows relatively smoothly. During the month of Ramadan more than one million Palestinian worshipers visited the Al-Aqsa mosque in Jerusalem, due to the issuance of a record number of permits to visit Israel.

On February 27, 2012, an agreement was signed between the Israel Electric Corporation and the Palestinian Energy Authority for the construction of four electricity substations (one of them in Area C). When completed in 2014, these substations will supply approximately 200 additional megawatts of electricity.

Since 2011, reflecting its wish to respond to the needs of the local population, Israel has approved 328 projects in Area C. These projects are submitted by the PA, some are sponsored by the international community and some are initiated by the Civil Administration. Among these projects, 97 have been implemented, 99 are in the planning stages and 25 were declined. In addition, the implementation of 53 projects has been suspended due to lack of funding.

Israel welcomes the international community’s support for approved projects in Area C and calls for a coordinated application process through the legal procedures and the Planning Committee. Israel encourages donors to sponsor and fund 16 projects which have already been approved by the Planning Committee but have not been implemented due to a lack of funding.

Over the last few months, Israel has made considerable progress in drafting new master plans for Area C. This has been done with the involvement and cooperation of the Palestinian side. These master plans, once approved, will accelerate planning procedures for further economic development. Israel maintains its coordinated cooperation with the international community on project development in this area, responding to the needs of the local population and implementing fast-track approval wherever possible.

The Gaza Strip, which has been under illegitimate Hamas control since June 2007, is outside of the PA’s reach. Despite this, the Gaza Strip places a significant financial burden on the PA, accounting for more than 50% of the PA’s total expenditures.

Since June 20, 2010, and despite ongoing attempts by Hamas and the Islamic Jihad to terrorize Israeli cities and the crossings between Israel and the Gaza Strip, Israel continues to implement a policy that contributes to economic and social well-being of the Gazan population. The years 2010-2011 marked a period of significant economic recovery in Gaza following this policy, yet in the first quarter of 2012 growth declined to 6%, and unemployment rose from 28% to 30% compared to the same period last year.7

Israel has approved 219 projects led by the international community in the Gaza Strip and has upgraded the infrastructure and capacity of the Kerem Shalom crossing to 450 trucks per day, far beyond actual use. In July 2012, Israel installed a new container scanner at the crossing in order to facilitate export from Gaza. During the first half of 2012, 24,506 people exited Gaza for humanitarian and business purposes, a 23% increase compared to the parallel period in 2011. Agricultural and textile exports to international markets have been expanded and the export of furniture and date bars to the West Bank has been approved and implemented.

Since the beginning of 2012, 650,000 tons of aggregates for international projects and private sector pilot projects have been shipped into Gaza, in addition to 120,000 tons of cement and 25 tons of iron. Israel provided the necessary permits for a UNDP project to upgrade the production capacity of the electricity power plant in the Gaza Strip, and it now reaches 100 megawatts. From June 7 to August 6, 2012, in cooperation with Egypt and the PA, Israel facilitated the daily transfer of approximately 7 million liters of diesel fuel to the Gaza Strip, within the implementation of a 30 million liter donation by Qatar, transmitted from Egypt via Israel into the Gaza Strip. The transfer was suspended following the terrorist attack on August 5, and has not yet been resumed.

During the first half of 2012, security in southern Israel along the border with the Gaza Strip remained under constant threat. A brutal assault of rockets and mortar shells from Gaza continued to terrorize a million Israeli civilians, paralyzing their daily lives. Since the beginning of 2012, 530 rockets have been fired into Israeli territory. This fire is deliberately aimed at heavily populated areas in Israel, including Beersheba, Ashdod, Ashkelon and surrounding areas, forcing a million Israeli citizens to take refuge in shelters.

The terrorist attack on August 5, 2012, in the area of the Kerem Shalom crossing and the Israel-Egypt border, which targeted civilians living in the vicinity, underlines the severity of the increased security threat in this area, posed by possible cooperation between terrorists in Gaza and the Sinai Peninsula. This unbearable security reality is an alarming reminder of the proliferation of terrorist military capacity in the Gaza Strip, which jeopardizes prospects for peace and regional stability.

Through the implementation of its policy, Israel supports economic development in the West Bank and humanitarian sustainability in the Gaza Strip, while commending the international community for its crucial financial support, and calling upon the Palestinian leadership to return to the negotiating table to revive the bilateral track, which is the only way to reach a sustainable solution, based on two states for two peoples.


1 For further information, see Chapter One, below.
2 An Israeli company.
4 During the first half of 2012.
5 Israel Ministry of Finance
6 Israel Airports Authority. Excluding the import of vehicles
7 IMF – Staff Report Prepared for the Meeting of the Ad Hoc Liaison Committee, September 23, 2012.