World Bank: Raw Deal With Israel Costs Palestinians $285 Million in Annual Revenue

High handling fees charged by Israel and mis-allocated taxes augment Palestinian deficit, World Bank says.

President Mahmoud Abbas.
AP

The Palestinian Authority loses revenues of some $285 million a year due to its current economic arrangements with Israel, according to a new World Bank report published Sunday.

These revenues could significantly ease the PA’s fiscal pressure, the report added.

Steen Lau Jorgensen, the World Bank’s country director for the West Bank and Gaza Strip, said that reducing this revenue loss could cut the PA’s budget deficit for 2016 to below $1 billion and more than halve its expected financing shortfall.

Under the 1994 Paris Protocol, which established a customs union between Israel and the PA, Israel is supposed to collect value-added tax, import duties and other taxes on the PA’s behalf and hand them over on a monthly basis. Though the agreement was never fully implemented, these revenues account for more than two-thirds of the PA’s total tax revenue.

The missing revenue, according to the World Bank, stems mainly from misallocated taxes on bilateral trade between Israel and the PA and underestimation of Palestinian imports from third countries.

The new report will be presented to the Ad Hoc Liaison Committee of donor states to the PA at a meeting in Brussels on Tuesday. The meeting was called to discuss development aid to the Palestinians.

The report’s estimate of $285 million in lost revenue does not include the taxes Israel collects from Area C, the 61 percent of the West Bank which the Oslo Accords left under full Israeli control.

The report said that resuming the work of the Israeli-Palestinian Joint Economic Committee, which was set up to monitor implementation of the Paris Protocol and resolve any problems that arose, would significantly improve bilateral economic cooperation. In particular, it argued, the high handling fee Israel charges the PA – which currently finances almost one third of the Israeli Finance Ministry’s customs and VAT department – should be reexamined.

Another issue raised in the report is that Israel continues to withhold payment of $669 million in accumulated Palestinian tax revenue. This sum includes pension payments by Palestinians working in Israel and their employers, as well as deductions meant to cover the workers’ health insurance and other benefits.

The pension money is supposed to be deposited in a dedicated pension fund, but the PA hasn’t yet set up this fund. The combination of the PA’s failure to set up the fund and Israel’s delays in transferring some of the other money has resulted in tens of thousands of Palestinian workers not getting the benefits they are supposed to get, the report said.

Moreover, the Palestinian economy isn’t growing fast enough to raise the standard of living and reduce the high unemployment rate, the report warned. Though it has recovered from a recession in 2014, last year’s growth rate of 3.5 percent is insufficient in light of Palestinian population growth.

With regard to Gaza, the report said the economy isn’t expected to recover fully from the 2014 Hamas-Israel war until 2018. Reconstruction work is still being hampered by the fact that pledged aid is trickling in only slowly. So far, just 40 percent of the aid promised by donor states at a post-war conference in Cairo has actually arrived.

At this rate, Jorgensen said, all the aid will finally have been delivered only five years after the war ended.

The fatigue of Gaza’s population is easily understandable, Jorgensen added, given that 20 months after the war ended, only nine percent of the houses that were destroyed have been rebuilt and only 45 percent of those that were damaged have been repaired. More than 14,800 families remain homeless, he said, and there’s nowhere for them to go.