In Response to UN Vote, Israel Unlikely to Rescind Economic Accords With PA

In advance of the vote at the UN, Israeli officials discussed offsetting debts owed to Israeli institutions from the funds that Israel collects on the PA's behalf.

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As it weighs the legal implications of last week's UN General Assembly vote which recognized Palestine as a nonmember observer state, the Israeli government is not expected to rescind the economic accords that govern relations with the Palestinian Authority.

Among the matters Israeli officials have considered, in response to the Palestinian United Nations initiative, have been the provisions of the Oslo Accords, including the 1994 Paris Protocol, which regulates economic ties between Israel and the Palestinian Authority.

In advance of the UN vote, Israeli officials discussed offsetting debts owed to Israeli institutions from the funds that Israel collects on the PA's behalf. The expectation, however, is that nothing will be done that would bring about the collapse of the Palestinian Authority.

One source in the Israeli industrial sector noted: "The business sector will make it clear to the government that it wants to continue to work with a growing Palestinian market, with consumers with buying power, with businesses that can cooperate with their Israeli counterparts abroad or as subcontractors to Israeli industry."

He added that the business sector is now awaiting the Israeli government's reaction to the United Nations vote, adding that the current uncertainty is not good for business.

Another source in the business sector said that last week's UN recognition is a positive development from a business standpoint. The Palestinians might join the World Trade Organization, he said, and they would then also be bound by international rules. Israel supported Palestinian membership in the WTO in the past for this reason, he added.

Last summer, in an effort to head off the economic collapse of the PA, Israel also approached the International Monetary Fund on the Palestinians' behalf for a $100 million loan, since the PA was not a state. The loan was rejected because the Palestinians could not meet the minimum conditions.

Many commentators acknowledge that the UN vote would have little practical significance on the ground. At this stage, the Israeli government does not appear to be prepared to rescind the accords that established relations with the PA, according to government sources who spoke over the weekend. They said the alternative could be the even worse prospect of the total absence of agreement between the two sides.

Opponents of the upgraded UN status said recognition as a state should not be a substitute for negotiating final status issues directly with Israel. When the issue of upgraded Palestinian membership in the UN surfaced a year ago, Israel concluded that it was not in its own interest to bring about the end of the Palestinian Authority and resume full administration of the West Bank (which Israel captured in the 1967 Six-Day War ).

Currently, pursuant to the Oslo Accords, the territory is divided among areas under full control of the Palestinian Authority, other areas under Palestinian civil control and Israeli military control, and other areas under full Israeli control.

The Paris Protocol provides for a customs union between Israel and the Palestinian Authority, which are considered a single economic entity. The new recognition of Palestine as a state, albeit not a member state of the United Nations, raises the issue as to whether it could result in the separation of the PA as a separate economic unit that could dictate economic policy, which could technically even render sales into the PA as exports.

As a practical matter, however, the PA lacks control over its border crossings and would be unable to conduct trade cut off from Israel.

A senior Israeli government source also noted that, by virtue of the Oslo Accords, Israel is the largest single source of funds to the PA, which would make it unreasonable for the Palestinians to create their own separate economic entity.

The PA is dependent upon Israel to handle imports into the areas under PA administration, and the Israel Tax Authority actually collects import duties on behalf of the Palestinian Authority.

Israel is also responsible for collecting value added tax on transactions Palestinians conduct in Israel. For their part, however, the Palestinians claim Israeli is retaining millions of dollars in tax revenues that are rightfully theirs.

The combined sum Israel collects in VAT and customs duties is an estimated $1.5 billion per year; this is thought to be the primary source of funding for the PA's budget.

Israeli "exports" to the Palestinian Authority include a wide range of products and services, including oil, natural gas and the supply of electricity. Among the leading items the Palestinians sell to Israel are fresh fruit and vegetables, stone and other building materials, textiles and clothing, and wood products.

About 89% of Palestinian exports are sold to Israel.

Palestinians waving flags during a rally in Ramallah this week in support of Abbas’ UN bid.Credit: Reuters
Palestinians celebrating in Ramallah after the PA was given status as a UN non-member state.Credit: Reuters

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