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memri
January 8, 1999 No.
11

The PA Economy (II)

By: Yigal Carmon and S. Lakind*

The primary sources of the PA's income are taxes (levied and collected primarily by Israel and transferred to the PA), foreign aid, and international loans. In 1997, the PA received $548,727,000 from the international donor community.[1] It also received more than $800 million in tax revenues transferred from Israel.[2] At the end of 1997, when the PA released its end of the year financial report, $323 million - nearly 40% of the annual budget - was "missing."[3] The lack of transparency in PA finances makes it impossible to track every dollar. However, an examination of PA financial affairs reveals deficient and corrupt management.

Abuse of PA's Budget

A special committee appointed by the Palestinian Legislative Council (PLC) conducted an investigation in 1997, and released an incriminating report on the PA administration. It accused the administration of financial mismanagement and demanded at least two ministers, Minister of Planning and International Cooperation, Nabil Sha'ath and Minister of Civil Affairs, Jamil Al-Tarifi, be ousted. However, they remained in their positions after Arafat reshuffled his cabinet in August.[4] The PLC's special committee raised the following accusations against the PA administration:

  • Use of government money for personal purposes by Minister of Planning and International Cooperation, Nabil Sha'ath; Minister of Youth and Sports, Talal Sidr; and Minister of Information and Culture, Yasser Abd Rabboh;
  • Excessive expenditure on rent, salaries and cost of travel in various ministries;
  • Embezzlement of funds by several ministries (Minister of Planing and International Cooperation, Nabil Sha'ath, for example, transferred money into accounts that are not subject to the PA budget nor to any PA inspection);
  • Receipt of bribes by ministry officials in the Ministry of Civil Affairs;
  • Illegal and unreported collection of taxes by the Ministry of Postal Services;
  • Granting illegal customs exemptions on cars (over 4,300 vehicles), furniture and material donations entering the PA;[5]
  • Misuse of public funds by the Ministry of Public Works;
  • Non-competitive business practices resulting in inflated costs by the Ministry of Planning and International Cooperation, the Ministry of Supplies and the Ministry of Civil Affairs.

Abuse of Special Funds

The Financial Times investigated the abuse of Palestinian pension funds. In accordance with the Oslo Accord, Israel transferred Pension funds for government employees who worked for years in the civil administration under Israeli rule to the PA. The Gaza Employees Pension Fund amounted to $160 million and was transferred in stages between 1995-7. In early 1996 the PLO deposited this fund with the Morgan Stanley Investment Bank. Later that year, the PA dismissed Morgan Stanley and transferred the money to Bank Credit Suisse in Zurich and appointed Belesta Asset Management, an unknown Irish investment management company, to manage the fund. In 1997, the PA ended its contract with Belesta as well.

The PA used money from the fund for various purposes. In mid-1997, $8 million were transferred to the Arab Bank in Gaza. An additional sum disappeared when, in August 1997, Arafat claimed that he needed $28 million from the Pension Fund to pay police salaries. Although the Europeans stepped in and paid $34 million to cover these salaries, the $28 million from the Pension Fund still made its way to Gaza.

Palestinian Minister of Justice and Chairman of the Government Controlled Insurance and Pension General Corporation, Freih Abu Middein, told The Financial Times that the PA wanted to invest the $28 million of the Pension Fund money in projects such as telecommunications. The vice president, and one of the main shareholders, of the Palestinian Telecommunication Company is Muhammad Rashid, Arafat's financialadvisor.[6]

After the deductions of $8 plus $28 million, there should have been $124 million left in the Pension Fund. However, in September 1997, only $20 million remained. Documents show that on September 4, 1997, Rashid ordered the transfer of half of the remaining $20 million to a liquid account in a Gaza bank.

Secret Accounts

According to Ha'aretz, [7] former Israeli Labor party Finance Minister, Avraham Shochat and Internal Security Minister, Moshe Shahal, said that the late Prime Minister Rabin agreed to Arafat's written demand to place Israeli transfers of taxes into a private account at a Bank Leumi branch in Tel Aviv. Members of European donor countries learned of the existence of accounts such as this only after they covered the PA's deficit of 1996. Once publicized, they demanded that all accounts be closed and consolidated into one account to guarantee transparency. The PA promised to do this by March 1997. Rashid solemnly told Ha'aretz's investigators that, "We are making sincere, serious and genuine efforts to fulfill this promise." However, as of December 1998, the PA has failed to comply with this request.

An investigative report published by the Hamas weekly, Al-Risala, estimated that an account accredited to the office of the presidency held $400 million, which to date has not been subject to any kind of external review. The report claims that the source of this money has been the monopolies. The money has been used, among other things, to fund the Palestinian security apparatuses and Arafat's "charities" which primarily aid citizens who personally request his help.[8]

Inflated Administration

Large sums of money are used to buy political loyalty. Long before the establishment of the PA, the PLO kept a large number of Palestinians on its monthly payroll.[9] Arafat was always proud of this, taking credit for the accomplishments of the PLO whom, he said, was both a "revolution" and a "state" that pays salaries to its employees. Gerard Shalian[10] , a scholar of national liberation movements, described this situation as unusual. Shalian observed that the PLO differs from any other national liberation movement in that it was not financed by its supporters, but rather paid them to support it. This practice continues today and the PA pays salaries to people who are not part of its administration. Inside the PA administration the number of directors and vice-directors is inflated. According to PLC's special Audit Committee, 87.5% of the employees in the Ministry of Information are directors.

Government Companies Outside of PA's Budget

Corporations controlled by the central government are not included in, and therefore do not report to, the PA budget. PLC members have strongly protested against the ongoing anomaly whereby major government companies are not included in the PA's budget, do not transfer money to the budget and are not inspected by the PLC. These companies include the Petroleum Authority, the cigarette monopoly UNIPAL, and the cement import company.[11]

Deficient Tax Collection

Sources in the Palestinian Finance Ministry reported that there is already a $600 million deficit in the PA's budget for 1998, adding that the PA never collected 60% of its prospective income from critical sources, such as taxes from the oil and cement companies.[12] One of the primary sources of PA deficit can be attributed to its system of tax collection.[13]

According to the Palestinian Ministry of Finance, the taxes paid on oil in the first third of 1998 amounted to $50 million.[14] If this level of taxation continued for the remainder of the year--up to $150 million in taxes should be added to the PA income. However, a contradictory report appeared in the Jerusalem Times, October 2, 1998, where Rashid claimed that petroleum taxes have increased 11 fold since the creation of the petroleum authority, controlled by Rashid, as the sole importer of oil, to a total of $2.5 million. The monitoring committee of the PLC expressed concern that taxes from the petroleum authority were not reaching the PA treasury.[15] In addition, an economic symposium held in Ramallah estimated that the yearly-unpaid tax revenues from the cement import reached $45 million.[16]

Income tax payments received from conglomerates such as PADICO are minimal. In 1995 PADICO paid $22,261 (7.5% of its income), and in 1996 $12,793 (0.5% of its income) in taxes. No information about its tax payments is available for the years 1997 or 1998, but it is clear from the 1995 and 1996 figures that the company paid minimal taxes and while revenues increased, the company's tax payments decreased.[17] Proper tax collection could have covered some of the PA's budget deficit.

Conclusions

The monopolistic and corrupt practices of the PA are known to the US administration. Former American Counsel General in Jerusalem, Edward Abington, stated in a February 1997 speech to the PLC that, "all of these problems may be part of the growing pains of a new democracy, but left untreated they represent a serious threat to the eventual establishment of a truly representational government for the Palestinians."[18] Nevertheless, the international community increased its donations to more than $750 million in 1998, pledging $3 billion over the next five years, including $400 million from the US.[19]

The premises accompanying the creation of the PA and the building of its economy have not been validated and the hopes remain unfulfilled. The PA has not built a free market economy. Instead, Arafat and his coterie of unofficial economic 'advisors,' in the words of David Hirst, "have thrown up a ramshackle, nepotistic edifice of monopoly, racketeering and naked extortion, which merely enriches them as it further impoverishes the society at large."[20]

The economic practices of the PA extend beyond corruption and inefficiency. They are also a political problem, and a form of repression. A free market is crucial to encouraging democracy. It allows wealth to be accumulated, independent and diffused sources of power to come into being, and society to focus on individual fulfillment. These are the building blocks of civil society. The PA's policies accomplish the opposite. The PA's failure to establish a free market economy in the territories under its rule reflects the emergence of a non-democratic rule.This development bears implications that exceed the issue of US foreign aid and concerns the US's attitude towards the peace process.

Stacey Lakind is a Research Associate with MEMRI. Yigal Carmon is the President of MEMRI.


[1] PECDAR monthly activities report for November 1997.

[2] Palestinian Authority Ministry of Finance/ Budget Department.

[3] Michael Kelly, Editor of The National Journal, writing in The Washington Post, December 2, 1998. A29.

[4] "Reshuffling in the Palestinian Authority Cabinet," by Yigal Carmon and Yotam Feldner, MEMRI's Inquiry & Analysis No. 2, August 7, 1998.

[5] In one case, a customs exemption was granted to a 75 year old Mukhtar (village chief) who lives in Jordan for a 1996 Jaguar. In fact, the car was used by a relative of the Minister of Civil Affairs.

[6] The Financial Times, December 2, 1998.

[7] Ha'aretz, April 3, 1996.

[8] Al-Risala, December 17, 1998.

[9] The Israeli researcher Meron Benbenisti has examined the issue of excessive employees in the PA government. According to him, the PA employs scores of Director-Generals and Deputy Director Generals in addition to its employees in seven security apparatuses, all amounting to an unusually high number of citizens on its monthly payroll. See: Ha'aretz, January 23, 1997.

[10] "On Guerilla," ed. Maj.Gen. (Res.) Y. Harkavi. Tel Aviv, 1971, p. 321.

[11] The Jerusalem Times, October 2, 1998; Al-Risala, July 2, 1998.

[12] Al-Quds, June 13, 1998.

[13] In August of 1998, the Palestinian Human Rights Monitoring Group issued a report citing numerous violations in the collection of taxes such as the method by which tax amounts were determined, embezzlement by officials and illegally assessed VAT-- never reported to the PA. www.phrmg.org/aug98/penalties.html

[14] Oil tax revenue figures are from the Palestinian Ministry of Finance/ Budget Dept. Yossi Antwerg, Director General of Dor oil company, which has an exclusive contract with the PA, told Ha'aretz (April 3, 1996) investigative reporters that Dor's annual sales to the PA were $150 million.

[15] Jerusalem Times, October 2, 1998.

[16] Al-Ayyam, October 13, 1998.No information is available about other monopolies such as the Rashid's cigarettes company or flour company.

[17] Based on PADICO's yearly reports for 1995 and 1996 respectively.

[18] Remarks by Edward Abington, Counsel General of the US, at the USAID-Palestinian Legislative Council Signing Ceremony, February 4, 1997.

[19] Forward, December 11, 1998.

[20] David Hirst, The Guardian, "Shameless in Gaza", April 27, 1997, p. T8.