BICOM

What happened: Israeli and Palestinian officials reached a secret deal last week to alleviate a seven-month long financial crisis in the Palestinian Authority, with a report yesterday in the Times of Israel indicating that it was the PA who ultimately softened its demands after refusing to accepting tax payments held by Israel.

• The crisis dates back February and the implementation of a new Israeli anti-terrorism law that involved deducting $11m per month from the amount in taxes it transfers to the PA, due to the Palestinian practice of making regular support payments to Palestinians convicted of terrorist offences and their families.
• The PA in response refused to accept any tax transfers from Israel – totalling $180m per month, the bulk of its budget – throwing the West Bank into economic peril.
• The compromise deal reached a few days ago involves $556m in fuel import taxes held by Israel: the PA agreed to accept fuel import taxes accrued by Israel over the past seven months in addition to an advance for the coming few months.

Context: As part of the economic annex to the 1994 Oslo Peace Accords (called the Paris Protocol), Israel and the PA are connected economically by a joint customs union. Every month Israel transfers to the PA tax revenues – including on fuel imports – it collects on goods entering the West Bank and Gaza Strip.

• Initial reports last week based on public statements by Palestinian officials indicated that Israel had agreed to transfer collection of the fuel taxes directly to the PA, which would have effectively constituted a tax break for the PA.
• Two sources quoted by the Times of Israel, however, refuted these reports and said Israel had only agreed to temporarily wave the fuel import charges for the next few months.
• The PA has been thrown into financial crisis due to its refusal to accept tax transfers: for the past seven months government austerity measures have been implemented, banks have strained under increased borrowing, and PA civil servants (including over 30,000 security forces personnel) have not received full salaries. Israeli security officials warned of increased unrest in the West Bank if the economic crisis was not resolved.

Looking Ahead: Despite competing narratives over the exact details of the deal, the end result is a win for both sides. The agreement allows Israel a mechanism to move money into the PA and maintain stability, while the Palestinians can maintain the position that they are upholding their principled stand against Israel’s new anti-terror law. PA officials have already indicated they will pay 110 percent of all government salaries next month. The deal is set to last beyond the Israeli election on 17 September and the subsequent coalition negotiations, after which a more permanent solution – including perhaps a re-negotiation of the Paris Protocol – will be required.