What the issue is…
The Palestinian Authority (PA) had a total budget deficit of $1.26 billion in 2021 according to a report issued by the World Bank. There is a combination of internal and external factors that have led to this deficit, such as the considerable decrease of international aid supply in recent years, Israel’s decision to withhold a percentage of the tax clearance revenue that it collects on behalf of the PA, and the increasingly insufficient public sector in the West Bank and the Gaza Strip. The main focus of this article, however, is to shed light on how smuggling is potentially contributing to this large budget deficit.
Why the issue exists…
Signed on September 13, 1993, the Oslo Accords divided the West Bank into three separate administrative areas: A, B, and C. While the PA has control over Area A, it shares administrative control over Area B with Israel. Area C, on the other hand, which accounts for roughly 60 percent of the West Bank, is fully controlled by Israel. Less than a year after signing the Oslo Accords, the two sides signed the Protocol on Economic Relations (PER), which gave Israel the authority to tax imports to the West Bank at a rate of 16 percent on behalf of the PA. Palestinian merchants are then required to pay an income tax of up to 15 percent on their imported products. To avoid being taxed at a rate that can roughly reach 30 percent on imported goods, many merchants in the West Bank have turned to smuggling to reduce the cost of their products and make more profit.
Given that the PA does not have full autonomy over the majority of the land within its territory, smuggling routes that link Area A to the rest of the West Bank are extremely difficult to track. This has incentivized some of the local merchants to convert Area C into a transit hub for smuggled goods. These smuggled goods cover various economic sectors, such as cars, fuel, construction, and agriculture. Estimates show that 40 percent of all imported goods in the West Bank were smuggled between 2015 and 2017, and roughly 30 percent of Palestinian merchants only sell smuggled goods. In 2018, undersecretary of the Palestinian Ministry of Telecom and Information Technology, Suleiman al-Zuhairi, stated that smuggling Israeli SIM cards to the West Bank alone has cost the Palestinian economy an estimate of $25 million a year in tax revenue loss. While there is no precise data that reflects the percentage of the budget deficit that smuggling accounts for, it is evident that the large volume of untaxed imports in the West Bank is very likely to have dire consequences on the economy.
How to move forward…
Addressing the budget deficit will require the PA to have complete authority over the points of exit and entry of its territorial land. Local merchants also need to be provided with tax incentives that will ensure their ability to make reasonable profit while selling their products at competitive prices without having to turn to smuggling. This objective cannot be met, however, without changing the provisions of the Oslo Accords and PER in a way that will ensure the Palestinians’ full right to self-governance.
The Oslo Accords and PER have evidently been standing as roadblocks in the way of realizing true Palestinian independence, as can be seen with their direct link to smuggling and the PA budget deficit. Therefore, the PA will need to apply political pressure on Israel for the ultimate purpose of revising these two agreements in a way that will provide the Palestinians with absolute control over their territorial land and ensure the development of a Palestinian economy that is not dependent on Israel. It is clear that Israel’s continuous expansion of illegal settlements on occupied Palestinian land directly violates the provisions of the Oslo Accords given that the agreement required Israel to gradually retreat from Area C and hand over control of the designated land to the PA. Therefore, the PA could potentially use international law as an instrument to further its agenda through taking the dispute to the International Court of Justice (ICJ) on the grounds that Israel has perceptibly failed to comply with the Oslo Accords. This should push the international community to place pressure on Israel to act in accordance with the PA demands. It is very important to point out, however, that such an outcome is very unlikely in the foreseeable future considering the historical lack of success that the international community has had over the years in deterring Israel from breaking international law.
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This article was written by an intern at The Jerusalem Fund. The views in this article are those of the author and do not necessarily reflect those of The Jerusalem Fund.
