The economy of the Palestinian Authority (PA) has arrived at a potentially catastrophic crossroads, one that is unprecedented since the authority’s founding in 1994. One path leads toward prosperity, based on the hope for independence and an end to the Israeli occupation that has been ongoing since 1967. The other leads to a total collapse and the official burial of the dream that the world witnessed as the Israelis and Palestinians entered into their first peace agreement.
The current crisis is not the result of recent events alone but the outcome of many years of accumulated measures taken by the Israeli occupation, gradually making the PA less and less capable of independently handling its economy.
Most improvement plans devised by Palestinian officials or economists to advance the Palestinian economy yielded promising results, but only for a short time. Without dismantling the obstacles and hurdles of the Israeli occupation and the restrictions it imposes on Palestinian economic life, the Palestinians will continue to face a deteriorating economy that is likely headed for the abyss.
Even when the PA implemented temporary relief measures to enhance its economic status and financial capacity, these efforts reached a dead end with the series of decisions taken by Israel’s hard-line right-wing minister of finance, Bezalel Smotrich.
In April last year, Smotrich ordered that Israel withhold the tax revenue Israel collects on every business deal between Palestinians and Israelis rather than transferring those funds to the PA as had been agreed upon. This move has exacerbated the PA’s financial crisis. Last month the authority began to pay its public servants only 50% of their salaries as opposed to the 70% it had paid them when Israel initiated the gradual takeover of Palestinian funds following the October 7 attacks.
As of May 2025, the PA’s debts totaled approximately $10.2 billion, comprising both external and domestic debts. The PA’s public debts reached $6.4 billion, including $3 billion for the pension fund, $1.5 billion for the private sector, and $1.47 billion in unpaid salaries. Not a single Palestinian official can answer when or whether the PA can settle these debts.
A recent report published by the World Bank painted a gloomy picture of the PA’s financial status, warning of serious economic consequences. Palestinian officials blame their economic crisis on the Israeli occupation in general and the ongoing hostilities in the Gaza Strip in particular. They argue that the worsening financial crisis results from the ongoing war in the Gaza Strip and the severe contraction of the Palestinian economy.
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The PA’s financial difficulties are compounded by factors like Israel’s withholding of clearance revenues and the loss of income from Palestinian workers in Israel. These issues, along with movement restrictions, have led to increased unemployment, poverty, and food insecurity.
According to the Palestinian Monetary Authority, the budget deficit is projected to be around 4.9% of the country’s gross domestic product in 2025, with public debt reaching approximately 69% of the GDP. The sharp decline in foreign aid, the indifference of the oil-rich Arab countries toward the PA’s financial crisis, and the Israeli measures have all worsened the situation.
As such, the PA’s only recent maneuver has been to resort to domestic financing sources, including borrowing from local banks and deferring payments to the public and private sectors. This has led to an overreliance on domestic financing, which threatens the financial stability of the Palestinian banking sector.
In its latest recommendations, the World Bank called on the PA to adopt a series of fiscal reforms aimed at minimizing the severe financial pressures it faces. Chief among the recommendations is the need for the PA to implement a clear and structured reform program to bring current spending under control, particularly regarding salaries and bonuses.
The World Bank also emphasized the importance of improving the tax collection system, urging the PA to increase efficiency without undermining economic activity. Additionally, it stressed the importance of greater transparency in managing public debt, particularly as borrowing and financial obligations continue to grow. Lastly, the World Bank recommended that the PA work to reschedule its outstanding arrears, with a particular focus on debts owed to the pension fund.
The Israeli decision to suspend banking agreements has put the Palestinian financial system at risk. The inability to transfer surplus shekels and the restrictions on cross-border banking operations portend a stifling liquidity crisis. If this issue is not addressed seriously, the local market could experience a banking crisis that threatens the economic stability of individuals and businesses alike.
The PA’s private sector represents more than two-thirds of jobs in the West Bank. It too faces an existential crisis due to declining demand, tightening import restrictions, restricted movement for Palestinians within the West Bank—resulting from the hundreds of Israeli army checkpoints—and rising operating costs. These factors would threaten the viability of any economy, not only that of the Palestinians.
Palestinian economists agree that their financial dependency on Israel leaves their economy exposed to external factors that, in some cases, dictate their decisions. The local industries, especially agriculture and manufacturing, are fragile and make it hard for the Palestinians to rely on their resources. The Palestinians are also denied the right to control their borders and resources, as any import or export needs to be cleared by the Israeli authorities, directly or indirectly, since Israel maintains the overriding control of the occupied Palestinian territories.
When Israel dictates lifting the movement restrictions within the West Bank, allowing free trade with the outside world (primarily with neighboring countries like Jordan), and taking other steps needed to improve the Palestinian economy, one can understand why the bulk of blame goes to Israel and not to anyone else, not even the PA, which Palestinian public perceives as a paralyzed body with its hands bound in Israeli handcuffs.
We must take the initiative and not wait for solutions from others.
Mazen Sinokrot, a leading Palestinian entrepreneur and businessman in Ramallah, admits that Israel’s measures are intolerable and yet argues that the Palestinians aren’t powerless. In a recent article, Sinokrot wrote, “We must take the initiative and not wait for solutions from others.”
The solutions he referred to include creating a follow-up mechanism and establishing a national economic platform comprising the Palestine Monetary Authority, the Ministry of Finance, the Association of Banks, private sector institutions, and academic experts from universities and research institutes.
Sinokrot argued that there would be no harm in seeking international assistance to formulate monetary and financial policies that mitigate the effects of this crisis and implement structural reforms to encourage the circulation of funds in economic activity, rather than freezing them in the banking system. In his view, such a move would help restore the balance between deposits and demand for financing, prevent the inflationary effects resulting from excess liquidity in the Israeli shekel, and thus enhance the stability of the banking sector and its effectiveness in supporting the real economy.
He also suggested promoting the use of other currencies circulating in the Palestinian market, such as the Jordanian dinar and the US dollar, by encouraging the public to adopt electronic payment systems through the transition to digital platforms and educating them about the importance of digital payments and their positive long-term impact on society.