The Palestinian Debt Catastrophe: From Government Debt to Employee Debt, with Citizens as the Victims

Dr. Saeed Sabry / International Economic Advisor - Member of the Board of Directors of the International Digital Transformation Authority - Dubai

"The Palestinian economy is facing a financial catastrophe and mounting debts that threaten structural collapse." With this stark warning, the World Bank has once again sounded the alarm, revealing an unprecedented financial fragility in the Palestinian system. However, behind the rhetoric of the reports lies a crisis more immediate to the Palestinian public: the debt crisis of public sector employees, who find themselves trapped in a vicious cycle of truncated salaries and accumulating loans, in the absence of a coherent economic vision.
First: More than 135,000 employees are on the brink of collapse.
The number of public sector employees in Palestine is between 135,000 and 140,000, divided between civilians in ministries and official institutions and military personnel in the security services. These employees constitute a vital social segment, representing not only the government workforce but also the primary driver of local demand in the Palestinian market.
For more than two years, these employees have been receiving partial and irregular salaries, ranging from 50% to 80% of their original salary. This ongoing crisis has forced thousands of them to resort to banks to cover their daily expenses, transforming their salaries from a means of subsistence into a mere monthly debt service installment.
Second: From state debt to employee debt
It is estimated that between 70% and 80% of public sector employees have direct financial obligations to banks, including personal and housing loans, credit cards, and overdrafts. Of the approximately 135,000 employees, more than 100,000 are estimated to have active loans whose monthly payments are deducted from their salaries, often amounting to less than half of the salary due.
Total employee debts to banks are estimated at more than $1.8 billion (equivalent to approximately NIS 6.5 billion).
In contrast, the Ministry of Finance is estimated to owe these employees more than NIS 7.5 to 8 billion in unpaid salaries over the past three years, as a result of the partial salary payment policy since 2021.
In this context, it's worth noting that the Palestinian government itself has borrowed approximately 9 billion shekels from local banks over the past few years to cover current expenses and the chronic fiscal deficit. This leaves the banking sector today caught between a double debt: debt owed by the government and debt owed by its employees.
Third: Extended effects on the economy and society
The effects of this crisis do not stop at the individual employee, but extend to the overall economy and Palestinian society as a whole:
● The decline in purchasing power led to a recession in the local market and a decline in sales in the commercial and service sectors, which forced many small businesses to close.
● The private sector is suffering a sharp slowdown due to the erosion of domestic demand, which is causing job losses and freezing investment.
● The informal economy is expanding with increasing borrowing from outside the banking system and the absence of oversight, which weakens the government's ability to manage financial resources.
● Increased social and psychological tension among employees due to financial pressures, which impacts family relationships and the level of trust in public institutions.
Fourth: What is required is to rescue, not postpone the crisis.
The continuation of the crisis without radical solutions will lead to gradual economic and social disintegration. What we need today is a comprehensive national rescue plan that goes beyond injecting funds, but also includes profound structural reforms:
● Rescheduling employee debts in coordination with banks, freezing interest for a transitional period, and ensuring that salary deductions do not exceed a reasonable percentage that allows for a decent living.
● Re-disbursing salaries in full through a transparent and stable mechanism that ensures regular financial flows and prevents the accumulation of arrears.
● Review the structure of public spending, reduce unnecessary expenditures, and direct resources towards basic and productive services.
● Political pressure to stop Israeli deductions from clearance funds, which drain a large portion of public revenues without legal justification.
● Adopting an "import substitution" policy as a tool to boost local production, by supporting national industries, encouraging local agriculture and food, and directing government purchases toward Palestinian products, thus enhancing self-sufficiency and reducing dependence on foreign currencies.
● Expanding job opportunities in the digital and entrepreneurial economy, and enabling youth to create sustainable self-employment opportunities outside of traditional government employment.
In this context, it must be emphasized that the foreign aid the Palestinian government receives from the European Union and some Arab countries, while important in providing temporary liquidity, is no longer sufficient and incapable of addressing the root causes of the crisis. It barely covers some short-term obligations, but it does not change the fact that the problem is internally structural and requires profound reform in the management of public funds and economic policies.
Conclusion: The citizen should not be the scapegoat.
Continuing to burden citizens—especially public sector employees—with the consequences of a financial crisis they had no hand in creating is unjust and unsustainable. What is required is a more equitable redistribution of burdens, and a recognition that economic reform begins with protecting those who stand at its forefront every day.