Preventing Collapse: The Palestinian Authority's Financial Survival Equation

In a time when public debt levels are rising and pressures on government budgets are increasing worldwide, dealing with financial crises has become a familiar reality for many countries. However, managing public finances for the Palestinian Authority goes beyond traditional economic policies to become a more complex equation related to maintaining institutional survival under exceptional political and economic conditions.

The Palestinian Authority operates in an environment that, in other contexts, would have led to complete financial and economic collapse. Yet, at the same time, it lacks the traditional tools that governments usually resort to in times of crisis; there is no national currency that can be devalued, no full control over the most important sources of revenue, and no ability to access international capital markets. In such a context, fiscal policy transforms into a delicate balancing act between limited resources and the primary goal of preventing the erosion of public institutions.

While governments in sovereign states are measured by their ability to ensure financial stability, the Palestinian Authority is measured by its ability to pay parts of its employees' salaries on time, maintain essential services such as health and education, and preserve a fragile social contract with citizens.

Even before the outbreak of the war in Gaza in October 2023, the Palestinian Authority faced significant difficulties in meeting its financial obligations. The war exacerbated these challenges due to a severe economic contraction and a decline in local revenues, in addition to increasing restrictions on the movement of individuals, goods, and capital.

However, the fundamental cause of the Palestinian financial crisis is not technical as much as it is political. Israel has continued to withhold an estimated $4.5 billion in accumulated Palestinian clearance funds, which are taxes and customs collected by Israel on behalf of the Palestinian Authority according to the Paris Economic Protocol. These revenues constitute about two-thirds of the Authority's monthly income, making any disruption to them a direct blow to financial stability. Israel has completely stopped transferring clearance funds since May 2025, leading the Palestinian Minister of Finance to recently describe this situation as an “existential threat” to the Palestinian Authority.

The risks are further complicated by repeated threats to sever correspondent banking relations between Israeli and Palestinian banks, which could expose the entire Palestinian financial system to the risk of paralysis and disruption of essential commercial activities.

As a result, over the past two years, the Palestinian Authority has only been able to cover about 60 percent of its monthly salary bill. Public debt has also risen to unprecedented levels, with arrears accumulating for public employees and private sector suppliers. This has led to a weakening of domestic consumption, a decline in private sector liquidity, and increased pressure on the banking sector.

If these dynamics continue without swift intervention, they could lead to a vicious cycle of economic deterioration and institutional disintegration. Nevertheless, practical steps can still be taken to reduce the risks of collapse.

First, regional and international diplomatic efforts must focus on the immediate release of the withheld clearance funds. The primary problem in Palestinian public finance is not a lack of technical solutions as much as it is the politicization of revenue flows. Even a partial release of these funds, along with an extension of correspondent banking relations, could significantly alleviate the severity of the financial crisis and reduce the risks of institutional collapse.

Second, emergency funding from international donors and multilateral financial institutions should be expanded to provide short-term liquidity support that ensures the continued provision of essential services and gives the Palestinian government time to implement necessary financial and economic reforms.

In the medium term, there is a need to deepen Palestine's integration into the international financial system, by enhancing cooperation with institutions such as the World Bank, the International Monetary Fund, and the European Bank for Reconstruction and Development. Even in the absence of full sovereignty, important international precedents exist. A country like Kosovo, despite the specificity of its political situation, managed to become a member of key international financial institutions, which allowed it access to innovative financing tools and contributed to strengthening its economic resilience.

Restructuring part of the domestic debt could also help alleviate the burden of high debt service that drains a significant portion of limited monthly revenues. By converting part of these debts into long-term bonds supported by appropriate guarantee mechanisms, liquidity pressures can be eased, and resources redirected towards essential expenditures.

However, the most important question remains whether the Palestinian Authority is capable of transforming this crisis from mere survival management into an opportunity to launch structural reforms that enhance financial sustainability. Crisis management alone is not enough. Long-term financial stability requires reforms in public financial management, including expanding the tax base, rationalizing expenditures, and encouraging the growth of private sector investments to reduce reliance on politically volatile funding sources.

In the Palestinian case, preventing collapse becomes an end in itself. But it is also a prerequisite for any future path towards economic recovery and building resilient institutions in a highly complex political and economic environment.