In September 2012, declining living standards ignited a firestorm of street protests and strikes in the West Bank. The immediate spark was a sharp increase in fuel prices, alongside an increase in the value-added tax (VAT) rate. It seems that the protesters had a message for Palestinian Authority (PA) policymakers: It is no longer acceptable to blame all of Palestine’s economic woes on Israeli occupation. Demonstrators were demanding that the PA manage the economy better, the occupation notwithstanding.

Palestinians have long questioned how much of their suffering is due to occupation and how much to PA mismanagement and corruption. It is a reflection of their puzzlement that their frustration erupted so fiercely, only for calm to return a few days later, and just as suddenly. What has caused the popular discontent? The reasons are four.

No Jobs, Low Pay

The first problem is lack of jobs. Over the last four years, the unemployment rate in the West Bank has hovered around 17.5 percent, rising to 20 percent in the first quarter of 2012. Economic growth created 108,000 jobs in the Palestinian territories during 2006-2010. But there are simply more entrants to the job market than there are new jobs: the labor force expanded at an average annual rate of 3.7 percent, while the rate of job growth was 3.1 percent. [1] Unemployment among people aged 15-24 is also far higher than the overall average, approaching 40 percent. High as they are, these rates do not reflect the full reality, as the technical definitions of “unemployed” and “labor force” exclude huge numbers of people who are actually unemployed or underemployed.

Second has been the decline in real wages, or nominal wages adjusted by the inflation rate. Real wages in the Palestinian territories (excluding the pay of workers in Israel and Jewish settlements) fell by 11.4 percent during the period 2006-2010. [2] That average masks a big regional difference: The decline was 3.3 percent in the West Bank and over 30 percent in Gaza. Across the Palestinian territories in those years, nominal wages grew by 5.7 percent while the inflation rate was almost 20 percent. The trend continued in 2011, when real wages dropped by over 4 percent, and by much higher rates in the governorates of Tulkarm, Qalqilya and Jerusalem. Real wages rose slightly in the first half of 2012, by 1.6 percent on average, but in two governorates, Tulkarm and Ramallah, they continued to fall (by 5.4 percent and 1 percent, respectively).

Rising Prices, Delayed Salaries

The third problem is inflation. The most reliable measure thereof is the Consumer Price Index (CPI), composed of the prices of 964 goods and services consumed by an average household. Each item in the index is weighted according to the proportion takes up of the average consumer’s basket. The items, as well as their respective weights, are determined on the basis of the regular household surveys. (Items and weights are different in the West Bank and Gaza.) According to surveys, the average West Bank household spends 38.82 percent of its income on food and drink, meaning that inflation of those prices is acutely felt.

Between January 2011 and August 2012, the CPI in the West Bank increased by a total of more than 8 percent. This considerable climb must have adversely affected household purchasing power. There are good reasons to believe that this average increase masks marked regional variation, with prices increasing at far higher rates than average in cities like Ramallah, Nablus and Hebron.

Much of the relentless rise in food prices is doubtless attributable to the same factors that have caused food price inflation globally. Since the summer of 2010, however, the UN Food and Agriculture Organization has tracked a 34 percent decline in the global food price index, and there has been no such drop in the West Bank. It appears that Palestinian prices are sensitive to inflationary global forces, but not deflationary ones. This phenomenon reflects structural defects in West Bank markets and the existence of powerful monopolistic forces.

The 1994 Paris Protocol between Israel and the PLO, part of Oslo accords, is a major culprit. The Protocol specifies that the value-added tax rate in the West Bank and Gaza may not be more than 2 percentage points lower than in Israel. It also dictates that the price of gasoline may not be lower than  15 percent of prices in Israel. Fuel prices and VAT rates, of course, affect the prices of all other goods and services — in this case driving them up.

The Paris Protocol influences prices in the Palestinian territories indirectly as well. Most Palestinian imports are Israeli-made or re-exported from Israel. Their prices in the Palestinian territories are pushed upward by Israel’s high labor, transport and other costs, typical of rich countries, as well as Israeli protections on agricultural products. Finally, there is the inflationary pressure exerted by the numerous obstacles that Israel puts in the way of the movement of goods and people in the West Bank. Together, these factors mean that food prices in the West Bank are often closer to Israeli prices than to prices in neighboring Jordan (bread is an exception, since unlike the PA the Jordanian government subsidizes that staple heavily).

Fuel prices and VAT increases lit the fuse of the September 2011 protests in the West Bank. Toward the end of the preceding month, the price of a liter of 95-octane gasoline in Israel (and thus, as per the Paris Protocol, the West Bank) increased by 56 agoras to 8.26 shekels. The increase was aimed mainly at letting consumers, rather than government coffers, bear the burden of global oil price increases: A study published by the Taub Center in Israel pointed out that while global gas prices (in shekels) had remained fairly constant since 2008, the Israeli price had gone up by 1.2 shekels per liter since then. Of this increase, 34 agoras represented hikes in refining, transportation and distribution profits, while the remaining 88 agoras went to the government in the form of higher taxes. The study confirmed that Israel has the sixth highest gasoline taxes in the Western world. [3]

Gas prices in Israel directly affect prices in the Palestinian territories. The Israeli government collects taxes on the petroleum products sold to the Palestinians, and transfers the collected money back to the PA through a “clearance process” mandated by the Paris Protocol. The PA, in turn, refunds a small percentage of this revenue to Palestinian consumers by “subsidizing” petroleum product prices to make them slightly lower than those in Israel. Israel reimbursed the PA for $457 million in petroleum taxes in 2011, an amount accounting for over 20 percent of domestic revenue in the PA’s budget.

Responding to an unexpected budget deficit of 30 million shekels, in 2012 the Israeli government decided to raise the VAT rate from 16 to 17 percent. The increase is expected to generate 4 billion shekels in annual revenue. [4] And since the Paris Protocol stipulates that the VAT rate in the Palestinian territories is tied to Israel’s, the PA initially also raised the rate by a full percentage point, from 14.5 to 15.5 percent. The VAT is a regressive tax, imposed uniformly on necessary as well as luxury goods and services, and thus borne disproportionately by the poor, who must allocate a higher percentage of their income to consumption of staples. VAT revenues account for approximately one third of the PA’s domestic revenues (before foreign aid). It was estimated that the full percentage point increase in the VAT would generate an extra 160 million shekels for the budget — which would, in turn, go a long way toward reducing the PA’s recurrent deficit of $464 million in 2011 (even after taking foreign aid into account).

Taken together, the petroleum product taxes and VAT revenues account for about one half of the PA’s domestic revenues. Given that about 55 percent of the PA’s recurrent expenditures go to payroll, it is tempting to draw a straight line between these two taxes and the fourth cause of popular’ discontent in the West Bank: the PA’s inability to pay its employees’ salaries on time. It is not only the 154,000 PA employees and their families who suffer from the uncertainty. There are also 12,500 retirees reliant on pensions and social welfare recipients dependent on disbursements. And then there is a long list of shopkeepers, landlords, traders and lenders who rely for their daily bread on the purchases and payments of PA employees.

In 2006 and the first half of 2007, there was an almost permanent halt in payment of salaries and pensions, due directly to Israel’s decision to withhold the taxes it collects on behalf of the PA. The payments only started flowing again in June 2007, thanks to over 1 billion euros in European aid during 2008–2011 (via the so-called PEGASE mechanism), 65 percent of which went to salaries, pensions and arrears. The PA was able to pay salaries regularly for the next three and a half years. But the interruptions appeared once more in June 2012 and intensified the following month. The renewed crisis was not, this time, due to Israel’s withholding of clearance monies but to the tapering-off of foreign aid. But in November 2012, following President Mahmoud Abbas’ successful application to the UN for member observer status, Israel once again announced that it will stop transferring the tax revenue.

The PA’s Response

The intensity of the demonstrations in September 2012 came as a surprise to most PA officials. The demonstrators harshly criticized the appointed premier of the West Bank PA, Salam Fayyad, calling upon his government to resign using the familiar slogans of Tahrir Square and other loci of Arab revolt. It was a rare occasion when the anger of Palestinian protesters was not directed primarily at Israel.

Taken aback, the Fayyad administration acted fast on three fronts. First, it reduced the VAT increase to half a percentage point, so that the new rate became 15 instead of 15.5 percent. The PA canceled the announced price increases in diesel, kerosene and cooking gas, bringing the prices back to their August levels. The retreat was not Fayyad’s first. Under strong pressure from businessmen the preceding February, his administration had backed away from implementation of new tax brackets decreed weeks earlier. The top income and corporate tax rate was cut from 30 to 20 percent. Pragmatic as they may be, the frequent reversals reflect poor preparation of policy decisions, as well as Fayyad’s awareness of his government’s shaky legitimacy.

Second, the PA fast-tracked minimum wage legislation, which had been promised since the labor law was issued in 2000, but was held up in committee. The labor minister convinced committee members to accept a compromise — a minimum monthly wage of 1,450 shekels — that the Council of Ministers endorsed on October 9. The Palestine General Federation of Trade Unions protested the decision outside the premier’s office, saying the wage is still too low. Many experts, however, question the PA’s ability to enforce even this legislation in the West Bank, let alone in Gaza. The Palestine Economic Policy Research Institute has calculated that, if properly carried out, the decree will increase the wage bill in the Palestinian territories by 945 million shekels.

Third, in an attempt to control prices, the Ministry of National Economy undertook to publish price ceilings on certain staples, vowing to prosecute shopkeepers who exceeded them. The Ministry abolished exclusive import contracts and franchise agreements in order to increase competition. Merchants protested, however, and many observers thought the price control measures were impractical. They were quietly but firmly abandoned.

A Short-Lived Revolt?

Thus, remedial steps taken by the PA are thus far from sufficient to stop the deterioration in living standards. The PA faces a dilemma because remedying one cause of the discontent might accentuate another. Lowering the VAT and petroleum prices, for example, is likely to reduce revenues and thus aggravate the delays in paying public-sector salaries and pensions. In September 2012 hardly anyone believed that the PA’s measures were adequate, yet the angry protesters vanished from the streets as quickly as they had appeared.

Palestinians in the West Bank are fully aware of the constriction of the PA’s room for policy maneuver, which some might describe as verging on impotence. Yet most remain unconvinced by the calls of smaller political groups to dissolve the PA or launch a third intifada. No matter how deep their dissatisfaction, their will to demonstrate against the PA is therefore limited. Many of the September 2012 demonstrators, indeed, may have suspected that they were being used by the wing of Fatah that has opposed Fayyad’s government from the start. People close to Fayyad certainly claimed that such manipulation was at work. It also seems that Fatah activists worried that the demonstrations might get out of hand and acquire their own momentum. Even Fatah supporters who actively participated in and encouraged the demonstrations at the beginning had a change of heart just a few days later.

Then there was the “shaming” factor. The Arab and local media covered the demonstrations in the West Bank intensively. But the talk shows often adopted a tone of implicit condemnation, scolding the Palestinians for demanding bread rather than the supposedly nobler goal of freedom from occupation.

The question nonetheless remains: How much longer will Palestinians in the West Bank tolerate worsening living conditions, with the PA teetering permanently on the edge of bankruptcy, even as Israel maintains its continuous siege?

Endnotes

[1] Palestine Economic Policy Research Institute, Who Shared the Fruits of Growth in the Palestinian Economy, 2006–2010? (Ramallah, 2012).
[2] Ibid.
[3] Haaretz, August 30, 2012.
[4] Palestine Economic Policy Research Institute, Economic and Social Monitor 29 (2012), p. 24.

How to cite this article:

Numan Kanafani "The Cost of Living Crisis in the West Bank," Middle East Report 265 (Winter 2012).
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