Dozens of Palestinian companies that do business with the Palestinian Authority are scaling back expansion plans and reducing their budgets because their biggest client can't pay them.
Palestinian Authority's cash crisis bites deep
TEL AVIV // In the wake of the biggest financial crisis faced by the Palestinian Authority, Ibrahim Barham has grown worried about the future of his computer wholesale business.
After all, the companies to which Mr Barham's firm, Safad, distributes products such as laptops and desktop computers have not been paid in months by a major client - the West Bank-based government.
About half of Safad's revenue depends on purchases by the Palestinian Authority, so the government's financial woes are a major blow to its operations. In 2011, client orders have dropped as much as 10 per cent. Revenue is expected to stagnate in 2012 for the second straight year. Furthermore, Safad is freezing recruitment and new investments and halving its marketing costs.
"Our clients are hesitant to participate in government tenders for fear of a long delay in payments, and this is badly affecting our business," said Mr Barham, the 46-year-old founder and chief executive of his Ramallah-based company.
Safad, one of the biggest information technology companies in the West Bank, is hardly alone.
Dozens of Palestinian companies from sectors including technology, construction and pharmaceuticals that do business with the Palestinian Authority are scaling back expansion plans and reducing their budgets because their biggest client can't pay them.
The Palestinian Authority, which is dependent on foreign aid to fill a deficit projected at US$1.1 billion (Dh4bn) in 2011, has blamed its crisis on donors - especially Arab states - failing to provide promised funds. The biggest Arab donors to the Palestinian Authority in recent years have been the UAE, Saudi Arabia and Kuwait.
Israel has also worsened the Palestinian government's financial condition by several times suspending monthly transfers of some US$100 million (Dh368m) in tax revenues that it collects on behalf of the Palestinians and that are mainly used to pay for salaries. The transfers were stopped as punishment for the Palestinian's successful bid for admission to the United Nations' cultural agency Unesco, which was part of a larger effort to gain admission as a state in the world body.
As a result, the Palestinian Authority now owes its suppliers from the private sector more than US$400 million and companies have said the government had more than halved its spending on some private sector goods and services. Additionally, the 150,000-strong staff of the Palestinian Authority - the West Bank's biggest single employer - were also spending less because they have not been paid on time or in full three times in the past year.
While the Palestinian government has owed the private sector similar amounts several times in the past few years, the current crisis is especially acute because most Arab countries are filling the gap, as they have in the past, according to economists.
Analysts said Arab countries were not giving more money to the Palestinian government partly because they were facing their own domestic pressures for financial resources. The Palestinians also face competition for Gulf funds from other Middle East countries in need, such as Tunisia.
For a private sector already stifled by Israeli restrictions on access to land, water, raw materials and export markets, the financial crisis "adds insult to injury," said Samir Abdullah, head of the Palestine Economic Policy Research Institute and an ex-Palestinian minister of planning and labour.
Indeed, it is the Israeli limitations that have made Palestinian companies overwhelmingly reliant on government spending, which has driven the territory's economy in recent years.
Economists said the government's troubles were likely to prompt more corporate losses and shutdowns, spur banks to be reluctant to grant loans to financially strapped firms and turn away private and foreign investors.
But the financial difficulties may also have a wider effect. Palestinian leaders have hoped that the private sector would eventually drive an economic expansion that would bolster their efforts to build a state in the West Bank, Gaza Strip and East Jerusalem.
However, the effects of the government's financial crisis were likely to delay such growth.
"The danger is that more private sector entities will shut down or reduce their investments and employment and not contribute to remove our reliance on donors and on Israel," said Sam Bahour, a prominent Palestinian-American entrepreneur in Ramallah.
Iyad Masrouji, a board member at Masrouji Group, a maker of pharmaceutical products, said his firm has so far failed to get the Palestinian Authority to pay its debt of 15 million shekels (Dh14.3 million) despite efforts to negotiate with officials and publicise the company's plight in the media.
About a fifth of Masrouji's revenue comes from the Palestinian Authority, which has taken as long as 18 months to pay some of the bills to the company, much surpassing the agreed three-month limit. As a result, the company's growth plans - including expanding into new lines such as cancer products - have been on hold for two years.
"We are not reaching our potential and are losing our opportunity," Mr Masrouji said in an interview. He added that the company was mulling cutting its supplies to the Palestinian Authority.
Non-governmental hospitals face similar woes, and some have warned that the financial crisis may have life-threatening consequences.
Tawfiq Nasser, head of Augusta Victoria Hospital, the second-biggest in East Jerusalem, said the Palestinian Authority owes his hospital 33 million shekels (Dh31 million) from referring thousands of patients to the institution but failing to pay for their treatment.
The debts have led the hospital, which depends on the Palestinian Authority for about 85 per cent of its revenue, to pay staff salaries late at least three times in 2011 and partly halt payments to suppliers.
Mr Nasser has also warned that the hospital - a key Palestinian cancer treatment centre - may stop admitting new patients and may run out of some medicines if it does not get paid within weeks.
"It is tormenting because it's me and not [the Palestinian prime minister Salam] Fayyad who has to face a mother of a child with leukaemia and tell her we cannot treat her," said Mr Nasser.
Entrepreneurs said that with the Palestinian Authority's financial troubles and the Israeli restrictions in the West Bank, they were taking a beating from all sides.
"We cannot forecast in the short term because of the government's crisis, but we also cannot forecast in the long term because of the political situation with Israel," said Mr Ibrahim.