Will Palestinian government implement reforms to unlock EU funds?

Welcome back to Al-Monitor Palestine.

In today's edition we look at a mega EU program for the Palestinian Authority that would save the Ramallah-based government from economic ruin. But will the PA implement the political and economic reforms needed to unlock the funds? 

Thanks for reading,
Daoud

Leading this week

Vice-President of the European Commission Kaja Kallas (L) attends a meeting with Prime Minister and Minister of Foreign Affairs of the Palestinian Authority Mohammad Mustafa (R) in Brussels on January 17, 2025. (AFP via Getty Images)

The high-level meeting between Palestinian Prime Minister Mohammad Mustafa, along with his team, and the senior EU officials in Brussels has provided a desperately needed agreement for the Palestinian Authority (PA). Held on April 14 in Luxembourg as part of the High-Level EU-Palestine Political Dialogue, the meeting was co-chaired by Mustafa and EU High Representative for Foreign Affairs and Security Policy Kaja Kallas. It brought together foreign ministers from all 27 EU member states and marked a critical moment for bolstering both political and financial support for the Palestinian government.

Although the 1.6 billion euro ($1.8 billion) three-year package deal announced after the meeting is much less than the 2.7 billion euros ($3.1 billion) the Palestinian leadership had hoped for, analysts believe the agreement has averted a near collapse of the Ramallah-based government. 

What's in the agreement? The EU plan includes 620 million euros ($704 million) directly to the Palestinian coffers, 580 million euros ($659 million) for “economic recovery and resilience” projects on the ground, including 82 million euros to UNRWA, and 400 million euros ($454 million) in low-interest loans to the Palestinian private sector. 

The European deal was finalized after the Palestinian government agreed to key requests from the EU and other international donors. In announcing the agreement, the EU stated that disbursement of most funds to the PA would be conditioned on the government’s "progress on key reforms in fiscal sustainability, democratic governance, private sector development and public infrastructure and services." Critics have accused the PA of being plagued by corruption and bureaucratic inefficiency.

Moayad Afaneh, a senior economic consultant based in Ramallah, told Al-Monitor that with the Palestinian territories experiencing a serious recession, the EU deal gives the Mustafa government some breathing room. 

“The PA has exceeded the borrowing ceiling of $2.5 billion allowed from private banks by having borrowed $2.8 billion, and the government has not been able to pay even 70% of the salaries it has promised military and civilian personnel in addition to having debts to pharmaceutical companies and others,” Afaneh said. For years, the Palestinian government in Ramallah has struggled to meet payroll obligations, frequently slashing public sector salaries by 60-70%.

Afaneh said that the Biden administration had helped by relieving the debt to Jerusalem hospitals, while the Moroccan king has helped resolve the issue of PA funds frozen in Norway.

In July 2022, US President Joe Biden announced $100 million in aid for six east Jerusalem hospitals, calling them “the backbone” of health care for Palestinians. In February 2024, Norway agreed to facilitate the transfer of frozen tax revenues collected by Israel for the PA, offering vital support to the cash-strapped government. The arrangement collapsed in May after Norway recognized Palestine, prompting Israel to halt the transfers. A compromise was later reached, following intervention by Morocco’s King Mohammed VI, allowing the funds to be used to pay off the PA’s electricity debts. 

Afaneh told Al-Monitor that the conditions focus on increasing transparency, cutting the PA budget by 5%, revising school curricula, reducing medical transfers by one billion shekels, capping retirement age and implementing digital governance platforms. The PA has long faced criticism over an inflated budget, largely due to a bloated public sector and debates over raising the retirement age to reduce pension costs. 

Israel has accused Palestinian textbooks of promoting violence against Jews, while Palestinians argue that Israeli demands for curriculum reform would erase their national identity.

Although the United States and EU have similar conditions, the Americans have placed more emphasis on political issues. “While the Americans insist on the Taylor Force Act and other areas that reflect the Israeli requirements, the Europeans are focusing on transparency and other economic means that would allow the government to survive despite the retraction of the GDP in the last 18 months by 28%,” Afaneh told Al-Monitor.

The Taylor Force Act is a US law that bars economic aid to the PA until it ends payments to individuals who commit acts of terrorism and to the families of deceased attackers made through the Palestinian Authority Martyrs Fund.

A source in Ramallah said that Saudi monthly support of $10 million has been stopped for the past three months, as they have conditioned the renewal of their support on the execution by the Palestinian leadership to legislate the position of presidential vice president. 

The Palestinian Central Council is due to meet on April 23 to decide on the process and the election of a vice president.

Al-Monitor has reached out to the Palestinian government for commentary but has not received any response as of this publication.

The monthly Palestinian financial need is NIS 1.35 billion, and at the best of times, the Palestinian revenues from local fees and taxes do not exceed NIS 600 million, Afaneh said, meaning that without external grants or a reduction of public expenses, the government will not be able to survive.

One major need is to recoup the over seven billion shekels of Palestinian monies that the Israeli government has been holding since 2018, when it passed a law demanding the 57 million shekels paid monthly to families of prisoners and those who carry out attacks be rescinded. 

While this would cover NIS 3.8 billion, a further two billion that the Palestinian government transfers to Gazan public service employees and other public costs have also been frozen due to a decision by the Israeli government ever since Oct. 7, 2023. 

A third portion of the seven billion shekels — NIS 1.2 billion — comes from exit fees collected by Israel at the King Hussein Bridge, known also as the Allenby Bridge. Although not governed by any specific law, these funds have been withheld by the current Israeli government without explanation. Travelers exiting via the bridge are charged double the fee compared with those using the exclusive Jordan-Israel crossing, with the additional amount originally established under the Oslo Accords to support the PA. However, Israel has not transferred these funds to the PA.

The Palestinian government has been trying to address four US/Israeli conditions on the release of the 3.8 billion that has been deducted by Israel (at the rate of NIS 53 million a month) due to the 2018 law. These conditions include the change in the way prisoners and families of killed attackers are compensated, the continuation of security cooperation and Abbas more publicly opposing violent attacks. The Palestinian security forces cooperate closely with Israel in terms of intelligence and other means to help reduce the armed attacks against Israel and Israelis.

Palestinian officials maintain they have met all the conditions, but Israeli Finance Minister Bezalel Smotrich has insisted that Israel will wait until 2026 to determine whether the changes are genuine and lasting. He cited concerns that President Abbas’s decision to reform the prisoner payment system may be temporary or tactical, and argued that Israel wants to ensure the policy is fully implemented and not replaced with alternative methods of compensating prisoners’ families.

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