The 2020 General Emergency Budget in Palestine: The Financing Gap

The decision issued as law concerning the general budget emergency for 2020, issued yesterday Thursday dated 9-4-2020, states in its first article that net public revenues and sources of financing amounted to 17,787 million sheqel, and that net revenues amounted to 8,358 million sheqel as of 31-12-2020, and that the value of financing sources amounted to 9,429 million sheqel, stemming from: grants and aid to support the general budget in the amount of 1,509 million sheqel, grants allocated for development expenditures in the amount of 720 million sheqel, in addition to bank financing amounting to 2,160 million sheqel... And after all this external and local bank financing, and in light of net revenues, a large financing gap appeared amounting to 5,040 million sheqel...

Article 6 of the decision by law also indicates that all figures and data relating to 2020 contained in this decision by law are indicative and subject to amendment and updating in light of future developments during the fiscal year.

Although we know that these data are indicative and that adjustments may occur as noted above, we will comment on some of the data and on the indications and signs they contain—our estimates—within the framework of an initial analysis of this emergency budget for 2020.

To begin, regarding the financing gap shown by the budget data above, amounting to 5,040 million dollar, that is approximately one billion Jordanian dinar… what does the emergence of a financing gap of this size mean? Despite all the revenues and external and domestic financing.

We are faced with figures and financial data for an emergency budget related to the Coronavirus pandemic. The financing gap, as customarily defined, is the state's need for cash (a cash deficit in the public treasury), in light of the shortfall of cash revenues realized for the treasury to meet the cash obligations due by the state during the same year only, i.e., 2020. It differs from budget deficits, balance of payments deficits, and from existing public external and domestic debt.

Reading the data in this emergency budget, it appears that net revenues in this emergency budget reached 8,358 million sheqel, a notable decline from total budget revenues realized as of 31-12-2019, which amounted to 11,713 million sheqel. The noticeable decline occurred in the local taxation side, which in the emergency budget amounted to 1,863 million sheqel, whereas the actual taxation realized at the end of 2019 amounted to 4,336 million sheqel. As for clearance (with the Israeli side), it was estimated in the emergency budget at 6,835 million sheqel, while the actual clearance figures realized at the end of 2019 amounted to 7,868 million sheqel.

It is clear that the estimated reduction in local taxation is evidence of a decline in local direct tax yield, coming from income taxes, and indirect taxes, excises, fees and other taxes. This is evidence of a contraction in economic activity in the private sector, the main payer of all these funds and collections, as a result of the stoppage of economic activity during the campaign to combat the spread of the Coronavirus and the lockdown. This decline in revenues, reflected in the emergency budget items in the amount of local revenues—local taxation—which decreased by 2,473 million sheqel, i.e., by more than 57% compared with local taxation for 2019; and net revenues also declined by 3,355 million sheqel, or 29%, compared with net revenues for 2019.

On the other hand, I suspect the Palestinian government has a program of tax adjustments in tax brackets and fees for the emergency period of 2020, which may involve restructuring tax rates and percentages during that period in particular, with expected reductions because the private sector bore heavy losses as a result of the halt in activity for reasons of the campaign to combat the spread of the Coronavirus… and citizens also bore burdens. I also suspect that the suspension of activity in Palestinian economic sectors and their recovery will be prolonged and slow for months and gradual. In addition, the private sector, even to return to gradual activity, will need a long time to generate taxable revenues in this emergency year. However, the government can broaden the taxpayer base and increase their numbers through awareness programs, monitoring, and centralization of public services so that any operator’s activities are dependent on his tax file, and by following up on tax evasion and avoidance matters more effectively. A government plan concerning taxation that was announced in the 2018 budget plan can also be activated, which in one item of the tax restructuring plan gives tax incentives to banks for credit extended by them to pioneering projects.

Regarding clearance, it is clear that its decline is not as sharp as the decline in local taxation, because clearance is taxation collected by the Israeli side, and clearance consists of indirect tax yields and customs on the value of Palestinian trade with foreign countries, which for the most part will be trade with the Israeli side. The decrease in the value of clearance reached about one billion sheqel, a decline of approximately 13%. Therefore, this supports the hypothesis that trade with Israelis and via them will be as before, and will not be negatively affected; rather Palestinian internal and external trade with Israel and via it may increase. Given that the Palestinian government seems inclined to activate imports and stimulate exports better than in 2019, the clearance proceeds will be at their normal levels, perhaps slightly better in my estimation.

As for expenditures and net lending reported in the emergency budget under review, they reached 17,787 million sheqel, an increase over total actual expenditures and net lending realized in 2019, which amounted to 14,092 million sheqel, by 3,695 million sheqel, i.e., an increase of 26%.

Regarding the components of expenditures as shown in the 2020 general emergency budget, salaries were not adjusted or reduced compared with the actual salaries and wages realized in 2019, which amounted to 6,648 million sheqel, whereas salaries and wages in the 2020 emergency budget amounted to 6,881 million sheqel, indicating sustainability in the payment of salaries and wages in 2020; they remain in place.

- As for operating and other transfer expenditures, they increased compared with their actual counterparts in 2019, which amounted to 4,326 million shekels in transfers. Meanwhile these expenditures in the 2020 General Emergency Budget amounted to 5,771 million shekels in transfers, where the transfer expenditures, in which the government provides support to individuals and institutions, increased by approximately 33% compared with the transfer expenditures in 2019 which actually occurred. Consequently, it is clear that the government has a special program of assistance and support for individuals and small institutions, whether cash or in-kind transfers; it is likely that this is through the Ministry of Social Affairs to strengthen its capacity to assist households and individuals and institutions, or through the government's program which will, it seems, disburse assistance and support larger than in 2019 than 2019. Even in operating expenditures, they amounted in the 2020 General Emergency Budget to 2,257 million shekels, an increase over operating expenditures for 2019 that actually materialized, which amounted to 1,274 million shekels, i.e., an increase in 2020 of 77% over 2019...

As for net lending, it amounted to 900 million sheqel in the 2020 emergency budget. It is evident that it is expected that these expenditures, stemming from obligations and expenses of municipal and local institutions toward the Israeli side, will be limited and not paid to the Israeli side when due; consequently, that side will deduct the value of these obligations from the clearance bill due to the Palestinian government, which will reduce revenue by the total of these amounts (900 million sheqel). The net lending actually realized in 2019 amounted to 1,138 million sheqel.

The emergency budget data for 2020 showed a total deficit before financing of 9,429 million sheqel. The financing amount in the 2020 emergency budget reached 4,389 million sheqel, distributed as follows: external financing of 2,229 million sheqel, of which 1,509 million sheqel are grants and aid to support the budget and 720 million sheqel are grants allocated to finance development expenditures; as for domestic financing, it amounted to 2,160 million sheqel, which is financing from local banks. Financing in 2020 increased over financing actually realized in 2019—amounting to 3,090 million sheqel—by 1,299 million sheqel, i.e., an increase of 42%.

The emergency budget data for 2020 showed that after all this external and domestic financing, there remains a large financing gap of 5,040 million sheqel (i.e., about one billion and four hundred million US dollars approximately). This gap will need financing and to be closed during the course of 2020—how?

- The government directs its financing operations to cover deficits and financing gaps either through one of its fiscal policy instruments such as imposing taxes.. to increase its collections for the State Treasury, or by domestic borrowing or external borrowing or obtaining grants and aid.. or through an austerity program for the public sector, in addition to demanding from the Israeli side the withheld funds and other monies due to Palestinian workers employed there.. ...

·       Borrowing from the banking system

- It is clear that the Palestinian government prohibited borrowing from local banks for this year 2020, except in the circumstance of the existence of a financing gap - if any – as provided by Article No. 5 of the emergency budget law for 2020, provided that the balance of debt outstanding as of 31-12-2020 does not exceed what it was on 31-12-2019, except with the approval of the Council of Ministers. It is noteworthy that the balance of public debt (at the end of 2019) amounted to 9,662 million shekels of which an amount of 5,452 million shekels was domestic debt, excluding arrears. As for the balance of public debt as shown at the end of February 2020, it amounted to 9,840 million shekels, i.e., the equivalent of 2,865 million dollars excluding arrears... Therefore, it is possible to borrow and cover the financing gap from the banking system.. However, it appears that public debt figures, whether external or domestic, have increased compared with the 2019 figures.. as we noted above... The task of the government and the responsible centers within it is difficult when it comes to closing the financing gap by borrowing from the banking system, given the increase in debts in this period compared to their balances at the end of 2019, noting that the debts outstanding at the end of 2019 according to the realized actual data of the 2019 budget amounted in total to public debt of 9,662 million shekels of which domestic debt amounted to 5,451 million shekels - of which debt to the banking sector - (1,577 million dollars), and external debt in the amount of 4,210 million shekels (equivalent to 1,218 million US dollars), this is in addition to arrears owed by the private and public sectors which amounted to about 5,937 million shekels of arrears for 2019 and accumulations of previous years...

·       Tax increases

- It is clear that local tax and fee collection is expected to decline markedly as we wrote previously, and therefore financing the government through local taxes is unlikely as the figures suggest; no taxes are expected to increase their rates.. rather, on the contrary, reductions of some sort and increased exemptions are expected.. at least in this emergency phase.. noting that increasing taxes or adjusting their rates upward will affect the investment sector and projects with clear economic benefit.

·       Foreign trade and clearing with the Israeli side:

- It is clear that the government's orientation will be towards clearing, enhancing trade, increasing it and encouraging it whether exports or revenues.. It is also possible to increase the employment of additional numbers of Palestinian workers with the Israelis.. and consequently, the value of the collected clearing will increase.

- It is also necessary to demand from the Israeli side many of the revenues withheld by the Israeli side which amounted to about 624 million shekels at the end of December 2019, which are the revenues withheld from the clearing that the Israeli side objects to on the grounds that they are allocated to the families of martyrs, the wounded and Palestinian prisoners,.. The Palestinian government received part of this amount withheld by Israel after the start of the coronavirus campaign, around 130 million shekels... The Israelis must pay them as they are Palestinian funds, and there are also health insurance entitlements and employment dues and end-of-service compensations for Palestinian workers with the Israeli side, which would have formed the nucleus of the Palestinian Social Security Fund and, as reported, amount to billions of shekels, belonging to Palestinian workers, and this was referred to in the Paris Protocol of the Economic Agreement, but the matter was postponed in Palestine due to local opposition. The time has come for the Palestinian government to reactivate the establishment of this fund and the Social Security Institution, and to obtain the dues of Palestinian workers, in addition to that they would form a social safety system for workers and employees of the private sector.. in Palestine..

- In this regard as well, attempts must be made to recover amounts that Israel receives as a commission of 3% as fees for collecting the monthly clearing bill, and to remit them to the Palestinian side, in addition to recalculating Israeli commissions from crossing fees and allocating most of them to the Palestinian side, in addition to other fees...

·       Borrowing and aid from abroad

- It is clear that borrowing from abroad, whether from donor countries or friendly and Arab countries, despite the clear contraction of Arab loans and grants, will be another refuge to obtain aid and grants to cover the financing gap, and to obtain concessional loans with long maturities... in addition to obtaining guarantees from donor or political entities that present these guarantees to international financial institutions or guarantees to the local banking sector to increase credit to the private sector.. and thus reflect positively on the public treasury.. However, the matter is not that simple, as it depends on political circumstances, understandings and pressures, and the changes in the region, most of which fall under interests, axes and deals...

·       Austerity policy in the public sector

- One can turn to some other economic policy levers such as pursuing austerity in spending, which is evident from the provisions of the Emergency Budget for 2020, in addition to controlling expenditures by, for example, reducing some allowances granted to senior employees, and the net lending related to debts of municipal and local bodies with the Israeli side should be resolved by the government and the Minister of Local Government, to settle matters with local units and municipalities, to adhere to proper collection systems for local council and municipal revenues, and not to delay any payments due to the Israeli side.. in order to avoid deductions from clearing receivables owed to the Israelis which this year were estimated at 900 million shekels (net lending).. in order to narrow the financing gap during 2020.

·       Assistance, donations and investments by expatriates abroad

- It is possible to activate and strengthen ties with Palestinian communities and investors abroad, and to hold conferences to encourage them to invest in Palestine, with assurances from the official Palestinian side, whether from the Ministry of Foreign Affairs and Expatriates, or the Ministry of National Economy, of the existence of the infrastructure to establish projects as in the industrial zones, tourism projects, and others, and to urge the international community to refrain from allowing the Israeli side to obstruct any deals regarding investment, and to strengthen the emotional ties between expatriates and their country of origin, since expatriates are a key element in their remittances and investments in the potential revival and development of the economy in Palestine.

- Date 10-4-2020