West Bank Faces "Explosive" Economic Crisis, Expert Warns
An escalating economic crisis in the West Bank, fueled by war-related restrictions and withheld tax revenues, poses a significant threat to regional stability, according to Middle East economics expert Yitzhak Gal.
Gal, affiliated with the Moshe Dayan Center and the Mitvim Institute, warns that the deepening financial distress is creating a volatile situation. "This is explosive material that is accumulating, and no one knows how it will detonate," he stated in an interview with 'Davar'. He highlighted that families are struggling to make ends meet, businesses are faltering, and the Palestinian Authority (PA) is finding it difficult to pay salaries and provide essential services, leading to growing frustration.
Gal argues that Israel can leverage its economic influence to foster stability by regulating economic activity, which is largely subject to Israeli policy. He suggests this could be coupled with PA reforms and agreed-upon oversight mechanisms, noting these steps do not require a comprehensive political settlement or a resolution on Palestinian statehood. However, he criticizes current Israeli policies, including limitations on Palestinian workers entering Israel, movement restrictions impacting trade, and the withholding of tax funds collected by Israel on behalf of the PA, which he attributes largely to Finance Minister Bezalel Smotrich.
Before the war, employment in Israel was a crucial income source for West Bank households, offering nearly double the local wages. Gal's analysis indicates that approximately half of West Bank household income stemmed from work in Israel and trade with the country. The current restrictions have not only impacted workers but also businesses and employees within the West Bank, as reduced consumer spending ripples through the economy. He estimates that the combined decline in official and unofficial trade between Israelis and Palestinians has reached 50%.
The PA's financial woes are exacerbated by its inability to pay full salaries, largely due to Israel withholding over 12 billion shekels in tax revenues. These funds, primarily customs and VAT collected by Israel on behalf of the PA, constitute about 70% of its income. While some deductions were initially made for payments to terror group families and Gaza, Israel has largely ceased transferring the remaining balance since mid-2025, following a decision by Smotrich. This has led to reduced public services, such as a shortened school week, as teachers protest partial salary payments.
Gal proposes that the tax collection mechanism, established under the Oslo Accords, could be reformed to allow direct PA collection, coordinated with Israel at ports and crossings. He believes that releasing the withheld funds, alongside PA reforms and eased economic restrictions, could help stabilize the situation and potentially balance the PA's budget within one to two years, reducing reliance on foreign aid. For a transition period, he suggests depositing the blocked funds under international management, such as by the World Bank, to be gradually released to the PA based on needs and reform progress.
