Palestine: What is the Palestinian Authority’s economic situation?

The structure of public revenues remains highly unbalanced, with a significant reliance on compensation funds, which represent approximately 68% of the Palestinian Authority’s income.

This configuration makes public finances particularly vulnerable to external decisions. Since May 2025, the suspension of transfers, following a prolonged period of partial withholding, has deprived the Authority of essential financial flows. More than NIS 14 billion remains untransferred, resulting in a sharp contraction of liquidity and exacerbating budgetary pressures.

The effects of the suspension of compensation funds have resulted in an immediate and persistent liquidity crisis.

At the beginning of 2026, monthly local revenues remained limited to approximately NIS 400 million, a level far below the minimum estimated needs of nearly NIS 1 billion per month to ensure the basic operation of public services. This structural mismatch between resources and expenditures quickly placed public finances under extreme strain.

At the same time, the debt dynamics are increasing the pressure on public finances.

The outstanding public debt is estimated at approximately NIS 46 billion (USD 14.65 billion), while debt servicing costs between NIS 250 million and NIS 300 million per month. This high level of debt, combined with limited resources, significantly reduces the government’s capacity to finance essential expenditures, while increasing its reliance on short-term financing.

This cash flow constraint is particularly acutely reflected in the management of public sector salaries.

Since 2019, full salary payments have been the exception rather than the rule, with only one instance of full payment during this period. The usual mechanism now relies on partial payments, generally between 50% and 70% of the salary, depending on available funds. However, even this proportional payment system has not been sustainable recently.

At the beginning of 2026, the situation deteriorated further.

For January salaries, the government was only able to pay a lump sum of 2,000 shekels to all public employees, regardless of their initial salary level. This uniform payment method, disconnected from actual wages, marks a break with previous practices and illustrates the severity of the liquidity crisis. It also reflects the inability of public finances to meet, even partially, usual salary obligations.

Despite these adjustments, systemic risks remain significant.

The accumulation of payment arrears affects both households and the banking sector, while also weakening the private sector, which is heavily dependent on public payments. The structure of the public debt illustrates the extent of these imbalances: obligations to the pension fund amount to approximately USD 4.5 billion, in addition to USD 3.4 billion owed to local banks.

Arrears owed to public sector employees are estimated at USD 2.5 billion, while debts to the private sector amount to approximately USD 1.65 billion, primarily to hospitals and pharmaceutical companies. This is compounded by external debt of USD 1.4 billion and other miscellaneous liabilities estimated at USD 1.2 billion. This accumulation of liabilities contributes to slowing economic activity, exacerbating liquidity pressures, and increasing the vulnerabilities of the financial system as a whole.

In this context, the banking sector plays a central role in maintaining a minimum level of economic stability.

Bank deposits amount to approximately USD 22 billion, with a loan-to-deposit ratio of 68%, reflecting a high level of exposure. Around 116,000 public sector borrowers rely directly on their salaries to meet their financial obligations. Therefore, reduced incomes have an immediate impact on their repayment capacity. Faced with this situation, the Monetary Authority had to intervene by requiring banks to adapt the collection mechanisms, in particular by limiting deductions in the event of partial salaries and by authorizing the postponement of deadlines.

Another key factor is the decline in international aid.

This aid, which historically constituted a pillar of public financing, has fallen significantly to approximately NIS 2.55 billion in 2026, representing a year-on-year decrease of more than 20%. This decline is due to evolving donor priorities and increased conditionality linked to structural reforms. Funding remains insufficient to offset the scale of the deficit and meet growing humanitarian needs.

Discussions with international partners underscore the need for more fluid, predictable, and sustainable financial support, complementing the ongoing reforms in public financial management.

However, beyond budgetary support, increased political commitment appears essential to facilitate the resumption of compensation fund transfers and encourage compliance with existing obligations, particularly those stemming from the Oslo Accords. In a context of significant structural vulnerability, a lasting improvement in the financial situation depends as much on the continuity of external financing as on the evolution of the political conditions governing these flows.

Source: French Embassy