The Palestinian Authority (PA) is nearly insolvent. A deep financial crisis is edging it closer to the brink of fiscal collapse. The PA’s main sources of revenue are drying up, pushing recurrent budget deficits to historic and dangerous levels. Traditional avenues of deficit financing (mainly, domestic bank borrowing and accumulated arrears to private sector suppliers) are exhausted, and public debt already surpassed the economy’s total output. The PA’s ability to pay full and timely salaries to its employees has been severely curtailed, while the provision of basic public services and their quality are seriously compromised. Politically, the crisis is weakening the PA’s ability to govern, eroding whatever legitimacy it still has among the Palestinians, and heightening the risk of its institutional collapse.
Primary Causes of the Crisis
The PA’s financial crisis is driven by three major factors: Israel’s refusal to transfer first some, and then all, Palestinian tax revenues; a sharp reduction in international aid; and the devastating economic impact of the Israeli war on Gaza.
Withholding of Palestinian Tax Revenues
Israel’s refusal to transfer Palestinian tax funds—which constitute two-thirds of the PA’s total revenues—is the main cause of the PA’s ongoing financial crisis. Under the terms of the 1994 Paris Protocol on Economic Relations that followed the 1993 Oslo Accords, Israel is supposed to collect customs duties and other taxes on goods destined for the Palestinian Territories (known as “clearance revenues”) on behalf of the PA and to transfer them, on a monthly basis, to the PA’s coffers.
Israel has suspended the tax transfer on several occasions since Oslo, using the funds as a pressure tool against the PA. Then, starting in 2019, Israel began to make systematic, unilateral monthly deductions from the clearance revenues. Between February 2019 and July 2024, Israel deducted around $1 billion from PA tax money, an amount equivalent to the funds that the PA supposedly paid to families of Palestinian security prisoners and martyrs. After the October 7, 2023, Hamas attacks, Israel began withholding an additional $75 million per month—an amount equivalent to the Gaza Strip’s share of the PA budget. This includes the sums that the PA is supposed to transfer to Gaza to pay salaries for its Gaza staff, social payments, and payments for electricity and water supplied to the Strip. Other Israeli deductions have included the amount of debt (unpaid bills) owed by the PA, mainly for electricity, water, sewage, and health services that Israeli suppliers provide to Palestinian municipalities in the West Bank.
Since May 2025, Israel has fully suspended the transfer of all clearance revenues. Israel’s refusal to transfer any of these funds has left the PA with dangerously low liquidity to fund salaries and basic services. Withheld funds were estimated to stand at $4.5 billion by the end of 2025.
Drop in Donor Aid
Exacerbating the PA’s recurrent budget deficit is the sharp decline in international aid, with donor support recently falling to its lowest point in years. In 2025, international aid to the PA was just $358 million, down from $2 billion in 2008. Furthermore, the Arab League pledge, first made at a 2012 summit of Arab leaders and reaffirmed in subsequent meetings, to provide the PA with $100 million a month as a financial safety net has failed to fully materialize.
Effects of War on Gaza
The third factor in the fiscal crisis is the post-2023 economic contraction caused by Israel’s war on Gaza, which has worsened the PA’s fiscal crisis in two ways. First, after October 2023, Israel canceled work permits for more than 200,000 Palestinian laborers from the West Bank (about 22.5 percent of the West Bank’s labor force), eliminating a critical source of income that generated, according to the UN Conference on Trade and Development, an estimated $4 billion annually (equivalent to 25 percent of the PA’s gross domestic product [GDP]) from work inside Israel and the Israeli settlements. This loss of livelihood has suppressed consumer spending and consequently decreased domestic tax revenues within the PA. Then, in 2024, Israel intensified its restrictions on movement of people and trade throughout the West Bank, precipitating a decline in economic activity as a result of private sector enterprises being forced to cut down on production and employment. As a result, domestic tax revenues declined, adding further strain to the PA’s fiscal situation.
As a result of the cumulative impact of these three factors, the PA’s fiscal situation has steadily deteriorated, with the recurrent fiscal deficit rising from 3.9 percent of GDP in 2023 to 10.5 percent by the end of 2024. The 2025 budget projected a further increase of 4 percentage points.
Consequences and Limited Options
As a result, for many years the PA has struggled to pay public sector employees. Since November 2021, it has not been able to pay full salaries, with payments often delayed and reduced to as little as 50 percent of earned pay. Wage shortages have crippled essential public services, mainly in the health and education sectors. The delayed start of the September 2025 school year, for instance, was a direct result of unpaid teacher salaries. As of November 2025, the PA owed $2.5 billion in unpaid salaries to its public employees.
With the clearance revenues drying up, and the level of external financial aid sharply falling, the PA resorted to the three traditional measures to address recurrent deficit financing. These measures are domestic bank borrowing; accumulating arrears to private sector suppliers and PA staff; and delaying payments to the government pension fund. All three sources of finance have largely been exhausted.
The PA’s reliance on local commercial bank loans to finance its budget deficit has grown substantially, significantly increasing the banking system’s exposure to the public sector. As of November 2025, public debt to domestic banks reached $3.4 billion. In addition to borrowing from local banks, PA arrears to private-sector suppliers have been accumulating fast, reaching an estimated $1.6 billion in November 2025. Adding unpaid contributions to the Palestine pension fund, the PA’s total debt reached an unsustainable figure of approximately $14.6 billion (or 106 percent of the PA’s 2024 GDP).
More Israeli-Driven Financial Troubles
The discussion of the PA’s dire fiscal crisis cannot be complete without a reference to two other serious risks facing the Palestinian banking sector: the corresponding banking relationships (CBR) between Palestinian and Israeli banks, and the excess surplus of the Israeli currency in Palestinian banks. Left unresolved, both issues threaten the viability of the Palestinian banking sector—and the future of the Palestinian economy itself.
Palestinian economic relations with Israel—a de facto major trading partner, with 58 percent of the PA’s imports and 86 percent of exports with Israel in 2024—and with the rest of the world are facilitated through Israeli banks. These banks require a letter of indemnity and immunity to protect themselves against any legal ramifications from supposed risks of money laundering related to services that they provide to Palestinian banks. These letters are issued and renewed by the Israeli minister of finance, who grants the Israeli banks a waiver permitting them to maintain ties with Palestinian banks and to act as intermediaries in the financial transactions with Israel and the rest of the world. The issuance of this letter has repeatedly been obstructed by Minister of Finance Bezalel Smotrich, thus putting the whole CBR at great risk and cutting the Palestinian banking sector off from the global financial system.
The surplus of Israeli currency in the Palestinian banking system emanates from the fact that the Palestinian economy has no national currency, and uses the New Israeli Shekel (NIS) as the main means of payment. Salaries of PA employees, prices of goods imported from and exported to Israel, Palestinian workers’ remittances from their jobs in Israel, and clearance revenue transfers are all paid in NIS. According to the 1994 Israeli-Palestinian economic agreement, excess NIS cash held in Palestinian banks is shipped back to the Bank of Israel in four quarterly installments, up to NIS 18 billion annually. Such a ceiling, however, does not reflect the current size of the Palestinian economy. Consequently, the Palestinian banks are replete with surplus NIS cash that they cannot transfer to replenish their correspondent accounts with Israeli banks—accounts which are essential for conducting cross-border trade with Israel. Currently, the accumulation of NIS in Palestinian banks has reached unsustainable levels, threatening the banking system’s capacity to finance trade with Israel.
Addressing the Crisis
Addressing the PA’s severe fiscal crisis requires, first and foremost, ending Israel’s financial strangulation of the PA and releasing the Palestinian tax money that it is withholding in violation of the 1994 Paris Protocol. It also requires ending the Israeli practice of unilateral deductions from the Palestinian tax money it collects on the PA’s behalf; releasing, at minimum, the Gaza share of the PA budget deducted from the clearance revenues since the start of the war on Gaza; and jointly addressing all outstanding issues concerning the deductions. Additionally, there is an urgent need to address the high risks related to the questions of CBR and the excess NIS cash in the Palestinian banks; both of which are crucial—under the 1994 economic arrangements with Israel—for the viability of the Palestinian banking system.
Continued international financial assistance at the time of the PA’s fiscal crunch is also crucial. On that front, an “Emergency Coalition for the Financial Sustainability of the Palestinian Authority” was launched on September 26, 2025, by 12 donor countries, including Japan, Saudi Arabia, and several European nations, in response to the urgent financial crisis confronting the PA, with the goal of stabilizing its finances, providing funding for essential public services, and preventing potential future collapse.
All are necessary measures to address the technical aspects of the current PA fiscal crisis—a crisis that, at its core, is structural and politically rooted, not technical. More specifically, today’s cash-strapped PA is a direct product of its sui generis situation in a captive and territorially fragmented economy struggling to operate under a prolonged military occupation; with no control over its natural resources and external borders, and no macroeconomic (fiscal, monetary, trade, exchange rate) policy tools at its disposal. It is a peculiar case of a repressed economy that is currently running on empty; dependent on foreign aid for its continued fiscal survival, and unable to generate enough income, savings, and productive investment for the welfare and wellbeing of its people, without much that the Palestinian Authority can do to correct its torturous path at any time in the foreseeable future.
The views expressed in this publication are the author’s own and do not necessarily reflect the position of Arab Center Washington DC, its staff, or its Board of Directors.
