2006–2007 Economic Sanctions Against the Palestinian Authority

Hamas won 74 of 132 seats in the January 2006 Palestinian Legislative Council election, compared with Fatah's 45.[1] Mahmoud Abbas subsequently nominated Ismail Haniyeh to form a government, and the Hamas-led government took office on March 30, 2006.[2][3]

The result isolated the PA internationally.[1] The Middle East Quartet — the United States, European Union, Russia, and United Nations — announced that assistance to the PA would continue only if the new government renounced violence, recognized Israel, and accepted previous Israeli-Palestinian agreements.[4] Hamas refused those conditions.[4] Israel stated that sanctions would be lifted only when the Palestinian government complied with the Quartet Principles.[5]

The financial architecture of Palestinian governance made the PA especially vulnerable to external pressure. Under the 1994 Paris Protocol's customs-union arrangements, Israel collected customs duties on imports destined for the West Bank and Gaza, as well as VAT on goods and services supplied from Israel, then transferred the proceeds to the PA after deductions for electricity, water, utilities, hospital fees, and sewage treatment.[6] Gross customs and VAT revenue had been estimated at approximately $75 million per month in 2005, with average deductions of $15 million, leaving roughly $60 million monthly for the PA.[6] Israel had been withholding those revenues since mid-February 2006.[6]

At the same time, restrictions at Gaza's commercial crossings contributed to shortages. Flour prices rose 25 percent in a single week in early March 2006, while UNRWA and the World Food Programme had been unable for weeks to import medication and food-assistance supplies.[6] By late February, the PA had also stopped payments to Israeli fuel supplier Dor Alon and canceled a check worth tens of millions of shekels. Palestinian finance minister Mazen Sonoqrot urged the company not to cut off fuel deliveries, saying EU aid was expected imminently.[7] Dor Alon, the PA's exclusive fuel supplier under a contract estimated at NIS 1.5 billion annually, halted deliveries until payment was made.[7]

On April 7, 2006, the European Union froze direct aid payments to the Hamas-led PA. An EU Commission spokeswoman described the decision as a policy of "maximum prudence" and confirmed there would be "no payments to or through the Palestinian Authority" pending foreign ministers' deliberations.[8] The same day, the United States announced it would provide $245 million for basic human needs and democracy-building through UN and nongovernmental agencies while suspending or cancelling $239 million in PA-related programs — including $105 million redirected to human needs — and reviewing another $165 million in projects.[9] The administration also requested the return of $50 million in direct aid provided to the PA in 2005; $30 million had been returned by April 7.[9] Secretary of State Condoleezza Rice said: "We are not going to fund a Hamas-led government. But we are going to look at what we can do to increase humanitarian assistance to the Palestinian people."[9]

Israel had already stopped transferring tax and customs revenues it collected on the PA's behalf. CRS reports give differing estimates of the monthly amount withheld: approximately $50 million in one report and approximately $55 million in another.[4][10] The latter report also noted that two leading Israeli banks planned to sever commercial relationships with West Bank and Gaza financial institutions, potentially complicating Palestinian commercial transactions in Israeli shekels.[10]

The United States also operated restrictions through the Treasury's Office of Foreign Assets Control. On May 10, 2006, OFAC determined that Hamas had a property interest in PA transactions; on July 20 it published guidance explaining the restrictions and its licensing policy.[11] OFAC issued General Licenses 2 through 5 on April 12, 2006, covering travel, employment and maintenance transactions, payment of taxes and incidental fees, transactions with entities under the control of the Palestinian President, and concluding activities with the PA.[12] General License 6, issued July 6, authorized in-kind donations of medicine, medical devices, and medical services.[12]

Congress added statutory restrictions during 2006. Section 550 of the Emergency Supplemental Appropriations Act, enacted June 15, prohibited assistance to the PA while allowing the President to waive the prohibition for specified assistance to Mahmoud Abbas's office, provided that it did not benefit or pass to Hamas.[13] The Palestinian Anti-Terrorism Act of 2006 became Public Law 109-446 on December 21. It barred aid to the Hamas-led government unless conditions including recognition of Israel's right to exist and adherence to previous agreements were met, while exempting humanitarian aid and democracy promotion.[13]

Parallel to the direct embargo, the EU spearheaded the development of a Temporary International Mechanism intended to deliver assistance to Palestinians while bypassing the Hamas-led government. The Quartet endorsed the TIM on May 9, 2006.[9] The EU's three-part plan proposed expanding a World Bank emergency program for essential health and social services and employees, maintaining essential utilities including fuel for electricity, and establishing a needs-based safety net for the poorest Palestinians.[9] The Quartet formally endorsed the plan on June 17; by September 20 the mechanism had been extended for three months and expanded to include security-sector reform, infrastructure reconstruction, and economic development.[9]

UN General Assembly Resolution 61/119, adopted December 14, 2006, urged states to continue emergency assistance to address the Palestinian financial crisis. It called on Israel to release tax revenues due under the 1994 Paris Economic Protocol and ease closures and movement restrictions, while acknowledging the TIM's role.[14]

Despite the embargo on direct PA assistance, total international aid to Palestinians did not fall in 2006. OCHA figures cited in contemporaneous reporting put total aid at more than $1.2 billion in 2006, up from about $1 billion in 2005, with European aid estimated at approximately $930 million.[15] A Washington Institute account reported approximately $900 million in foreign aid for budget support in 2006, including $448 million from Arab League states, $219 million from the EU, $42 million from the World Bank, $11 million in bilateral support, and $180 million in cash from various sources.[16] Arab donors who had initially suspended aid resumed contributions later in 2006.[16]

Aid was routed to recipients such as the PA president's office and individuals rather than the Treasury in an effort to bypass the Hamas government. This made spending less coordinated, while development projects were largely put on hold as aid focused on averting a humanitarian crisis.[15] By February 2007, the TIM had paid out $415 million, helping pay more than 77,000 civil servants and supporting 150,000 heads of households — benefiting approximately one million people — while keeping hospitals running and supplying emergency fuel.[15] The EU's reported TIM beneficiaries also included health facilities and approximately 100,000 heads of household, representing some 600,000 people.[16] The UN humanitarian appeal for 2006 rose from an initial budget of $216 million to $384 million after the sanctions took hold; in 2007 the appeal sought $454 million in emergency contributions.[15]

A parallel financial strain arose because financial institutions feared violating anti-terrorism laws, contributing to the Hamas government's inability to pay salaries even when funds were notionally available.[17] By September 2006, leading Arab banks had closed Palestinian government accounts, while donor countries had almost completely halted funds to the government.[18]

The loss of clearance revenues and direct aid created what the Congressional Research Service described as "crippling budgetary shortfalls for the PA and significant derivative economic hardship for many Palestinian citizens."[10] CRS attributed the crisis to the loss of Israeli-held customs-tax transfers and direct foreign aid from the United States and EU.[10]

The fiscal deterioration was severe. The PA's monthly budget fell from $180–200 million the previous year to approximately $25 million by September 2006, while about half of the earlier budget had gone to salaries for 150,000 public-sector workers.[18] Israel withheld approximately $600 million in clearance taxes collected on behalf of the PA between March 2006 and July 2007.[16] During this period, 164,000 PA civil servants — who had nearly one million dependents — received only about half their salaries.[16] Strikes, absenteeism, and reduced operation of ministries and public services followed.[16] By September 2006, estimated annual per-capita income was reported at $700 in the PA and $600 in Gaza, with half the Palestinian workforce unemployed and 66 percent of the population living in poverty, defined as income of $2 per person per day.[18]

During April, May, and June 2006, tensions over unpaid salaries and command responsibilities escalated between the Hamas-led government and security personnel loyal to Fatah and President Abbas.[10] By mid-2006, Erez, Karni, and Rafah crossings were described as practically sealed, with humanitarian-aid trucks among the few exceptions. The West Bank faced additional constraints including checkpoints, road closures, and restricted access across the separation fence.[18]

Economic deterioration reflected several interacting pressures, including sanctions, the loss of clearance revenues, reduced PA spending, internal conflict, and movement restrictions. Real GDP fell by 5–10 percent in 2006, poverty increased from 17 to 26 percent, and the share of Gaza's population dependent on food aid rose from 50 to 80 percent.[16] An April 2007 UN assessment stated that "the PA as a governing body [has] essentially ceased to function," although the same assessment noted that Palestinian institutions had not completely disintegrated and retained procedures, financial controls, and a functioning civil service.[16] The World Bank reported that the PA estimated it needed $1.62 billion in donor assistance annually to close its fiscal gap.[13]

A March 2007 report described the Hamas-led government's inability to pay civil servants and provide health care, welfare payments, and education, with civil servants' incomes supporting approximately one quarter of all Palestinians.[15] The redirection of aid through channels outside the Hamas government also reduced some financial pressure on the administration itself because international organizations and NGOs maintained basic services without routing funds through Hamas.[2]

Following Saudi-led mediation, Hamas and Fatah agreed to form a unity government, which was sworn in on March 17, 2007.[19] The Quartet maintained that the unity government did not meet its conditions for resumed direct assistance.[13] Direct assistance to the Hamas-led power-sharing arrangement remained suspended through June 2007, while the Quartet continued to press Hamas to recognize Israel, renounce violence, and accept previous Israeli-Palestinian agreements.[20]

During this period, the United States continued to rule out assistance to Hamas while exploring support for non-Hamas officials and Abbas-aligned security forces.[13] Routing aid through specialized international agencies and NGOs somewhat reduced the financial pressure on the Hamas-led government because basic services were partly maintained without funds flowing through Hamas.[2]

In January 2007, Israel transferred $100 million to a special bank account intended to ensure that the money did not reach Hamas.[13] CRS sources describe this transfer differently in relation to the broader release of withheld revenues.[13]

Renewed factional clashes escalated sharply in June 2007. Hamas forcibly seized control of Gaza, prompting Abbas to dissolve the unity government and declare a state of emergency on June 14.[19] On June 17, he named Salam Fayyad prime minister and formed a new emergency government based in Ramallah.[19]

The political change triggered an immediate reversal of Western policy toward the PA in the West Bank. The United States and EU lifted the economic and political embargo within days after the PA returned to the control of Abbas's Fatah-led government.[13] OFAC issued General License 7 on June 20, 2007, broadly authorizing U.S. persons to engage in transactions with the PA that otherwise would have been prohibited under terrorism sanctions programs.[12]

Israeli tax transfers resumed in July 2007, offering short-term relief, and the transfer of frozen tax arrears was expected to be completed by the end of the year.[16] One CRS account specifies that Israel transferred $118 million to the PA on July 1, 2007, while another describes a release in June 2007.[13] A November 2007 Israeli government account stated that approximately NIS 1 billion — roughly $250 million — in withheld revenues had already been transferred and that a further NIS 1 billion would be transferred by year's end. It said Israel and the PA had established a monitoring mechanism intended to prevent the funds' use by terrorist organizations.[21]

An Israeli government report to the Ad Hoc Liaison Committee later stated that the Ministry of Finance had transferred clearance revenues to the PA Ministry of Finance consistently each month since July 2007. It recorded approximately NIS 12.2 billion credited between July 2007 and the end of 2009 and noted that approximately NIS 2 billion had been collected during 2006–2007 but not previously transferred.[22]

Even after transfers resumed, the PA's wage bill exceeded revenues.[13] The Bush Administration provided $59 million to Abbas: $43 million for training and nonlethal assistance to the Palestinian Presidential Guard and $16 million for improvements at the Karni crossing.[13] A June waiver authorized another $18 million for democracy assistance, anti-money-laundering assistance, and security upgrades at the crossing.[13] In July, President Bush announced plans to use previously appropriated funds for humanitarian assistance, loans to Palestinian businessmen, and security-force reform.[13] Total U.S. bilateral assistance for fiscal year 2007 was approximately $69.488 million.[20]

The measures did not end uniformly. International assistance and Israeli-collected revenues were redirected away from the Hamas-run administration in Gaza, while support for the Abbas-Fayyad PA in the West Bank was restored.[17][13] Israel also tightened restrictions on goods and people after the takeover, banning marketing and exports from Gaza and severely restricting the kinds and quantities of civilian goods entering the territory.[17] Hamas remained in control of Gaza, and the boycott of its administration continued.[13]

Descriptions of the measures vary because they combined several distinct policies. Encyclopedia.com describes the United States and EU as having cut all aid to the PA, whereas CRS accounts distinguish between direct aid to the PA government and humanitarian or project assistance delivered through international organizations and NGOs.[1][4]

Accounts also differ on timing. One CRS report dates the cessation of U.S. direct and indirect foreign aid to March 30, 2006, when the Hamas-led government was formed, while a later CRS report describes the United States and EU as halting assistance in April 2006.[3][13] The UN fact-finding report places the redirection of aid and imposition of Israeli sanctions shortly after Hamas's election victory and formation of a government, while a March 2007 news account described the sanctions as beginning the previous spring.[5][15]

The monthly amount of Israeli tax revenues withheld is given as approximately $50 million in one CRS source and approximately $55 million in another.[4][10] Accounts of the initial release of withheld revenues also diverge: CRS material refers variously to a June 2007 release, a $118 million transfer on July 1, and a $100 million transfer to a special account in January 2007.[13]

The UN Human Rights Council's Goldstone Report describes the redirection of aid as intended to isolate the new Palestinian executive and pressure it to accept the Quartet Principles — a politically contested characterization.[23] A later Times of Israel report quoted former Quartet representative Tony Blair as saying that the international community's decision not to try to draw Hamas into dialogue had been a mistake.[24]

Whether the sanctions achieved their stated aim of pressuring Hamas to meet the Quartet's conditions, and how much they contributed to the subsequent fiscal collapse and political fragmentation between Gaza and the West Bank, remain matters of contested causal judgment.[16][17]