2023-05-14

ًWest Bank

West Bank / position paper

The Palestinian government manages public funds without transparency or participation

The Palestinian government faced significant difficulties in 2022 and the first quarter of 2023, including a crippling financial crisis that prevented it from meeting its obligations, which caused a cascade of financial problems across the public and private sectors, including issues related to union and syndicate rights, most notably, the non-payment of salaries to government employees for a period of about 18 months. Despite this, the Palestinian government has stuck to its policy of disregarding the provisions of the Palestinian Basic Law and the Public Budget Regulation Law of 1998 in terms of respecting the dates of preparation and submission, adopting a closed-minded approach devoid of any form of consultation, failing to publish and clarify financial decisions and spending priorities, as well as denying taxpaying citizens and their representatives the right to participate in developing or establishing the public spending priorities. Accordingly, a Decree Law regarding the public budget for the fiscal year 2023 was published claiming that it was approved by the President for the fiscal year 2023, despite there being no indication of the validity of this claim in the decisions of the Council of Ministers that had been announced in the preceding months.

The government did not adhere to the legal provisions and conditions governing the public budget, as outlined in Law No. (7) of 1998, with regard to the date for preparing and publishing the public budget. Consequently, the preparation of the 2023 budget was marred by legal issues, including the claim that it was approved during the exception period permitted for approving the public budget for the fiscal year 2023, which was published in the Official Gazette more than a month after claiming its approval by the President, and under a false pretext that the government is working on approving a supplement to the 2023 budget. At cabinet meeting No. (200) on 3/4/2023, the Council of Ministers discussed the supplements to the 2023 public budget as well as the emergency budget; however, no state of emergency has been declared in accordance with Chapter (7) of the Palestinian Basic Law (Provisions of the State of Emergency), which the president can declare under specific circumstances and restrictive conditions, but this has not occurred. Here, the civil team reiterates that the exception period intended by the Financial Affairs Regulation Law of 1998, in accordance with the provisions of Article (4), is related to revenue collection and not to the preparation and submission of the budget by the Council of Ministers, as the law clearly states in Article (31) that the Council of Ministers shall submit the draft law by November 1^st. Therefore, failure to submit the budget by this date constitutes an explicit violation of the law, as this is not an exception period granted to the Council of Ministers, for it is only given to the legislative council which has the authority to approve the public budget law, but the president assumed de facto control of the legislative authority during the division period. This means that the Council of Ministers has until the beginning of the fiscal year to submit a draft public budget law, and in this case, the Council of Ministers is allowed to continue revenue collection for a period of three months.

The government grants itself power to oversee budget execution contrary to the budget law's provisions

The decree-law pertaining to the 2023 budget gave the Minister of Finance and the Prime Minister wide discretionary powers, in violation of the provisions of Article (61) of the Basic Law and the public budget Law of 1998, that state that the Legislative Council/legislator is the one authorized to issue laws and make decisions regarding transfers between the budget heads (chapters) and allocations. As stated in Article (6) of the decree-law regarding the general budget for the fiscal year 2023 that “All numbers and information pertaining to the year 2023 mentioned in this Decree-Law are subject to change in light of future developments during the fiscal year. Priority-based monthly monetary spending plans are developed and presented to the Council of Ministers, which follows the cash rationing principle.” The aforementioned article provides wide powers to the Minister of Finance to amend and update the budget numbers, in a manner that contradicts Article (36) of the Budget Regulation Law, which states “If there is a need for any amendment of any items in the public budget or the addition of items which would require new appropriations, each such amendment shall be prepared as a supplement to the budget and submitted by the Council of Ministers to the Legislative Council for approval and promulgation as law.”

In addition, the government continued its policy of utter disregard for civil society institutions and taxpaying citizens by approving the budget without any community consultations or participation in setting priorities consistent with the vision of civil society. The Palestinian Gazette only included one page of general information and numerical data, such as expected revenue and expenditure totals. As a result, the information that has been released does not provide the information needed to determine how spending is allocated among sectors or the allocations for supervisory positions, or even the amount designated for financial reserves, which the Budget Law for 2023 authorized disbursement from (if the expenditure was due to an emergency) by a decision of the Council of Ministers on the recommendation of the Minister of Finance.

Although the government pledges to implement reforms, it delays incorporating these changes into the procedures for preparing and allocating the public budget.

The financial statements of the budget performance for 2022 show no progress in achieving financial reforms or any administrative, economic, social, security, and public order reforms, indicating that the Palestinian government has not committed to implementing the reform policies outlined in the public funds' management strategy and the reform agenda. The PA system's administrative structures, the most crucial of which are the security and civil administrative system, retirement, local governance, health system, and civil service law, have not been reformed or rationalized. Additionally, public spending is still high and exceeds budgeted levels, especially in the areas of wage bills, net lending, and medical referrals.

In this budget, the government reaffirms, in its letter to donor countries, its commitment to adopt reform policies after claiming that some of them have already been implemented. The Palestinian government outlined a number of fundamental reforms for 2023, including:

— Reviewing and modifying administrative structures in order to reduce salaries and wages (by enacting the "new employee for every 2 retired employees" policy).

— Continuing to reform the medical system and improve the health sector, as well as reviewing the foundations of contracting with private hospitals and drug suppliers, with a strong emphasis on capacity building in government hospitals, as well as reviewing the government health insurance system.

— Reducing net lending in cooperation with the Ministry of Local Government and other partners.

The government's policy of reducing the salary bill and semi-salaries

The government did not succeed in implementing the reform plan in 2022, as the salary and wage bill for the year 2022 increased by nearly 2 billion shekels since 2018, and the salary bill exceeded the amount allocated in the 2022 budget by 7%. Therefore, there are no actual steps or procedures in place to reform the salary bill, in accordance with the government reform plan 2022 and other national and sectoral plans. Despite the existence of an almost complete draft, no new civil service law has been approved in Palestine to address the existing distortions in the current law as a result of multiple amendments and agreements signed with various unions.

Although the financial reforms include reducing the salary bill, reviewing administrative structures, and reforming the civil service law, yet the public budget estimates do not reflect the proposed direction, with salaries and wages for the year 2023 estimated at 9.5 billion shekels, equivalent to roughly 50% of total expenditures and net lending (excluding development expenditures) with a 15% increase over the estimate for 2022.

The policy of debt and arrears reduction and expenditures rationalization

At the end of 2022, the net accumulated arrears were 11.2 billion shekels, and the public debt was 12.5 billion shekels, of which 7.9 billion shekels were internal debt and 4.6 billion shekels were external debt. Despite the difficulty of estimating the government's accumulated financial liabilities, due to the existence of many hidden liabilities, such as deferred payment bonds and employee arrears caused by payment of only 80% of their salaries. The total financial liabilities are estimated to be around 30 billion shekels, including 12.5 billion shekels of public debt, 8 billion shekels of debts to the Pension Fund, and 11 billion shekels in arrears.

Arrears were estimated at 1.7 billion shekels for the year 2023, without a clearly-defined plan for paying arrears and other debts, as the government continues to follow a policy of deferring payments and accruing debts. This will diminish the services provided to citizens and burden public officials and taxpaying citizens with the repercussions of the deficit, especially the less fortunate families who have been deprived, for the fourth year in a row, of two payments of their allowances.

The rising cost of medical referrals: A result of failing to follow a serious health system reform policy

The 2022 budget included reforming the health insurance system and linking the allocation for medical referrals to the budget, but it was not actually accomplished, as the cost of medical referrals and supplies increased. The cost of medical referrals amounted to $144 million in 2015, $260 million in 2019, and approximately $345 million in 2022, while revenues from health and insurance fees amounted to roughly $108 million, accounting for 17% of the Ministry of Health's total expenditures of $640 million.

Also included in the 2022 budget was the development of government services and specialized departments such as catheterization, heart surgery, tumors, hematology, and baby incubators. However, the financial data do not indicate the implementation of these development projects and show the continued purchase of services from hospitals outside the government, which raises questions about the sincerity of efforts to reduce medical referrals and the unwillingness to reevaluate the current health insurance system due to influential parties' interests in investing in foreign hospitals.

Net lending (The government continues to claim its intention to cut back, but fails to do so)

The Palestinian government continues to set a specific objective to cut-back on net-lending which is “The sum of the amounts deducted from the clearance revenues by Israel; to settle outstanding debts for Israeli companies that provide electricity, healthcare, water, and sanitation services to Palestinians and other items”. Despite the establishment of an institutional unit dedicated to handling and monitoring all net lending-related matters as well as ensuring the sustainability of local government work and the provision of services to citizens, yet net lending expenditure in 2022 totaled 1.2 billion shekels which is 128% of the projected amount.

The Palestinian government estimated that net lending would total 1.26 billion shekels in 2023, a 32% increase over the estimated budget for 2022 and the highest net lending estimate of all the public budgets.

Based on the aforementioned observations about the government's policy for managing public funds, the Civil Society Team for Enhancing Public Budget Transparency demands the following:

— Respect the rule of law, cease flouting the provisions of the law, and work swiftly to hold general elections in order to face the challenges afflicting the Palestinian Authority, because without a legislative council to sign off on the budget and hold the government accountable, taxpayers will continue to have no say or control in how the government spends their money.

— The civil team emphasizes that the government and the Ministry of Finance must uphold transparency and publish the complete budget law, including details on allocations for supervisory positions, and publish the periodic reports stipulated in the Basic Law, in particular the Public Budget and Financial Affairs Regulation Law of 1998. Additionally, it stresses the importance of a transparent budget implementation process, particularly with regard to development expenditures and their funding sources, as well as social protection sector expenditures, which include protection for the less fortunate and guarantee the complete payment of their allowance.

— The need for the government and the Ministry of Finance to be forthcoming with the representatives of citizens and civil society organizations and to involve them in establishing the budget priorities, particularly expenditure priorities and collection policies. The government should also specify expenditure priorities based on a sensible balance between spending and available capabilities, taking into account expenditure rationalization and social justice enforcement, especially when it comes to the mechanisms used to pay public sector employees' salaries, as well as the transparency of development expenses and funding sources.

— The need to present the reform plan that launched in 2022, with all of its details, the extent of its implementation over a year, and its effects on rationalizing expenditures and promoting administrative and financial reform in 2023, particularly in light of the anticipated negative financial results of the plan's implementation.

Thus, the civil team believes that the continuing dissolution of the Legislative Council, disregard for general elections, persistent violations of the General Budget and Financial Affairs Regulation Law of 1998, and the absence of a representative body for citizens that oversees, and holds the government accountable, will perpetuate the failure in managing public funds and thwart reform efforts. However, the government cannot use the financial crisis and Israel’s commandeering of the clearance revenues as an excuse to violate the provisions of the law regarding the preparation and publication of the public budget. Additionally, the government's continued approach to defer crises, especially agreements with trade unions and various federations, will create ticking bombs that will explode in the form of strikes and long labor disputes, disrupting public work and jeopardizing citizens' access to essential public services, most notably educational and health-related services, at great societal cost.