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Israel should continue to transfer tax revenues to the Palestinian Authority, despite the electoral victory of the Hamas, until there is a "good reason to do otherwise," Bank of Israel Governor Stanley Fischer told foreign journalists in Jerusalem Monday.
Israel is obligated to make the payments by virtue of an agreement signed in Paris in 1996, he said, noting that the revenues reflect payments made by Palestinians to the Israeli tax authority and customs authority on goods imported to Palestinian areas. "There is a line to be drawn," he said.
Under the 1995 Israel-PA interim agreements, which Hamas does not recognize, Israel is to transfer to the PA each month tax and customs revenues it collects on the PA's behalf. A payment of some $60 million was to have taken place Friday, but a provisory decision was made following the Hamas victory to halt payments until it was clear that the money would not end up in terrorist hands.
Fischer said that although trade and employment relations with Israel are "very significant" for the Palestinian economy, they are less important for Israel, noting that Israel's GDP is about $125 billion, more than tenfold the Palestinian Authority's $10b.
Before the outbreak of violence in 2000 and subsequent waves of Palestinian attacks targeting Israeli civilians - many carried out by Hamas activists - there were over 100,000 Palestinians working in Israel, and their economy was "doing the best ever," Fischer said, adding that economic relations between Israel and the PA are "very heavily driven by security."
Hamas control of the PA does "not necessarily" mean a return to greater violence, he said, noting that the group had been maintaining the cease-fire "pretty well," that the situation is not entirely out of Israel's control.
How Israel handles the PA under Hamas and how security forces deal with threats could also help keep the situation in check, albeit "with occasional terrorism", he said.
While the outbreak of violence was also a significant factor in the recession that hit Israel's economy, particularly in 2001-2003, Fischer predicted that any further deterioration in Israel's security situation would be largely headed off by a more experienced security force, preventing a second recession of that magnitude. Fischer said he was confident markets are strong enough to continue very rapid growth even in such circumstances, noting that the illness of PM Ariel Sharon provided a "live test" of the economy's resilience. Strong trading even in the aftermath of Sharon's debilitation, he said, indicate the "newfound maturity of Israeli financial markets".
Given "conditions of relative security", the Israeli economy could grow at roughly 5% yearly for the next 10 to 15 years. But, he said, there is "no question" that if the security situation deteriorates badly or if global economy goes into a serious recession, Israel's economy would be hurt.
Fischer also expressed confidence that the current economic policy of reforms, fiscal restraint, and withdrawal of the government from economic intervention would continue under the next Israeli government.