Israeli government policies are deepening the economic crisis in the West Bank and bringing the Palestinian Authority closer to collapse. Combined with escalating violence against the Palestinian population, the worsening economic crisis is undermining stability and creating a serious risk of chaos and a Hamas takeover of the West Bank.
This policy reflects an intensified version of the “Hamas is an asset and the PA is a burden” policy. The collapse of both the PA and the Palestinian economy is openly presented as part of a strategy aimed at advancing annexation, even at the cost of strengthening Hamas and harming Israel’s security.
Preserving economic stability in the West Bank has always been a cornerstone of Israeli policy. GDP per capita in the West Bank increased fourfold between 2002 (the Second Intifada) and 2022, raising living standards. By contrast, Gaza, under Hamas rule since 2007, experienced economic stagnation, and GDP per capita barely increased.
Operation Swords of Iron led to a sharp change in Israeli policy toward the West Bank as well. Movement restrictions and additional measures taken by Israel caused substantial damage to economic activity. GDP per capita in the West Bank fell from $5,500 in 2022 to $4,800 in 2025, returning to the level it had been a decade earlier.
The deterioration in economic activity has been reflected in a sharp rise in unemployment, from 13% in 2022 to 30% in 2024 and 2025. Much of this increase resulted from the near-total suspension of work permits for Palestinian workers in Israel.
The number of Palestinian workers employed in Israel fell from approximately 170,000 in the third quarter of 2023 to about 30,000 on average in 2024 and 43,000 on average in 2025 (mostly unauthorized workers). Income earned by workers in Israel declined by 85% – from $4.3 billion in 2022 to $650 million in 2025.
The second pillar of economic stability in the West Bank – trade with Israel – was also severely damaged. Key components of this trade (e.g., the vegetable and furniture exports with the Arab community in Israel) were reduced by one-half to two-thirds.
Together, these two pillars accounted for roughly half of household income in the West Bank until October 2023. The income they generated has fallen by approximately two-thirds between 2022 and 2024-2025, dramatically reducing living standards and household incomes across the West Bank.
However, the most serious immediate risk to political stability and security in the West Bank stems from Israeli measures that are pushing the PA toward collapse. These measures have damaged both its fiscal stability and operational capacity, while also undermining the Palestinian banking system.
The principal fiscal measure is Israel’s withholding of tax and customs revenues that it collects on behalf of the PA under the clearance revenue arrangements established by the 1994 Paris Protocol. These transfers account for approximately 70% of the PA’s budget revenues.
The amount withheld has risen dramatically, from less than NIS 100 million per month between January and September 2023 to NIS 600 million per month in the second half of 2025 and nearly NIS 700 million per month in January-February 2026.
As a result, the PA’s underlying monthly budget deficit (before external aid) increased fivefold, from less than NIS 200 million before October 2023 to nearly NIS 1 billion in the second half of 2025.
As a result of this enormous deficit, by the end of 2025 the PA was close to insolvency. Consequently, the functioning of the PA and its ability to provide services to the population were severely impaired:
- Extreme arrears in payments to suppliers and service providers. By the end of 2025, these arrears totaled NIS 6 billion, equivalent to two years of goods and services procured by the PA. Most arrears are owed to medical services, undermining the ability to provide healthcare.
- Inability to repay large loans obtained from local banks. The PA has become a borrower that threatens the stability of the Palestinian banking system and now has limited ability to obtain additional loans.
- PA employees receive only partial salaries, and these are paid with significant delays. Unpaid wages nearly tripled during 2024-2025, amounting to more than a full year’s unpaid salary. Public services have deteriorated, with staffing, service provision, and education all affected.
Austerity budget
The PA announced that in 2026 it would operate under an “austerity budget,” making only essential purchases that could be paid for from actual revenues. The policy is already reflected in sharply lower expenditures and a further decline in public services.
Under the austerity budget, the PA will continue paying partial salaries and will be unable to meet its debt repayment obligations to banks. It will continue paying interest while principal repayments are deferred.
The most dangerous Israeli measure affecting the Palestinian banking system concerns the validity of the “indemnity letter” issued by the Finance Ministry to Israeli banks that work with Palestinian banks. The indemnity letter protects against potential legal claims.
Without it, the Palestinian banking system could be disconnected from the Israeli and international financial systems. The finance minister renews the indemnity letter only for a few weeks or months at a time, while maintaining the threat that it may not be renewed. This policy has injected persistent uncertainty into the Palestinian banking system.
Combined with growing violence and accelerated annexation processes, the security risk posed by continuing the current policy and pushing the PA toward collapse is increasingly difficult to ignore: the transformation of the West Bank into another Gaza, with all the severe implications and costs that entails.
A different policy must be adopted, and the measures that are damaging the Palestinian economy and collapsing the PA must be halted.
Urgent action is required in three areas: ending the withholding of clearance revenues to stabilize the PA’s fiscal situation; establishing a stable arrangement regarding the indemnity letter for the Palestinian banking system; and gradually resuming entry permits for Palestinian workers into Israel while simultaneously strengthening enforcement measures to prevent the entry of unauthorized workers.
The writer, a research fellow at the Mitvim Institute, is an expert on Middle Eastern economies. He is also a research fellow at the Dayan Center for Middle Eastern and African Studies and a senior economic consultant specializing in the Palestinian economy and Israeli-Palestinian economic relations.