Palestinian Public Debt: Who Borrows from Whom? And Until When?

Author: سعيد صبري

Author/ International Economic Consultant – Member of the Board of Directors of the International Digital Transformation Authority – Dubai

Amid the abundance of daily agendas overwhelming our Palestinian reality – from delayed salaries, fragmented deposits, and water and electricity bills that burden citizens, to reducing working hours for employees and ever-changing financial scenarios every week – my pen is perplexed about what to write and which angle deserves priority. Yet, amidst this chaos, one question persists with insistence: What is the fate of the Palestinian public debt? Who is borrowing from whom? And until when will the government continue to borrow to cover its operating expenses instead of investing in a sustainable economic future?

In this turbulent context, the path of public debt cannot be separated from the broader economic scene, where mismanagement of public finances intertwines with resource scarcity and the complexities of Israeli restrictions.
It is notable that countries usually resort to borrowing to develop infrastructure and create vital economic zones that contribute to driving growth. In the Palestinian case, we often borrow to cover salaries and operational spending, which are alarming indicators of fragile financial planning and resource depletion without achieving productive accumulation or economic stimulation.

The Palestinian public debt has seen accelerated growth since 2005, when it was approximately 4.2 billion shekels, gradually rising over the following years, alongside a decline in foreign aid, reaching around 16 billion shekels by the end of 2024, according to data from the Ministry of Finance and oversight reports. Estimates indicate that the public debt currently constitutes about 85.7% of the Gross Domestic Product (GDP), one of the highest rates in the region. Budget data shows that international aid to the authority's budget dropped from about 2 billion dollars annually in the first decade of this century to around 400 million dollars only in 2023, decreasing from about 27% of GDP to less than 2%. This sharp decline in support has pushed successive governments to improve tax collection and raise revenues, but without a real ability to cover the accumulated annual deficit, leading them to borrow locally from banks, pension funds, and the private sector.

Data issued by the Ministry of Finance indicates that the total public debt reached about 14.7 billion shekels in February 2025, down from 15.3 billion shekels in January 2025, and 15.36 billion shekels in January 2024. At the same time, documented oversight reports reveal that the total public debt of the Palestinian government nears 16 billion shekels, distributed between 5 billion shekels in external debts and 11 billion shekels in debts to the private sector. Among this latter debt, there are approximately 2 billion shekels owed to the health sector and 700 million shekels owed to contractors.

As for internal debt, it carries additional dimensions when we realize that it is not limited to banks alone, but also includes arrears owed to the private sector, entitlements for public employees, pension funds, and suppliers. Estimates indicate that the debt owed to banks reached 2.88 billion dollars, and to the public pension agency about 3 billion dollars, while the debts owed to employees exceeded 1.50 billion dollars, and to the private sector 1.5 billion dollars. These accumulated obligations threaten the government's ability to meet its basic requirements and weaken public confidence in the stability of the financial system.

The crisis of public debt cannot be understood without addressing the clearance system, which is the primary source of Palestinian public revenues, contributing between 60 to 70% of total government income. According to official data, clearance funds transferred from the Israeli side during 2024 amounted to about 9.9 billion shekels, but estimates indicate that the actual amount owed before deductions exceeded 12.8 billion shekels, meaning that what was forcibly deducted by the occupation is estimated at over 2.9 billion shekels – equivalent to about 22.6% of revenues.

Israel justifies these deductions by claiming they are for the salaries of prisoners and martyrs, or for electricity and water bills, without any mechanism for review or dual auditing. This means that the government is forced to incur internal debt to cover this chronic deficiency, exacerbating the public debt instead of resolving it. Worse, these deductions are effectively turned into a tool of financial and political pressure rather than remaining within agreed administrative and economic arrangements.

One aspect that is often overlooked is the significant risks facing the Palestinian private sector, which continues to supply goods and services to the government despite accumulating debts and delays in payment. Over time, these debts become a burden on companies, forcing them to reduce their activity, postpone expansion, or even lay off workers, thus exacerbating unemployment rates and weakening the economic cycle. If the government continues to postpone payments without a clear plan, it threatens the private sector's trust in dealing with it, pushing it to reduce exposure to the public sector or impose stricter conditions in the future.

Practical Solutions:

From here, the need to activate the Palestinian Public Debt Law No. (24) of 2005 arises, and to amend it to keep pace with current financial challenges. This law stipulated organizing internal and external borrowing, subjecting external public debt agreements to the legislative council's approval, and publishing them in the official gazette. However, the lack of practical activation, amid the paralysis of legislative oversight, has deprived this law of many of its executive tools. The development of this law should include explicit provisions to guarantee the rights of individuals and institutions, especially concerning securing the payment of their entitlements, and protecting them from erosion over time by linking them to fair financial indicators, and ensuring their inclusion in the general budget, with a clear timeline for repayment.

In light of the continuous expansion of the salary bill, which rose from 6.4 billion shekels in 2011 to 8.4 billion in 2021, and is expected to reach 8.9 billion shekels in 2025, without a corresponding improvement in government performance, one source of financial bleeding lies in allowances not tied to efficiency. Reports have shown that most employees receive allowances that do not reflect job roles or productivity, exacerbating the gap between actual expenditures and institutional returns. Here, the need arises to review the civil service and security service laws established nearly two decades ago, as they have become a chronic financial burden.

Additionally, it is essential to enact an updated law regulating public debt, setting a legal ceiling as a percentage of GDP, and obliging the government to direct part of loans towards investment spending that generates future returns, instead of just depleting salaries and operational expenses.
And the question we must answer today, before tomorrow: Are we managing the debt… or is the debt managing us?