Palestinians feel pinch

Cutting aid to the Hamas government is already having an impact on everyday life.

Every month, Fatma Nofal cashed a $500 check from a brother who works abroad to support their family here. But on Monday the debit note from the US's Chevy Chase Bank was rejected.

"This is the first time that I've gotten that answer," says Ms. Nofal, as she walked out of a central Ramallah money changer with no place to redeem the check. "I don't know what to do."

Nofal is one of many Palestinians feeling the pinch of an economic boycott of the Hamas-run Palestinian Authority (PA), as a cutoff in ties by the US, Europe, and Israel touches off a financial crisis that could snowball. Already retailers won't accept credit from public servants out of concern they will never be repaid, lines are growing at some gas pumps amid a shortage of fuel, and a top Israeli bank said it will no longer work with Palestinian counterparts.

"The situation is deteriorating in a dramatic and tragic way," Palestinian President Mahmoud Abbas told reporters Tuesday.

The growing hardship comes amid an unprecedented Israeli shelling of Gaza that has killed 13 militants and four civilians - including a 7-year old girl - in retaliation for cross-border salvos of primitive rockets by Palestinian militants.

The economic pressure is aimed at forcing Hamas's fledgling government to relent on its refusal to meet international demands to recognize Israel, give up its weapons, and honor previously signed peace agreements. But it is still unclear whether the economic sanctions will prompt a Palestinian about-face or backfire by rallying sympathy for the embattled Islamic cabinet and undermine a year-old calm in violence.

"I don't think that Hamas is for sale. If they gave in to the international demands, they wouldn't be Hamas anymore," says Gershon Baskin, the cochairman of the Israel-Palestine Center for Research and Information in Jerusalem. "They'll be viewed by the public as being victimized, and in the short run, they'll be able to pull through."

US and EU sever millions in aid

Last weekend, both the US and the European Union made long-awaited announcements that they would sever tens of millions of dollars in budgetary aid to the PA. Also, Israel has frozen transfer of customs taxes collected for the PA. Newly appointed Palestinian Finance Minister Omar Abdel Rzeq said he is awaiting some $50 million in financial aid from Arab countries.

The international aid is potent leverage because PA spending accounts for half of gross domestic product in an economy beleaguered by more than five years of violence with Israel, economists say. The government has already failed to pay March salaries. Meanwhile, the anticipation of a cash crunch is trickling down to consumers and businesses alike.

"If the PA acts like a pariah, then they can't be surprised if they're being treated like a pariah," said Israeli Foreign Ministry spokesman Mark Regev, who argued that the policy to isolate Hamas is working.

While Hamas is likely to remain popular, the crisis could undermine public confidence in its ability to govern, analysts say. That would give Mr. Abbas political capital to dissolve the recently elected parliament.

"[Palestinians] may say, 'We like you in our heart, but it seems to us that it is not the best time for you to be in power,' " says Samir Barghouti, a Ramallah economic consultant to the EU. "Nobody can predict the scenario, but there will be instability, and the president will be involved. It could be a reason to organize a new election."

At Rainbow 86 dry cleaners in central Ramallah, manager Khaled Kuran held a fist full of unpaid bills from officers in the Palestinian security services, and vowed not to fill new orders for government employees.

"The people's salary is mortgaged to the bank," says Mr. Kuran, a supporter of the deposed Fatah party. "The government needs a political program. They need to think for themselves. Go to Hizbullah, go to Iran [for help], but don't sit there weak."

That difficulty has become clearer after Israeli gas company Dor Alon drastically reduced supply to the West Bank and Gaza because of the PA's unpaid debt, threatening a halt in vehicle traffic and factory activity.

And Israel's largest bank, Bank Hapoalim Ltd., is severing ties with Palestinian counterparts, removing a key monetary link with the outside world.

A Bank Hapoalim spokesperson says that the bank worries a relationship with Palestinian financial institutions that bankroll the new government could expose it to Israeli and US legal sanctions on doing business with Hamas.

But Palestinian businessmen describe the move as a politically motivated "financial disengagement" from the Palestinians, cutting an economic umbilical cord that has developed over nearly 40 years of Israeli military occupation of the West Bank and Gaza.

"Going cash-only is going to create an environment where less transactions can be done, and lower volumes of goods can be moved," says Sam Bahour, a technology consultant based in Ramallah. "It's one more notch in the collapsing of the economy."

Banks won't pay

Because Bank Hapoalim served as an intermediary to clear US checks for Palestinian financial institutions, Nofal's Ramallah money changer explained he couldn't be sure whether the bank note would be honored.

Palestinians didn't expect such a quick deterioration after Hamas's rise.

"Everything is in the hands of the government. A solution has to be found so stability can be achieved," says Nofal, who explained that, like the Palestinian economy, most of her family's income comes from abroad. "Every time things are expected to improve, they only get worse. People voted Hamas because they wanted change, but look at the crisis after the Hamas victory," she says.

Palestinian Prime Minister Ismail Haniyeh said last week the Islamic militants had inherited a penniless government and accused the US of "blackmail" for cutting aid. At a Ramallah sandwich shop, owner Wael Rabiyeh speculated that business might drop by next week because of the crisis, but added that he blamed Israel rather than the government.

"Even if I lose money, our self esteem is more important than economic gains," says Mr. Rabiyeh. "It's not because of Hamas ... it's because of people who claim [to support] democracy and then fight democracy."

Can a Hamas-led PA survive?

On Tuesday, a Hamas spokesman described Israel's sanctions as a "declaration of war." Indeed, if the new government collapses, say observers, the Islamic militants will have little incentive to uphold the year-long calm in suicide attacks on Israel.

"If Hamas fails, it will realize that it's due to Israel, Europe, and the Americans," says the economist Mr. Barghouti. "So if it has to give up power, Hamas's message to the world will be: You did not give us an opportunity to be part of the political process, so we will return to military activities."

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