Order Code RS22370
February 2, 2006
CRS Report for Congress
Received through the CRS Web
U.S. Aid to the Palestinians
Jeremy M. Sharp
Middle East Policy Analyst
Foreign Affairs, Defense, and Trade Division
Summary
With the recent success of Hamas at the polls, many observers have cautioned that
continued foreign assistance to the Palestinian Authority (PA) may be at risk due to
Hamas’ commitment to the destruction of the state of Israel and its designation as a
terrorist group by the United States. Currently, the Palestinians are the largest per capita
recipients of foreign aid worldwide and, with a shattered economy, are completely
dependent on external support to meet basic needs. Without Western aid, a Hamas-led
government may be forced to rely completely on donations from wealthy Arab Gulf
states or from Iran. On the other hand, the prospect of losing U.S. and European aid may
force Hamas to tone down its radical views and accept Israel’s right to exist. In the
meantime, foreign donors have been cautious, demanding that Hamas renounce the use
of violence and recognize Israel while withholding a complete cessation of aid programs
pending the formation of a new Palestinian government. This report will be updated as
events warrant. For more information, see CRS Issue Brief IB91137, The Middle East
Peace Talks, by Carol Migdalovitz.
Background
Until his death in November 2004, former PA President Yasser Arafat controlled
Palestinian finances and faced widespread criticism for his lack of transparency,
corruption, and misuse of foreign aid. Some observers described Arafat’s use of the PA
treasury as his “personal cashbox” and allege that almost half of the $7 billion provided
to the PA since its creation in the early 1990s may have been diverted by Arafat to
political patronage and kickbacks.1 Although the extent of Arafat’s misuse of PA money
was never fully known, Israeli leaders, Palestinian reformers, and others repeatedly
accused Arafat and his inner circle of corruption; nevertheless, his total domination of
Palestinian political life made him indispensable to those seeking his cooperation in
achieving regional peace and many were forced to ignore such charges.
1 David Samuels, “ In a Ruined Country,” Atlantic Monthly, September 2005.
Congressional Research Service ˜ The Library of Congress

---

CRS-2
After the renewal of Israeli-Palestinian violence in September 2000, the United
States and Israel worked to isolate Arafat and demanded that PA finances be reformed.
In response to external pressure, Arafat appointed Salam Fayyad, a Palestinian economist
and former International Monetary Fund (IMF) representative to the PA, as Finance
Minister. During his tenure, which ended in late 2005, Fayyad was credited with
streamlining PA government finances and making PA expenditures more transparent. In
November 2005, Fayyad resigned from his post, citing his desire to run for parliament and
his frustration with international donors who have failed to follow through on pledges of
aid.
Recent U.S. Aid
With the death of Yasir Arafat and the election of Mahmoud Abbas as the new
President of the Palestinian Authority, there was renewed hope for restarting the dormant
Middle East peace process. The United States signaled its commitment to playing an
active role by stepping up diplomatic efforts and increasing aid amounts to the
Palestinians in order to strengthen Abbas’ efforts to consolidate power inside the PA.
In fiscal year 2005, the Bush Administration and Congress significantly increased
U.S. economic aid to the Palestinians through supplemental appropriations and by
reprogramming economic aid that had been appropriated in previous years. President
Bush also used his authority to provide $50 million in direct assistance to the Palestinian
Authority, marking only the fourth time a U.S. president has used a congressionally
authorized waiver to channel aid away from USAID programs and directly to the PA.
Table 1. U.S. Assistance to the Palestinians, FY2002-FY2006
(Regular & Supplemental Appropriations; Current Year $ in millions)
FY2002
FY2003
FY2004
FY2005
FY2006
Account
Actual
Actual
Actual
Estimate
Estimate
ESF
$72.000
$124.500
$74.558
$274.400
$150.000
P.L. 480 Title II
-
$9.984
-
-
-
Total
$72.000
$134.484
$74.558
$274.400
$150.000
Source: U.S. State Department.
The United States took the following actions in FY2005-FY2006 to support
Palestinian President Abbas.
New Appropriations
! Congress appropriated $75 million in Economic Support Funds (ESF) for
USAID’s West Bank and Gaza program in P.L. 108-447, the 2005
Consolidated Appropriations Act. The United States also provides $100
million annually to the United Nations (UNRWA) for Palestinian refugee
camps in the Gaza Strip.
! Congress appropriated $200 million in supplemental ESF in P.L. 109-13,
the FY2005 Iraq supplemental appropriations act.

---

CRS-3
! In the FY2006 Foreign Operations, Export Financing, and Related
Programs Appropriations Act (P.L. 109-102), Congress has provided
$150 million in ESF for the West Bank and Gaza Strip, which is double
the recent annual amount of economic aid for USAID programs for the
Palestinians.
Reprogramming
! The Bush Administration and USAID reprogrammed an estimated $45-
$75 million in ESF that had been previously designated for a
desalinization plant in Gaza.
Direct Assistance to the PA
! President Bush used the waiver authority granted him by Congress to
provide $50 million in direct assistance to the Palestinian Authority to
rehabilitate roads, water facilities, schools, and health clinics in Gaza to
help ease the transition after the Israeli disengagement. The direct aid
came out of the $75 million ESF appropriation for FY2005.
Non-Lethal Security Assistance
! Of the $200 million in FY2005 supplemental ESF, the United States
designated $2.3 million for non-lethal assistance to security forces under
the command of the PA Interior Ministry. This equipment included
vehicles, riot gear, and basic provisions. All items were cleared through
Israeli Customs and were coordinated by the U.S. Security Coordinator
for the Palestinians and USAID.
Aid for the Palestinian Elections
As was reported in the press, USAID spent $2.3 million in ESF on support for the
Palestinian elections, which many observers allege was designed to bolster the image of
President Abbas and his Fatah party. According to recent reports, USAID’s Office of
Transition Initiatives used discretionary spending accounts for various projects, including
tree planting, schoolroom additions, a soccer tournament, street cleaning, and computers
at community centers.2 Reportedly, the sensitivity involved in supporting such projects
led USAID to remove its usual branding requirement on its sponsored activities. In
reaction to critics who have charged the United States with trying to influence the
outcome of the election, one USAID official stated that “we are not favoring any
particular party ... but we do not support parties that are on the terrorism list. We are here
to support the democratic process.”3
2 “U.S. Spent $1.9 Million to Aid Fatah in Palestinian Elections, “ New York Times, January 23,
2006.
3 “U.S. Funds Enter Fray In Palestinian Elections,” Washington Post, January 22, 2006.

---

CRS-4
Current U.S. Restrictions on Aid to the Palestinians
Direct Assistance to the PA. Since the signing of the Oslo Accord in 1993, the
U.S. government has committed more than $1.8 billion in economic assistance to the
Palestinians. Approximately 80% of U.S. funding for the Palestinians has been channeled
through USAID contractors and 20% through private voluntary organizations (PVOs).
According to annual foreign operations legislation, congressionally approved funds for
the West Bank and Gaza Strip cannot be used for the Palestinian Authority, unless the
President submits a waiver to Congress citing that doing so is in the interest of national
security. To date, the United States has provided direct assistance to the Palestinian
Authority on four occasions. In1993-1994, the United States provided $36 million
through the Holst Fund at the World Bank for direct assistance to the Palestinian
Authority and an additional $5 million in cash and equipment for the Palestinian police.
From 1995-2002, no U.S. assistance went to the Palestinian Authority or any of its
constituent bodies. On July 8, 2003, the United States announced that it would provide
$20 million out of a $50 million FY2003 supplemental appropriations as direct aid to the
PA for infrastructure projects. On December 8, 2004, President Bush again approved $20
million in direct assistance to the PA to pay off overdue Palestinian utility bills to Israeli
companies. Following PA President Mahmoud Abbas’ May 2005 visit to the White
House, President Bush transferred an additional $50 million from unobligated ESF funds
to the Palestinian Authority.
Auditing of U.S. Assistance. For several years, Congress has mandated that
U.S. aid to the Palestinians be tightly monitored in order to prevent aid from going to
terrorist groups. P.L. 109-102, the FY2006 Foreign Operations Appropriations Act,
specifies that up to $1,000,000 in ESF may be used by the Office of the USAID Inspector
General for audits and inspections of the USAID West Bank and Gaza program. In
addition, the act requires the U.S. Comptroller General to conduct its own audit of all
funds for the bilateral West Bank and Gaza program.
Other Restrictions. In annual foreign operations appropriations bills, Congress
also has acted to restrict assistance to the Palestinian Broadcasting Corporation (PBC).
Israel accuses the PBC of inciting violence against Israelis. The PBC was originally
designed to be an independent corporation. Congress also has specified that no U.S.
assistance can be provided to a future Palestinian state unless the Secretary of State
certifies, among other things, that the leadership of the new state has been democratically
elected, is committed to peaceful coexistence with Israel, and is taking appropriate
measures to combat terrorism.
Palestinian Authority Finances
Although media reports vary widely on the exact nature of Palestinian finances, PA
expenditures in 2005 were approximately $1.8 billion, and revenue, including direct
external budget support, was estimated at only $1.1 billion. The PA generates its revenues
from modest amounts of collected taxes ($400 million), customs duties collected by Israel
($400 million), and foreign aid ($320 million in direct aid). Currently, the PA is running
a significant monthly deficit and has been forced to borrow from commercial lenders in
order to pay salaries for its 174,000 employees, of whom approximately 58,000 are in the
security services. On February 1, 2006, Israel announced that it was freezing the transfer

---

CRS-5
of customs revenues to the PA. Israeli officials noted that future transfers will be put on
hold while the issue is being reviewed.
Table 2. International Direct Assistance to the
Palestinian Authority for Calendar Year 2004
($ in millions)
Country/Organization
Donations
European Union
105.800
World Bank
92.344
Saudi Arabia
76.999
United States
20.000
Libya
13.799
United Kingdom
12.300
Norway
12.000
Japan
10.000
Canada
7.000
Egypt
3.317
Other
6.647
Total (est.)
360.206
Source: USAID, PA Ministry of Finance.
Indirect Assistance. The international community also provides a large amount
of indirect assistance for the Palestinian people through donations to specific development
projects. The European Union and the United States are major providers of indirect aid
($300 million and $345 million respectively in calendar year 2005). Assistance from Arab
countries has averaged about $200 million annually, though there may be significant other
unreported donations, particularly from Persian Gulf governments.
Hamas and Potential Implications for U.S. Aid
In the short time period following the recent Palestinian legislative elections,
Administration officials and some Members of Congress have warned the Hamas
leadership that the United States will no longer provide assistance to a Hamas-led PA
government unless Hamas changes its charter to recognize Israel’s right to exist and
renounces the use of violence. On January 30, 2006, representatives of the Quartet
(United States, Russia, United Nations, and European Union) conditioned future foreign
assistance to the PA on the future government’s commitment to nonviolence, recognition
of the state of Israel, and acceptance of previous agreements. If Hamas should resist such
changes, Congress and the Administration could potentially alter or halt U.S. assistance
to the Palestinians. Some changes or new options could include the following:

---

CRS-6
! Eliminate the presidential waiver authority to authorize direct aid to the
PA;4
! Tighten existing restrictions on the USAID West Bank/Gaza program,
including the oversight of Palestinian non governmental organizations
working as subcontractors;
! Direct U.S. economic aid to non-Hamas groups;
! Direct U.S. economic aid to projects run by ministries controlled by non-
Hamas leaders or to the office of President Abbas; and
! End future U.S. assistance to the Palestinians but continue funding
existing programs.
It is worth noting that the United States currently provides small amounts of ESF aid
for projects in Lebanon, despite the participation of Hizballah, a U.S.-designated terrorist
group, in parliament (14 out of 128 members) and in the current cabinet (one minor
cabinet post). However, in Lebanon, Hizballah is part of a larger coalition government,
whereas in the West Bank and Gaza, Hamas is poised to be the dominant player in the
political arena.
Recent Legislation
H.R. 4668; referred to the House International Relations Committee on January 31,
2006. Among other things, this legislation would require the President to certify that the
PA is not controlled by a foreign terrorist organization before U.S. aid to the PA is
provided.
H.R. 4681; referred to the House International Relations Committee on February 1,
2006. According to Congressional Quarterly, this legislation, among other things, would
halt bilateral aid unless the President certified that the PA had purged individuals with ties
to terrorism from its security forces, arrested suspected terrorists, confiscated their
weapons, and halted anti-Israeli language in Palestinian media. In addition, the bill would
deny visas to Palestinian officials to visit the United States. Finally, it would require the
State Department to audit U.N.-funded programs in the region to eliminate “duplicative
efforts” and ensure “balance in the approach to Israeli-Palestinian issues.”
S. 2237; referred to the Committee on Foreign Relations on February 1, 2006. A bill
to withhold United States assistance from the Palestinian Authority until certain
conditions have been satisfied.
4 Section 550 (b) of P.L. 109-102, the FY2006 Foreign Operations Appropriations Act, states
that the President may use this waiver if providing direct aid to the PA is important to the
national security interests of the United States. By law, the waiver must be accompanied by a
report to Congress detailing the steps the Palestinian Authority has taken to arrest terrorists,
confiscate weapons, and dismantle the terrorist infrastructure. The report also must include a
description of how funds will be spent and the accounting procedures in place to ensure that they
are properly disbursed.

---