The Palestinian economy in the West Bank faces severe contraction as security restrictions and fiscal disputes between Israel and the Palestinian Authority threaten regional stability, according to a new International Crisis Group report documenting a deepening financial crisis affecting roughly 3.4 million Palestinians.
The report, based on interviews with Palestinian business leaders, mayors and government officials, details how the West Bank economy has contracted substantially since the third year of the conflict that began with Hamas' Oct. 7, 2023, attack. Unemployment has reached roughly 30%, while private companies have experienced an estimated 50% decline in business, reflecting tightened movement controls, disrupted supply chains and heightened uncertainty.
Security Measures and Economic Impact
After the Hamas attack, Israel revoked work permits for most of the nearly 200,000 Palestinians who had previously worked in Israel. Officials cited security concerns, but the move eliminated nearly $400 million a month from the Palestinian economy, representing almost one-fourth of its overall economic output. Throughout decades of military occupation, the Palestinian economy has been constrained by checkpoints and military gates that curtail movement of people and goods, with households and businesses relying heavily on jobs and imports tied to Israel while facing restrictions on land and trade.
The International Crisis Group report states that Israeli measures restricting movement, withholding revenue and taking land are crippling the Palestinian economy. It says Israeli policies suggest a concerted effort to "advance Israel's own declared goal of extending its control and preventing a Palestinian state from emerging." The report warns: "The economic conditions necessary for any Palestinian future other than permanent subjugation are being dismantled."
Palestinian Authority Fiscal Crisis
The Palestinian Authority stands at the center of the crisis as the occupied West Bank's largest employer and service provider. Government agencies have borrowed heavily to maintain operations as public sector workers go unpaid and infrastructure such as roads and water lines deteriorate. The inability to fund public services is keeping patients out of hospitals and children out of school.
Most of the Palestinian Authority's revenue comes from taxes collected on goods entering the West Bank through Israeli ports, because Palestinians do not control their own borders. Under hard-line ministers in Israeli Prime Minister Benjamin Netanyahu's government, Israel has withheld billions of dollars in owed tax revenue and unilaterally imposed deductions on the funds. No transfers have been made since May 2025, one year ago.
Many businesses are struggling to pay workers, contractors and suppliers. The report states: "Palestinian society survives, but in a state of grinding immiseration. Absent remedies, the result will likely be a loss of hope and a growing risk of instability and greater violence."
Government Divisions
Joost Hiltermann, International Crisis Group's special adviser for the Middle East and North Africa who wrote the report, said the world's focus on more than two years of war in Gaza had drawn attention away from the West Bank, but that changes taking place now could have arguably wider consequences for Palestinians' future aspirations. Hiltermann said Israeli officials, who exert considerable control over many of the policies in question, did not agree to be interviewed. He noted disagreements within Netanyahu's government, with settler leaders and security officials often clashing on how to manage the Palestinian economy.
"The security establishment doesn't want the Palestinian Authority or economy to collapse because they would have to assume the burden of governing the territory in full after essentially destroying it," he said.
Why This Matters:
The West Bank's economic deterioration presents serious fiscal and security implications for regional stability. The loss of nearly $400 million monthly in Palestinian wages following security-related permit revocations demonstrates the difficult balance between protecting Israeli citizens and maintaining economic functionality in contested territories. The Palestinian Authority's dependence on Israeli-collected tax revenues—now withheld for one year—highlights fundamental governance questions about fiscal sovereignty and administrative sustainability. The Israeli security establishment's concern about potential collapse underscores a core tension: restrictive measures designed to enhance security may create conditions requiring even greater Israeli administrative and financial burden. With 30% unemployment and a 50% decline in business activity, the risk of instability grows, potentially requiring increased security expenditures and direct governance responsibilities that neither side appears equipped to manage sustainably.