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By Ali Sawafta
RAMALLAH, West Bank | Sun Sep 9, 2012 12:03pm EDT
(Reuters) - The cash-strapped Palestinian Authority said on Sunday it has asked Israel to consider overhauling a key economic agreement that has determined its customs and tax rates for the past 18 years, in the wake of street protests against high prices.
U.N. agencies and Palestinian economists say the economic sections of the Oslo interim peace deals, outlined in the Paris Protocol of 1994, have been implemented by Israel selectively and mostly to its benefit.
"Eighteen years of the Paris economic agreement have become a heavy burden on the Palestinian people and led to very difficult financial and economic conditions," Palestinian Civil Affairs Minister Hussein al-Sheikh told Reuters.
The aid-dependent Palestinian Authority (PA), which exercises limited self-rule in the occupied West Bank, has also been plunged into its deepening financial crisis by a drop in assistance from Western and wealthy Gulf backers.
The Paris Protocol maps out an economic blueprint for a customs union between Israel and the Palestinian territories and pegs value added tax to Israeli rates, now at 17 percent, effectively blocking any steep price cuts in the West Bank.
In another blow to the Palestinian economy, provisions allowing the Palestinians to make free trade agreements with other states and mandating access to Israeli markets have not transpired.
Last week, days of street protests in the occupied West Bank against high living costs led Palestinian Prime Minister Salam Fayyad to say on Thursday he would be willing to resign if there was "a real public demand" that he step down.
Sheikh said he had sent a letter, at President Mahmoud Abbas's request, to Israel's Defence Ministry "demanding they open" the Paris accord and offering to form joint technical committees to negotiate its amendment.
Asked about the Palestinian move, Amos Gilboa, a senior Israeli Defence Ministry official, told Israel Radio: "We have to examine exactly what they are proposing and to see if it's practical."
The Palestinian government is grappling with a recurring budget deficit and external debt, both hovering above a billion dollars or nearly a fifth of gross domestic product.
Foreign aid is now lagging, as a hoped-for $1.1 billion in 2011 reached only $750 million, as pledges from Gulf states in particular fell short.
Some economists say economic growth could be as low as 3-4 percent this year, and with a fifth of the population unemployed, prospects for many of the West Bank's 2.5 million Palestinians are declining.
The Palestinian Authority's cash crisis has delayed salary payments for some 153,000 civil servants several times this year.
Perhaps worried the stalling economy will unleash unrest in the territories, Israel is showing flexibility.
After a year of negotiation, Israel agreed this summer to streamline the handling of import duties it collects on goods bound for the Palestinian market - duties worth some $100 million a month, around two-thirds of PA income.
But Samir Abdullah, director general of the Palestine Economic Policy Research Institute, said the Paris accord need to be renegotiated to free Palestinians from their dependence on Israeli oversight and allow them more leeway to trade abroad.
"Israel has not committed to open its market to the Palestinians while the Palestinian market has remained open to it," he told Reuters.
Mechanisms for economic dialogue between Israel and the Palestinians were mandated by the interim Paris deal, which like the Oslo accords, was meant to last for only five years pending a final peace agreement between Israel and the Palestinians.
A 2000 to 2005 Palestinian uprising led Israel to tighten restrictions on the movement of Palestinian goods and statehood negotiations have been frozen since 2010 in a dispute over Jewish settlement construction.
(Writing by Jeffrey Heller in Jerusalem, Additional reporting by Noah Browning in Ramallah; Editing by Sophie Hares)