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Hamas short on cash as Egypt clamps down on smuggling, revealing first cracks in Hamas' rule

GAZA CITY, Gaza Strip (AP) — Hamas confirmed Sunday it is unable to pay thousands of government workers in full for a second straight month — a new sign that the Islamic militants are caught in what may be the most serious cash crunch in three years of ruling Gaza.

Hamas dismisses rumors of a financial crisis, and insists its money woes are temporary. However, it has resorted to an unpopular tax drive to raise money, suggesting that a heavy blockade on the territory, an Egyptian crackdown on smuggling and an increasingly expensive government bureaucracy are taking their toll.

The hunt for revenue has prompted a rare public backlash, hinting at a small crack in Hamas' hold on power. A 40 percent tax on cigarettes set off a flurry of angry text messages among smokers, and a small opposition group warned the new taxes could unleash a popular revolt.

Hamas acknowledges it is having trouble bringing in money from abroad — no small problem for a government that says it raises only 10 percent of its revenue locally.

The Islamists are secretive about the sources of their money, but they are believed to get large sums from Iran and a network of Hamas supporters abroad, with cash smuggled through a network of tunnels under Gaza's border with Egypt.

The current crisis reflects Hamas' dilemma: It wants to be both a militant group and a government providing for 1.5 million people. Hamas' refusal to soften its hardline ideology, for fear of losing its militant credentials, has perpetuated a border blockade by Israel and Egypt. The closure has further impoverished Gazans and has put a heavier load on the government.

Still, Hamas largely managed to make ends meet.

In recent months, however, Egypt disrupted the balance by clamping down hard on the smuggling — building a steel wall to gradually close off the tunnels, blowing up entry shafts on Egyptian soil and confiscating contraband. Just last week, four Palestinians were killed when Egypt blew up a tunnel shaft. In March, Egypt arrested 45 smugglers, including a man suspected of carrying $242,000 for Hamas.

Issa Nashar, mayor of the Gaza border town of Rafah, says he believes dozens of some 400 tunnels are idle.

An Arab diplomat, speaking on condition of anonymity because he is not authorized to brief reporters on security issues, said Egypt is trying to disrupt the cash flow to pressure Hamas into signing a reconciliation agreement with its Western-backed rival, Palestinian President Mahmoud Abbas. Hamas drove out Abbas' forces when it seized Gaza in 2007, leaving him with only the West Bank. Egypt has staked its prestige on ending the rift, but Hamas won't commit to Cairo's plan to give Abbas a foothold in Gaza.

As the money flow slows, running Gaza's government is becoming more expensive. Hamas has increased the size of its public payroll from a few thousand to 32,000 civil servants and troops, in part a response to pressure to find jobs for supporters.

With a 2010 budget of $540 million, Hamas needs $16 million a month just for salaries, said Deputy Finance Minister Ismail Mahfouz. In March, the government was unable to cover the payroll in full, paying each employee only $400; those who normally earn more were promised the rest later. A midlevel civil servant makes about $700 a month and a top earner about $1,100.

Mahfouz confirmed Sunday that April salaries would also not be paid in full.

Later Sunday, Gaza Prime Minister Ismail Haniyeh said some 25,000 unemployed laborers would receive $100 each to mark May Day. The unemployed only receive occasional handouts.

Mahfouz said Hamas isn't broke, just short of cash.

"We are having difficulties in getting the money in (to Gaza) because of the siege, and this will not last long," Mahfouz said in comments posted on Gaza's Finance Ministry's website. "The government has its own reserves, and it can make them available, but it needs a way of getting them."

Bank transfers are not an option, said Jihad al-Wazir, head of the West Bank-based Palestine Monetary Authority, which regulates the banking system in the West Bank and Gaza. The Gaza branches of Palestinian banks avoid ties with the militants so as not to run afoul of anti-money laundering regulations or lose business abroad.

"We have a firewall between us and the Hamas government in Gaza," said al-Wazir.

The Arab diplomat said Hamas launders some money through Gaza importers, but the volume is limited because of the blockade.

Some speculate that Hamas is saving for a time it might be forced from power, that it has too much cash tied up in business ventures such as real estate or that there is friction over money between the Hamas movement and the Gaza government. But Hamas' secretive nature makes such claims difficult to verify.

Gaza analyst Mukheimar Abu Sada said Hamas' willingness to impose taxes, at the risk of eroding support, suggests the Islamists need cash badly.

Tunnel smugglers say they've been asked to pay at least $1,000 for each car they import, and gas station owners are charged 3 percent on smuggled fuel. The Gaza City municipality, which provides services to 600,000 residents, is now demanding taxes from businesses and households, after Hamas stopped paying half of the municipal budget six months ago.

Hamas portrays the new cigarette tax as a crusade against smoking, not a money maker.

But Gaza smokers, who now have to pay $2.95 for a pack of Marlboros, up from $2.15, don't buy that.

"Message from the rightly guided government — smoking hurts your health but keeps the government alive," read one of the many sarcastic text messages Gazans sent to each other.

Rami Franji, 20, who runs his family's small grocery in Gaza City, said he can't afford to pay local tax and doesn't want to, either, because he no longer supports Hamas.

His father Nasser, 47, who is being asked to pay tax on his tiny car repair shop, said Hamas has done well in ending chaos in the streets, but has failed in providing for Gaza's citizens. "The situation is bad," he said. "There is security, but there is no food."

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Associated Press writers Dalia Nammari and Mohammed Daraghmeh contributed to this report in Ramallah, West Bank.