Prime Minister Binyamin Netanyahu and his security cabinet decided to reinstate the monthly transfer of tax revenues to the Palestinian Authority on Monday, according to a Prime Minister's Office spokesman.
The move came just days after US President Barack Obama visited Israel and the PA, and US Secretary of State John Kerry met with Netanyahu and PA President Mahmoud Abbas to discuss efforts to renew the peace process. Obama said during his visit that he wanted to see "steps that both Palestinians and Israelis can take to build trust and confidence upon which lasting peace will depend".
Interim peace deals task Israel with collecting taxes and customs duties on the Palestinian Authority's behalf on goods imported into the Palestinian territories. Israel has previously frozen payments to the Palestinian government during times of heightened security and diplomatic tensions, provoking strong international criticism.
Netanyahu withheld the transfer of tax revenues collected for the PA in the aftermath of the Palestinian statehood upgrade at the UN in November.
Since, Israel has evaluated the transfer of the tax revenues to the PA on a month-by-month basis. Monday's directive appeared to normalize the tax transfers, cancelling the monthly reviews.
The aid-dependent Palestinian Authority has been in a financial crisis fueled by a drop in assistance from Western and wealthy Gulf backers, renewed tensions with Israel and a need to meet an expanding public sector payroll.
The International Monetary Fund warned earlier this month that the Palestinian Authority's fiscal situation was "increasingly precarious."
The IMF called for urgent action to help it close a gaping budget deficit and to stabilize the economy.
The United States confirmed over the weekend that it was releasing nearly $500 million in aid which had been frozen to the PA.
However, a PA official consequently warned that the financial crisis in the West Bank was not over despite the US aid.
"Only $200 million of the $480 million from the United States will go to the Treasury, and the rest will be go to USAID-funded projects," the Bethlehem-based Ma'an News Agency quoted PA Labor Minister Ahmad Majdalani as saying on Saturday.
He added that of the $1.3 billion in aid pledged to the PA from various donor countries in 2012, only some $800 million had actually been transferred.
The IMF urged the cash-strapped Palestinian Authority to draw up contingency plans that include spending cuts. It also said the Authority should look at ways to boost growth, which is forecast at roughly 4.0 percent between 2013 to 2016.
The IMF said unemployment had increased to almost a quarter of the labor force by the end of 2012, with unemployment among the youth particularly high.
In the past few months, the Authority has failed to pay full salaries to its 160,000 employees in the West Bank and Gaza Strip, territory controlled by the rival Hamas Islamist movement.
"Domestic sources of financing are drying up, with both the bank and non-bank private sector increasingly reluctant to finance the government," the IMF said in a report prepared for a donor meeting on March 19.
"If left unchecked, these trends will ultimately lead some to question the legitimacy of the PA and undermine its ability to govern effectively," the IMF added.