Palestine - Economy

Unemployment in Gaza is 53.7% and 80% of Gaza’s population depends on humanitarian assistance, such as food aid, to meet their basic daily needs. In 2017 the United States provided $360 million to UNRWA [U.N. Relief and Works Agency], while in 2018 the announced budget was $60 million. Trump announced the cuts to UNRWA’s budget after the U.N. General Assembly overwhelmingly voted to condemn his decision to recognize Jerusalem as the capital of Israel. In January 2018 UNRWA launched an $800 million emergency appeal to assist Palestinian refugees in Gaza, the West Bank and Syria. The money would provide desperately needed food, cash, emergency medical supplies and support for mental health and gender-based violence programs. The United States cut off all funding to UNRWA on 31 August 2018.

As a result of the elimination of American support both for the Palestinian Authority and for the United Nations Relief and Works Agency for Palestine Refugees (UNRWA), by late 2018 the international community was deeply concerned about the sustainability of the Palestinian economy. Unless the situation improves significantly, there is a risk that the Palestinian economy could collapse during the course of next year. This would be a serious setback after 25 years of international donor support and state building in Palestine. Norway and other donors are also deeply concerned about the negative security consequences this could have both for Israel and for the region as a whole.

Palestinian businesses have a reputation for professionalism and product quality. Large Palestinian enterprises are internationally connected, with partnerships extending to Asia, Europe, the Gulf, and the Americas. The Palestinian economy is small and relatively open, although several large holding companies dominate some sectors. Because of the small size of the local market, access to foreign markets through trade is essential for private sector growth.

The Palestinian economy is primarily cash-based. There is little data available on the extent of money laundering in the West Bank or Gaza. Bulk cash smuggling, intellectual property rights violations, and counterfeit currency cases are reported. Trade-based money laundering, customs fraud, and other forms of value transfer allow criminal organizations to earn, move, and store supporting funds and illicit proceeds under the guise of legitimate trade. Trade-based money laundering and customs fraud are among the largest money laundering threats to the PA.

2015 was another difficult year for the Palestinian economy. Growth in the West Bank slowed to an estimated 2.8 percent, as investment remained weak, donor aid declined sharply, and the suspension of clearance revenue transfers in the early part of the year undermined confidence. While reconstruction efforts following the Israel-Hamas conflict in 2014 provided some boost to the Gazan economy, the pace of recovery was hampered by slow aid disbursements and restrictions on imports of construction materials, and the humanitarian situation remains dire. Unemployment remained stubbornly high in the West Bank and higher still in Gaza, where two-thirds of young people are without a job. In the face of the challenging circumstances, the authorities managed economic policies well, reducing the overall deficit for the third consecutive year.

If peace talks succeed, the Palestinian Authority would need to raise its implementation capacity through improved infrastructure and institutional reforms to optimize the economic impact of new financing and investment. The Economic Initiative for Palestine and other sources of support will present difficult economic management challenges, and cannot by themselves overcome persistent fiscal deficits and aid dependency. If peace talks do not succeed, the outlook could worsen and a new financing model—aimed at lower deficits and a change in the composition of spending in favor of development—would be urgently needed.

Economic activity is weak and insufficient to generate adequate job opportunities. In the West Bank, the first quarter of 2015 was characterized by reduced private consumption and investment growth and accumulation of arrears as a result of suspension of clearance revenue collected by Israel on goods imported into the West Bank and Gaza. In Gaza, growth has slowly resumed driven by some revival of donor-supported reconstruction activity. Unemployment rates remain high, reaching 42 percent in Gaza and 16 percent in the West Bank.

The economy of the West Bank and Gaza Strip is small, poorly developed, and highly dependent on Israel, and it has been impacted severely by the Israeli security measures imposed in response to the Intifada. The economy relies primarily on agriculture, services, and, to a lesser extent, light manufacturing.

Expanding employment opportunities for Palestinians in Israel and the Gulf brought a period of strong GDP growth in the 1970s, with an average estimated at 8-9% a year. The deteriorating external environment – with the onset of the intifada in 1989 and in the aftermath of the Gulf War, when Palestinians were expelled from Kuwait and Gulf countries – caused a decline in GDP in 1987-89 and again in 1991. The wide variation in growth has continued since, with a surge to 11.8% growth in GDP in 1994 in the wake of the Oslo accords followed by two years of decline, and a recovery in 1997-99, when the annual rise was running at around the 2-4% rate. These results, combined with the surge in population numbers, mean that GDP per head had risen in only one year – 1994 – while GDP per head in 1999 will have been about one eighth below its level in 1993.

Economic output in the Gaza Strip - which comes under the responsibility of the Palestinian Authority since the Cairo Agreement of May 1994 - declined perhaps one-third between 1992 and 1996. The downturn was largely the result of Israeli closure policies - the imposition of generalized border closures in response to security incidents in Israel - which disrupted previously established labor and commodity market relationships between Israel and the WBGS (West Bank and Gaza Strip).

The most serious negative social effect of this downturn was the emergence of high unemployment; unemployment in the WBGS during the 1980s was generally under 5%; by 1995 it had risen to over 20%. Since 1997 Israel's use of comprehensive closures has decreased and, in 1998, Israel implemented new policies to reduce the impact of closures and other security procedures on the movement of Palestinian goods and labor. These changes fueled an almost three-year long economic recovery in the West Bank and Gaza Strip; real GDP grew by 5% in 1998 and 6% in 1999. Recovery was upended in the last quarter of 2000 with the outbreak of Palestinian violence, which triggered tight Israeli closures of Palestinian self-rule areas and a severe disruption of trade and labor movements.

Before the beginning of the Intifada, approximately 125,000 West Bank and Gazan workers, representing roughly 20 percent of the Palestinian work force, were employed at day jobs in Israel, Israeli settlements, and Jerusalem. Israeli-imposed closures, or increased restrictions, on Palestinian cities and towns have impeded Palestinians from reaching jobs or markets and disrupted internal and external trade. In addition the IDF and settlers have destroyed sections of Palestinian-owned agricultural land and economic infrastructure. The Government of Israel stated that some of these actions, such as the destruction of groves alongside roadways by the IDF, were necessary for security reasons. Some human rights groups stated that these actions often exceeded what was required for security. The adjusted unemployment rate was roughly 38 percent throughout the year. The poverty rate in the PA was 33 percent at the end of 2000 and was estimated at 50 percent by the end of the year.

Economic activity in 2013 was weaker than expected and fiscal strains have continued. Real GDP rose by just 1½ percent, reflecting the impact of uncertainty regarding the Israeli-Palestinian peace process and a sharp deterioration of economic conditions in Gaza. Owing to weak growth, the unemployment rate increased to 25 percent at end-2013. Despite increased donor assistance, the Palestinian Authority continued to accumulate arrears. At the same time, the Palestinian Authority reduced the outstanding stock of debt to commercial banks. The overall deficit, including development spending, is estimated at 13.7 percent of GDP, nearly 3 percentage points lower than in 2012, helped by improved revenue performance and some commendable efforts to contain spending.

The economic outlook for 2014 and beyond depended heavily on the outcome of the peace talks. Under the status quo, where peace talks were ongoing and their result is not yet known, the IMF projected growth of around 2½ percent this year, and similar subpar growth performance over the medium term, with rising unemployment.

Security reforms by the Palestinian Authority (PA), including the reestablishment of law and order in major West Bank cities, were complemented by the relaxation of restrictions on movement and access in expanding private sector activity. However, Gaza’s situation remained difficult, despite some easing of Gaza’s blockade. Provided remaining restrictions in the West Bank were lifted in the remainder of the year, real GDP in the West Bank is projected to rise by about 7 percent in 2009, which would represent the first substantial increase in living standards since 2005. However, assuming only a limited easing of its blockade, Gaza’s real GDP per capita would decline further, although at a slower pace than in 2008.

The PA continued with institution-building and prudent fiscal policies. These policies, along with progress in public expenditure management and good governance, bolstered private sector confidence. Discipline in containing growth in public sector wage rates and employment has continued, and utility subsidies are being phased out. However, the war in Gaza imposed a substantial burden on the budget. While total donor aid during January to August 2009 was generous, in line with the original 2009 budget, over half of it was disbursed as late as in July and August. The Gaza war and delays in donor aid has worsened an already difficult liquidity situation and led to substantial government borrowing from commercial banks as well as arrears accumulation in the first half of the year. It is particularly important for the PA to keep budgetary expenditures in line with the 2009 budget target, notably by restraining non-wage spending.

Although it had undergone a significant process of modernisation over the five years 1995-2000, the Palestinian economy was characterised by profound structural imbalances and high external dependence. This owed much to the lengthy period of Israeli occupation from 1967, which blocked export markets (other than Israel) and deterred investment in production capacity. With the scope for domestic employment generation thus severely curtailed, a large proportion of the Palestinian labour force had to find work in Israel. The ratio varied with the security situation, with border closures by Israel repeatedly interrupting the flow of workers. It has fallen since the Oslo peace accords in 1993, but Palestinian employment in Israel and the Jewish settlements in West Bank and Gaza represented a fifth of the total work force in 1998.

The economy was thus highly dependent on the earnings from this group, and also from inflows of funds from the Palestinian diaspora. Since much of the latter is not recorded, its exact size can only be estimated. The IMF has put the value of transfers at upwards of $1bn a year in mid-1990s – or around double the level of Palestine’s export earnings. The labour surplus in Palestine and the capital resources of the expatriate community represent two significant reservoirs to feed economic growth.

Gaza’s fishing waters remained inaccessible to Palestinians due to Israeli restrictions, but in 2012 Israel eased restrictions on fishing along the coast by allowing fishermen to venture out to six nautical miles instead of the previous limit of three nautical miles. Israel reduced the limit to three miles from March until May, due to rocket fire that raised security concerns. The United Nations reported that the timing of the restriction was “of particular concern” and affected the livelihood of approximately 3,500 fishermen. Israeli naval patrol boats strictly enforced this fishing limit, which was a reduction from 20 nautical miles, as designated under the 1994 Agreement on the Gaza Strip and Jericho Area (later incorporated into the 1995 Interim Agreement). Israeli naval forces regularly fired warning shots at Palestinian fishermen entering the restricted sea areas, in some cases directly targeting the fishermen, according to OCHA. The Israeli armed forces often confiscated fishing boats intercepted in these areas and detained the fishermen, while Palestinian fishermen reported confusion over the exact limits of the new fishing boundaries.