Palestine - Economy
Israel reaps the benefit of its siege and impoverishment policies in the form of cheap Palestinian labor working inside the occupied territories. Before the 2023 war, the unemployment rate in Gaza was 46%, while 80% of the population received humanitarian aid, while 80% of the buildings destroyed in the 2014 war had not been rebuilt by the eve of the war. According to the UN, the Gaza Strip was not experiencing a normal situation before the war, as the siege imposed on it since 2007 was the most dangerous manifestation of Israel’s long-term policies of restricting the movement of Palestinians.
A full month after the outbreak of the October 2023 war, the Palestinian economy is experiencing a state of weakness that it has never witnessed before. The impact was not limited to Gaza, which destroyed most of its buildings and infrastructure, but also extended to the West Bank, which affected most of its economic sectors. After the seventh of October, Gazans lived under continuous violent bombardment that not only causes physical destruction, but also deprives them of access to basic services such as life-saving health care, water, food, electricity, education, and employment.
At the end of October 2023, the head of the government media office in Gaza, Salama Marouf, said that the Gaza Strip had incurred $3 billion in direct and indirect losses as a result of the Israeli aggression, which affected commercial and economic establishments, civilian homes, government and civil headquarters, and infrastructure, in a preliminary estimate of the size of the losses due to the ongoing aggression since The seventh of last October.
A few days earlier, the United Nations Economic and Social Commission for Western Asia ( ESCWA ) revealed that the Gaza Strip had been exposed to unprecedented destruction and economic repercussions as a result of the aggression it was being subjected to by the occupation. It pointed out astonishing numbers stating that almost all of Gaza’s population, or an estimated 96%, live They are now in poverty and suffering multiple forms of deprivation due to the current war. Palestinian census data show that there were approximately 140,000 Palestinian workers from the West Bank working in Israel, in addition to 18,500 workers from the Gaza Strip. Most of these workers were at home due to the suspension of the majority of economic activities in Israel, with the exception of the agriculture and food sectors. The wage bill for these workers amounts to approximately 1.5 billion shekels ($397 million) per month, most of which is pumped into West Bank markets in the form of purchasing and consumer power.
According to the Palestinian Central Bureau of Statistics, the Palestinian industrial sector suffered losses amounting to billions of dollars in the first months of the war, as all forms of industries stopped in Gaza, while factories and industrial companies suffered major setbacks in the occupied West Bank. The agency estimated the economic losses in Palestine since the start of Israel’s aggression against the Gaza Strip at about $1.5 billion, as a result of the almost complete cessation of production in Gaza, and the repercussions on the West Bank, equivalent to about $25 million per day, excluding direct losses in property and assets.
By January 2024 the continuation of the war resulted in many problems and obstacles, most notably the Israeli checkpoints and the high costs of internal transportation and shipping between Palestinian and external cities, and the import of raw materials, which increased production costs at a time when demand was declining under the weight of the war. In terms of distributing products, the barriers are the biggest obstacle facing them, as the closure has led to many problems, including the inability of workers to arrive during work hours and their delay if they are able to arrive, in addition to the difficulty of transporting products and goods to merchants and agents in the governorates. Truck drivers are forced to use difficult and sometimes dangerous roads, which increases the financial burden on the Muhannad factory, as the trucks often return without delivering the goods as a result of the occupation closing the checkpoints, or they take longer detours to reach the agents and complete the delivery.
Secretary of the Federation of the Chamber of Industry and Commerce in Palestine, Samir Hazboun, told Al Jazeera that the industrial sector, with its backward types, whether extractive or transformational, faces multiple problems, the most prominent of which are the barriers between the governorates, and the second is the imposed closure and thus the difficulty of importing raw materials.
The third obstacle is the high transportation costs, whether internal as a result of the war and checkpoints, or external as a result of the closure of the crossings. The fourth is the difficulty of moving labor between governorates, according to Hazboun, who said that Palestinian industries are now operating at no more than 60% of their production capacity, while The majority of factories operate at between 40 and 50%. Hazboun pointed to other factors affecting the industry, including the rise in the exchange rate of currencies, especially those used to import raw materials from abroad, and the increased reliance on cash liquidity as a result of banking difficulties in dealing with checks and transfers.
Some companies had borne all employee expenses as a matter of social responsibility, but would not be able to continue this approach if the war continues, and will reach a point where they lay off employees because the conditions have become disastrous.
On 21 January 2023 the Israeli government approved a plan that allowed the transfer of frozen Palestinian tax funds to another country, while reserving the right to determine when the funds will be transferred to the Palestinian Authority. Under the temporary peace agreements between Israel and the Palestinian Authority, the Israeli Ministry of Finance collects taxes on behalf of the Palestinians and makes monthly transfers to the Authority, but there are ongoing disagreements between the two sides regarding this arrangement, and since the Al- Aqsa Flood Operation - launched by the Palestinian resistance against the occupation - Israel has intended to stop Transferring these funds, given that a portion of them reaches the Authority’s employees in the Gaza Strip.
According to figures from the Monetary Authority and the Palestinian Central Bureau of Statistics, the debts owed by the Palestinian Authority by the end of 2022 amounted to about $3.4 billion, of which about $2 billion were internal debts to local banks, in addition to the accumulation of about $900 million in late debts on the Authority. Palestinian funds for the benefit of the Palestinian private sector, while the Authority’s general budget continues to record an annual deficit of no less than 7%. All of this comes in light of the continuing decline in foreign and international grants and aid, which in 2008, for example, constituted about 28% of the Palestinian Authority’s gross domestic product, then declined and reached less than 2% in 2021 and beyond, according to World Bank reports . In addition to the complete collapse of all aspects of life in the Gaza Strip , all economic sectors witnessed a varying decline during the last half year. According to figures from the Palestine Monetary Authority, the added value of various economic activities in the West Bank declined during the last quarter of 2023 compared to the corresponding period. From the previous year, the construction sector declined by 27%, the services sector - the largest sector in size - by 21%, the agricultural sector by 12%, and the industrial sector by 24%. As for the unemployed, their numbers increased in the West Bank with the cessation of work for Palestinian workers in the 48 territories since October 7, and private sector activities in the West Bank have also declined, as the “Palestinian Monetary Authority” estimates the unemployment rate in the West Bank for the year 2023 at about 30%, as With the war, the “Palestinian economy” lost about 270 thousand jobs, distributed among workers in the 1948 territories, settlements, and the Palestinian private sector in the West Bank. Even for Palestinian public sector employees (PA employees), they only received a month and a half’s salary during the entire period of the war. If we add to all of this the restrictions imposed on movement as a result of the occupation’s barriers and restrictions, it is expected, according to the Palestine Monetary Authority, that poverty rates in the West Bank will rise significantly during the current year 2024. Throughout the period of military rule of the occupation in the West Bank and Gaza Strip (1967 - 1994), all resources and institutions were under the control of the occupation authorities. These authorities supervised the management of economic activity, collected taxes and fees, and issued licenses to practice various economic activities. The sectoral composition of the Palestinian economy during the period of military rule was mainly composed of three sectors: first ; Locally funded projects, which are mostly family projects distributed in the areas of simple manufacturing industries, agriculture, tourism, stone industry, etc., and secondly ; Cooperative societies, most of which focus on the agricultural field, the most recent of which are ; Financial transfers received from abroad, most of which consist of the salaries of workers in the West Bank and the Gaza Strip within the “Green Line”, and the money of expatriates transferred to their families, in addition to funds from grants and various aid. Local industrial projects at that time constituted one of the most important sources of income for the Palestinians, and represented one of the most prominent forms of local economic activity that was prevalent before the establishment of the Palestinian Authority. Aside from the controversy that surrounded a good portion of these projects in that period, considering that they were merely subcontracts to operate “Israeli capital” in the territories occupied in 1967, they were among the sectors that absorbed about 26 thousand workers, according to a study by Adel Samara. Published in 1990 in the first issue of the Journal of Palestine Studies. According to the study, industrial projects until the late 1980s constituted about 10% of the gross domestic product in the Gaza Strip, and approximately the same in the West Bank.
As for the agricultural sector in general, until the end of the 1980s, it constituted about 27% of the GDP in the West Bank, and about 13% in the Gaza Strip, knowing that the agricultural sector constituted a larger percentage of the GDP in the West Bank and the Gaza Strip before the military rule. . During the period of military rule, olive cultivation, and the activities and businesses related to it, had a significant share of the “Palestinian economy” in the West Bank in particular, as it amounted to about 14% of the total value of agricultural production in the West Bank. Olive cultivation in it is considered, The largest sector in terms of employing independent workers.
The most prominent experience at the level of the Palestinian “national economy” in that period was cooperative societies. Although these associations actually began the period of Jordanian rule of the West Bank and were established in accordance with Jordanian laws, their most prominent roles became clearly evident during the period of the first intifada (1987-1993), as institutions that depend entirely on national local capital and local participatory efforts, as well as directing their services. And produced for the local market. However, its role went beyond the economic field and included social, educational, and health roles. This contributed to strengthening the steadfastness and steadfastness of the Palestinians during the first intifada.
Later, with the establishment of the Palestinian Authority and its control over the public economic and social sphere, the role of cooperatives and their spread in Palestinian society gradually declined, and this meant that the Palestinians lost a tool of confrontation and steadfastness in the face of the Israeli occupation.
The economic portion of the Oslo Agreement, known as the Paris Economic Protocol or the 1994 Paris Agreement, is perhaps the most controversial part of the agreement. Although the protocol, like the entire agreement, is supposed to expire 5 years after its signing, paving the way for the establishment of the promised “Palestinian state,” these five years have passed to this day. Despite the large amounts of water that flowed through the channels of the remaining parts of the agreement related to security and political issues, the Paris Agreement, with its various provisions, remained steadfast and implemented almost perfectly.
Thus, the agreement came as a transitional stage, to establish Palestinian independence and build the economic institutions of the prospective Palestinian state, but its terms and details were devoid of anything that could lead to this independence or separation from the “Israeli economy,” but rather it established total dependence and institutionalized the organic connection between the two economies. From an institutional standpoint, the agreement stipulated the formation of a joint economic committee to follow up on the implementation of the agreement, discuss details and mechanisms, and resolve disputes that may arise later, in addition to forming the necessary technical subcommittees.
With regard to collecting customs on imports, sales taxes, and value-added taxes - which constituted the largest share of the Palestinian Authority’s revenues -, the agreement restricted the matter of collecting, collecting, and transferring them to the Authority to the hands of “Israel.” Rather, the agreement stressed restricting the authority’s powers to determine tax and customs values with specific differences from Its counterparts in Israel are what is known as the “single customs envelope” policy, with the large difference between income levels on both sides of the “green line,” that is, between the West Bank and the Gaza Strip on the one hand, and Jerusalem and the 1948 territories on the other hand.
At the level of the trade relationship with the Arab border countries, Egypt and Jordan in particular, the agreement stipulated a specific list of goods that the Palestinian Authority could import from them, according to special customs and tax rates determined by the Authority, and even this item was not without restrictions related to the environment, specifications, and others.
As for fuel prices (gasoline specifically), the agreement restricted the authority’s ability to do its own pricing, not to exceed a 15% difference from the price of gasoline in “Israel.” It also stipulated restrictions related to the environment and European and American specifications approved in Israel for importing fuel from Egypt and Jordan.
The agreement stipulates that the Israeli currency is an approved currency in the areas of the Palestinian Authority, and does not give the Authority the right to issue a special currency except within the framework of an agreement approved within the Joint Economic Committee, which deprived the Palestinian Authority of taking independent and feasible financial and monetary policies.
According to the Palestinian Central Bureau of Statistics, Israel has the lion’s share of trade exchange with the Palestinian Authority, amounting to two-thirds of its value. In 2022, Palestinian exports to Israel amounted to 88% of the total Palestinian exports, while the Palestinian Authority’s imports of Israel for the same year represents 57% of its total imports, knowing that there is a trade balance deficit in favor of Israel of approximately $3.2 billion.
Not only that, until October 6, Israel was competing with the Authority for the position of the largest employer of Palestinian workers, as approximately 200,000 Palestinian workers were working in the occupying state and its settlements in the West Bank, and the majority of them became unemployed overnight. The work is based on a decision by the Israeli government, in a clear example of the fragility of the Palestinian economy, which was established by the Paris Agreement.
It seems that the problem of the agreement is not limited to its unfairness, as it extends beyond that to the way in which the Palestinian Authority dealt with the agreement. According to a study issued by the Palestinian Economic Policy Research Institute (MAS) in 2013, it dealt with the practical reality of the Paris Economic Agreement, and concluded that there are provisions in the agreement that serve the Palestinian economy, and the Palestinian Authority did not make an effort to activate, apply, and use them optimally, including, for example, the possibility Importing fuel at a better price from Jordan and Egypt, or items related to mutual tax information to reduce losses in tax collection (= uncollected due taxes), as well as some items related to agriculture, workers, and others. The study also indicates a number of items that were not implemented or were implemented incompletely.
In any case, despite the importance of discussing the technical aspects of the agreement, they are not merely technical economic terms that can be treated in isolation from politics. This agreement is essentially a political agreement. Any technical improvement that was possible in application would not have addressed the Palestinians’ loss of control over their borders and land and sea outlets, nor their lack of a central bank and independent financial and monetary policies, nor would it have addressed their deprivation of benefiting from the natural resources in their lands, especially those located in areas classified as Land C. According to the Oslo Accords of 1993.
Thus, the Paris Protocol only contributed to institutionalizing and deepening the dependence of the Palestinian market on the Israeli economy. In light of this, most Palestinian economists in the past concluded that it was impossible or difficult to create a strong Palestinian economy, or sustainable economic development, in light of the escalating occupation invasion since the signing of the Oslo Accords and within the terms of its economic annex. Even those who were more optimistic about the possibility of successful economic development in these circumstances, according to the director of the MAS Institute, Raja Al-Khalidi, came to the same conclusion.
The first five months of the Black Sabbath War have once again confirmed the weakness and vulnerability of the Palestinian economy in the face of crises. However, it is not the agreements alone that brought this crisis to the Palestinian economy, but also perceptions, convictions and models adopted by the authority and its elites, which resulted in financial and economic policies implemented over the past three decades, which deepened the economic rift in Palestinian society. What are these policies?
The expert and economic advisor, Nasr Abdel Karim, points out that a good portion of the Palestinian Authority’s economic elite believes in the necessity of achieving further integration with the “Israeli economy,” considering that it is the most correct economic option, given that the “Israeli economy” is an advanced economy and integrated into global markets. And adopts free market policies; Which will benefit the “Palestinian economy,” according to their belief.
This is at a time when many experts agree that the safest economic option is to reduce dependence on the “Israeli economy”, for purely economic reasons, far from even political reasons. Compared to its Israeli counterpart, the “Palestinian economy” is considered a small, closed economy that lacks many of the necessary components to compete and protect local capital and product.
But the frantic pursuit of integration into the "Israeli economy" prevailed. The first stage of establishing the Palestinian Authority was a stage of building various institutions, and enacting laws and legislation or importing them and applying them locally. But the most prominent feature was and still is its absorption of a large number of employees in the public sector, both civil and security; This was reflected in the share of the salary bill in total public expenditures, as the salary bill ranged between 1997-2018 - according to data from the Monetary Authority, the Ministry of Finance, and the Central Bureau of Statistics - between 45% and 60%, that is, 50% on average, which is a relatively large percentage that constitutes twice the average. Global ratio of public sector salaries to public expenditures.
Criticism abounded about the lack of governance and transparency and the spread of corruption within the authorities, and it became a pretext that was strongly used to restrict Yasser Arafat by withdrawing financial powers from him and institutionalizing spending and funding, against the backdrop of accusing him of supporting the armed uprising that began in 2000. Later, with the end of the Al-Aqsa Intifada, Mahmoud Abbas took over Presidency of the Authority, and formed the government of Salam Fayyad, which went far in adopting “free market” policies, except from Israel.
Fayyad worked to urge banks to invest larger percentages of their funds in the West Bank, since the Gaza Strip had become under the rule of the Hamas movement, so he instructed the banks to deal according to two different policies for the West Bank and Gaza. As for the West Bank, it was flooded with banking facilities, which mostly meant providing easy and quick loans for consumer purposes, so the loans granted between 2007 and 2017 doubled four times. Salam Fayyad's government worked to create an imaginary state of prosperity based on loans and citizens' dependence on banks.
The majority of loans granted were focused on consumer or non-productive purposes. For example, according to figures issued by the Monetary Authority for the year 2023, the share of the agricultural sector was only about 2% of the value of the credit facilities granted, and the industry and mining sector was about 7%, while the share of purchasing cars and vehicles was about 5%, and consumer loans amounted to about 14%; Which could be considered a clear indication of the nature of the policy followed in directing and granting credit facilities.
Even apart from lending, economically and politically important sectors such as agriculture and manufacturing industries were neglected, at the expense of internal trade and services sectors. According to a study issued by the Palestinian Policy Network, the share of internal trade in 2018 amounted to 22% of the gross domestic product, compared to 7.5% for agriculture and 11.5% for manufacturing industries.
In addition, the Authority worked to attract expatriate Arab and Palestinian capital to invest in the West Bank, and the Bethlehem Investment Conference in 2008 is a good example of the efforts of the Salam Fayyad government in this regard. With the flow of international and Arab aid to the Palestinian Authority, growth rates were achieved in the economy during the years of Salam Fayyad’s government, but great criticism arose about the reality of this growth and its real economic impact on the Palestinians.
The Palestinian Authority is also one of the few models in which customs duties constitute a very large percentage of its financial imports. In most countries and natural economies, the share of income taxes is much higher than the share of customs duties in imports, but the opposite happens in the case of the Authority. In addition, this huge dependence depends on Israeli policy, as it controls the collection of these resources (customs duties) and therefore has the right to prevent them, transfer them to the authority, or use them as a punishment and a means of pressure and blackmail, as has been the case for years.
Researcher Ibrahim Shaqaqi points out that the dominance of the occupation economy over the “Palestinian economy” and the latter’s subordination was the distinctive feature of the period before the Palestinian Authority, while the Authority was not able to change this situation, but on the contrary, it became more entrenched with it.
As for the period of the first intifada, according to Shaqaqi, it was an exception, when the Palestinians were able to employ the resistance factor as a tool of independence by adopting a boycott and the activity of cooperative societies. This relative success was due to the fact that this economic factor was used in the context of a political project at the time. Shaqaqi concludes that there are no economic solutions to a political issue, explaining the failure of all successive economic peace paths.
Thus, the Palestinian Authority, in its financial policies, sought to try to remove politics from the economy, as it presented a fragile economic model, on the surface of prosperity and economic development, but inside of it was an occupation that plunders, confiscates, and controls resources, making us more dependent on it. The nakedness that the flood revealed is nothing but the badness of this model.
By 2017, unemployment in Gaza was 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.
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