Current Economic State of the Palestinian Authority
The economic growth that many predicted would come to the Palestinians following the 1993 Oslo agreements has yet to materialize. The PA economy is presently in shambles. Population growth is exceeding the limited economic growth and thus GDP per capita is declining. Yasser Arafat and the Authority continue to face serious challenges to their economic and political development, such as high unemployment, rampant corruption, a continued fundamentalist threat and dependency on the Israeli economy.
In contrast to real growth in the 1970s and early to mid-1980s, Palestinian GDP has stagnated or declined since the late 1980s due to several factors. These factors include the Intifada, the loss of remittances from Palestinians expelled from Gulf countries following the Gulf War, the reduction in work permits issued by Israel and the impact of Israeli border closures.
Although Israel and the Palestinians continue to negotiate their separation, the Palestinian economy in many ways continues to be defined by its relationship with Israel. Israel, for example, currently purchases almost 85 percent of West Bank/Gaza exports. And realistically, much of the Palestinian economy, and many Palestinians' livelihood, will depend on Israel for the foreseeable future.
Despite the economic hardships and obstacles, there are significant investment opportunities in the Palestinian Authority, including Infrastructure development, private housing construction, manufacturing and industry, agriculture and tourism. And despite official statistics showing a recent economic slowdown in the West Bank and Gaza, there has been a substantial increase in imports of consumer goods, particularly small electronic appliances, clothing and shoes.
But there are also many obstacles to investment. The Palestinian Authority has been accused of widespread corruption and a lack of transparency. So acute has the problem become, that many donor countries who have pledged millions of dollars in aid have thus far refused to meet their obligations fearing that the money will be misused.
But there are some worrisome signs that the PA plans to own different parts of the economy. For example, the PA has signed monopoly deals that grant government control of sales of fuel, cigarettes and cement.
Further cause for concern is the critical role the PA, including Chairman Arafat and various ministers, play in the approval process for private commercial projects. Several ministries are often responsible for major projects and foreigners interested in investing must speak to representatives from each. Additionally, a new investment law requires special approval of new investments that seek incentives, such as tax holidays. Some investors believe this system to be tainted and many proposals submitted by Israeli investors have not been approved. Other foreign investors have chosen not to invest in the PA fearing that the region may not be as politically stable as its leaders purport it to be. The PA, however, is working to amend this investment law in a way that will be more attractive to investors.
An additional factor that has further exacerbated the economic problems is the vast corruption among most of the higher echelons of the Palestinian government. Many "donor countries" that have pledged economic aid packages have become concerned by the corruption and lack of transparency and have refused to release the funds.
In 1998, gross national product (GNP) in the West Bank and Gaza rose to $4.509 billion from $4.235 billion the previous year. Gross domestic product (GDP) rose 2 percent, and amounted to roughly $3.9 billion. The discrepancy between GNP and GDP levels (GNP tends to run about 25-30 percent higher) stems from repatriated wages and other funds from Palestinians living abroad.
But when these figures are converted into GDP per capita, the results are far less encouraging. Due to natural population growth of approximately 4 percent, GDP per capita actually declined by 2 percent to $1,380 in 1998 from $1,430 in 1997.
Economic Figures (in US$, unless otherwise indicated)
GNP (billions) 4.5 4.2
GDP per capita 1,380 1,430
GDP Growth (percent) 2 0.8
Workers in Israel (thousands) 45 35
Donor Aid Received (millions) 400 550
Unemployment (percent) 14.4 20.3
Budget Deficit (millions) 153 37
Recently released indicators also reveal enhanced economic conditions in the PA. The foremost of these is a decline in the official unemployment rate to 13.8 percent in the middle of 1999, versus 15.6 percent a year earlier. During the first half of 1999, 47,100 net new jobs for Palestinian workers were created. More than 60 percent of these jobs were located within the Palestinian economy (as opposed to Israel), of which 38.2 were in the private sector. The total value of projects approved under the Palestinian Law for the Encouragement of Investment in the first half of 1999 was $107.6 million compared to $161.0 million for all of 1998. Foreign investment projects accounted for $15.1 million, or 14 percent of the total.
Still, donor aid disbursements amounted to merely $268.3 million in 1999, versus levels of $364.1 million, $475.1 million and $541.9 years in 1998, 1997 and 1996 respectively. As alluded to earlier, major donors, particularly the European Union and the United States, have grown increasingly frustrated with the lack of accountability for past disbursements of assistance.
The Palestinians and Israel signed an economic accord as part of the Gaza-Jericho Agreement in May 1994. Known as the Paris Protocol, this and other follow-up agreements grants the PA responsibility over most key spheres in the Gaza and Jericho economies, including trade and investment. The West Bank and Gaza market, with a total population of nearly 3 million, is approximately 5 percent the size of the Israeli economy.
The West Bank/Gaza economy remains linked and heavily dependent upon the Israeli market. Israel currently purchases almost 85 percent of West Bank/Gaza exports, and the Palestinian Authority, which does not have its own currency, uses the New Israeli Shekel (NIS) as legal tender. (The Jordanian Dinar is also legal tender in the West Bank but the NIS is more widely used). As the Palestinians assume greater control of their economy, however, the strong economic ties between Israel and the Palestinians may gradually weaken, particularly in terms of trade sources. Discussions are underway at several levels regarding the final status economic relationship between Israel and a Palestinian state (i.e. free trade, customs union).
But no matter what the outcome of these talks is, realistically, Palestinian labor, and much of the Palestinian economy, will remain dependent on Israel for the foreseeable future. Commercial development in the territories, even at an optimistic pace, cannot occur overnight. Furthermore, closures will remain an obstacle to the mobility of Palestinian labor and Palestinian economic growth in general.
In fact, the years since peace negotiations with the Palestinians began in the early 1990s have been some of the harshest in terms of economic growth in the Palestinian territories. In contrast to real growth in the 1970s and early to mid-1980s, Palestinian GDP has stagnated or declined since the late 1980s due to several factors. These include dislocations caused by the Intifada (uprising), starting in December 1987; the loss of tangible Gulf remittances (with the expulsion of Palestinians from Gulf countries following the Gulf War); the reduction in work permits for Israel from a high of over 100,000 before 1990 to about 50,000 in December 1996; and since 1993, the impact of Israeli border closures on the economy.
The impact of closures itself can be seen in the improved economic growth in 1998 during which there was a sharp drop in the number of border closures with Israel from an estimated 14.5 days, compared with four times that figure in 1997. According to Labor Ministry and UN Special Coordinator Office (UNSCO) estimates, 1998 Israeli work permits averaged 44,000 per month. But at least as many workers are thought to have crossed illegally to Israel.
The Palestinian Central Statistics Department reported that the rate of unemployment in Palestinian territories dropped to 14.4 percent in 1998, compared to 20.3 percent in 1997. The highest rate of unemployment was among the young from both genders in the 15-24 year age bracket. The unemployment rate was 22.6 percent in this age bracket, 22.0 percent among males and 27 percent among females.
Workers in Palestinian lands in 1998 were distributed as follows: 53.8 percent in the West Bank, 24.5 percent in the Gaza Strip, and 21.7 percent in Israel and the settlements. The report showed that roughly one quarter of the Palestinian work force (27.1 percent) work in services and 18.2 percent are employed in business and trade and in the restaurant and hotel industries.
Despite official statistics showing a recent economic slowdown in the West Bank and Gaza, there has been a substantial increase in imports of consumer goods, particularly small electronic appliances, clothing and shoes. This may be due to a growing "gray" market with unreported income, and to increasing ties between Palestinians living in the West Bank and Gaza and expatriate Palestinians.
Moreover, since the beginning of reconciliation between Israel and the Palestinians in 1993, expatriate Palestinians have begun to transfer funds to the area for investment and residential/commercial construction.
One area where investments has remained strong since the 1980s is in housing accounting for 20 percent of GDP compared to 7 percent in similar economies. Gaza and Ramallah in the West Bank have witnessed a boom in housing construction since the signing of the Declaration of Principles in September 1993.
Most housing construction is privately financed and benefits the middle and upper classes as well as many expatriate Palestinians. Availability of affordable housing remains a serious problem for the lower-middle and lower classes, particularly in Gaza. Land prices, especially in urban areas, have skyrocketed since September 1993, primarily because of the scarcity of land available for development in the West Bank or Gaza.
While a number of Arab banks have already established offices in the West Bank and Gaza, the financial services market remains relatively undeveloped. Correspondent and other international banking relationships are developing. Because the PA permits holding foreign currency accounts, some observers believe that areas under Palestinian Authority control for banking services will show strong growth in offshore banking facilities.
Leading Growth Sectors
Both publicly and privately financed infrastructure development projects will be a major growth sector in the West Bank and Gaza during the next five years. Construction of the Gaza port, for which France and the Netherlands are providing $60 million, is scheduled to begin shortly. Palestinian officials have indicated that this contribution must be revised as the project's cost has risen.
During the past five years, there have been measurable improvements in the physical and institutional infrastructure in Palestinian-controlled areas. Between 1994 and 1998, the Palestinian Economic Council for Development and Reconstruction (PECDAR) implemented projects to improve 783.5 kilometers of roads throughout the West Bank and Gaza, with major attention focusing on municipal and village roads. Another 154 kilometers of roads are being renovated with financial backing coming from the European Investment Bank (EIB). Furthermore, hundreds of schools and clinics have also been renovated and expanded, and two new hospitals recently built.
The water and sanitation sector has received considerable attention, with $315 million being disbursed to 112 projects during 1994-98. Of this, roughly 80 projects were designed to increase water quantities available to Palestinians to 28.6 million cubic meters a year through network expansion, rehabilitation and new source development.
This target has not been reached, primarily because Israel, which continues to control water resources in the West Bank and Gaza, has refused to issue the necessary permits. Nevertheless, tangible improvements have been made, and access to piped water has increased throughout the areas.
In the power sector, the first independent project (IPP) is now underway with Enron International of the US and the Palestine Electricity Company (PEC). The two bodies have signed an agreement with the Palestinian Energy Authority to supply electricity from a planned $140 million, 136-MW combined cycle power plant to be built south of Gaza. It is scheduled to be operational by mid-2000. PEC shareholders include Athens-based Consolidated Contractors International Company (CCC), Palestine Development & Investment Company (PADICO), Arab Bank, Arab Palestine Investment Company, and the PA.
Private Housing Construction
Private housing construction is also expected to be a strong-growth sector as demand for low and lower-middle income housing is expected to remain high. Much of this demand can be met by local builders and engineers at comparatively low prices. Still, innovation in low-cost, multi-family housing construction is needed from outside sources. There is a growing trend, particularly in Gaza, of building large commercial and residential towers rather than one or two story buildings. Companies that can produce low-cost construction inputs in high volume should consider marketing and distribution options in the West Bank and Gaza.
Manufacturing and Industry
Expansion is expected in light industry and low-tech electrical assembly, such as car dashboards and electronic goods assembly, and in the manufacturing and export of processed foods, pharmaceuticals, textiles and shoes, hardware, wood and cane furniture, plastics and housewares. Construction inputs, such as cement and steel products, also will be in heavy demand. The relatively high education level of the work force compared with Jordan's and Egypt's should give the West Bank and Gaza a competitive advantage in industries requiring technical expertise.
The agricultural sector employs more than 14 percent of the West Bank and Gaza workforce and accounts for 30 percent of West Bank's and 25 percent of Gaza's GDP. The sector possesses excellent growth potential, particularly for providing inputs for the local food processing industry. Local entrepreneurial talent, climate and a sound technological base are strategic advantages in the sector. The ultimate growth potential of the agricultural sector, however, depends in part upon the willingness of Israel and neighboring countries to lower agricultural trade barriers or to at least allow the transit of Palestinian agricultural goods to Europe and the Gulf.
Tourism in the West Bank and Gaza is also expected to grow, but expansion depends heavily on security issues and, in areas of the West Bank where Israel remains in control, on certain administrative matters. Expansion of the tourism sector also depends on obtaining land and building permits from the Israelis.
© 2000 Mena Report (www.menareport.com)
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