Global Investment House- Economic & Strategic Outlook – Palestine-Macroeconomic Profile – Palestine is a small unique, economy where political economic issues play a much more critical role in gauging economic performance. Since the start of the second Intifada in September 2000, the Palestinian economy has experienced sever structural shocks and adjustments but did not collapse. Nevertheless, it should be noted that in order to better understand the factors driving macroeconomic developments in Palestinian Territory, it is important to know how dependent the Palestinian economy is on Israel. This dependency is traced back to several sources as Palestinian employment in Israeli labor market, the close trade ties with Israel and the Palestinian dependence on Revenue Clearance System with Israel. Because of this dependency, fluctuations in economic activity over the past ten years have been closely related to the varying levels of restrictions imposed by Government of Israel (GoI). The most important of these restrictions have been the periodic border closures in addition to the internal blockades and curfews.
The Israeli labor market has been, and will continue to be a very important source of employment and income for many Palestinians. Prior the onset of Intifada almost 150,000 Palestinian workers had their jobs in Israel generating annual wage income of US$800mn. The Palestinian economy is very dependent on these remittances as a significant component of aggregate income. Currently, border closures and other restrictions affected the number of workers allowed to cross into Israel to only 15,000 workers.
Moreover, under the Revenue Clearance System Israel is required to transfer to the PA all import duties on products destined to the Palestinian Territories. This source of much needed income has been repeatedly withheld by Israel and has caused severe budget deficits since almost half of the PA revenue is derived from this source of income. This widening budget deficit has been repeatedly financed by donor countries.
Finally, Israel is the most important trade partner for Palestine that accounts for 90% of exports and 70% of imports. This dependency on Israeli economy has distorted prices and reduced competitiveness where overall price movements are highly correlated and tend to be linked to the NIS and US$ rate movements.
Yet under all these constraints, the Palestinian economy has shown a remarkable degree of resilience as Palestinian Authority institutions are still able to function efficiently and deliver basic services, albeit with the much appreciated assistance of donor countries.
