Economy of the State of Palestine

The economy of the State of Palestine refers to the economic activity of the State of Palestine.

History

GDP per capita in the Palestinian territories rose by 7% per year from 1968 to 1980 but slowed during the 1980s. Between 1970 and 1991 life expectancy rose from 56 to 66 years, infant mortality per 1,000 fell from 95 to 42, households with electricity rose from 30% to 85%, households with safe water rose from 15% to 90%, households with a refrigerator rose from 11% to 85%, and households with a washing machine rose from 23% in 1980 to 61% in 1991.

Economic conditions in the West Bank and Gaza Strip, where economic activity was governed by the Paris Economic Protocol of April 1994 between Israel and the Palestinian Authority, deteriorated in the early 1990s. Real per capita GDP for the West Bank and Gaza Strip (WBGS) declined 36.1% between 1992 and 1996 owing to the combined effect of falling aggregate incomes and robust population growth. The downturn in economic activity was due to extensive corruption in the newly governing Palestinian Authority, and to Israeli closure policies in response to terrorist attacks in Israel, which disrupted previously established labor and commodity market relationships. The most serious effect was the emergence of chronic unemployment. Average unemployment rates in the 1980s were generally under 5%; while by the mid-1990s it had risen to over 20%. After 1997, Israel's use of comprehensive closures decreased and new policies were implemented. In October 1999, Israel permitted the opening of a safe passage between the West Bank and the Gaza Strip in accordance with the 1995 Interim Agreement. These changes in the conduct of economic activity fueled a moderate economic recovery in 1998–99.

As a result of the Israeli blockade, 85% of factories were shut or operated at less than 20% capacity. It is estimated that Israeli businesses lost $2 million a day from the closure while Gaza lost approximately $1 million a day. The World Bank estimated the nominal GDP of the territories at US$4,007,000 and of Israel at US$161,822,000. Per capita these numbers are respectively US$1,036 and US$22,563 per year.

For 30 years, Israel permitted thousands of Palestinians to enter the country each day to work in construction, agriculture and other blue-collar jobs. During this period, the Palestinian economy was significantly greater than the majority of Arab states. Until the mid-1990s, up to 150,000 people—about a fifth of the Palestinian labor force—entered Israel each day. After Palestinians unleashed a wave of suicide bombings, the idea of separation from the Palestinians took root in Israel. Israel found itself starved for labor, and gradually replaced most of the Palestinians with migrants from Thailand, Romania and elsewhere.

In 2005, the PNA Ministry of Finance cited the Israeli West Bank barrier, whose construction began in the second half of 2002, as one reason for the depressed Palestinian economic activity. Real GDP growth in the West Bank declined substantially in 2000, 2001, and 2002, and increased modestly in 2003 and 2004. The World Bank attributed the modest economic growth since 2003 to "diminished levels of violence, fewer curfews, and more predictable (albeit still intense) closures, as well as adaptation by Palestinian business to the contours of a constrained West Bank economy". Under a "disengagement scenario" the Bank predicted a real growth rate of −0.2% in 2006 and −0.6% in 2007.

In the wake of Israel's unilateral disengagement from Gaza, there were shortages of bread and basic supplies due to closure of the al Mentar/Karni border-crossing into Israel. Israel's offer to open other crossings was turned down by the Hamas-run Palestinian authority.

Following the January 2006 legislative elections, decisively won by Hamas, the Quartet (apart from Russia) cut all funds to the Palestinian Authority led by prime minister Ismail Haniyah (Hamas). The PA had a monthly cash deficit of $60 million-$70 million after it received $50 million – $55 million a month from Israel in taxes and customs duties collected by Israeli officials at the borders. After the elections, the Palestinian stock market fell about 20%, and the PA exhausted its borrowing capacity with local banks. Israel ceased transferring $55 million in tax receipts to the PA. These funds accounted for a third of the PA's budget and paid the wages of 160,000 Palestinian civil servants (among them 60,000 security and police officers). The United States and the European Union halted direct aid to the PA, while the US imposed a financial blockade on PA's banks, impeding the transfer of some of the Arab League's funds (e.g. Saudi Arabia and Qatar). In May 2006, hundreds of Palestinians demonstrated in Gaza and the West Bank demanding payment of their wages. Tension between Hamas and Fatah rose as a result of this "economic squeeze" on the PA.

In 2009, the Israeli military removed its checkpoint at the entrance of Jenin in a series of reductions in security measures.
In September 2012, EU activists stated that the Palestinian economy "lost access to 40% of the West Bank, 82% of its groundwater and more than two-thirds of its grazing land" due to the occupation and settlement construction.

The first planned Palestinian city named Rawabi is under construction north of Ramallah, with the help of funds from Qatar. In 2013, commercial trade between Israel and the Palestinian territories was valued at US$20 billion annually.

By sub-region

West Bank
In 2007, the economy in the West Bank improved gradually. Economic growth reached about 4–5% and unemployment dropped about 3%. Israeli figures indicated that wages in the West Bank rose more than 20% in 2008 and trade rose about 35%. Tourism in Bethlehem increased to about twice its previous levels, and tourism increased by 50% in Jericho. Life expectancy is 73.4, placing the territories 77th in the world, compared with a life expectancy of 72.5 in Jordan, 71.8 in Turkey, and 80.7 in Israel. Car sales in 2008 were double those of 2007. The International Monetary Fund report for the West Bank forecast a 7% growth rate for 2009.

The Bethlehem Small Enterprise Center opened in early 2008. Funded by Germany, the center has helped to promote computer literacy and marketing skills.

In 2009, efforts continued to build Palestinian local institutions and governments from the ground up. Much of this work was done by Tony Blair and US General Keith Dayton. Some analysts saw this as a more substantial way to lay a groundwork for viable institutions and for local peace. In August 2009, a state of the art web-based system for tracking goods coming in and out of the area by Palestinian customs was launched in partnership with the United Nations Conference on Trade and Development.

In 2009, an economic "boom" began with growth reaching 8 percent, higher than in Israel or the West. However, with inflation around 9.9% that same year, real economic growth is actually negative insofar as purchasing power has decreased.  Tourism to Bethlehem, which had doubled to 1 million in 2008, rose to nearly 1.5 million in 2009. New car imports increased by 44 percent. New shopping malls opened in Jenin and Nablus. As an outcome of the Palestine Investment Conference, Palestinian developers are planning to build the first modern Palestinian city, Rawabi.

In 2010, Ramallah was described as a hub of the economic activity thanks to improved security within the city, successful battle against corruption and large consumer base.

In 2011, the Palestinian Planning Minister said that GDP growth was expected to reach 9%, rising to 10% in 2012 and 12% in 2013.

East Jerusalem
East Jerusalem was once the business and shopping hub of the West Bank. However, since the advent of Israeli security checkpoints and the separation barrier starting over a decade ago, it has become isolated from its customer base leading to serious economic decline. According to Hanna Siniora of the Palestinian-American Chamber of Commerce, the turning point was 1993. He states that since then East Jerusalem has become a closed city through isolation from the rest of the West Bank causing a loss of 50% of its business between 1993 and 2001.

According to a 2012 report by the Association for Civil Rights in Israel and interviews conducted by the Forward, the decline of the economy in East Jerusalem has led to unprecedented levels of poverty, with 80% of the Palestinian population living below the poverty line. The main cause is seen as the political and physical barriers separating it from the rest of the West Bank. The ACRI report attributing the problem to "‘the cumulative effects of annexation, neglect, rights violations and the completion of the separation barrier." Another contributing factor to the economic decline is the housing situation. The Israeli government has facilitated extensive construction for Israeli settler neighborhoods, but has severely restricted development and building for the Palestinian population.

Gaza Strip

According to Hamas, Israel's closure policy, which was extended when the Hamas administration came to power in 2007, was responsible for high levels of poverty and unemployment and a significant decline of the private sector which was heavily reliant upon export markets. Israel blamed Hamas for taking actions that led to the closure policy. A large part of the population is dependent on humanitarian assistance, primarily from the UN agencies.

An easing of Israel's closure policy in 2010 resulted in an improvement in some economic indicators, but regular exports from the Gaza Strip were still prohibited. According to the Israeli Defense Forces, the economy improved in 2011, with a drop in unemployment and an increase in GDP. New malls have opened, local industry is developing and the economic upswing has led to the construction of hotels and a rise in the import of cars. Wide-scale development has been made possible by the unhindered movement of goods into Gaza through the Kerem Shalom Crossing and tunnels between the Gaza Strip and Egypt. The current rate of trucks entering Gaza through Kerem Shalom is 250 trucks per day. This figure fluctuates depending on the level of interference with goods being brought into Gaza from Egypt through tunnels. The increase in building activity has led to a shortage of construction workers. To make up for the deficit, young people are being sent to learn the trade in Turkey.

Currency

Since the mid 1980s, the primary currencies used in the West Bank are the New Israeli Shekel and the Jordanian dinar. The shekel is used for most transactions, especially retail, while the dinar is used more for savings and durable goods transactions. The United States dollar is also sometimes used for savings and for purchasing foreign goods. The dollar is used by the overwhelming majority of transactions overseen by the Palestinian Monetary Authority (Palestine's nascent central bank), which only represent a fraction of all transactions conducted in Palestine or by Palestinians.

The shekel is the main currency in Gaza. Under Egyptian rule (1948–1956), Gaza mainly used the Egyptian pound. When Israel occupied the Gaza Strip during the 1956 Suez Crisis, the military administration made the Israeli pound (the predecessor to the shekel) the only legal currency in Gaza in a December 3 decree, and implemented a favorable exchange rate to remove all Egyptian pounds from circulation. As a result, the shekel became the dominant currency in Gaza, a situation that was reinforced by the Israeli occupation of Gaza following the Six-Day War.

Because the Palestinian Monetary Authority does not issue its own currency, it is unable to pursue an independent and effective monetary policy. At the same time, the use of two currencies increases the costs associated with fluctuating exchange rates. 

Since the 1993 Oslo Accords, proposals have periodically surfaced for the State of Palestine to reissue the Palestine pound, the currency under the British Mandate pre-1947. The Palestinian Authority (PA) began considering replacing the shekel and dinar with the Palestine pound in 2010, as part of a broader push by Prime Minister Salam Fayyad to make Palestine a viable independent state. The PA and Palestinian Monetary Authority abandoned the idea of an independent Palestine pound in 2011.

Taxation

Taxation in the Palestinian territories is a complex system which may involve payment to the Palestinian Authority (PA) and/or Israel. In 2005 the PA collected approximately $34 million per month from taxes and other charges, while Israel collected about $75 million per month in tariffs on foreign imports and value added taxes (VAT) on Israeli goods and services and on average retained about $15 million for the payment of water and power bills of Palestinians, while forwarding the other $60 million to the PA. Israeli collected funds account for about two-thirds of the PA's self-generated revenue, which Reuters put at $100 million in December 2012. Since the 2006 Palestinian legislative election and the formation of a Hamas government in the PA, Israel has regularly withheld the taxes it owes the PA.

Employment
According to the Council for European Palestinian Relations, the agricultural sector formally employs 13.4% of the population and informally employs 90% of the population. Over the past 10 years, unemployment rates in Palestine have increased and the agricultural sector became the most impoverished sector in Palestine. Unemployment rates peaked in 2008 when they reached 41% in Gaza.

By Israelis
High unemployment in the Palestinian economy led about 100,000 Palestinians to work in Israel. By March 2014, about 45,000 permits were issued for work in Israel with further 25,000 issued for work in West Bank settlements. It is estimated 35,000 Palestinian work through illegal channels and without a permit. Recently the quota for permits has increased and minimum age for obtaining one was reduced from 26 to 24. Sectors in which Palestinians are employed include construction, manufacturing, commerce and agriculture.

As of 2013, average daily wages in Israel and the settlements is nearly 2.2 times higher than in the private sector in the West Bank and over 4 times that in Gaza. Palestinian monthly minimum wage is ₪1,450, almost a third of the Israeli minimum wage of ₪4,300. In the West Bank, Israeli labour laws are partially applied through military enactments, and a ruling of the Supreme Court of Israel of 2007 apply the law for work done inside Israeli settlements. Yet, there have been incidents where Israeli employers did not fulfill their legal obligations to the employees by refusing to provide a paycheck or hide the number of work hours to avoid labour laws such as minimum wage or social security benefits.

In 2014, an article published on Al-Hayat Al-Jadida, the Palestinian Authority's official daily, praised Israeli treatment of Palestinian workers. With having added benefits such as transportation, medical and pensions, Palestinians are quick to leave their Palestinian employees and work for Israelis, whenever they have the opportunity to do so. Safety rules are enforced strictly by Israeli Workers' Union and physical examinations are done by doctors. While the PA has passed labour laws but do not enforce rules such as minimum wage, yearly vacation, sick leave or extra payment for additional work hours.

Water supply and sanitation

Agriculture

Agriculture is a mainstay in the economy. The production of agricultural goods supports the population's sustenance needs and fuels Palestine's export economy.  According to the Council for European Palestinian Relations, the agricultural sector formally employs 13.4% of the population and informally employs 90% of the population. Around 183,000 hectares of land in the Palestinian territories are cultivated, of which around half is used for olive production.  Olive products earn more in export income than any other agricultural crop.

Over the past 10 years, unemployment rates in Palestine have increased and the agricultural sector became the most impoverished sector in Palestine.

Palestinian agriculture suffers from numerous problems, blockades to exportation of produce and importation of necessary inputs, widespread confiscation of land for nature reserves as well as military and settler use, confiscation and destruction of wells, and physical barriers within the West Bank. Because the root of the conflict is with land, the disputes between Israel and Palestine are well-manifested in the agriculture of Palestine.

Handicrafts

A wide variety of handicrafts, many of which have been produced by Arabs in Palestine for hundreds of years, continue to be produced today. Palestinian handicrafts include embroidery work, pottery-making, soap-making, glass-making, weaving, and olive-wood and Mother of Pearl carvings, among others. Some Palestinian cities in the West Bank, particularly Bethlehem, Hebron and Nablus have gained renown for specializing in the production of a particular handicraft, with the sale and export of such items forming a key part of each city's economy.

Stonecutting
Stonecutting is a traditional source of income for the Palestinian economy. The annual average output per worker in the stone industry is higher than in any other sector. There are 650 stone production outlets in the West Bank, 138 of them in Beit Fajjar. The quarried material is cut into a rich range of pink, sand, golden, and off-white bricks and tiles known as Jerusalem stone.

Transportation

Communications

The World Bank estimated in 2016 that restrictive measures placed by Israel on telecommunication operators in the West Bank have had a notable  negative impact on the development of the Palestinian telecommunications networks, which is sustaining losses in the range of $1 billion. These restrictive measures include the denial to operate in 60% of the West Bank under Israeli military administration (Area C), limitations on the importation of technology for ICT companies, requiring Palestinian operators to access international links via a company with Israeli registration, delaying in the provision of mobile broadband, the failure to set in place an independent regulator for the sector in the territories, and Israeli operators who lack appropriate authorizations who continue to operate in the Palestinian market.

High-tech
During the 2000s, a high-tech sector emerged in the Palestinian territories, supported by its proximity to Israel, and by 2013, 4,500 Palestinians worked in the IT sector, specializing in software outsourcing (including outsourced work from Israeli companies), telecommunication development and manufacturing equipment. The Palestinian IT sector grew from 0.8% of GDP in 2008 to 5% in 2010. The industry has seen a 64% increase in foreign business since 2009. The majority of Palestinian IT companies are concerted in the city of Ramallah north of Jerusalem.

In May 2018, the World Bank published a major report into the Palestinian technology sector entitled, "Tech startup ecosystem in West Bank and Gaza." According to the report, as of early 2017, there were 241 active tech start-ups in Palestinian Territories, which has created a total of 1,247 jobs. The report also recorded 51 active investors in Palestinian tech companies (around 75 percent angel investors and 25 percent venture capital firms). Among the major VC firms listed are Sadara Ventures, Ibtikar Fund and Oasis500. Venture capital firms reported having invested just under US$150 million in over 40 Palestinian tech companies by 2017. The report also recorded 20 start-up accelerator programs, 19 of which are in the West Bank, and one, Gaza Sky Geeks, in the Gaza Strip.

Tourism

In 2010, 4.6 million people visited the Palestinian territories, compared to 2.6 million in 2009. Of that number, 2.2 million were foreign tourists while 2.7 million were domestic. This number of international visits is misleading, however, since most tourists come for only a few hours or as part of a day trip itinerary. In the last quarter of 2012 over 150,000 guests stayed in West Bank hotels; 40% were European and 9% were from the United States and Canada. Major travel guides write recently that "the West Bank is not the easiest place in which to travel but the effort is richly rewarded."

The Palestinian Authority and Israeli tourism ministries have attempted to work together on tourism in the Palestinian territories in a Joint Committee. Recent cooperation to share access to foreign tourists has not proven successful in Palestine for many reasons relating to the occupation. Israel controls the movement of tourists into the West Bank. Foreign tourism is presently restricted to East Jerusalem and the West Bank, following the August 2013 indefinite closing of the Rafah crossing located between Egypt and the Hamas controlled Gaza Strip. There is essentially no tourist flow to Gaza since 2005 because of the ongoing Israeli military land, air, and sea blockade.

In 2013 Palestinian Authority Tourism minister Rula Ma'ay'a stated that her government aims to encourage international visits to Palestine, but the occupation is the main factor preventing the tourism sector from becoming a major income source to Palestinians. There are no visa conditions imposed on foreign nationals other than those imposed by the visa policy of Israel. Access to Jerusalem and the West Bank is controlled by the Government of Israel and access to Gaza is controlled by Hamas.Entry to the occupied Palestinian territories requires only a valid international passport but entry to Israel may be denied for Palestinians or Arabic visitors

Foreign aid

In 2008, the West Bank and Gaza economies were heavily reliant on foreign aid which stood at 1.8 billion. Approximately 30% of the GDP, or US$487 per Palestinian per year came from aid. Foreign aid provided essential services for nearly half of the Palestinian people, and allowed the Palestinian Authority to operate and pay its estimated 140,000 employees.

In 2010, Arab states cut financial aid to the Palestinian Authority. According to the Palestinian Finance Ministry, the PA received $583.5 million in budget support by August 2010, of which only 22 percent came from Arab states. The remainder was from international donors, including the European Union and the United States. Salah Rafat, a member of the PLO Executive Committee, urged the Arab countries to honor their financial pledges.

In April 2011, Salam Fayyad met with Western donors in Brussels and requested $5 billion in aid.

As part of the US Government's attempt to create a peace agreement between Israelis and Palestinians, US Secretary of State John Kerry unveiled a $4 billion plan that would help grow the Palestinian economy by 50 percent and bring "unprecedented wealth to the region". The plan was coordinated in conjunction with former UK Prime Minister, Tony Blair. However, the following day after Kerry announced his initiative, the Palestinian Authority rejected the deal saying it won't "make political compromises for financial benefits." The Palestinian Authority's Economic Advisor, Mohammad Mustafa, said "PA's priorities are not economic, but rather a political framework for the creation of Palestinian state based on the 1967 lines, with East Jerusalem as its capital, that also ensures the rights of refugees and a political compromise, the Palestinian news agency added."

According to Jonathan Cook, Israeli economist Shir Hever has estimated (2016) that at a minimum 78% of foreign humanitarian aid to Palestine finishes up in Israeli coffers. He draws the implication that foreign donor countries are thereby financing Israel's occupation.  In return Palestinians receive the equivalent amount in food, goods and services from Israel which is used to improve the standard of living of Palestinians.

Israeli–Palestinian relations

Commerce

Joint economic cooperation between Israelis and Palestinians officials has experienced growth over the past years. Starting in 2008, Cisco Systems began a concerted effort to jump-start the nascent Palestinian IT sector with a holistic ecosystem approach, encompassing venture capital, private equity, capacity building and direct outsourcing to Palestinian companies. The company invested $15 million toward that end and drew in other major international investors and donors, including Microsoft, HP and Google. The Palestinian IT sector has since grown from 0.8% of GDP in 2008 to 5% in 2010.

Olives of Peace is a joint Israeli–Palestinian business venture to sell olive oil. Through this project, Israelis and Palestinians have carried out joint training sessions and planning. The oil is sold under the brand name "Olives of Peace."

In October 2009, a new project got underway promoting tourism and travel between the two areas. New business efforts and tourist attractions have been initiated in Jenin. The two regions are planning a joint industrial zone which would bridge the border. Palestinians would produce locally-made handicrafts and sell them through Gilboa to other regions of the world. Another possible project is a joint language center, where Israelis and Palestinians would teach each other Arabic and Hebrew, as well as aspects of their cultural heritage.

Since 2010, Israeli high-tech companies have begun to employ Palestinian engineers. To date, most of them are outsourced workers, but Mellanox, a computer hardware firm, plans to hire 15–20 Palestinian engineers as regular employees.

In 2011, bilateral trade between Israel and the Palestinian-ruled areas reached $4.3 billion, with Israeli exports to the PA amounting to $3.5 billion and Palestinian exports to Israel amounting to $816 million. According to Nader Tamimi, chair of the Association of Traditional Industries in the PA, there are regular interactions between Palestinian and Israeli businessmen.

At a conference hosted by the Faculty of Business and Management at Ben-Gurion University of the Negev in 2012, Israeli and Palestinian trade experts met to discuss ways of promoting cross-border business interactions.

In 2013, commercial trade between Israel and the Palestinian Authority were valued at US$20 billion annually. The continuously increasing transactions led to the creation of the joint Palestinian and Israeli initiative, the Jerusalem Arbitration Center (JAC). The center will specialize as an independent institution focusing on business arbitration between Israelis and Palestinians.

Due to the clearance crisis with Israel, the Palestinian economy was severely hit in terms of public finances, according to the World Bank’s report in 2019. World Bank Acting Country Director for West Bank Gaza Anna Bjerde said, "The economy, which in 2018 saw no real growth, is now facing a severe fiscal shock because of the standoff over clearance revenue transfers." The report states, "Against a background of declining aid flows, the recent standoff stemmed from Israel’s unilateral deduction of US$138 million from the PA’s clearance revenues in 2019 to offset estimated payouts to Palestinian martyrs and prisoners’ families."

Conflict
See also: Agriculture in Palestine

In 2006, the unity of the Palestinian economy was threatened when Israeli ties to the West bank were severed. The following war in 2008–2009 destroyed all economic infrastructure in Gaza, leaving the Palestinian economy without any remaining activity and owing $1.4 billion. The Oslo Accords in 1993 aimed to prevent this, but was unable to keep the Palestinian economy from fluctuating. Currently, the Palestinian economy lives on foreign aid and customs revenue between Israel and Palestine. However, Israeli restrictions fragmented the Palestinian economy and caused and increase in unemployment. By 2008, 71% of the Gaza Strip's population was unemployed. The import and export prosperity in Palestine was impacted by the border restrictions and constant Israeli control in the West Bank and Gaza, which also weakened the industrial and agricultural sectors. In order for the Palestinian economy to be prosperous, the restrictions on Palestinian land must be removed. In the West Bank, the Israeli restrictions caused the Palestinian economy to lose $3.4bn (%35 of the annual GDP), according to The Guardian and a report for World Bank.

Development indicators

School enrollment, primary (%) gross: 94% in 2012

CO2 Emission (metric tons per capita:  0.6 in 2010

Poverty rate:  25.8% in 2011

Improved water source rural: 82% in 2012

Life expectancy at birth total years: 73 in 2012

GNI per capita (current US $): $2,810 in 2012

Population: 4,169,509 in 2013

See also
Blockade of the Gaza Strip
 List of banks in Palestine

References

External links

MEED – Middle East Business intelligence since 1957
Meeting Minutes of the Palestinian Reform Task Force, 10 July 2002