Forecast for Palestinian Economic Survival

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Overview:

Soon after the all-Hamas government was sworn in, Israel and donor countries executed their earlier threats of economic sanctions against the new Palestinian government. Israel has suspended the transfer of millions of dollars in customs and tax revenues which it collects on behalf of the Palestinian Authority (PA). The monthly transfer is one aspect of Palestinian-Israeli economic interaction. Israel has severely, and in some areas completely, restricted Palestinian workers’ access to Israel and its settlements and the flow of imports and exports between the Palestinian areas and Israel. Donor countries have suspended, reduced, or are reviewing various categories of assistance. With the PA almost completely depended on foreign aid and customs transfers to provide public services to and employment for Palestinians, the economic outlook is dim.

The Palestinian Economy

Due to its heavy dependence on Israel and foreign aid, the Palestinian economy is highly sensitive to external induction. A March 2006 World Bank report warned of the potential negative impact that the suspension of these two financial sources will have on Palestinian personal income, unemployment and poverty levels over the next three years (2006-08).

According to Palestinian economist Mohammed el-Samhouri, the PA has received an annual aid package of about $1 billion dollars for humanitarian, developmental and direct budgetary support. In addition, it receives a monthly transfer of about $50-60 million in customs and tax revenues that Israel collects on behalf of the PA as agreed under the Paris Economic Protocols of 1994.

Since September 2000, international aid doubled from $500 million to $1 billion a year. Despite positive growth rates during 2003-05, as recorded by the World Bank, Palestinian incomes still remain lower than their pre-intifada levels with real Gross Domestic Product (GDP) per capita in 2005 about 31 percent lower than in 1999. Unemployment and poverty rates in the Occupied Palestinian Territory are three times higher than their pre-2000 levels, Samhouri noted.

In 2005, the international community, acting through the Ad Hoc Liaison Committee (AHLC), established that in order to achieve desirable Palestinian GDP growth rates, Israel would need to continue the transfer of revenues, roll back its restrictive measures on movement and access, and increase Palestinian labor access to Israel–”or at least maintain the 2005 level of access. The committee also noted the importance of sustained high rates of donor and private investment and reform of Palestinian governance.

The committee found that the impact of Israel’s suspension of revenue transfers and continued restrictions on movement and access would be much greater than that of reduced aid flow.

The Impact of Economic Sanctions

According to the World Bank report, Israel’s reaction would have the greatest and immediate impact on the Palestinian economy. Three actions against the Palestinian economy that Israel can or has taken are:

1). Suspension of the transfer of tax revenues. These revenues have, at times, made up two-thirds of the total PA revenue. Some reports suggest that in 2005, the amount was in the area of $740 million, or approximately 13 percent of the Gross Disposable Income (GDI). According to signed agreements, Israel remits to the PA taxes and customs levied in Israel on goods destined for the West Bank and Gaza Strip.

2). Restricting or terminating entry of Palestinian workers to Israel. In 2005, some 44,800 Palestinians went to work in Israel per day. Their combined annual wages of approximately $405 million made up 7 percent of the GDI. Since the January 2006 election, an average of 25,000-30,000 Palestinians have entered Israel for work on a daily basis.

3). Restricting trade across borders. In 2005, Palestinian imports totaled about $2.8 billion (68 percent of the GDP) and Palestinian exports were $600 million (15 percent of the GDP) for a total of about $3.4 billion (83 percent) of Palestinian GDP. Israel announced that it will tighten its border with the West Bank and Gaza Strip.

The crucial role that trade, movement and access play in the Palestinian economy led in part to the November 2005 Agreement on Movement and Access (AMA), brokered by U.S. Secretary of State Condoleezza Rice. However, many of the obligations under the AMA have not been fulfilled–”mainly the agreement on the Karni commercial crossing between Gaza and Israel.

John Ging, Director of UNRWA operations in Gaza warned, “If Karni remains closed, we are, once again, counting down to a food crisis.” According to an 11 April 2006 UNRWA press release, 765,000 Palestinian refugees depend on the agency for flour, oil, sugar and other basic food items, which it has not been able to distribute due to the border closure.

Ging added, “From a humanitarian perspective, the outlook in Gaza is bleak. We are once again facing imminent food shortages; insecurity is making delivery of humanitarian services difficult. All of this is likely to add up to more refugees falling under the poverty line and becoming dependent on humanitarian assistance.”

International aid to the PA falls into three categories–”budget support; emergency and humanitarian aid; and development aid. According to the World Bank’s Economic Monitoring Report (No. 1), donor contributions in 2005 totaled approximately $1.3 billion. The majority of the aid, $500 million or 38 percent, went to humanitarian and emergency assistance. Aid for development projects came in second with $450 million (35 percent), followed by $350 million (27 percent) for budget support.

Donors have indicated that humanitarian/emergency assistance will continue given that almost all of this type of assistance is channeled through the United Nations (UN) and non-governmental organizations (NGOs), not through the PA. Any reduction or suspension of aid is likely to come from the $800 million–”like that provided in 2005–”for budget and development support.

However, donor countries plan to set up new verification procedures for humanitarian and emergency aid. These new procedures may cause delays in assistance. For the Occupied Territory, timing is always a crucial factor. Furthermore, the PA is responsible for a large portion of public services and PA salaries are a large part of maintaining public welfare. If salaries are not paid, the 140,000-member workforce would compound the growing humanitarian crisis in the West Bank and Gaza Strip.

Distribution of humanitarian and emergency aid is also a concern for UN agencies and NGOs, as UNRWA has recently experienced. Even if the international community does delivery on its promise to keep and even increase humanitarian assistance, Palestinians will not benefit if Israel maintains its restrictive measures on the borders.

Future Prospects

In its report, the Work Bank developed four scenarios that may be used. It analyzed the effects of each scenario on the Palestinian economy over a three-year period. Scenario One saw no abrupt change; Scenario Two saw a suspension of revenue transfers, trade and labor restrictions. Scenario Three involved reduced aid. Scenario Four involved suspension of revenue transfers, trade and labor restrictions, and reduced aid.

Depending on which scenario is employed, Samhouri predicts that by the end of 2008 the loss in GDP per capita income will range from 11 to 36 percent. Unemployment will range between 35 and 47 percent. The poverty rate will be between 55 to 74 percent.

Under Scenario One, where international aid, tax revenues, and restrictions on Palestinian labor and trade remain at their 2005 levels, the economic prospects are not good. In 2005, donors had set a 10 percent real GDP growth rate per annum to reduce the unemployment rate. Under the Scenario One, the Bank projects a decline in real GDP per capita growth from 6 percent in 2005 to 5 percent in 2006, with negative returns in 2007 and 2008. By 2008, the Bank projects real incomes to be 19 percent lower than in 2005 and unemployment and poverty to increase by eleven and seven points respectively–”34 percent of the workforce and 51 percent of the population.

If Scenario Two happens, unemployment would reach 45 percent by 2008 and poverty levels would hit 70 percent. The Bank predicts that a Scenario Three situation would be less shocking. “Although real GDP growth turns negative in 2006 and real GDI per capita declines by 7 percent more than under Scenario One, most other aggregates are only marginally worse than under ‘No Abrupt Change,'” the Bank report stated.

Scenario Four proves to be most lethal. According to the Bank, in one year (2006), real GDP per capita would decline under this scenario by 27 percent and personal incomes by 30 percent–”rates equivalent to a deep depression. By 2008, unemployment will reach 47 percent and poverty 74 percent.

Many have asked why the PA, which receives a large annual aid package–”the highest aid recipient on a per capita basis–”is in an economic abyss. According to Samhouri, financial mismanagement is not the only reason. After undergoing significant reforms under the former finance minister Salam Fayyad, the International Monetary Fund (IMF) and the World Bank consider the PA as one of the most transparent and accountable regimes in the region.

“Under normal circumstances, international aid of this magnitude to a relatively small economy with a population of just 4 million should have been enough to transform it over time to a self sustained economy,” Samhouri said. “But over the past five years, conditions in the Occupied Palestinian Territory were anything but normal.”

The Palestinian economy has always been tied to the political process. Economic depression and a lack of economic growth have a deep impact on the political process. Economic growth is an important part of a viable political process. Real economic progress must be addressed within the political context of transforming the Palestinian territory into a viable political state that is then able to convert its economy from dependence and survival to a viable, self-sufficient economy.

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