Tuesday 24, October 2017 by Nabilah Annuar

Championing Palestine

As long as regional political tensions continue, economic recovery in Palestine will forever be an uphill battle.

Thrown into recession in 2014 by the Gaza war, the Palestinian economy has nonetheless been on a recovering trend. Although driven by unsustainable factors, the economy rebounded in 2015 with real GDP growth rate reaching 3.4 per cent in 2015 and an estimated 4.3 per cent in 2016.

World Bank estimates suggest that growth in the Gaza Strip reached 7.4 per cent in 2016 driven by a surge in construction activity, while the West Bank economy expanded by 3.4 per cent mainly due to an increase in household consumption financed by bank loans.

The unemployment rate in Palestinian territories remains high at 27 per cent, masking wide regional differences with unemployment in Gaza, at 42 per cent, more than twice as high as in the West Bank. Youth unemployment continues to be a major concern in Palestinian territories, particularly in Gaza where more than half of those aged between 15 and 29 are out of work.

Fiscal health

Public revenues in 2016 grew by about five percentage points of GDP reaching 26 per cent, on account of one-off revenue transfers by the Government of Israel and advance receipts of telecom licence fees. In spite of this, the Palestinian Authority’s (PA) fiscal situation remained difficult in despite the strong revenue performance.

According to the World Bank, this offset the higher than budgeted increase in public expenditures which reached 32 per cent of GDP in 2016, mainly driven by wage increases for teachers and engineers, and led to a decline in the total deficit (before grants) to eight per cent of GDP. In parallel, aid to the PA continued its declining trend in 2016, resulting in a $330 million financing gap (2.5 per cent of GDP) and further arrears accumulation to the private sector and the public pension fund.

The external current account deficit (including official transfers) is estimated to have slightly widened in 2016 and reached 16.3 per cent of GDP mainly due to a fall in aid inflows. On the other hand, the trade deficit witnessed a slight decline in 2016 to 41 per cent of GDP following a drop in imports from Israel—the Palestinian territories’ main trading partner—due to lower fuel prices and a trend among Palestinian consumers to boycott Israeli products. Exports continue to be constrained by the ongoing trade restrictions, and have remained low and stagnant at around 19 per cent of GDP.

Challenges and opportunities

Lack of progress in the peace process and the Israeli constraints on trade, movement, and access to resources, in addition to the internal political divide between the West Bank and Gaza, as well as a challenging business environment, continue to stand in the way of a sustainable economic recovery in Palestine. Therefore, downside risks to growth and employment for the nation remain significant.

Despite some progress, setbacks to the reconstruction process in Gaza are possible. The World Bank asserts that the resumption of armed conflict cannot be ruled out and if this happens, the Gaza economy is expected to slip back into recession. Moreover, if tensions erupt again throughout the West Bank, they will result in elevated security risks that may further hamper economic activity.

On the bright side, supporting the development of the country, last July, the World Bank undertook four projects in the Palestinian territories aimed at improving living conditions and expanding opportunities. The projects will be funded by grants worth $43 million, and will support of job creation, recovery and reconstruction, service delivery, and social protection of the most vulnerable.

The Third Municipal Development Project will be funded by $16 million from the World Bank and $20 million donor co-financing form the Partnership for Infrastructure Development Trust Fund administered by the World Bank (PID MDTF). The new project will build on the success of previous projects and will scale up its operations to improve municipal performance and service delivery.

Another collaboration between the World Bank and international partners is the Electricity Sector Performance Improvement Project. With $4 million from the World Bank and $7 million from the PID MDTF, the project will strengthen the capacity of key energy sector institutions, improve the efficiency and service quality of the electricity distribution system, and pilot a new business model for solar energy in Gaza.

Supporting job creation, the World Bank will carry out the Second Finance for Jobs Project. With grants from the Bank worth $8 million and $1.5 million from the State and Peacebuilding Fund, the project will support innovative financing approaches to jumpstart job creation through private capital. It will provide support to early-stage financing of startups, investment for employment in medium and large companies, and investment in the skills needed by the private sector.

Outlook

According to the World Bank, the recent pickup in growth was driven by Gaza reconstruction and this is unsustainable without an easing of external restrictions and efforts to improve the domestic business environment. The economic outlook for the Palestinian territories therefore remains unfavourable, with projected growth levels insufficient to improve living standards.

Assuming that the current restrictions remain in place and that the security situation stays relatively calm, the real GDP growth rate of the Palestinian economy in 2017 is projected at 3.5 per cent: 2.7 per cent in the West Bank and 5.5 per cent in Gaza. In the medium term, real GDP growth may average at 3.5 per cent. This sluggish growth implies near stagnation in real per capita income and an increase in unemployment.

Palestine’s fiscal deficit (before grants) is projected to increase to 10 per cent of GDP ($1.35 billion) in 2017. At the same time, foreign aid in 2017 could fall to about $640 million, leaving a financing gap in excess of $0.7 billion (five per cent of GDP). The PA’s actions alone will not be enough to fully close the gap. Unless donor aid is significantly stepped up, the gap will mostly be financed through arrears to the private sector and borrowing from local banks.

Due to the persistently large trade deficit, the 2017 current account deficit—including official transfers—is projected to stay high. Constrained by the restrictions system, Palestinian export growth is expected to remain sluggish and the Palestinian territories will continue to heavily depend on imports to meet even some of their basic needs. Consequently, the current account deficit is expected to remain high in 2017, at about 15.5 per cent of GDP.

Growth forecasts

The Palestinian Monetary Authority (PMA) in a report released at the end of last year forecasted that real GDP growth during 2017 will be primarily underpinned by an increase in private consumption financed by further expansion in bank credit and the swelling of arrears. Real GDP growth will be additionally favourably affected by the upturn in total investment, particularly relating to the reconstruction process in the Gaza Strip, its slow pace, notwithstanding.

The private-sector value added is expected to grow by 3.2 per cent in 2017, raising the sector’s contribution to real GDP at factor costs to around 79 per cent, as opposed to an expected growth of public-sector value added by only two per cent, pushing the sector’s contribution to real GDP down to around 21 per cent.

Additionally, PMA forecasts point to an expected upturn in total consumption spending by 4.1 per cent during 2017 (of which 3.7 per cent is for private consumption and 5.7 per cent for public consumption), pushing its contribution to real GDP up to 119.5 per cent. Conversely, total investment spending is expected to increase slightly by about 0.8 per cent, to constitute 20.9 per cent of GDP during the same year.

For the Palestinian external sector, predictions point to an expected growth in exports by 2.2 per cent as opposed to a growth in imports by 3.6 per cent, mainly associated with an increase in consumption. Subsequently, it is expected that these changes in exports and imports will exacerbate the trade balance deficit by about 4.4 per cent to constitute 40.4 per cent of the real GDP predicted for 2017.

The PMA highlighted that because the predicted growth in real GDP is not high enough and historically shown to be a strong stimulator to employment, this growth may not have a significant impact on job creations and employment. Instead, it is expected that unemployment rates in Palestine will continue to climb, reaching about 27.6 per cent of labour force in 2017.

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