The reasons behind the near-collapse of the Palestinian economy are the tightening grip of occupation, the suffocation of Gaza’s local economy, a 6 percent drop in donor support between 2017 and 2018, deterioration of the security situation, and the lack of confidence as a result of bleak political horizons, the United Nations Conference on Trade and Development (UNCTAD) warned in its report.
In 2018 and early 2019, the Palestinian economy stagnated, per capita income further fell by 1.7 percent, unemployment increased, poverty deepened, and the environmental toll of occupation rose in the occupied Palestinian territory (Gaza and the West Bank including East Jerusalem).
About one in three Palestinians in the labor market is unemployed. In Gaza, the unemployment rate is above 50 percent while the poverty level has reached 53 percent, even though most of the people classified as poor receive aid from the government and international organizations.
Gaza is increasingly becoming unlivable under the severe and worsening socioeconomic conditions. In 2018, its local economy contracted by 7 percent, leading to a 10 percent decline in its per capita income.
Even though all sectors of the economy are constrained by occupation, agriculture and manufacturing are disproportionately impacted and the ensuing massive trade deficit adversely affects economic growth.
Between 1994 and 2018, the share of manufacturing in the economy shrunk from 20 percent to 11 percent of the gross domestic product (GDP), whereas the share of agriculture and fishing dropped from over 12 percent to less than a paltry 3 percent, the report said.
The viability and competitiveness of Palestinian producers are undermined by the multilayered system of physical and administrative restrictions deployed by the occupying power.
In the West Bank alone, 705 permanent physical obstacles restrict the movement of Palestinian workers and goods. They include checkpoints, gates, earth mounds, roadblocks, and trenches.
In addition, the economy is further weakened by the Israeli ban on the import of a long list of “dual-use” essential technological and intermediate goods as well as other critical production inputs (“dual-use” goods are civilian ones deemed, by Israel, to have potential military applications).
The report noted that occupation isolates the Palestinian people from international markets, compelling them into overwhelming trade and economic dependence on Israel, which accounts for 80 percent of Palestinian exports and supplies 58 percent of its imports.
The UNCTAD report suggested that occupation has prevented the Palestinian people from developing their oil and natural gas resources in Gaza and the West Bank.
Consequently, the estimated accumulated losses are worth billions of dollars and the associated opportunity cost of forgone development is staggering. The longer this situation persists, the higher this cost will be and the total economic cost of occupation borne by the Palestinian people will continue to rise.
Multiple fiscal shocks precipitate steeper economic decline, warned UNCTAD.
In addition to the unprecedented deterioration in socioeconomic conditions, in July 2018, Israel passed a law mandating deduction, from Palestinian fiscal revenues, of an amount equivalent to the payments made by the Palestinian government to families of Palestinian martyrs and prisoners in Israeli jails.
Subsequently, in 2019, Israel deducted $11.5 million per month (equivalent to $138 million annually) from Palestinian clearance revenues. The Palestinian government responded by refusing to accept anything less than the full amount due to it in fiscal revenue.
The fiscal faceoff deprives the Palestinian government of 65 percent of its revenue (15 percent of GDP). Deprived of two-thirds of its tax revenue, the Palestinian government coped by implementing painful cuts to social assistance to the neediest and paying public employees only 50 percent of their salaries.
This fiscal shock will further amplify the already large negative impact of declining donor support on output, employment and socioeconomic conditions. If this fiscal standoff persists, it may well push the economy into recession and instigate the collapse of Palestinian finances, the report warned.