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THIRD WORLD ECONOMICS

Palestinian economy at an all-time low, says UNCTAD

A UN development body has highlighted the ruinous impact of the Israeli occupation on the Palestinian economy.

by Kanaga Raja

GENEVA: The performance of the Palestinian economy and humanitarian conditions in Israeli-occupied Palestine reached an all-time low in 2018 and early 2019, according to the United Nations Conference on Trade and Development (UNCTAD).

In its report on UNCTAD assistance to the Palestinian people, released on 10 September, UNCTAD pointed to falling per capita income, increasing mass unemployment, deepening poverty and the rising environmental toll of the occupation in both the Gaza Strip and the West Bank.

According to UNCTAD, the reasons behind the near-collapse of the Palestinian economy are the expansion and tightening grip of occupation, suffocation of Gaza's local economy, a 6% drop in donor support between 2017 and 2018, deterioration of the security situation and lack of confidence as a result of bleak political horizons.

The Palestinian people are also being denied the right to exploit oil and natural gas resources and thereby deprived of billions of dollars in revenue, it said.

At a media briefing on 10 September, Richard Kozul-Wright, Director of the UNCTAD Division on Globalization and Development Strategies, said that when looking at the numbers presented today, "we are looking not simply at the immediate horrors that face the Palestinian people but also our own future."

According to Kozul-Wright, when one looks at the trends that the Palestinian economy is being subject to stagnant growth, high levels of debt, fiscal squeeze, environmental crises, water shortages, declining wages "these are problems that we see as endemic in a wider neoliberal agenda."

"Obviously, in the case of the Palestinian situation, you have the very specific challenges around occupation; but in many respects, what we see on the ground in Gaza and in the West Bank has uncomfortable ramifications beyond the immediate Middle Eastern context," he said.

"In reading these numbers, it is very disconcerting to see parallels between a wider situation in the global economy and the particular challenges that are being faced by the Palestinian economy," Kozul-Wright added.

Slowdown

According to the UNCTAD report, precipitous deterioration in Gaza and a slowdown in the West Bank combined in a scant 0.9% growth in gross domestic product (GDP) in 2018, well below the population growth rate, implying a drop in per capita income and worsening unemployment and poverty crises.

The slowdown was driven by the dire conditions in Gaza, with the recent decimation of the productive base and capital stock and restrictions on the importation of essential production inputs. The economy of Gaza contracted by 7% and poverty deepened.

Investment in Gaza practically vanished, falling to 3% of GDP, 88% of which was channelled to the rebuilding of structures destroyed during several major military operations in the last 10 years. Non-building investment remained minimal, at 0.5% of GDP. Had the capital stock accumulation and productivity growth rates been similar to those in the West Bank, output growth in Gaza could have reached 9%, said UNCTAD.

In the West Bank, the economy may have reached the limits of consumption and credit-led growth; GDP growth slowed from 4% to 3% between 2017 and 2018.

"The slowdown is explained by the decrease in donor support, contraction of the public sector and deterioration of the security environment, which discouraged private sector activities."

The forces set in motion by occupation restructured the Palestinian economy and made its growth performance driven by the non-tradable goods sector, namely, construction, wholesale, retail and services, while exports contribute little and the massive trade deficit adversely affects GDP growth.

The overall share of manufacturing in total value added shrank from 20% to 11% of GDP between 1994 and 2018, while the share of agriculture and fishing declined from over 12% to less than 3%.

According to UNCTAD, this pattern underscores the incapacity of the Palestinian National Authority (PNA) to steer the economy towards an export-led growth strategy, which would be most suitable for a small, open economy.

The distorted distribution of investments across sectors gives rise to jobless growth in good times and deprives the economy of the benefits of technological innovation and the dynamism it entails, which are characteristic of the manufacturing and agricultural sectors hampered by occupation.

The prospects for the Palestinian economy are grim because the sources of growth that have propelled it in the last two decades are disappearing, while the constraints imposed by prolonged occupation persist and worsen, said UNCTAD. Many new developments render the horizon bleaker, including heightening political uncertainty, the steep decline in donor support and the volatile fiscal situation.

In the short term, growth is expected to hover around 1%, well below the population growth rate, which means continuous decline in real per capita income and rising levels of poverty.

The depression-level unemployment rate in the Occupied Palestinian Territory continued to climb in 2018, reaching 31%: 52% in Gaza and 18% in the West Bank. Adverse labour market conditions manifest themselves in a low overall labour force participation rate of 46% (21% for women) and the fact that more than one-third of private sector employees receive less than the minimum wage, with the situation being worse in Gaza, where four in five employees work for less than the minimum wage.

The trends in the real wage and labour productivity have been declining. In 2017, the real wage and productivity per worker were 7% and 9% below their levels in 1995, respectively.

The anaemic GDP growth, declining real income, high unemployment level and falling donor support resulted in worsening incidence of poverty and food insecurity in the Occupied Palestinian Territory. This situation leaves 2.5 million people in need of humanitarian assistance, the overwhelming majority of whom live in areas outside the control of the PNA, that is, Gaza, Area C of the West Bank and East Jerusalem.

Citing Palestinian Central Bureau of Statistics data, the UNCTAD report said that in 2017, 29.2% of Palestinians lived below the consumption-based poverty line, defined as $4.6 per day, including social assistance and transfers. Furthermore, deep poverty afflicts two-thirds of the poor, who live on less than $3.6 per day.

The poverty rate was 13.9% in the West Bank and 53% in Gaza, where over 1 million people, or one in two, are now poor, including over 400,000 children. In Jerusalem, 72% of Palestinian families live below the poverty line, compared with 26% of Israeli families, and 81% of Palestinian children live below the poverty line, compared with 36% of Israeli children.

Dependence

According to UNCTAD, the incapacity of the restrained economy, under occupation, to generate jobs, in the face of a growing population, forces a high number of Palestinians to seek employment in Israel and settlements in the West Bank, which are illegal under international law. Over 127,000 Palestinian workers (24% of the West Bank employed workforce) are employed in Israel and settlements, at wages 60% higher than domestic wages.

Occupation fosters uncertainty and high transaction costs, which undermine investment in the export and import-competing sectors and thereby deepen the dependence of the Occupied Palestinian Territory on imports and transfers, including aid, remittances and income from the employment of Palestinians in Israel and settlements, said UNCTAD.

In 2018, import dependence continued unabated. Imports were at 60% of GDP, while exports were at 20%, and the trade deficit, in absolute terms, increased by 8%. In relative terms, the trade deficit in 2018 increased from 37% to 40% of GDP. Export revenue covered one-third of the $8.7 billion import bill and the ensuing trade deficit is the sixth highest in the world, behind that of Lesotho, Nepal, Somalia, Tonga and Tuvalu.

According to UNCTAD, the exchange rate of the new shekel, set in Israel according to the evolving needs of its economy, is economically inappropriate for the structurally different Palestinian economy. The appreciation of the shekel in 2017 and early 2018 added to the overvaluation of the real exchange for the Palestinian economy, estimated by the International Monetary Fund to range between 5% and 25%.

However, the key driver of the deficit is the loss of competitiveness and potential investment thwarted by the physical and administrative restrictions put in place by the occupying power, including a dual-use list that bans the importation of technology, critical production inputs and machinery. Within the 5,655 sq km total area of the West Bank, 705 permanent obstacles restrict Palestinian vehicles and pedestrian movement, including checkpoints, road gates, earth mounds, roadblocks, trenches and earth walls. These barriers render the average trade cost per container for Palestinian firms greater than the cost for Israeli firms by a factor of 3, while the time cost is higher by a factor of 2 to 4. These restrictions are of greater negative significance than tariff barriers.

Enforced isolation from global markets compels the Palestinian people to overwhelming dependence on Israel for trade. In 2018, Israel accounted for 57% of total Palestinian trade, or 21% of GDP. The trade deficit with Israel, at over $3 billion, was greater than the total value of all Palestinian exports of goods and services.

Except for the control system of the occupying power, there is no economic logic to justify the fact that Israel absorbs nearly 80% of Palestinian exports or supplies 58% of imports, while neighbouring Arab markets, with much higher incomes and greater populations, account for 17% of Palestinian exports and 12% of imports, said UNCTAD.

The Palestinian market absorbs 4-6% of Israeli exports of goods and ranks fourth among Israel's top export markets, directly behind the largest markets, such as China, the United Kingdom and the United States, and ahead of large markets such as France, Germany and India.

Fiscal challenge

Despite deteriorating political and economic conditions, the PNA persisted with its fiscal reform efforts and further reduced its budget deficit by $1.1 billion in 2018, to 7.3% of GDP from 8% in 2017.

In 2018, domestic tax revenue (excluding clearance revenue) and non-tax revenue increased by 9% and 10%, respectively. However, total net revenue declined by 5%, driven by lower clearance revenues.

In July 2018, the government of Israel enacted a law freezing funds paid by the PNA with affinity to terrorism out of funds transferred to it by Israel, which mandates the deduction from clearance revenues an amount equivalent to the payments made by the PNA to families of Palestinian prisoners in Israel and Palestinians killed in attacks or alleged attacks against Israelis. Consequently, in February 2019, Israel informed the PNA that it would deduct $11.5 million per month ($138 million annually) and the PNA declared that it would not accept anything less than the full amount of its rightful revenues. The ramifications of this fiscal challenge are underscored by the fact that clearance revenue accounts for 65% of total PNA revenue (15% of GDP).

Deprived of two-thirds of its tax revenue, the PNA did not publish a budget for 2019 and operated on an emergency cash management plan, addressing the crisis through a cut of 30% to the wage bill, freezing hiring and promotions, reducing social assistance to the neediest, increasing public debt and accumulating greater arrears. Finally, the PNA declared that, as of March 2019, public employees would be paid only 50% of salaries, with exceptions to protect employees at the lower end of the pay scale.

According to UNCTAD, the exploitation of the West Bank by the occupying power is not restricted to land, water and natural resources, but includes the transfer of large amounts of hazardous waste produced in Israel to the Occupied Palestinian Territory. This threatens the health of the Palestinian people and the integrity of their environment and natural resources, it said.

The stringent environmental regulations in Israel and the associated high cost of waste disposal have prompted Israel to use the West Bank as a "sacrifice zone" in which to place its waste treatment facilities, without the consent of the Palestinian people. The transfer of waste is facilitated through the application of lower environmental standards in industrial zones in settlements and subsidies and tax breaks for firms operating there.

With respect to the situation in Gaza, UNCTAD said that 12 years of an almost complete economic siege and repeated major military operations have gutted the local economy of Gaza and all of its productive sectors. The share of Gaza's productive sectors fell from 28% to 13% of GDP between 1994 and 2018; the share of manufacturing halved, to 8%, and that of agriculture fell from 9% to 5%.

Gaza's share in the Palestinian economy has declined from over one-third in the 1990s to less than a quarter in recent years and its per capita real GDP is now less than half of that in the West Bank. Had Gaza had the same access to production inputs as the West Bank, growth rates could have been three times higher than the actual rates, said UNCTAD.

Unrealized oil and natural gas potential

The UNCTAD report said that studies by geologists and natural resources economists have separately confirmed that the Occupied Palestinian Territory lies above considerable reservoirs of oil and natural gas wealth off the coast of Gaza and in the West Bank.

In 1999, the BG Group (BGG) discovered a large gas field (Gaza Marine) at a distance of 17 to 21 nautical miles off the Gaza coast. In November 1999, within the bounds of the Oslo Accords, which give the PNA maritime jurisdiction over its waters up to 20 nautical miles from the coast, the PNA signed a 25-year contract for gas exploration with BGG.

In 2000, BGG drilled two wells in the field and carried out feasibility studies with good results. With reserves estimated at 1 trillion cubic feet of good-quality natural gas, it was envisioned that the Palestinian people would be able to satisfy domestic demand and export the remainder.

The 25-year contract gave BGG 90% of the licence shares and PNA 10% until production began. Subsequently, the PNA share was slated to increase to 40%.

In July 2000, the Israeli government granted BGG authorization to drill the first well, Marine 1. The authorization to drill the second well and the successful gas strikes at the two wells promised a potential windfall for the Palestinian people.

In May 2002, the Israeli government agreed to negotiate an agreement for an annual supply of 0.05 trillion cubic feet of Palestinian gas for a period of 10 to 15 years. Yet in 2003, it reversed its position, stating that funds flowing to the PNA could be used to support terrorism.

However, in April 2007, the government of Israel approved a proposal to renew discussions with BGG, whereby Israel would purchase 0.05 trillion cubic feet of Palestinian natural gas for $4 billion annually, starting in 2009, with profits in the order of $2 billion, of which $1 billion was to go to the Palestinians. It was argued that this would generate mutual benefits deemed to foster a good atmosphere for peace.

The government of Israel, however, had different plans for sharing revenues with Palestinians, according to the UNCTAD report.

An Israeli team of negotiators was set up to formulate a deal with BGG, bypassing the Palestinians. It appeared that the team wanted the Palestinians to be paid in goods and services and insisted that no money should go to the Hamas-controlled government in Gaza. The effect was essentially to nullify the contract signed in 1999 between the PNA and BGG.

In November 2008, the Ministry of Finance and the Ministry of National Infrastructures, Energy and Water Resources of Israel instructed the Israel Electric Corporation to enter into negotiations with BGG on the purchase of natural gas from the BGG offshore concession in Gaza.

However, a new territorial arrangement emerged subsequent to the Israeli military operation in Gaza in December 2008, featuring the militarization and control of the entire Gaza coastline and maritime areas and the de facto confiscation of Palestinian natural gas fields and their integration into Israel's contiguous offshore installations.

Nineteen years have passed since the drilling of Marine 1 and Marine 2. Since the PNA has not been able to exploit these fields, the accumulated losses are in the billions of dollars and the Palestinian people have been denied the benefits of using this natural resource to finance socioeconomic development and meet their fiscal and energy needs, said UNCTAD.

The losses borne by the Palestinian people under occupation are not restricted to Marine 1 and 2. There are also other losses emanating from the Israeli control of the Meged oil and natural gas field, located inside the occupied West Bank in Area C.

Meged was discovered in the 1980s and began production in 2010. Its reserves are estimated at about 1.53 billion barrels of oil, as well as some natural gas. The potential of the contested oil field ranges between 375 and 534 barrels per day.

UNCTAD cited a generally accepted figure for the proven natural gas reserves in Marine 1 and Marine 2, off the coast of Gaza and under the control of the occupying power, at 1.4 trillion cubic feet. Based on the average price of $3.85 per 1,000 cubic feet in the period 2012-17, the total value of these reserves could exceed $5.39 billion. If the $800 million value of investment to develop the field is deducted, this gives a net value of $4.59 billion.

The proven oil reserves of the Meged field are estimated at 1.53 billion barrels. At the price of $65 per barrel, the total value of these reserves would be estimated at $99.1 billion. Noting that current 2018 prices are used as proxies for a rough approximation of the valuation of these reserves, UNCTAD said based on the regional average cost of production of $23.5 per barrel, the net valuation drops to $63.29 billion.

The total Palestinian reserves losses are therefore estimated at $67.9 billion ($4.6 billion plus $63.3 billion).

UNCTAD also said the new oil and natural gas discoveries in the Eastern Mediterranean, resources typically shared among neighbouring countries, are critical.

The United States Geological Survey has estimated a mean of 1.7 billion barrels of recoverable oil and a mean of 122 trillion cubic feet of recoverable gas in the Levant Basin Province. The net value of these resources is $453 billion for natural gas and about $71 billion for oil, for a total of $524 billion.

These resources in the Levant Basin Province exist in common pools that do not coincide with political borders. This makes them shared common resources, and the Palestinian people therefore have stakes in them, said UNCTAD. (SUNS8975)

Third World Economics, Issue No. 687, 16-30 April 2019, p6-9


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