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TWN Info Service on UN Sustainable Development (Sept20/05)
14 September 2020
Third World Network


COVID-19 devastating the Palestinian economy, says UNCTAD
Published in SUNS #9188 dated 14 September 2020

Geneva, 9 Sep (Kanaga Raja) – The COVID-19 pandemic has worsened the socioeconomic conditions in the Occupied Palestinian Territory (OPT), which were already moving from bad to worse before the onset of the pandemic, the UN Conference on Trade and Development (UNCTAD) has said.

In a report on its assistance to the Palestinian people (TD/B/67/5), UNCTAD said that even before the economic shock due to the COVID-19 pandemic, the economy was expected to slip into recession in 2020 and 2021, with Palestinian women continuing to pay an additional toll due to occupation.

“Economic prospects darkened further as a result of the annexation of large areas of the West Bank, the economic ramifications due to the COVID-19 pandemic, faltering aid flows and the loss of hundreds of millions of dollars through deductions or leakage to the treasury of Israel,” it added.

The Palestinian National Authority (PNA) is ill-equipped to cope with the far-reaching economic ramifications of the COVID-19 pandemic, said UNCTAD.

“Nor would it be able to cope with a future outbreak of the same or different situations. Its capacity to respond to sudden crises has been eroded over time by occupation and a lack of policy space and conventional economic policy tools to deal with shocks.”

It has little access to external borrowing and extremely limited fiscal space and does not have a national currency or an independent monetary policy.

This underscores the urgency of action at the international level to ensure that the PNA and the Palestinian people can weather the COVID-19 pandemic, said UNCTAD.

At a “hybrid” media briefing (in both physical and online formats), Mr Richard Kozul-Wright, the Director of the UNCTAD Division on Globalization and Development Strategies, said that “COVID-19 forces us to look at pre-existing conditions and the pre-existing conditions in the Occupied Palestinian Territories are essentially malignant, and they will get worse over the coming years as a consequence of COVID-19.”

Inequality, indebtedness, insecurity, and insufficient investment have been the longstanding problems in the OPT and COVID-19 has cast a strong light on those problems, he added.

He also said that lockdown is destructive and the OPT has essentially been in lockdown arguably since 1967 but certainly more intensely since 2000, and the economic consequences in this context are very severe.

Looking through the COVID-19 lens, said Mr Kozul-Wright, fiscal space matters a lot in terms of responding to economic challenges and shocks and building resilience.

Fiscal space in the OPT has been squeezed significantly over the years and continued to be squeezed dramatically in recent years, he said.

“If you are going to build back better, wherever that is, you need fiscal space and that is the central issue and challenge, not only for the Palestinian authorities but also for the international community,” said Mr Kozul-Wright.

COVID-19 has also forced us to think about the generational impact, he said, pointing out that there is a real generational issue around COVID-19 and the need to take the longer term perspective on all kinds of challenges that have been exposed as a consequence of the crisis.

He also pointed to the failure of the international community to execute the promise of a two-state solution, which was essentially agreed to by the international community back in 1974.

“I think it is fair to say that we are further behind in reaching that solution than we have ever been,” Mr Kozul-Wright said.

GRIM FORECASTS BEFORE ONSET OF COVID-19

According to the UNCTAD report, before the onset of the COVID-19 pandemic, the performance of the Palestinian economy was weak and the overall environment was unfavourable.

“The productive base had been hollowed out by recurrent hostilities, geographical and economic fragmentation, technological regression, restrictions on imported inputs and technology, the loss of land and natural resources, settlement expansion, the leakage of fiscal resources and the near collapse of the economy of the Gaza Strip.”

The Palestinian economy failed to regain momentum in 2019, registering just 0.9 per cent of real GDP growth, not much better than in the two preceding years.

The slowdown was driven by a decline in public and private consumption and investment. Down from 2.3 per cent in 2018, growth in the West Bank was at 1.15 per cent, the lowest since 2012.

Meanwhile, in Gaza, GDP growth was virtually at zero and Gaza has thus failed to rebound from two consecutive contractions: -7.7 per cent in 2017 and -3.5 per cent in 2018.

Therefore, real GDP per capita declined by 1.6 per cent in the Occupied Palestinian Territory for the third year in a row, falling by 1.1 per cent in the West Bank and 2.8 per cent in Gaza, said UNCTAD.

As in recent years, the weak economic growth relied on the services and construction sectors, which grew by 2.9 and 1.1 per cent, respectively.

Meanwhile, the tradable goods sector continued its secular decline, with the agricultural sector contracting by 1 per cent and the industrial sector registering 0.2 per cent growth.

UNCTAD said that during the last decade, PNA has pursued far-reaching fiscal reforms and succeeded in bringing the fiscal deficit from 23.3 per cent of GDP in 2006 to 6.3 per cent of GDP in 2018.

This was achieved mainly via improved revenue collection and reduction of the wage bill from 24 per cent of GDP in 2006 to around 11 per cent. Despite the inability to collect taxes in Gaza, PNA managed to enlarge the tax base, raise public revenue and contain expenditure.

The Paris Protocol entrenched the dependence of the Palestinian economy on Israel via a customs union that leaves no space for independent Palestinian economic policies, said the UNCTAD report.

It ties the Occupied Palestinian Territory to the trade policies, tariff structure and value-added tax rate of Israel. Moreover, the authorities in Israel collect trade tax revenues on behalf of PNA and transfer them to PNA.

“This arrangement allows Israel to control two thirds of Palestinian tax revenue, a leverage frequently used, and entails the leakage of Palestinian fiscal resources to the treasury of Israel, estimated at hundreds of millions of dollars per year.”

UNCTAD partially estimates the Palestinian fiscal leakage, from six main sources, at 3.7 per cent of Palestinian GDP or 17.8 per cent of total tax revenue. The cumulative fiscal leakage in 2000-2017 is estimated at $5.6 billion, or 39 per cent of GDP in 2017.

The PNA fiscal situation took a sharp negative turn in early 2019. In March 2019, the Government of Israel began to implement its law mandating the deduction of $12 million per month from Palestinian clearance revenue, equivalent to the payments made by PNA to families of Palestinian prisoners in Israel and Palestinians killed in attacks or alleged attacks against Israelis.

Overall, the fiscal deficit reached $1.4 billion in 2019. With donor support at $590 million, the financing gap of $800 million was the largest in years.

Donor budget support has declined substantially in recent years, falling from 32 per cent of GDP in 2008 to 3.5 per cent of GDP in 2019.

“The negative trend in aid, combined with unpredictability and fluctuations, has been a constant source of fiscal uncertainty.”

The PNA relied on domestic sources to finance two thirds of the budget deficit. Commercial banks accounted for 64 per cent of domestic financing and net arrears to the private sector accounted for the rest. Public debt rose by 8 per cent, reaching $2.8 billion, or 16.4 per cent of GDP, of which domestic debt accounted for $1.6 billion.

According to the report, the restrictions by Israel on trade have stunted the Palestinian economy and impacted the production of exports and importable goods.

Almost all Palestinian imports and exports transit via ports and crossing points of Israel, at which delays and security measures can increase costs by an average of $538 per shipment. This cultivates a significant persistent trade deficit. In 2019, the trade deficit remained high, at 33.7 per cent of GDP.

Meanwhile, Palestinian economic dependence on Israel deepened in 2019, with the bilateral trade deficit rising from $3.4 billion to $4 billion, as Israel accounted for 63 per cent of total Palestinian trade.

“While Occupied Palestinian Territory exports to Israel are primary and low value-added manufactured goods, imports are sophisticated, final consumer goods and durables.”

The dual-use list system, which bans the importation of technology and critical inputs, undermines the export sector, said UNCTAD.

The list contains 56 items requiring “special approval” to enter Gaza and the West Bank and an additional 61 items that only apply to Gaza. The economic costs of the dual-use list as currently implemented have been shown to be significant. Relaxing the dual-use list ban alone would allow GDP to expand by 6 per cent in the West Bank and 11 per cent in Gaza by 2025.

Even before the onset of the COVID-19 pandemic, economic forecasts for 2020 and 2021 were bleak, UNCTAD said.

The Palestinian Central Bureau of Statistics (PCBS) simulated the economy under a baseline scenario that assumed a continuation of the same conditions as in 2019 except for improved aid flows and, under this scenario, GDP per capita would decrease by 0.1 per cent.

However, under a more realistic scenario, which assumes a decline in aid, the tightening of restrictions by Israel and a delay in the transfer of clearance revenue by Israel, GDP per capita would decrease by 4.5 per cent and unemployment would worsen further.

However, the World Bank projects that even under a scenario that assumes no change in the conditions that prevailed in 2019, the economy will slip into a recession in 2020 and 2021, implying a decline in GDP per capita of more than 3 per cent.

The barriers to the movement of Palestinian workers have significant human and economic implications. They divide the West Bank into disconnected islands controlled by over 600 military checkpoints, gates and roads exclusive to settlers from Israel, said UNCTAD.

According to PCBS, by some estimates, Palestinians lose 60 million work hours per year (equivalent to $274 million) as a result of mobility restrictions and also lose about 80 million litres of fuel, at a time of worsening global warming.

Assessing the cost of mobility restrictions, the World Bank estimates that easing road obstacles, a single element of a larger set of restrictions, just enough to improve market access by 10 per cent, would increase local output in the West Bank by 0.6 per cent and, therefore, in the absence of such obstacles, GDP per capita in the West Bank would have been 4.1 to 6.1 per cent higher than its observed level.

In 2019, this was equivalent to a total loss of $589 million to $876 million. Furthermore, some relaxation of other restrictions by Israel would, by 2025, enlarge the Palestinian economy by 33 per cent.

The poverty rate in the Occupied Palestinian Territory increased from 25.8 per cent in 2011 to 29.2 per cent in 2017 and was at 13.9 per cent in the West Bank and 53 per cent in Gaza in 2017.

Furthermore, by 2018, 68 per cent of households in Gaza had been identified as food insecure, compared with 53.3 per cent in 2014. The rising unemployment levels, declining donor support and falling per capita GDP indicate that the poverty crisis has only become worse since 2017 in both Gaza and the West Bank.

Low wages and high unemployment demonstrate the extreme weakness of the labour market, said the report.

Driven by the situation in Gaza, the depression-level unemployment rate in the Occupied Palestinian Territory rose from 31 per cent in 2018 to 33 per cent in 2019, despite a low labour force participation rate of 46 per cent.

The unemployment rate in Gaza was 45.1 per cent in 2019, compared with 14.6 per cent in the West Bank, while the gender breakdown indicates 39.5 per cent unemployed men compared with 63.7 per cent unemployed women.

PCBS data suggest that occupation deprives the Palestinian people of 55 per cent of West Bank land classified as of high or medium agricultural value.

It also affirms that most of the valuable land is in Area C, which covers 60 per cent of the area of the West Bank and remains under occupation by Israel and inaccessible to Palestinian producers.

In 2019, Israel demolished or seized 622 Palestinian structures in the West Bank, including 127 intended for humanitarian assistance. In Area C alone, there are over 13,000 pending demolition orders, including 40 for schools.

In 2019 and early 2020, occupation was further entrenched through the accelerated expansion of settlements. The occupying Power approved the construction of 8,457 new housing units and the establishment of 13 new outposts.

By the end of 2018, there were 150 settlements and 128 outposts. Settler population had reached 671,007 by the end of 2018, equivalent to about a quarter of Palestinians living in the West Bank.

Palestinian agricultural livelihood is undermined by the uprooting of and damage to olive trees, said UNCTAD.

To facilitate settlement expansion, in 2018 alone, the occupying Power uprooted 7,122 trees, bringing the total to over 1 million trees destroyed since 2000.

In 2019, the rate of incidents rose by 16 per cent compared with 2018 and by more than 100 per cent compared with 2017.

IMPACT OF COVID-19 ON PALESTINIAN ECONOMY

According to UNCTAD, the prolonged occupation and conflict have left the Palestinian economy vulnerable to shocks.

The pandemic struck at a time of rapidly deteriorating conditions in the Occupied Palestinian Territory, with the first case of COVID-19 reported in early March.

The PNA responded by closing institutions and limiting the movement of people within the Occupied Palestinian Territory, and completely locked down some localities.

Before the outbreak, the most optimistic forecasts for 2020 projected sluggish economic growth and a further decline in GDP per capita.

The severity of socioeconomic conditions before the pandemic is illustrated by the deep fiscal crisis, unemployment of one third of the workforce and 25 per cent poverty rate among Palestinian households, said UNCTAD.

Subsequent to the annual loss of $144 million through deductions by Israel, the pandemic will have far-reaching fiscal implications, it added.

The slowdown in imports will decrease clearance revenue while the reduction in labour supply, freeze in economic activities and deterioration in output will impact tax revenue from income, profit and value-added tax.

The impact of the revenue collapse will be heightened by the additional expenditure necessitated by the pandemic, which extends from health to security, social welfare and support for the private sector.

The PNA declared an emergency budget, aimed at keeping public spending to a minimum, reorienting expenditure towards public health and ensuring adequate funding to the Ministry of Health and other vital public services, providing a safety net for vulnerable groups and maintaining the salaries of public employees who, together with pensioners, support a quarter of the population.

By mid-April 2020, the Ministry of Finance and the Palestinian Monetary Authority had reached an agreement whereby banks would extend $400 million of additional financing to the PNA for the six-month duration of the emergency budget.

However, the fiscal impact of the pandemic and the large-scale losses borne by households and firms risks de-stabilizing the banking system, which is highly exposed to PNA and its employees, who together account for 35 per cent of total bank credits ($3.11 billion).

Tourism is destined to be among the hardest hit sectors and its recovery from the pandemic will be slower than that of other sectors, said the report.

Before the pandemic, the sector directly accounted for 4 per cent of the employed workforce and, in recent years, its contribution to the economy had been rising fast. During the first half of 2019, the sector registered a 21 and 40 per cent increase in hotel guests compared with the corresponding periods in 2018 and 2017, respectively.

The general slowdown of the economy, cessation of operations and decline in sales has significantly affected the private sector, said the report.

One month after the outbreak, private sector representatives announced plans to cut wages by 50 per cent.

Meanwhile, the loss of income of the 140,000 Palestinians who work in Israel and settlements will significantly undermine household consumption and affect the entire economy via aggregate demand shock.

Such workers earn, on average, 2.5 times more than their counterparts employed in the domestic economy, and their households account for one third of private consumption, a key driver of GDP growth in recent years.

Over the years, occupation has cultivated and deepened the dependence of the Palestinian economy on official and private transfers from expatriates, both of which will likely decline in the aftermath of the pandemic, which is expected to burden the PNA budget with additional expenditures of over $120 million at a time when donor support is expected to be at $266 million, the lowest in more than a decade.

With no buffer to cope with the additional fiscal pressure, by April, barely one month after the pandemic-induced restrictions had been initiated, PNA revenues from trade, tourism and transfers had declined to their lowest levels in 20 years.

Therefore, the already wide PNA fiscal gap in 2020 is likely to exceed $1 billion and could rise to $1.4 billion or more. The fiscal stress is compounded by the annual loss of $144 million deducted by Israel from Palestinian tax revenue.

Various institutions have attempted to forecast the impact of the pandemic, said UNCTAD.

Estimates of the economic loss vary with the assumptions made regarding the severity and duration of the crisis and the nature of the policy response.

One such attempt is by the Economic Policy Research Institute, which uses a computable general equilibrium model to estimate the losses under certain assumptions about relevant variables.

The Economic Policy Research Institute compares two scenarios to a baseline, which assumes that, in the absence of the COVID-19 pandemic, GDP in 2020 would have grown at a rate equal to the average growth rate in 2017-2019.

The optimistic scenario assumed that the pandemic would have been contained in two months after the lockdown ordered in March, paving the way for a gradual return to business as usual during the third month. The second scenario assumed that the state of emergency would extend for another 90 days and restrictions gradually removed afterwards, but at a slower pace.

Compared with the baseline benchmark, under the first scenario, the real GDP of the West Bank would fall by 21 per cent in 2020 and public revenue would fall by 24 per cent. Under the second scenario, real GDP would fall by 35 per cent and public revenue would fall by 33 per cent.

PCBS also simulates the economy under different assumptions pertaining to crisis duration, severity and scope.

Assuming a three-month duration before a gradual return to normalcy, PCBS projects the contraction of GDP by 14 per cent compared with the baseline.

Meanwhile, the World Bank projects the cost of the pandemic to be in the range of 2.5 to 7 per cent of GDP.

However, these projections are merely demand-driven, static and based on relaxed assumptions, and do not account for the supply-side shock nor for second-round effects.

The historical record suggests that the cost of the pandemic will be significant, the UNCTAD report concluded.

 


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