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Info Service on UN Sustainable Development (Oct23/11) Penang, 26 Oct (Kanaga Raja) — Last year was one of the worst years for Palestinians in recent history, with the already fragile socioeconomic conditions in the Occupied Palestinian Territory deteriorating in 2022 as a result of worsening political tensions and security crises that affected all regions, according to the UN Conference on Trade and Development (UNCTAD). In its latest report on assistance to the Palestinian people, UNCTAD said inflation, a shrinking fiscal space, a decline in foreign aid and the build-up of debt has kept the Palestinian economy below its 2019 pre-pandemic level. Restrictions on investment and the movement of Palestinian people and goods persisted, with one-sided fiscal deductions by the occupying Power (Israel) and the further loss of land and natural resources to settlements, it said. “As the economy continued to operate well below potential, other persistent challenges intensified, including inflation, poverty, shrinking fiscal space, a decline in foreign aid and the build-up of public and private debt.” It said with heightened political tensions and a long-stalled peace process, 2022 was one of the worst years for Palestinians in recent history. SLUGGISH RECOVERY According to the UNCTAD report, in 2022, the Palestinian economy continued on a weak rebound from the COVID-19 pandemic-related slump. Gross domestic product (GDP) grew by 3.9 per cent, yet the economy has yet to fully recover from the COVID-19 shock. Following the onset of the pandemic in 2020, real GDP shrank by 11.3 per cent, then grew in 2021 from a low base, by 7 per cent. However, by the end of 2022, real GDP per capita remained at 8.6 per cent below the level in 2019. Data from the Palestinian Central Bureau of Statistics (PCBS) show that, as pandemic-related restrictions were lifted, GDP growth in 2022 was fuelled by a rise in private consumption and investment facilitated by an increasing number of Palestinian workers, mostly from the West Bank but, for the first time since 2004, a small number from the Gaza Strip, who were employed in Israel and settlements. In the West Bank, 3.6 per cent GDP growth in 2022 resulted in GDP per capita increasing by 0.8 per cent, yet this remained 7.6 per cent below the level in 2019. In Gaza, real GDP grew by 5.6 per cent and GDP per capita increased by 2.7 per cent, still 11.7 per cent below the level in 2019 and close to the lowest level since 1994. PCBS data show that in 2022, unemployment fell to 24 per cent, compared with 26 per cent in 2021, and was 13 per cent in the West Bank compared with 45 per cent in Gaza. Over the years, occupation-related policies have led to greater socioeconomic disadvantages for women and made them more vulnerable, said the report. PCBS data show that women are affected disproportionately; in 2022, women’s labour force participation was at 18.6 per cent and unemployment was at 40 per cent, compared with 71 and 20 per cent, respectively, for men. Among youth, those of 15-24 and 25-34 years of age also faced significant challenges, with unemployment rates of 31 and 61 per cent, respectively. The unemployment crisis and the poverty it entails has rendered 2.1 million Palestinians, or 40 per cent of the population, in need of humanitarian assistance in 2023, with 58 per cent of the population of Gaza and one quarter of the population of the West Bank requiring assistance, said UNCTAD. “In addition, the World Food Programme notes that over one third of the population is classified as food insecure and 61 per cent, severely food insecure. One quarter of all households is identified as being in severe conditions, a 20 per cent increase over 2022.” Households respond to the crises and dearth of opportunities through a combination of aid dependency and negative coping strategies, some of which entail long-term costs, including borrowing and reducing the quantity and quality of food, education and health care, said UNCTAD. Following the COVID-19 shock, in 2022, the global economy experienced a combination of supply and demand shocks that triggered inflation, led by food and energy price hikes, which have been transmitted to the Palestinian economy given its high level of dependency on imported energy and food, with imported food accounting for two thirds of food consumed and one third of the total import bill, it added. It said that in the Occupied Palestinian Territory, a slight deflation in 2020 was followed by inflation of 1.2 per cent in 2021. However, it said the era of low inflation was interrupted in 2022, with inflation of 3.7 per cent, driven by the rise in global food and fuel prices and, to some extent, by the recovery in domestic aggregate demand as pandemic- related restrictions were eased. “Inflationary pressures persisted in early 2023, at around 4 per cent. Poorer households are disproportionately affected because food accounts for a greater share of their total expenditure. As noted by the World Bank, the share of wheat and vegetable oil is estimated at one third of the total expenditure of the poorest 10 per cent of the population.” DEEPENING ECONOMIC DEPENDENCY The report said nearly three decades since the signing of the Paris Protocol, and a quarter of a century after its presumptive ending in 1999, it remains the framework that shapes Palestinian economic reality. The customs union, de facto monetary union and fiscal arrangements in the Protocol tie the Palestinian economy to that of Israel, cultivating conditions of significant dependency and vulnerability, it added. “The restrictions imposed under occupation on Palestinian trade inflate costs and serve as significant non-tariff barriers.” The World Bank notes that they erode the competitiveness of Palestinian exports; with the average trade cost per transaction for a Palestinian firm nearly three times as high as for an Israeli firm and the average duration of the import process for a Palestinian firm nearly four times as long as for an Israeli firm. In addition, the restrictions and closures, in effect since 2007, have severed the trade links of Gaza with the West Bank, East Jerusalem and regional and global markets. The barriers to trade with the rest of the world create an uneven dependency on Israel as the dominant trading partner, said the report. In 2022, Israel accounted for 72 per cent of total Palestinian trade, and the bilateral trade deficit with Israel reached $5.3 billion, or 28 per cent of Palestinian GDP. The trade deficit with Israel and its share in total Palestinian trade has peaked in recent years. In 2022, imports of goods and services rose by 26 per cent, from $8.3 billion in 2021 to $10.4 billion in 2022. Exports failed to match this growth, rising by just over 6 per cent, from $2.7 billion to $2.9 billion. As a result, the trade deficit increased from 37 per cent of GDP to 48 per cent of GDP in 2022, among the highest in the world, said the report. Excessive trade costs and restrictions on domestic investment cultivate a high, chronic trade deficit, with export revenues consistently covering only a small fraction of the import bill. In 2022, exports financed less than one quarter of total imports, and the gap was financed by income earned by workers in Israel and settlements, foreign aid and expatriate remittances. The tradable goods sector will remain depressed, with weak exports and a deep level of import dependence, as long as political barriers continue to elevate the cost of trade and production to levels that significantly weaken the competitiveness of Palestinian producers, said the report. Occupation implies that the Palestinian economy is incorporated into the more advanced economy of Israel, with the new Israeli shekel as the main currency in circulation in the Occupied Palestinian Territory. It said geographical proximity, the customs union and the de facto “currency union” combine to tie prices and costs with those in Israel despite the significant difference in income, whereby the average Palestinian earns 8 cents for every dollar earned by an Israeli citizen, said UNCTAD. Lack of a national currency and independent monetary policy leaves the Palestinian economy subject to changes in Israeli economic policies and circumstances. The stability of the new shekel protects against imported inflation through the exchange rate. However, the report said that the strong shekel constrains the already impaired competitiveness of Palestinian producers because the exchange rate is determined in the structurally different, advanced economy of Israel, a member of the Organisation for Economic Co-operation and Development. Forced dependency on Israel pervades every aspect of the Palestinian economy, yet the payment system linking the two economies is complex and inefficient, and imposes costs and uncertainties for Palestinian economic agents, said the report. In 2022, 22.5 per cent of employed Palestinians from the West Bank worked in Israel and settlements, where they earned more than twice the average domestic wage in the West Bank, with total earnings in the range of $4 billion, or 25 per cent of GDP. Their incomes contribute significantly to aggregate demand, which sustains GDP growth. However, Palestinian workers pay an average of 30 per cent of their gross monthly wage to brokers. As noted by the International Labour Organization, adding the cost of transport and meals reduces the net earnings to 44 per cent of gross pay, thereby eroding the difference between the average domestic wage and that paid to Palestinians employed in Israel and settlements. Over-reliance on precarious employment in Israel and settlements exposes the Palestinian economy to shocks in an environment characterized by frequent political tensions and security crises, said the report. In addition, it decouples domestic wages from productivity growth, undermines competitiveness and stunts the tradable goods sector. The International Labour Organization notes that the outflow of Palestinian workers to the economy of Israel and settlements has also created labour shortages, skill gaps and mismatches in certain areas in which Palestinian firms find it difficult to attract and retain skilled workers, said the report. SETTLEMENTS & ENDURING OCCUPATION The report noted that the United Nations Security Council, in its resolution 2334 (2016), reiterated its demand that Israel immediately and completely cease all settlement activities and reaffirmed that the establishment of settlements in the Occupied Palestinian Territory, including East Jerusalem, had no legal validity and constituted a flagrant violation under international law, and condemned all measures aimed at altering the demographic composition of the Occupied Palestinian Territory, including East Jerusalem. However, it said settlements and outposts continued to grow in 2022 and 2023. In the first two months of 2023, the occupying Power announced the retroactive legalization of nine settlement outposts and plans to establish 10,000 settlement units, more than in 2021 and 2022 combined. Occupation bars almost all Palestinian development in large parts of the West Bank. Israeli Civil Administration data indicate that less than 1 per cent of Palestinian construction requests have been approved since 2016, and the approval rate has further dropped in recent years; this policy forces Palestinians to build without permits, to meet basic human needs, yet Israeli authorities issue demolition orders for these structures, as noted by the Office for the Coordination of Humanitarian Affairs. The UNCTAD report said that the resulting evictions entail the violation of many human rights, with women and girls disproportionally impacted. In the year 2022, the highest number of demolitions of Palestinian structures in over a decade took place. Israel demolished 953 structures, including water cisterns, storerooms, agricultural buildings, businesses and public buildings. Of the 144 buildings demolished in East Jerusalem, 74 were demolished by their owners, to avoid additional fines. UNCTAD said that violence across the West Bank persisted and, as noted by the Office for the Coordination of Humanitarian Affairs, 2022 was the deadliest year for Palestinians since the beginning of systematic recording in 2005. “The growing settler population, destruction of Palestinian assets and settler violence alter the demographic composition of Area C in the West Bank by worsening the coercive environment that forces Palestinians to leave their homes.” It said since its formation in 1994, for three decades, within an extremely narrow policy space, the Palestinian Government has been tasked with managing economic, political and social responsibilities far greater than the economic and political resources at its disposal. However, it continues to deliver in a difficult context of enduring occupation, it added. “The Palestinian Government has been facing significant fiscal challenges in recent years. A confluence of adverse conditions has aggravated a chronic fiscal crisis, including decreasing donor aid, one-sided deductions by Israel from its revenues and the economic fallout of the pandemic.” The Palestinian Government has continued to implement far-reaching fiscal reforms intended to increase revenue and contain expenditure. It reduced its deficit from 7 per cent of GDP in 2021 to 2.9 per cent of GDP in 2022, primarily through greater revenue collection and the maintenance of recurrent expenditure at 2021 levels. Net revenue rose from 23.6 per cent of GDP in 2021 to 26.3 per cent of GDP in 2022. Public debt fell from $3.85 billion to $3.54 billion, or from 21.3 to 18.5 per cent of GDP. In 2022, during the global cost-of-living crisis and worsening domestic humanitarian and political conditions, the Palestinian Government received only $250 million in donor budget support and $300 million for development projects. This was a steep decline in aid from a total of $2 billion, or 27 per cent of GDP, in 2008, to $550 million, or less than 3 per cent of GDP, in 2022, as noted by the World Bank, said the report. The report said that lack of access to external financial markets, coupled with a significant decline in foreign aid, pushed the Palestinian Government to deal with the problem through a combination of accumulating more arrears to the private sector and the pensions fund, which is equivalent to borrowing. It added $1.07 billion in arrears, which have grown to a concerning total of $3.5 billion. “Since November 2021, the Palestinian Government has been paying partial salaries to public sector employees, ranging between 75 and 85 per cent of monthly salaries.” Salary cuts have pushed public employees to borrow from banks and informal sources. By mid-2022, 43 per cent of households in the West Bank and 83 per cent in Gaza declared a burden of incurred debt. The report said the accumulation of arrears is not sustainable in coping with fiscal crises, and clearing them will be economically and socially disruptive unless there is support from donors. Budget cutbacks and the payment of partial salaries will ultimately weigh down on economic growth by constraining demand and thereby weakening public revenue growth. In addition, it said the fact that the occupying Power collects trade tax revenues on behalf of the Palestinian Government means that it in effect controls two thirds of Palestinian tax revenue, a form of leverage used to impose deductions, delays or withholding. “The damage inflicted under occupation extends to all sectors of the economy through several other channels, most salient among which is the loss of land and natural resources to settlements, the ban or restrictions on the importation of certain technology and inputs under the dual-use list system and the barriers to movement that elevate production, transaction and trade costs and thereby erode and stunt the competitiveness of all Palestinian producers.” Economic prospects are dim. GDP growth is expected to decelerate as the pandemic-related low-base effects fade. Occupation-related constraints are recognized as the key impediment to economic development in the Occupied Palestinian Territory, said the report. The International Monetary Fund estimates that the impact of loosening occupation-related restrictions would be about three times greater than the impact of improving the Palestinian business climate, electricity and water supply. In addition, the World Bank states that removing constraints on Area C would enlarge the West Bank economy by one third. UNCTAD estimates that the partial easing of restrictions in 30 per cent of Area C would increase the size of the West Bank economy by 25 per cent. “There is consensus that the performance of the Palestinian economy depends on the severity of restrictions imposed under occupation, on donor support and on policy reforms.” Of the three decisive actors, the one party that has been delivering consistently over the last decade is the Palestinian Government, while occupation has tightened and donor aid has decreased, said UNCTAD. “Unless aid inflows improve and occupation-related restrictions are loosened, studies show that GDP growth is expected to fall below population growth and hover at around 2 per cent in the medium term, implying higher levels of unemployment, lower levels of income per capita, greater poverty and increased overall fragility.” DE-DEVELOPMENT OF GAZA Israel occupied Gaza and the West Bank, including East Jerusalem, in June 1967. Despite the “withdrawal” by Israel in 2005, Israel has retained control over the airspace of Gaza and all land and sea borders, except for the 12 km border with Egypt, said the report. Gaza has one of the highest population densities in the world. The population density per square kilometre at end-2021 was 878 individuals in the Occupied Palestinian Territory, 557 in the West Bank and 5,855 in Gaza, which increased to 5,934 in 2022, according to PCBS data. Added to this issue is the fact that Israel restricts Palestinian access to areas within 300 metres of the Gaza side of the perimeter fence, and identifies an additional several hundred metres as not safe, thereby preventing or restricting human and productive activities, as noted in a report by the United Nations Children’s Fund, it said. PCBS data show that the resulting buffer zone along the eastern border of Gaza implies that the occupying Power effectively controls about 24 per cent of the total area of Gaza, the report added. In 2022, the number of exit permits issued by the occupying Power increased, and more people were allowed to travel outside Gaza. However, movement remained highly restricted, with the majority of residents virtually “locked in”, UNCTAD said. “The unpredictability of the level of restrictions, which can be tightened by the occupying Power at any time, heightens business risk and pre-empts private sector investment.” Data from the Office for the Coordination of Humanitarian Affairs show that most of the recent relaxation of restrictions is accounted for by permits issued for Palestinians to work in Israel and settlements, which in 2022, accounted for 83 per cent of the total, while patients seeking treatment in East Jerusalem and the West Bank, as well as their companions, accounted for 7 per cent.” In January 2023, 88 per cent of exit permits were for day labourers in Israel and traders. However, one third of applications for medical treatment outside Gaza were denied, and the list of goods that can be exported remains restricted to mostly agricultural products. Israel controls not only pedestrian and commercial crossing points but also the sea and airspace of Gaza, and does not allow the construction and operation of air or seaports. Israel makes fishing off the coast of Gaza hazardous for Palestinians, who rarely have full access to the fishing zone of 20 nautical miles stipulated in the Oslo Accords. In practice, access for Palestinian fishing boats has ranged from 6 to 15 miles. In mid-2022, they were allowed access to 10 miles. This has led to overfishing, which endangers the sustainability of fishing resources, said the report. It said another significant constraint on Palestinian productive activities is the ban on the importation of certain technology and inputs under the dual-use list system. The list includes civilian items such as machinery, spare parts, fertilizers, medical equipment, appliances, telecommunications equipment, metals, chemicals, steel pipes, milling machines, optical equipment and navigation aids. More items are banned with regard to Gaza compared with the West Bank. The list is far-reaching, “opaque and stringent compared to prevailing international practices”. Several military operations have taken place in Gaza, in 2008, 2012, 2014, 2021 and 2022. These operations have resulted in thousands of casualties, internal displacement and the destruction of infrastructure, capital stock and physical and productive assets in Gaza, said UNCTAD. It said in May 2021, a military operation was conducted that was the worst experienced in Gaza since 2014. The operation inflicted damage on an already shattered infrastructure. It said this damage affected agricultural land, crops, livestock sheds, greenhouses, fruit trees, storage facilities, boats, fishing equipment, agribusinesses, irrigation canals, water pumping systems, electricity networks, Internet networks, factories, office buildings, housing units, educational facilities and health-care centres. The report said that the impact of military operations on the productive base of Gaza has been examined by the International Monetary Fund, which notes that the military operation in 2008-2009 destroyed the equivalent of over 60 per cent of the total capital stock of Gaza and that the military operation in 2014 resulted in a decline of 85 per cent of the capital stock that had survived the previous operation. These two operations, not including the operations that followed, resulted in the collapse of the productive base of Gaza. “The erosion of the capital stock has stunted growth potential, constrained productivity growth and entrenched poverty and dependency on international aid.” UNCTAD has estimated the impact of restrictions and military operations on household welfare, noting that, if the economy of Gaza had been allowed to continue to grow at the same rate as that of the West Bank, that is, by 6.6 per cent, the annual GDP of Gaza would have been 50 per cent higher in 2017 and GDP per capita would have been 105.5 per cent higher than its actual level. The economy of Gaza has gone through three structural phases. In the period 1994-1999, the economy grew, by an average of 6.1 per cent annually, and that of the West Bank grew by 10.7 per cent. In the period 2000-2006, much of the Palestinian infrastructure, including institutions of the Palestinian National Authority, was significantly damaged, workers were banned from employment in Israel and settlements and the movement of goods was restricted, precipitating a 2 per cent drop, on average, in annual GDP growth. Since June 2007, Gaza has been subjected to a land, sea and air closure and several military operations. A vicious circle of destruction and insufficient reconstruction was set in motion. In the period 2007-2022, annual average real GDP growth dropped to 0.4 per cent. Some economic indicators before and after the closures show aspects of the de-development of Gaza, said the report. In addition, the report said investment virtually disappeared, falling from 31 per cent of the national total in 1994 (equivalent to 11 per cent of Palestinian GDP) to 7 per cent in 2022 (equivalent to 1.9 per cent of Palestinian GDP). Non-building investment in Gaza remained low, at 1.3 per cent of GDP in 2022. In the period 2006-2022, the population of Gaza grew by 61 per cent, but GDP grew by only 1.1 per cent and real GDP per capita shrank by 27 per cent, from $1,994 in 2006 to $1,257 in 2022, compared with $2,923 and $4,458 in the West Bank, respectively. In the same period, the regional divergence in living conditions widened, as the share of Gaza in the Palestinian economy contracted from 31 to 17.4 per cent. The report said in addition, in the same period, the labour force grew by 112 per cent, the number of unemployed workers increased by 157 per cent and unemployment increased from 34.8 to 45.3 per cent, one of the highest levels in the world. “Population and labour force growth and the dearth of jobs have resulted in lost generations of impoverished, unskilled and de-skilled workers.” The report said at the time of the establishment of the Palestinian National Authority in 1994, Gaza had about the same standards of living as the West Bank, with its ratio of GDP per capita to that of the West Bank at 97 per cent. This ratio fell to 44 per cent with the onset of the restrictions and closures in 2007 and reached an all-time low in 2021, at 27.7 per cent. “The economy of Gaza has undergone a significant structural distortion because of restrictions on movement, limited access to imported inputs, the destruction of the productive base and semi-autarkic isolation from domestic and global markets. This transformation has reduced the share of agriculture and manufacturing in the economy, from 32 per cent in 1995 to 17.6 per cent in 2022.” The result of the restrictions and closures and military operations has been the suppression of investment and productive activities and the collapse of the economy of Gaza, as well as its separation from the world and the rest of the Palestinian economy in the West Bank and East Jerusalem, said the report. +
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