TWN Info Service on WTO and Trade Issues (Apr21/08)
19 April 2021
Third World Network

United Nations: COVID-19 has significant impact on Palestinian economy
Published in SUNS #9328 dated 19 April 2021

Geneva, 16 Apr (Kanaga Raja) – The impact of the COVID-19 pandemic has been significant, with the Palestinian economy being forecast to shrink by 15.5 per cent in 2020, according to the United Nations Conference on Trade and Development (UNCTAD).

In a new study, titled “Integrated Simulation Framework – II Model for Palestinian Economic Policy”, UNCTAD has forecast GDP per capita to decline by 17.5 per cent in 2020 and unemployment to be around 30 per cent.

“It will take two years for the economy to recover from the impact of the pandemic as GDP is projected to grow by 11 and 6 per cent in 2021 and 2022, respectively,” it said.

Thereafter, the Palestinian economy is projected to grow by 3.7 per cent annually until the end of the forecast period (in 2025), it added.

Over the forecast period (2019-2025), GDP is projected to grow at an annual average of 3.4 per cent, it said.

According to the study, UNCTAD developed its first generation of the Integrated Simulation Framework (ISF) in 2006 to model the Palestinian economy after the establishment of the Palestinian National Authority (PNA).

After more than a decade, since the ISF was first developed, significant structural changes have taken place, and more data and information have become available, it said.

Therefore, UNCTAD deemed it necessary to update and upgrade its macro-econometric model of the Palestinian economy by developing an updated generation of the ISF.

“The new analytical framework is a tool to assist Palestinian policymakers and other stakeholders in formulating sound economic policies,” said Mahmoud Elkhafif, coordinator of UNCTAD’s assistance to the Palestinian people.

“It will help them craft policies guided by a clear understanding and assessment of the impact of alternative, competing policy packages so that they can chart the best course for planning, budgeting and the pursuit of the UN Sustainable Development Goals,” he added.

According to the UNCTAD study, ISF II forecast of baseline scenario of the economy of the Occupied Palestinian Territory (OPT) assumes the continuation of current trade and fiscal policy arrangements with Israel under the 1994 Paris Protocol, no major change in the present political environment, no major movement towards a political settlement, and the persistence of the ongoing Israeli blockade of Gaza since 2007.

The ISF II baseline scenario forecasts 139 endogenous variables over the period 2019-2025.

According to the UNCTAD study, the Paris Protocol on Economic Relations between Israel and the Palestine Liberation Organization (PLO), signed in 1994, shaped, and continues to shape, the Palestinian economic policy framework.

The Protocol has defined the economic policy space and instruments available to Palestinian decision makers since the establishment of the Palestinian National Authority (PNA).

However, said UNCTAD, the inadequate and one-sided implementation of the 1994 Oslo Accords (the key political reference framework between the PLO and Israel) continues to cast a heavy shadow over the economic side of the agreement – Paris Protocol on Economic Relations between the PLO and Israel.

The latter has outlived the five-year transitional phase for which it was designed. In addition, Israel has frequently violated, ignored, limited or selectively interpreted many of the Palestinian rights under the Protocol, it added.

According to the UNCTAD study, this, among other factors, has led to the shrinking of the productive capacities of the Palestinian economy and erosion of its economic base.

It also gave rise to mutually reinforcing economic distortions, depression-level unemployment rates, fiscal un-sustainability, chronic budget and trade deficits and high dependency on international aid to finance large and persistent budget and trade deficits.

The Palestinian economy has long suffered restrictions and political instability that continue to constrain public and private sector activities, said UNCTAD.

“Occupation fosters uncertainty and high transaction costs which undermine investment in the export and import- competing sectors, and thus deepens the dependence of the OPT on imports and transfers, including aid, remittances and income from the employment of Palestinians in Israel and settlements which are illegal under international law.”

UNCTAD said the OPT has experienced weak economic performance, well below its capacity, with GDP growth decelerating from an average of 7 per cent during 2007-2011 to 3.7 per cent during 2012-2018.

“This has worsened the level and severity of poverty and stifled the economy’s ability to create jobs for a growing and rather young population.”

Furthermore, the decline in donor support from 32 per cent of GDP in 2008 to 3 per cent in 2018 has worsened an already difficult situation.

According to the study, in early 2020, the COVID-19 pandemic struck at a time of rapidly deteriorating conditions in the OPT, 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 OPT and completely locked down some localities.

The general slowdown of the economy, cessation of operations and decline in sales hit the private sector hard.

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

Meanwhile, said UNCTAD, the loss of income of the 140,000 Palestinians who work in Israel and settlements will seriously undermine household consumption and feed into the whole economy via aggregate demand shock.

These 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.

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

Following the outbreak of the Second Intifada in September 2000, the occupying power (Israel) imposed a stringent policy of border and internal closures that resulted in widespread disruption of economic activity in the OPT.

The restriction reversed a cycle of double-digit growth in the previous year as real GDP contracted by 9, 9 and 13 per cent in 2000, 2001 and 2002, respectively.

The consecutive three-year contraction translated into the decline of real GDP per capita by 11 per cent in 2000, 12 per cent in 2001 and 15 per cent in 2002.

The assumptions of the exogenous variables in the baseline scenario start in 2019 and continue to 2025, taking into account the impact of the COVID-19 pandemic in 2020, said the study.

UNCTAD said for the overall political environment, the baseline forecast assumes that there will be no movement towards political settlement and the persistence of the separation between Gaza and West Bank. In other words, the restrictions are assumed to continue at the same level.

For 2020, the closure days are assumed to be 200 days to capture the lockdown imposed by Israel and the PNA to contain the pandemic.

Net current transfers are assumed to decline by 20 per cent due to the decline in the income of Palestinians who work in Israel and settlements.

In addition, government investment is assumed to decline by 15 per cent due to the fiscal pressure that ensued with the pandemic.

Finally, GDP in Jordan and Israel (main trading partners) are assumed to shrink by 1 and 2 per cent, respectively.

In 2021, the economy is assumed to recover from the COVID-19 pandemic, closure days are to revert to their pre- pandemic levels, and net factor income is assumed to grow by 6.5 per cent, said the study.

Government investment is assumed to grow by 40 per cent. Finally, the economies of Jordan and Israel are also assumed to recover with GDP growth of 2 and 4 per cent, respectively.

For the remaining years of the baseline scenario, UNCTAD said it is assumed that the number of closure days is to continue at the same rate of 125 days per year, based on the assumption that the blockade on Gaza will continue, and the level of mobility restrictions imposed on the West Bank in the last few years will not change.

The annual number of Palestinian casualties in the forecast period is assumed to equal the average number of casualties in the last ten years (390 casualties per year); meaning that the impact of the three military operations on Gaza during the period 2007 to 2018 continues in the forecast period.

Finally, the forecast assumes the continuation of the current trade and fiscal arrangements with Israel which are formalized under the terms of the 1994 Paris Protocol, said the study.

For public finance, the baseline scenario assumes that the growth rate of government investment will show a steady growth after 2021 at 8 per cent.

Local government consumption and consumption abroad also exhibits steady growth after 2021 at 6 and 4 per cent, respectively, to the end of the forecast period.

The assumption about net current transfers from abroad (mainly donor support) reflects the trend of the past five years, with decline in the level starting from 15 per cent in 2018, 8 per cent in 2019 and then 4 per cent from 2022 onwards.

This pattern suggests that donor contributions, and their share in GDP will continue to decline over time, said the study.

Following the same trend over the last 10 years, population growth rate in the OPT is assumed to remain at 3.5 per cent annually during the forecast period.

Also, the ratio of the male-to-female population and their respective share in manpower is assumed to stay constant during the forecast period.

Based on these assumptions, the study said that the baseline scenario suggests a GDP growth rate of 0.8 per cent in 2019 resulting in further decline in GDP per capita.

“The impact of the COVID-19 pandemic in 2020 is significant,” it said.

The Palestinian economy is forecast to shrink by 15.5 per cent in 2020, and GDP per capita is expected to decline by 17.5 per cent in 2020, while unemployment will be around 30 per cent.

It will take two years for the economy to recover from the impact of the pandemic as GDP is projected to grow by 11 and 6 per cent in 2021 and 2022, respectively, said the study.

Thereafter, the economy is projected to grow by 3.7 per cent annually until the end of the forecast period, barely keeping pace with population growth, resulting in 1.2 per cent annual increase in GDP per capita.

According to the UNCTAD study, the poverty implication of this growth pattern correlates with the unemployment trajectory, with the latter forecast to hover around 31 per cent throughout the forecast period.

“In the long term, with the persistence of the current political and economic environment, the Palestinian economy will not be able to create enough jobs to make a dent on its depression-level unemployment rates,” said UNCTAD.

“With this growth trajectory, the distorted structure of the economy is expected to remain the same,” it cautioned.

Agriculture’s share in GDP is projected to decline from 8.2 per cent in 2018 to 6.6 percent in 2025. The share of the services sector remains at around 75 per cent, and the share of manufacturing remains around 12-13 per cent, while the share of construction will remain around 6 per cent.

According to the study, the ratio of the trade deficit to GDP is expected to decline slightly from 35 per cent in 2018 to 30 per cent of GDP in 2025.

Domestic employment is projected to increase steadily from 834,000 jobs in 2019 to 919,250 jobs by the end of the forecast period.

Driven by the higher demand in Israel, employment in Israel is projected to increase from 115,000 jobs in 2018 to 145,000 jobs by 2025.

However, neither domestic employment nor employment in Israel is sufficient to drive the unemployment rate below 30 per cent, said UNCTAD.

The government budget deficit is expected to grow as expenditure growth will exceed that of revenues during the forecast period, UNCTAD said, adding that the administrative separation of Gaza from the West Bank is a source of additional fiscal pressure.

Furthermore, UNCTAD said the forecast indicates a decline in imports from Israel and those from the rest of the world (ROW) as a percentage of GDP, adding that this decline in imports has a direct impact on Palestinian total revenues.

“This grim forecast makes it abundantly clear that sustainable economic recovery and poverty reduction pre-requisite an alternative policy framework featuring an end to the restrictive measures imposed by the occupation, the availability of more policy space for the Palestinian policy makers including sovereign fiscal, monetary and trade policy instruments available to Palestinian decision makers,” it added.

According to UNCTAD’s new simulation integration framework, forecasts of the model up to 2025 raise major concerns.

It said that the baseline forecast captures the economy’s response to the political environment, featuring occupation restrictions and the continuation of the Paris Protocol as the policy framework that governs Palestinian economic, trade, monetary and fiscal relations with Israel and the rest of the world.

The persistence of such unfavourable conditions implies slow, below potential GDP growth, that barely keeps pace with population growth and consequently a stagnation in per capita GDP, it added.

“Such feeble economic growth cannot reduce poverty or resolve the unemployment problem in a meaningful and sustainable way,” said UNCTAD.

“Genuine, sustainable socio-economic recovery in the OPT therefore requires greater donor support, lifting the blockade on Gaza, easing and ending occupation restrictions in the West Bank, and replacing the outdated Paris Protocol with a favourable, enabling framework for effective economic, monetary, fiscal and trade policies capable of responding to the complex and evolving needs of the Palestinian economy,” it added.