Estudios Económicos
Palestinian Territories

Palestinian Territories

Population 4.7 million
GDP - US$
D
Country risk assessment
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Synthesis

major macro economic indicators

  2018 2019 2020 (e) 2021 (f)
GDP growth (%) 1.2 0.9 -12.0 8.2
Inflation (yearly average, %) -0.2 1.6 -1.2 0.3
Budget balance (% GDP) 0.5 0.3 -6.3 -2.8
Current account balance (% GDP) -13.1 -10.7 -11.1 -13.7
Public debt (% GDP) 33.1 34.6 44.2 42.1

(e): Estimate (f): Forecast

STRENGTHS

  • Observer status at the UN since the end of 2012
  • Very youthful population
  • Substantial remittances from the diaspora

WEAKNESSES

  • Lack of geographical, political and economic unity
  • Very high unemployment rate, particularly in Gaza
  • Israeli restrictions on movement in the West Bank, and blockade of the Gaza Strip by Egypt and Israel
  • Stalemate in the peace process with Israel
  • Lack of monetary policy due to lack of own currency
  • Budgetary revenues dependent on international aid and relations with Israel
  • Differing economic trajectories in the Gaza Strip and West Bank

RISK ASSESSMENT

Recovery and uncertainties 

After sluggish growth in 2019, the economy contracted sharply in 2020. The authorities declared a state of emergency in March 2020 for 30 days, to be extended depending on the spread of the pandemic. Public spaces such as schools, cultural spaces and places of worship, and non-essential shops were closed, as were borders, limiting the interaction with Israel. However, subsequent measures allowed economic and commercial activity to resume gradually (shops opened at fixed hours, limited capacity in bars and restaurants). With companies producing less, the unemployment rate increased further from an already high level (25% of the population in 2019), especially among young people (42%), which impacted consumption (90% of GDP). Prices fell, declining by 2% in June 2020 year-on-year, due to lower demand and the deflationary effect of shekel appreciation on the prices of imported goods. The economic contraction was also attributable to the drop in public consumption and investment due to the fiscal crisis faced by the Palestinian authorities because of the lack of cash, especially after Israel stopped paying customs revenues from Palestinian exports in May 2020. The Islamic Development Bank (IsDB) Group provided USD 35.7 million to Palestine in July 2020 for its COVID-19 emergency response and is implementing several major initiatives aimed at job creation and economic empowerment for Palestinians. In 2021, the reopening of borders and the end of lockdown measures will allow the economy to pick up again. The recovery will also depend on the authorities' ability to reach an agreement with Israel on customs duties.

 

Public and current accounts undermined by the conflict with Israel and the crisis

The Palestinian Authority's (PA) budgetary room for manoeuvre remains very limited. On the expenditure side, civil servants' wages still accounted for 49% of current expenditure in 2019. As public funds are mainly allocated to current expenditure (95% of total expenditure), public investment remains very low, especially in a context of declining revenues. Customs duties, which are collected by Israel on behalf of the PA before being transferred to the government, are the main source of income. However, in May 2020, when the PA stopped working with Israel in protest over the announcement of a possible annexation of Palestinian territories, Israel decided to stop transferring these duties. As a result, the stimulus package to combat COVID-19 was worth just 0.8% of GDP. The plan focuses on maintaining wages and transfers while reducing operational and development expenditures. In the budget announced in April 2020, monthly recurrent expenditure was reduced to USD 314 million (2% of GDP) during the crisis period. IThe announcement of a resumption of security cooperation with Israel in November 2020 implies an improvement in relations with the latter in 2021, which would allow an improvement in public accounts, which will also benefit from an increase in international grants.

The balance of goods and services shows a chronic and substantial deficit (40% of GDP). This has not been changed by the closure of the borders with Israel, which negatively affects trade. Conversely, the income balance is usually in surplus thanks to the wages of cross-border workers (16% of GDP) and remittances (12% of GDP) from the large diaspora (seven million worldwide). However, due to the global economic situation and travel restrictions, many members of the diaspora have lost their jobs, particularly in Israel, resulting in a loss of income and reducing the amount of remittances, such that the current account deficit is likely to widen again.

 

New elections in a tense atmosphere

Mahmoud Abbas, president of the PA and the Palestine Liberation Organisation (PLO), has controlled the West Bank since the 2005 presidential election, while Ismail Haniyeh's Hamas has controlled the Gaza Strip since the 2006 legislative elections, which led to deadly clashes with Fatah, the largest faction of the PLO. While the situation has remained unchanged since then, following on from an announcement by Mr Abbas in September 2019, Fatah and Hamas agreed to hold general elections by March 2021. Initially, parliamentary elections will be held, followed by elections for the PA President and the PLO Council. This is part of a desire by the two movements to come together in order to counter the normalisation of relations between Israel and the Gulf countries, which Palestine sees as a betrayal. Externally, the Israeli-Palestinian conflict escalated in late 2019, following Israel’s assassination of a commander of the Islamic Jihad organisation in Gaza. The peace plan proposed by the U.S. in January 2020 for the Israeli-Palestinian conflict, which provides for the annexation by Israel of settlements in return for a USD 50 billion investment in the development of Palestine, was rejected by the Palestinian side. The persistence of the conflict has serious humanitarian consequences, particularly in Gaza. According to the World Bank, because of COVID-19, 64% of people in the Gaza Strip and 30% in the West Bank live below the poverty line of USD 5.5 per day.

 

Last updated: February 2021

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