Estudios económicos
Palestinian Territories

Palestinian Territories

Population 4.6 million
GDP 3,199 US$
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Synthesis

major macro economic indicators

  2017 2018 2019 (e) 2020 (f)
GDP growth (%) 3.1 0.9 1.3 0.5
Inflation (yearly average, %) 0.2 -0.2 1.5 1.3
Budget balance (% GDP) -6.6 -5.9 -7.0 -7.2
Current account balance (% GDP) -10.8 -11.4 -10.2 -11.0
Public debt (% GDP) 35.6 37.0 39.8 42.3

(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

RISK ASSESSMENT

Economic situation still as worrying as ever

The situation of the Palestinian economy will remain worrying in 2020, particularly in the Gaza Strip, where activity is set to decline for the fourth consecutive year. Growth is expected to be resilient, if not strong, in the West Bank, which will increase the gap between the two territories. Their economies have diverged significantly since the imposition of the Gaza blockade in 2007, which prevents residents from working in or exporting to Israel. Private consumption (90% of GDP in 2018) will remain the main driver of the economy. However, reflecting labour market conditions, private consumption is expected to be much stronger in the West Bank, where the unemployment rate stood at 15% in June 2019 (17% in 2018), than in Gaza, where it was up 12 points to 64%. Productive investment (only 4.5% of GDP) will remain limited by an unfavourable business environment (117th out of 190 in the World Bank’s Doing Business ranking) marked by economic restrictions and uncertainties related to the conflict with Israel. Public spending will continue to be constrained by lower transfers of customs taxes collected by Israel and by the redirection of international grants towards humanitarian aid and away from budget support, which fell from 11% of GDP in 2013 to 4.6% in 2018. Overall, the conflict with Israel and its impact on public spending, on which the Palestinian economy is highly dependent (26% of GDP), will continue to depress household and business confidence. Finally, Palestinian exports will continue to be affected by constraints on access to foreign markets and by the lack of competitiveness induced by the use of the Israeli shekel, in the absence of a national currency.

 

Public and current accounts undermined by the conflict situation

The Palestinian Authority’s (PA) budgetary room for manoeuvre will remain very limited in 2020. On the expenditure side, civil servants’ salaries still accounted for 48% of current expenditure in 2018, despite significant efforts to reduce their share in recent years (58% in 2014). As public funds are mainly intended for current expenditure (95% of total expenditure), public investment will remain very low, especially in a context of declining revenues (less than 30% of GDP). Customs duties on imports and exports, which are collected by Israel on behalf of the PA before being transferred to the government, are the main source of income. In February 2019, Israel decided to deduct USD 138 million from the taxes transferred to the PA over allowances paid to Palestinian prisoners’ families. While the PA initially refused all transfers (nearly 70% of current revenue, or 15% of GDP) as a sign of protest, it was ultimately forced to accept partial tax transfers because of the critical state of public finances, which had forced it to cut civil servants’ salaries in half. In this context, and following the ceasefire of May 2019, Qatar announced USD 480 million in aid (USD 250 million in loans, USD 50 million in budget support, USD 180 million in humanitarian aid). In 2020, public account developments will once again depend on relations with Israel, as international donations to the PA budget are expected to decline further. In the event of further tensions and blocked transfers, the public deficit and debt will increase sharply.

The balance of goods and services shows a chronic and substantial deficit (40% of GDP in 2018), which will continue in 2020. Conversely, the income balance is in surplus thanks to the wages of cross-border workers (16% of GDP) and remittances (12% of GDP) from the large diaspora (7 million people worldwide). However, these remittances are expected to weaken in line with the global economic situation, so the current account deficit may widen again. The current account deficit will again be largely financed by government and private donations, although the amount of these donations can vary significantly from year to year (11.6% of GDP in 2018, against 5% in 2017).

 

Mounting tensions in Gaza and new elections announced

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 parliamentary elections, which led to deadly clashes with Fatah, the largest faction of the PLO. While the situation has remained unchanged since then, President Abbas announced in September 2019 that general elections would be held in Palestine. Although the election date has not yet been set, Fatah has already said that President Abbas will be its candidate, and Hamas has expressed its readiness to participate in the elections, which could generate tensions, in an echo of 2006. Externally, the Israeli-Palestinian conflict escalated in late 2019 following Israel’s assassination of a commander of the Islamic Jihad organisation in Gaza. This latest event illustrates the fragility of the progress made in talks conducted in the previous months. The US plan to resolve the conflict looks doomed to fail given the stormy relations with Donald Trump’s administration. The persistence of the conflict has serious humanitarian consequences, particularly in Gaza. According to the World Bank, 24% of the population lived below the poverty line of USD 5.5 per day in 2017 (46% in Gaza and 9% in the West Bank).

 

Last update: February 2020

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