Economic revival to be delayed

31 March 2015

The dire economic situation in the Palestinian territories could well lead to another bout of conflict, compounded by the potential emergence of a right-leaning cabinet in Israel

This year’s general election in Israel has provided a stark reminder to Palestinians of how little control they have over their own destiny.

During the campaign, Benjamin Netanyahu tacked hard to the right in an effort to win enough votes to secure a fourth term as prime minister. Among the casualties of that manoeuvre was the cause of Palestinian statehood. On the eve of the election, he disavowed his previous support for a two-state solution and said he would further expand Israel’s illegal settlements in the West Bank.

Uncertainty and various headwinds will likely prevent a strong economic recovery in 2015

Christoph Duenwald, IMF

He has since tried to row back on some of these things, but in the short-term, the tactics worked and Netanyahu’s Likud Party secured the largest number of seats in the Knesset (parliament). The precise make-up of the next Israeli government was not clear as MEED was going to press, but the most likely scenario was that Netanyahu would stitch together a right-wing coalition to secure his fourth term in office.

Bad news

On the face of it, this spells bad news for anyone in Gaza or the West Bank who had been hoping a change in leadership in Israel might have enhanced the chances of peace or Palestinian statehood. Some seasoned observers in the region, however, are stoical about the result.

“I don’t think Mr Netanyahu really changed much with his statement [on Palestinian statehood] because ever since he has been prime minister, he has resisted the idea of a Palestinian state coming into being,” said Prince Turki bin Faisal al-Saud, a veteran Saudi diplomat, speaking at the Chatham House think-tank in London on 18 March.

Whether or not Netanyahu or his supporters believe a Palestinian state is likely or desirable, his re-election is likely to put further pressure on the Palestinian economy and its political environment.

The economy is already suffering from a crisis triggered by the decision of the Palestinian Authority (PA) on 2 January to seek membership of the International Criminal Court and to get it to investigate alleged crimes by Israel in the occupied Palestinian Territories. On 16 January, Fatou Bensouda, the prosecutor of the court, opened a preliminary examination into the situation in Gaza and the West Bank – standard practice at the court whenever a valid referral is made.

It is a time bomb. Nobody will be able to say when the next conflict happens that we were taken by surprise

Pierre Krahenbuhl, UNRWA

It remains to be seen whether a formal court investigation will follow, but Israel has not wasted any time in retaliating against the possibility of a war crimes investigation. On 4 January, Tel Aviv suspended the transfer of tax and customs revenues to the PA. Such revenues are collected by Israel on behalf of the PA, accounting for about two-thirds of the latter’s revenues. In a speech to the Palestinian Liberation Organisation (PLO) Central Council on 5 March, Mahmood Abbas, president of the PA, said Israel owed the Palestinian government some NIS1.8bn ($460m).

The health of the Palestinian economy was in any case already fairly poor. According to the Washington-based IMF, GDP across the Palestinian Territories fell last year by almost 1 per cent, its first contraction since 2006.

The problems are worst in Gaza, as a result of the conflict between Palestinian Islamic organisation Hamas and Israel last summer, and the long-running blockade by Tel Aviv of the territory. GDP in Gaza contracted by 32 per cent in the third quarter of last year and by an estimated 15 per cent for the year as a whole. In contrast, the West Bank economy grew by about 4.5 per cent last year, but it also decelerated sharply in the third quarter.

Unemployment levels remain extremely high, at 41 per cent in Gaza and 19 per cent in the West Bank. More than 60 per cent of the youth in Gaza are jobless, according to the IMF, and the current and predicted economic growth rates will not be sufficient to create enough new jobs.

Little hope

There is little hope of a meaningful recovery this year, according to Christoph Duenwald, head of the IMF’s mission to Palestine.

“A high degree of uncertainty and various headwinds will likely prevent a strong economic recovery in 2015,” said Duenwald, following a visit to Ramallah and East Jerusalem in late January. “Most notable is the non-transfer to the PA of clearance revenues collected by Israel. Reduced wage payments and other public spending cuts necessitated by the suspension of clearance revenues… will likely cause a sharp reduction in private consumption and investment.”

Overall, the IMF is predicting that the Gaza economy will post a modest level of growth this year, as post-war reconstruction efforts continue, but the story is different in the West Bank, where it believes the economy is likely to contract by 2 per cent. While the West Bank does not suffer from a full-on Israeli blockade, it is hampered by the fact that the majority of the area, including the border crossings with Jordan, is directly controlled by Israel.

“Medium-term growth will remain modest, unless there is an improvement in the political climate that would lead to a lifting of restrictions in the West Bank and the blockade in Gaza,” said Duenwald.

The situation is being partly ameliorated by international donors coming forward to help the Palestinian government. Several Arab states have stepped in to help fill the void in the PA’s revenues. For example, Iraq and Qatar handed over a total of $54.7m in January to support its budget.

Other governments have also made promises of aid. In February, Japan announced a $32.2m contribution to the UN’s Palestinian refugee agency, UNRWA, much of which will go to relief and recovery operations in Gaza. In the same month, the EU announced a $5.7m package to help with job creation in Gaza.

Empty promises

But promises of assistance are not always matched with action. That has certainly been the case following a conference in Cairo on 12 October, which was held to coordinate international aid for Gaza. Billions of dollars were pledged, but a group of 30 international aid agencies, including ActionAid, Oxfam and the World Food Programme, issued a statement on 26 February in which they complained that “the international community is not providing Gaza with adequate assistance. Little of the $5.4bn pledged in Cairo has reached Gaza”.

In the meantime, the pressures continue to build. The IMF has calculated that, if the transfer of clearance revenues is resumed in the next few months, the PA will run a budget deficit of 15 per cent of GDP, three percentage points higher than last year, and there will be a financing gap of about $450m. Any delays to the resumption of clearance revenues mean the figures will look much worse.

The situation is being exacerbated by the continued lack of progress in the reconciliation efforts between Hamas, which controls Gaza, and political party Fatah, which rules in the West Bank. Many observers are predicting that it is only a matter of time before further violence erupts.

Speaking at an event in Brussels on 4 March, Pierre Krahenbuhl, commissioner-general of UNRWA, said he had “a very strong sense of alarm” about the position of Palestinians, and that conditions were particularly fraught in Gaza. “It is a time bomb,” he said. “Nobody will be able to say when the next conflict happens that we were taken by surprise, that we didn’t see this coming.… Leaving this situation unattended politically is a risk too high to consider.”

Prince Turki also suggested the situation was getting dangerous, in his comments in London after the Israeli election. “Denying the Palestinians the right to self-determination and all that comes with that is a dangerous prospect, and I think on both sides the extremists now are taking advantage of this,” he said.

“On the Arab side, the extremists are very happy Netanyahu has come out the way that he has, because now they can turn to the rest of us and say: ‘You see, we told you he is not serious; Israel is not going to give up anything and it is going to continue the settlement policy, and therefore we have been justified all this time not to come into the peace process.’

“And on the Israeli side, of course, I’m sure the settlers and all the other extreme right wingers are also happy, because it shows from their point of view that they’re equally justified in what they have been doing in the past. So the danger is there; it is going to continue.”

Frederica Mogherini, the EU’s high representative for foreign affairs, has said she thinks a new round of peace talks needs to start as soon as possible.

“The protracted stalemate in the talks can only strengthen forces that oppose an agreement, in both Israeli and Palestinian communities,” she said in a speech in London on 24 February. “The status quo is not an option: if we don’t move towards peace, we will move towards more violence.”

Volatile situation

But whether there will be any real appetite to launch a new peace initiative once the latest Israeli government is formed remains to be seen. US Secretary of State John Kerry failed in his previous efforts and, at the very least, Netanyahu appears to have severely limited his room for negotiation or compromise. In the meantime, the Palestinian authorities have suggested they might withdraw security cooperation with Israel, which would make the situation even more volatile.

“Progress on the peace process with the Palestinians is very unlikely,” says Firas Abi Ali, head of Middle East country risk analysis at IHS, a UK-based consultancy. “Netanyahu is likely to form a right-leaning cabinet, which would significantly raise the risk of civil unrest among the Arab-Israeli and West Bank Palestinian populations, and which would increase the risk of another war.”

Without any new political initiatives, the prospects for the Palestinian economy also look extremely dim.

Key fact

GDP across the Palestinian Territories fell last year by almost 1 per cent

Source: IMF

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