The chief executive officer of Palestine Development & Investment Company (Padico) appears remarkably sanguine about the prospect of $4bn of investment flowing into private sector, the fruit of the latest initiative from US Secretary of State John Kerry.

“We welcome any foreign investments coming into the economy,” says Samir Hulileh, head of Padico. “However, here in Palestine we tend to be cautious about big declarations and having too high expectations. Reports of 50 per cent increases in gross domestic product (GDP) over three years and slashing unemployment by two-thirds is politicians’ speak, rather than economists’.”

We are ready to engage, but we must emphasise the main obstacles … is not lack of money alone

Sam Bahour, business consultant

No doubt, Kerry appears to have Gaza and the West Bank closer to his heart than previous US secretaries of state. His announcement at the World Economic Forum (WEF) summit on 26 May that Tony Blair, as head of the Middle East Quartet, would lead a group of private sector representatives in devising a plan to unshackle the Palestinian economy from its donor dependence is intended to create a significant catalyst for development.

Few details

Detail on the Kerry plan has been scant, although further announcements are expected over the next few weeks. So far, this much is known: the White House intends to promote “shovel-ready” projects in areas such as tourism, agriculture, light manufacturing and building materials to kickstart economic recovery. Blair will encourage businesses to invest in the Palestinian territories with the aim of ramping up GDP and cutting unemployment to just 8 per cent (from an official 23 per cent) and raise the minimum wage by 4 per cent.

Palestine key economic indicators
  Jul-05 2013f
GDP ($m) 6653.6 7009
Trade balance ($m) -3025.7 -3445.7
Exports ($m) 1024.2 993.8
Imports 4049.9 4439.4
Unemployment rate 23 23.1
GDP=Gross domestic product; f=Forecast.Source: Palestinian Central Bureau of Statistics

The indefatigable business community is holding back from offering opinions about what are still vague investment plans. It is still early days, says Hashim Shawa, chairman and general manager of Bank of Palestine. “We have yet to see the details of the plan unfold. We are all for sizeable investments into Palestine, our only concern is that without final status solutions to establishing a Palestinian state with free borders, according to previously agreed international agreements, the risk is that these initiatives turn into temporary fixes.”

Hulileh, as head of a well-connected investment company set up by the influential Palestinian billionaire Munib Masri, and which has investments in a range of sectors from construction to telecoms, is diplomatic about the possibilities of these plans. As a key figure involved in discussions with business leaders beyond the Green line, he is open to all new avenues and approaches that offer the prospect of fresh funding for growth-oriented businesses.

“We are very receptive to any proposals in this context,” says Hulileh. “We are ready to engage, but we must emphasise that the main obstacles to our development is not lack of money alone. Yes, it’s one of the issues, but not the main one.”  

Other private sector players are more direct in their criticism of the Kerry initiative. Sam Bahour, a prominent Ramallah-based business consultant, says: “The $4bn number thrown out at the WEF is to me a matter of smoke and mirrors on the grandest scale. To take half the GDP of a country and try to say that it will inject that investment – it’s a huge amount for the economy to absorb.”

Bahour’s suspicion, echoed by many in the West Bank, is that Kerry’s plan is more an effort to cover up sustained diplomatic and political failure. 

Talks collapse

Kerry’s renewed interest in Gaza and the West Bank reflects a realisation within the Obama administration that the peace process has been brought to a state of near total collapse, to the point that the secretary of state is openly warning that the paradigm of a “two-state solution” is about to be lost.

Kerry has put six months to two years on the timeframe to “save” the two-state solution. That maybe the primary motivator behind the renewed interest in putting the Palestine territories at the top of the Middle East agenda.

The trouble with Kerry’s plan is that there is no potential for economic activity at the scale being discussed as long as the US is not able to convince Israel to ease restrictions on the Palestinian economy.

Palestine labour market (percentage)
  Palestinian territories West Bank Gaza
Unemployment rate 22.9 18.3 32.2
Labour force participation rate 43.9 46.1 40
Youth unemployment 35.1 27.9 48.9
Youth labour force participation 38 40.3 34.2
Sources: World Bank; PA Finance Ministry

Many Palestinian business leaders have come to the conclusion that the Israel-Palestine peace process has been too focused on keeping it constrained within a very narrow institution-building framework. The role of the quartet, a group comprising the US, the EU, Russia and the UN, has been restricted to supporting confidence-building measures that evidently do little to release the Palestinian economy from its Israeli-imposed stranglehold.

“If the plan is implemented alongside a political track with an easing of Israeli restrictions, the plan would definitely open up a lot of lending opportunities,” says Shawa. “In fact, the removal of Israeli restrictions alone, even without the proposed investment, will open up lending opportunities for Bank of Palestine and all banks operating in Palestine.”

Economic blockade

The impact of the Israeli stranglehold is more keenly felt in Gaza than the West Bank. In Gaza, the economic blockade has hollowed out the economy, leaving it dominated by a tunnels-focused black market. “It’s impossible to export goods from Gaza, so why would people come to invest in a place where such risk exists?” asks Sami Abdel Shafi, head of the Gaza-based Emerge Consulting group. “I don’t doubt Secretary Kerry’s intentions, but you can’t have an economic recovery plan that doesn’t touch on the politics.”

The Obama administration is sensitive to these criticisms and the increasing frustrations expressed by Palestinian business leaders. Former prime minister Salam Fayyad’s efforts to improve the performance of Palestinian Authority (PA) institutions have not materially improved the trading potential of the economy, which remains hamstrung by Israeli red tape.

Palestinian Authority revenues, 2012*
  Actual Budget Percentage difference
Total net revenues 7,894.4 8,493 -5.9
Gross domestic revenues 2,806.4 3,087 -9.1
Tax revenues 1,852 2,124 -12.8
Non-tax revenues 9,54.4 963 -0.9
Clearance revenues 5,617 5,859 -4.1
Tax refunds 434 454 -4.4
*=NIS million (1 NIS=$0.28). Sources: World Bank; PA Finance Ministry

Although Kerry has assured PA President Mahmoud Abbas that the economic plan is not meant to be a substitute for a political solution, many see it as exactly that.

Fayyad achieved impressive results in institution building during his term of office, which came to an end in April.

“Despite the Israeli restrictions, we have been working on internal reform and institution building,” says Bank of Palestine’s Shawa. “For example, we have a very healthy banking sector. Non-performing loans in Palestine are the lowest in the region at 3 per cent. This stems from significant improvements by the Palestine Monetary Authority (PMA) in the financial market infrastructure, including the establishment of one of the first electronic credit bureaus in the region.”

However, the Washington-based World Bank, in its latest report on the Palestinian economy released in March, notes that prospects for sustainable growth remain constrained.

“With the current economic slowdown, measures to increase tax revenues handicapped by external constraints, most notably Israeli restrictions, and any further increase in the PA’s borrowing from local commercial banks considered unsafe for the stability of the banking sector, the provision of basic services by the PA is increasingly affected,” the report says.

What is more, the growth potential of a small economy depends to a large extent on its capacity to compete in global markets – yet, it notes, since 1994, the economy has been steadily losing this capacity. Exports have never got off the ground. According to the World Bank, the share of exports of goods in the Palestinian economy, at 7 per cent in 2011 (down from 10 per cent in 1996), is among the lowest in the world.

You come back yet again to the central question of Israel’s overall control on the ground

Yezid Sayigh, Carnegie Middle East Center

Padico’s Hulileh insists the Palestinian business community does not want to appear pessimistic before the full details of the Kerry plan are known. However, he says, the Obama administration needs to do more to show that it is serious about the political issues. “We expect the Americans to help us on the political side because they are the ones who can decide on this. But we don’t expect them to be the main contributors to investment as that is traditionally the role of the EU. We want the US to deliver in the [areas] that they can deliver on – convincing the Israelis to negotiate an end to this conflict.”

The irony of the lukewarm reception afforded to Kerry’s plan is not lost on Palestinian business leaders. “Really, it should be odd for me as someone active in the private sector not to open my arms to $4bn-worth of investments,” says Bahour. “But as a business consultant, I have to be honest with clients wanting to invest here. I have to tell them that I have witnessed the inability of real investment to happen under conditions of occupation.”

Low expectations

Expectations will remain limited so long as plans like Kerry’s do not fully address the Israeli control system. “If they find $4bn and pour that into Palestine then yes, there would be some level of job creation, but whether that would actually enable the Palestinian private sector to take off and become self-sustaining is a wholly different matter,” says Yezid Sayigh, a senior associate at the Carnegie Middle East Center. “You come back yet again to the central question of Israel’s overall control on the ground, on the movement of goods and all the delays that come with that.”  

Investments in the key sectors of light manufacturing, tourism and agriculture will be needed in coming years. But if Kerry’s plan does not apply sufficient pressure on Tel Aviv, it will appear as good money chasing after bad. And that could be as detrimental to long-term Palestinian economic prospects as being starved of investment cash.

Kerry’s challenge in galvanising momentum behind his economic plan is relatively straightforward. He needs to ensure that the quartet charged with steering the scheme expands its scope of work so that it is not simply a conduit for large investments in Palestinian enterprises, but a plan that addresses all the links the chain.

“Israel still holds the strings to our economy and if they don’t release those restrictions, our economy cannot grow – regardless of whether there’s $4bn or $40bn of investments,” says Bahour.

In numbers

8 per cent: Unemployment rate targeted by Kerry plan

4 per cent: The increase in minimum wage targeted by the economic plan

Source: MEED