Palestinian growth decelerates

24 June 2013

Israeli restrictions and shortfalls in donor aid are dragging down the economy of Gaza and the West Bank, but the promise of Western investment could stimulate growth

Events in Syria over the past couple of years have demonstrated that the Arab-Israeli conflict is no longer the main pivot around which Middle Eastern politics revolves.

Despite the lack of headlines generated by the Palestinian Territories, diplomacy has continued. There has been a noted increase in activity since John Kerry took over as US secretary of state from Hillary Clinton in early 2013.

Revised plan

In May, the Arab League gave its backing to a revised version of the peace plan first tabled by Saudi Arabia’s King Abdullah in 2002, based around a Palestinian state within the boundaries of 1967. This plan – welcomed by the White House – concedes that land swaps may be needed in order to account for changed developments since 1967, potentially to include Jewish settlements. However, it has been flatly rejected by Hamas, the governing authority in Gaza.

Real GDP growth for the first three quarters of 2012 was 6.1 per cent, down from an average of 11 per cent in 2010-11

Palestinian Central Bureau of Statistics

Although it no longer grabs headlines the way it did before the recent Arab unrest, the West Bank and Gaza have been far from quiet. In September 2012, the Palestinian Authority (PA) was the target of protests over the state of the economy in the West Bank, while in February-April 2013, unrest intensified over Israel’s detention of Palestinian prisoners. These protests may yet herald a serious challenge to the PA’s legitimacy, though it continues to hold its ground. The PA was rocked in mid-April by the resignation of Prime Minister Salam Fayyad. Fayyad’s differences with PA President Mahmoud Abbas were the main reasons behind the decision.

A technocrat to the core, Fayyad had failed to build up a power base within the Palestinian Territories, and had attracted growing criticism from other Fatah figures who attributed some of the PA’s failures, including the faltering economy, to the prime minister. His resignation nonetheless dealt a severe blow to the authority, as the former premier had achieved significant progress in improving transparency and ensuring better service delivery. 

Appointment criticised

Fayyad’s replacement, named in early June, is the British-educated independent Rami Hamdallah, a relatively little-known figure with a background in academia, whose appointment was immediately criticised by Hamas as illegal.

One of the more positive developments has been the informal discussions between senior Palestinian and Israeli business leaders, under the auspices of the World Economic Forum. About 300 executives presented a joint appeal on 26 May, stating that the current situation endangered the economy and the social fabric of both nations, and may render the two-state solution unattainable.

The economy, after a period of relative stability over the past two years, has shown signs of persistent weakness. A World Bank report on the Palestinian Territories economy, released in March 2013, noted that during the economic slowdown, measures to increase tax revenues had been handicapped by external constraints, most notably Israeli restrictions. Any further increase in the PA’s borrowing from local commercial banks was deemed unsafe for the stability of the banking sector.

Growth slows

According to the Palestinian Central Bureau of Statistics, real gross domestic product (GDP) growth for the first three quarters of 2012 – the latest period for which figures are available – was 6.1 per cent, down from an average of 11 per cent in 2010 and 2011.

While Gaza’s economy was growing at an average rate of 15 per cent between 2010 and 2011, the World Bank notes that growth dropped to just 7.7 per cent in the first three quarters of 2012. In the West Bank, real GDP growth averaged 9 per cent between 2010 and 2011, but slowed to 5.5 per cent during the first three quarters of 2012.

Aside from Israel’s failure to ease restrictions on the territories, other causes behind the economic decline are the shortfalls in donor aid and the PA’s continued fiscal stress. Construction output declined by 7 per cent in 2012, in part because of the rising amount of PA arrears to local contractors.

Furthermore, the Palestinian economy in East Jerusalem has been progressively isolated and constricted. It now wields less than half the economic influence that it had in 1993, noted a UN Conference on Trade and Development report in May 2013. 

The White House’s keener interest in the Palestinian Territories may offer a basis of greater support for the economy’s future growth prospects. Kerry announced in May 2013 that several branches of the US government would be involved in a new initiative to help stimulate employment on the West Bank, including Export-Import Bank of the US and the US Agency for International Development.

This plan is expected to be worth $4bn and could help expand the economy by up to 40 per cent over the next three years, according to its sponsors.

Foreign investment

Former UK prime minister Tony Blair is set to play a key role in the economic revitalisation plan, bringing together a network of international investors to address opportunities in sectors such as tourism, construction, light manufacturing, agriculture and communications.

Former UK prime minister Tony Blair will play a leading role in helping the economic revitalisation plan

There will, however, be no significant changes in the PA’s economic policy, at least until the replacement for Fayyad is fully installed. There is also little anticipation that Israeli-Palestinian peace efforts can gain serious traction in the midst of a more serious regional conflagration that is absorbing the international community’s attentions.

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