Rebuilding will simulate growth

14 July 2015

If pledged foreign aid is forthcoming and tax revenues continue to flow from Israel, the economies of the West Bank and Gaza should begin to recover in 2015

The conflict in the summer of 2014 was the latest blow to economic survival in the Palestinian territories, with GDP growth in Gaza falling 15 per cent as a result of the war with Israel. The Washington-based IMF estimates that the war caused losses of $4bn, equivalent to 35 per cent of the GDP of the West Bank and Gaza.

The 51-day conflict resulted in damage to tens of thousands of homes and businesses, and utilities and key infrastructure were significantly damaged.

Reconstruction efforts

The vast rebuilding effort will place further stresses on Gaza’s economy, which was already struggling to cope with the expanding population and growing levels of unemployment.

Due to the low base rate, the IMF is forecasting GDP growth in Gaza of 7 per cent as the reconstruction efforts take place. The institution projects that the West Bank will achieve “very modest” growth in 2015 as a result of the resumption of transfer of revenues collected by Israel on its behalf, following their cessation in December.

The fund forecasts an overall GDP growth of 2.5 per cent in 2015 if reconstruction efforts begin to move forwards more quickly.

Due to the considerable damage caused to infrastructure during the 2014 conflict, and continued restrictions on trade and activity as a result of the dispute with Israel, it is imperative that the Palestinian Authority (PA) continues to receive aid from the international community to allow it to regain a path to economic growth.

The West Bank and Gaza are not IMF member states, and so are not eligible for support from the fund. Consequently, bilateral or multilateral aid from international states is of paramount importance.

At a donor conference held in Cairo in October 2014, spearheaded by Egypt and Norway, a host of international states pledged $5.4bn of aid for rebuilding efforts in Gaza. This included $1bn from Qatar, $200m from Kuwait and the UAE, and $212m from the US. This was followed in January by Qatar and Iraq providing $54.7m to the Palestinian Authority to support the 2015 budget.

However, it was reported in 2015 that a significant amount of the pledged aid had not yet reached Gaza. Senior officials from Norway and Egypt have said it is crucial that the funding is delivered as quickly as possible to enable the rebuilding efforts to move ahead. This has been reinforced by the IMF, which says the reconstruction is moving slower than required for the economy to begin to recover.

In addition to aid for infrastructure developments, international donors and agencies have pledged support for refugee support and job creation. Earlier this year, the EU announced a $5.7m aid package to help generate jobs in Gaza.

Even during 2006-13, when the Palestinian territories were achieving consistent economic growth, they were unable to adequately address the unemployment issue.

According to the IMF, unemployment rates are as high as 41 per cent in Gaza and 19 per cent in the West Bank, and current economic growth projections will not be adequate to sustain required job creation.

Withheld revenues

As with all aspects of the economy in the West Bank and Gaza, the fractious relationship with Israel continues to stifle economic development. In addition to the obvious problems caused by armed conflict, restrictions on trade and other economic barriers continue to prevent sustainable growth.

This was clearly illustrated earlier this year, when Israel announced it was freezing $127m of tax revenues collected for the PA in December in response to the authority’s move to join the International Criminal Court. The withholding of revenues led to a significant fiscal deficit occurring in the first quarter of 2015, with the PA having to borrow up to $200m from local banks to cover the shortfall.

While the transfer of tax revenues has now reportedly resumed, West Bank and Gaza’s lack of control over certain areas of their economies will continue to be a hurdle to long-term economic growth.

The IMF reports that the territories’ banking system remains healthy under the circumstances, but it is still concerned about vulnerabilities. In its latest report on the economy of the West Bank and Gaza, it highlights the fact that about 43 per cent of local banks’ loan portfolios are for lending to the PA and employees. The IMF also highlighted the need for the PA to introduce structural reforms to improve economic prospects.

If pledged international aid is forthcoming and the flow of tax revenues from Israel remains unaffected, the economies of the West Bank and Gaza should begin recovering in 2015. However, until a working peace agreement can be reached with Israel, long-term sustainable growth will remain an impossible prospect.

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