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8.Economy

8 . 1 G ENERAL BACKGROUND & OV ERV I EW With the establishment of the PA in 1994, numerous economic and development projects were initiated, but the WBGS arestill totally dependent on support from outside. Palestinian economy is dominated by services, while industry remainsunderdeveloped and at a low level, and the agricultural sector from the lack or restrictive access to natural resources.

The main reason behind the current economic crisis is the general closure and separation policy imposed by Israel in

March 1993, which has never been lifted since. In violation of international law, the closure is used as collective punishmentagainst the Palestinian people, preventing WBGS residents from entering Jerusalem or Israel unless they hold an Israeli-issuedpermit. Any sustained Palestinian economic recovery will ultimately require the dismantling of the closure system.

The economic restrictions have remained and the situation in Gaza continues to deteriorate. The PCBS estimates that realGDP growth in the WBGS in 2007 was 0.5%, while IMF analysis notes a drop in GDP of -0.5% in 2007 and modest growthof 0.8% in 2008. (The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.)

With a growing population and a shrinking economy, real per capita GDP is now 30% below its height in 1999; had theannual growth trend of an average 6% from 1994-1999 continued, GDP per capita would nearly be 85% higher than it iscurrently. (The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.)

Economic progress has been insufficient to stimulate growth in the OPT because of the restrictions on movement, whiledependency on aid was increasing. Approx. half of all Palestinian households are dependent on food assistance providedby the international community (80% of households in Gaza, 33% in the WB).(ILO, The Situation of Workers of the OccupiedArab Territories. May 2008.)

Key Indicators of the Palestinian Economy (Excl. Jerusalem, selected years)

1995 1999 2002 2003 20041 20051 20062 20073

GDP (US$ million) 3,276 4,517 3,156 3,624 4,007 4,478 4,533 5,045GNI (US$ million) 3,799 5,454 3,546 4,105 4,534 5,017 5,068 5,620

GDP per capita (US$) 1,400 1,590 999 1,108 1,203 1,191 1,165 1,261GNI per capita (US$) 1,615 1,920 1,122 1,255 1,337 1,334 1,303 1,405Real GDP growth (%) 6.1 8.6 -3.8 5.8 6.0 6.0 -4.8 0.0

Real GNI per capita growth (%) 7.9 4.1 -8.9 6.2 1.5 -1.0 -14.9 -0.7

Domestic expenditure (% of GDP) 151.8 163.0 145.8 150.2 150.7 154.5 173 -Inflation (CPI - annual %) 10.8 5.5 5.7 4.4 3.0 3.6 3.6 -Poverty rate4 (% of population)

West Bank:Gaza Strip:

201332

514168

473764

483865

2247.9

19.151.8

1 Revised; 2 preliminary; 3 estimates 4 World Bank estimates

Source: UNCTAD.Report on UNCTADs Assistance to the Palestinian People. July 2007, except:4 World Bank estimates.

PCBS uses two measures ofpoverty: Deep Poverty (absolute) and Poverty. The DeepPoverty line reflects a budget for food, clothing and housing only. For a family of six it

was NIS 1,837 in 2006. The Poverty line adds other necessities, incl. health care,education, transportation, personal care and housekeeping supplies; raising the line toNIS 2,300 for a family of 6. In 2007, the Deep Poverty rate was 69.9% in Gaza and34.1% in the West Bank.

According to OCHA, the income-based poverty rate was 57% in 2006 while the 44%lived in absolute poverty. (OCHA, 2008).

A Sept. 2008 IMF report states that unemployment in Gaza was over 30% andinflation 18%, with at least 79% of the population living below the poverty line.

By mid-2008, inflation was projected by the World Bank to be about 9.5% (ascompared to the expected 4%)

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WBGS Economic Structure, 2007 (% of GDP)

Source: PCBS, Quarterly National Accounts, 2008 (Jerusalem excluded).

Co ns um er Pr ic e In de x (Yearly Averages)

8 . 2 A GR I CU LTURE

The Agricultural Sector at a Glance

WBGS

Total Cultivated area (dunums) (2007) 1,834,851

Agricultural land as % of total land area (2006)- of which irrigated 25.210.7Area of fruit trees (2007)

- as % of total cultivated area1,164,56262%

Area of field crops (2007)- as % of total cultivated area

482,49427.2%

Area of vegetables (2006)- as % of total cultivated area

187,34410.5%

Area of cut flowers (2007) 451No. of cattle (2007) 34,255No. of sheep (2007) 744,764No. of goats (2007) 343,565No. of poultry (2005) 43,197No. of beehives (2003/04) 59,946No. of plant nurseries (2005) 197

Agriculture &Fishing, 8.2% Mining,

Manufacturing,

Electricity &Water, 12.7%

Construction,2.5%

Wholesale andRetail Trade,

10%Transportation,

Storage,

Communications,11.6%

Other Services,21.9%

Financial Inter-mediation, 4.7%

Public Admin. &Defense, 13.5%

99.6

119.78

122.99

127.7

133.32

107.86

123.58

99.8

120.95

123.32

136.14

149.71

109.71

117.67

99.74

120.23

127.34

140.88

149.15

109.06

120.79

99.66

119.93

124.79

137.73

152.09

109.28

120.66

0 20 40 60 80 100 120 140 160

1995

1999

2001

2003

2005

2007

Oct.2008

Total

West Bank

Jerusalem

Gaza

(Source: PCBS, various years.)

Source: PCBS,Agricultural Statistics, 2006/07, previous years.

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As of Sept. 2008, 14.9% of the employed persons in the WBGS were working in agriculture, fishing and forestry (PCBS,Labor Force Survey, July-Sept. 2008).

In the first quarter of 2008, Agriculture and Industry combined were approx. 19% of GDP (as compared to 25% in1999). (The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.)

Sealing off the Gaza Strip was especially harmful, as its agricultural sector and many of its industries are export-oriented.Only one fifth of its two main export products - carnations and strawberries was exported in 2007 while the remainderwas used as animal feed, resulting in some $6.5 million in losses for carnation farmers and US$7 million for strawberryexporters million. (UNCTAD. Report on UNCTADs Assistance to the Palestinian People. July 2008).

The sector generates approx. 25% of all Palestinian exports; major export goods are fruits, olives and olive oil, vegeta-bles and cut flowers. The sector suffers from the lack of access to markets (Israeli export companies still control thequantity and the quality of Palestinian agricultural commodities), and restricted water resources.

Approx. 900,000 dunums are planted with 10 million olive trees, constituting 45% of cultivated land and contributing 15-19% of agriculture output. In 2008, some 128,000 metric tons of olives were estimated to be picked and 32,000-35,000metric tons of olive oil were expected to be produced. (UN, The Olive Harvest in the West Bank and Gaza Strip, Oct. 2008).

In 2007, there were 6,976 agricultural establishments operating. (PCBS, Establishment Census, 2007).

In 2005, Gazas 2,998 fishermen - operating707 boats - caught some 1,818.3 tons of fish, mainly sardines. (PCBS,Agricultural Statistics, 2006).

Due to the separation barrier important areas of land and water resources are becoming increasingly difficult to bring

into production, affecting some 170,000 dunums of fertile agricultural lands or 10.2% of the total area cultivated inthe West Bank, with an average economic value of US $38 million equal to roughly 8% of Palestinian agricultureproduct (World Bank, The Economic Effects of Restricted Access to Land in the West Bank, Oct. 2008)

The halt in exports and the prohibition on importing fertilizer, pesticides, packaging materials and other inputs has led tothe loss of more than 40,000jobs in the agriculture sector. PalTrade estimates total agricultural export losses at US$30 million in the 2007/2008 season. (World Bank, West Bank and Gaza Update, Oct. 2008).

It is estimated that as a result of the construction of the separation barrier some 15% of West Bank agricultural landwill be lost (UNCTAD, 2008).

8 . 3 I NDU STRY & PR I VATE S E C TOR Facts & Figures

The industrial sectors share of the Palestinian GDP was estimated at 14% in mid-2008 (manufacturing: 11.3%, mining/quarrying: 0.5%, construction: 2.7%) and itsshare in total employment at 12.3% (1995: 17.5%) (PCBS. Quarterly NationalAccounts. 2008).

At the end of 2007, the share of the GDP of manufacturing, mining &quarrying was estimated at 10.9%, that of construction at 2% that oftransport, storage & communications at 12.1% and that of services (health, education, social, real estate,business,hotel & restaurants) at 24.5% (PCBS. Quarterly National Accounts. 2008).

In the first quarter of 2008, Agriculture and Industry combined were approx. 19% of GDP (as compared to 25% in1999). (The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.)

While employment in services consistently increases, employment in industry and construction is declining, whichis particularly apparent in Gaza, where it declined from 21% of total employment in 2000 to 7% by the end of 2007.(ILO, The Situation of Workers of the Occupied Arab Territories. International Labor Conference, May 2008.)

Especially Gaza suffers from severe capacity underutilization owing to the lack of access to inputs and markets. According to World Bank research, 96% of the 3,900 industrial establishments that existed in Gaza June 2007,employing 35,000 workers, have been forced to close.

Consistent with the lack of borrowing, industrial output continues to decline. According to PCBS estimates, in 2007manufacturing output was approx. 1.8% lower than in 2006 and nearly 23% off from 1999.

In 2007, there were 132,874 establishments in the WBGS, excl. Jerusalem (WB: 94,205 or 70.9%; GS: 38,669 or29.1%), implying a 34.1% increase compared to 1997. Some 116,804 of the total are operating (WB: 82,871 GS: 33,933),while 3,657 are completely and 5,130 temporarily closed, 638 are under preparation, and 6,645 are auxiliary units. (PCBS,Establishment Census, 2007).

CompletelyClosed2.7%

TemporarilyClosed3.9%

UnderPreparation

0.5%

Auxiliary Unit5.0%

In Operation87.9%

Establishments by Operation Status

(Source: PCBS, Establishment

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Hebron governorate has the highest number of establishments (17,661), followed by Nablus (14,582) and Gaza

(14,053), while Jericho has the lowest number (1,388). (Ibid.). Some 90.7% of the total establishments are owned by the private sector, 4.9% to the govt., 3.3% to NGOs and 1.1% to

local authorities, UNRWA and international organizations. (Ibid.).

The main economic activity of 54.0% of the establishments is wholesale, retail trade and repairs, while 14.0% ismanufacturing. (Ibid.).

Some 296,965 persons are engaged in the operating establishments, 81.4% of them males (18.6% females) and 70.6%of them in the West Bank (29.4% in Gaza). (Ibid.).

The Palestinian Federation of Industries (PFI) estimates that 98% of Gazas industrial operations are currentlyinactive, with only 23 of Gazas 3,900 industries operating. (The World Bank. Palestinian Economic Prospects: Aid, Access andReform. Sept. 2008.)

As of June 2008, 12.1% of the employed persons in the WBGS were working in mining, quarrying and manufacturingand 10.8% in construction (PCBS, Labor Force Survey, April-June 2008).

Hotels &restaurants,

4.2%

FinancialIntermediation,

0.8%

Transport,storage &communi-

cations, 1.1%

Real estate,renting, businessservices, 3.9

Education; 2.2

Health & socialwork; 3.9

Other commu-nity, social &

personalservices, 8.2%Agriculture,

6.4%Mining &

quarrying, 0.3%Manufacturing,

14%

Electricity &water supply,

0.4%

Construction,0.6%

Wholesale, retailtrade & repairs;

54

Establishments by Economic Activity

De Facto Co.,6.1%

GeneralPartnershipCo. , 1.6% Shareholding

Co. , 1.5%

PublicShareholding

Co., 0.3%

Assoc. &Charities,

3.5%

Others; 0.8

Sole Proprietor,86.2%

Establishments by Legal Status

NGO Sector3.3% Central

Government4.9%

LocalAuthority

0.7%

UNRWA &InternationalOrganizations

0.4%

Private Sector90.7%

Establishments by Ownership

5-9Employees,

15.5% 10-19Employees,

9.6%

20-49Employees,

7.5%

50+Employees,10.6%

1-4Employees,

56.8%

Establishments by Employment Size

(Source: PCBS, Establishment Census,

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8 . 4 L A BOR & EMP LO YMENT

Labor Market General DevelopmentThe labor force participation rate of the working age population (15+ years) stood at 41.6% (43.5% in the West

Bank and 38% in the Gaza Strip. (PCBS, Labor Force Survey Report Series, April-June 2008).

As of June 2008, 89.2% of WBGS workers were working in the Palestinian territories (85.8% of West Bankers; 100%of Gazans), 80.2% of them within the same governorate. Another 10.8% were employed in Israel, incl. settlements(14.2% of West Bankers, incl. Jerusalemites) (PCBS, Labor Force Survey, April-June 2008).

The highest percentage ofunemployment - 43.4% - is found among the age group 20-24 (WB: 35.1%, GS: 58.5%).

Of the employed workforce, 61.3% were working in the private sector, 22.7% in the public sector, 10.8% in Israelandsettlements and 5.2% in other sectors(PCBS, Labor Force Survey, April-June 2008).

The main reason for those not economically active (58.4% of the working age population of 15 years and above)was housekeeping (46.7%), followed by studying/training (34.8%) and age/illness (11.5%). The main reason amongmen was studying/training (54.8%) and among women housekeeping (65.3%) (PCBS, Labor Force Survey, April-June 2008).

Unemployment figures do not include underemployed workers who have turned to unpaid family or seasonalagriculture labor, nor discouraged workers who have left the labor force, nor the large number of workers absent fromtheir usual work (assumed to be temporarily away from jobs due to illness, work stoppage, or other reasons but stillreceiving normal pay; UNRWA estimates their number at nearly 45,000 in Gaza early 2007).

As of June 2008, unemployment by ILO standards - stood at 25.8% - 16.3% in the West Bank and at 45.5% in Gaza.Lowest West Bank unemployment was in Jericho and Jerusalem (8%), highest in Qalqilya (23.2%). Gaza unemploymentrates ranged from 34.1% in northern Gaza to 64.3% in Deir Al-Balah. (PCBS, Labor Force Survey, April-June 2008).

Average daily wages ranged from NIS 146 in Jerusalem to NIS 70.4 in Jericho to 52.8 in Gaza City, and from NIS143.3 in Israel/settlements to NIS 79.5 in the public and NIS 74.6 in the private sector. (PCBS, Labor Force Survey, April-June 2008).

Highest average daily wages were paid in the construction sector (NIS 155) and in services/other branches (NIS156.8) in Israel and settlements. In Gaza, highest average wages were found in services/other branches (NIS 70.4) andin the West Bank in the transportation, storage and communication sector (NIS107.7) (PCBS, Labor Force Survey, April-June2008).

The average monthly wage in the WBGS, as of June 2008, was NIS 2,413 (West Bank: NIS 2,603; Gaza: NIS 1,601)(PCBS, Labor Force Survey, April-June 2008).

Palestinian Labor Force Various Features (by ILO Standards)

by employment status(%)2008 (April-June)

WB GS Total1997-99Average

2000 2005Average

Labor force participation rateFull employmentUnderemploymentUnemployment

43.575.87.9

16.31

38.045.78.845.5

41.666.08.225.8

42.8577.76.715.5

41.580.95.014.1

40.769.96.623.5

by labor status(%):EmployersSelf-employedWaged employeesUnpaid family members

4.324.160.411.2

3.316.971.38.5

4022.463.010.6

5.520.465.48.7

4.619.666.19.7

4.326.159.510.1

by economic activity(%):Agriculture, forestry, fishingMining, quarrying, manufacturing

ConstructionCommerce, hotels, restaurantsTransportation, storage, communicationServices and other branches

15.714.5

14.120.64.230.9

12.34.6

0.417.04.361.4

14.912.1

10.819.84.238.2

12.815.8

21.217.84.727.7

13.714.3

19.717.54.929.9

14.613.0

12.919.45.734.4

Working time and wages WB GS IsraelWBGS average

1997-99 2000 2005 Average weekly working hours 42.7 40 44.3 44.3 43.1 42.0

Average monthly working days 22.3 24.2 20.2 22.6 23.2 23.8 Average daily net wage NIS 86.9 61.5 143.3 67.8 77.3 78.1

Median daily net wage - NIS 76.9 57.7 150.0 53.8 69.2 60.0

(Source: PCBS, Labor Force Survey Report, April-June 2008, previous rounds.)

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Women in the Labor Force Despite the high and successful secondary school enrolment of women, which generally correlates positively with

female work, womens labor force participation (15+ years) remains low, accounting for only 15.2% of the formallabor force, making itone of the lowest in the world. (PCBS, Labor Force Survey, July-Sept. 2008). As of Sept. 2008,12.1% of the female labor force was unemployed. Main reasons for the low participation is housekeeping.

Of the women participating in the labor force, 42.1% had 13 or more years ofschooling. However, also among theunemployed women the largest group (33.1%) was that with 13 and more years of schooling. Of the women outsidethe labor force, 65.3% did not participate due to housekeeping and 26.8% due to studying/training. (PCBS, Labor ForceSurvey, April-June 2008).

Historically, employment of women has been concentrated in agriculture, often as unpaid family helpers, and inservices, mostly in public administration. At the end of 2007 employment of women was 48.9% in services and 33.7%per cent in agriculture. (ILOThe Situation of Workers of the Occupied Arab Territories. May 2008).

Of the female labor force in mid-2008, 52.1% were employed in services and other branches, 30.7% in agriculture,forestry, fishing, 9.2% in mining, quarrying, manufacturing, 7.1% in commerce, hotels, restaurants, 0.4% in construction,

and 0.5% in the transport, storage and communication sector. The vast majority (58.2%) were wage employees, 27.8%unpaid family members and 13.5 self-employed. (PCBS, Labor Force Survey, April-June 2008).

Chi ld Labor In 2006, 5.3% of the total number of children aged 10-17 years (WB: 7.4%, GS: 2.1%) participated in the labor

force, up from 3.8% in 2005. Of these, approx. 2/3rd were working for their families (unpaid). In 2005, about 47.6%of the employed children were not at school. (PCBS, Child Statistics, Annual Report, 2006 and 2007).

The main reason for child labor is low economic status of the household: 71.0% of employed children aged 5-17years are working because of economic need (51.4% to assist in family projects, 19.6% to contribute in increasingfamily income). (PCBS, Child Statistics Series No. 9, Annual Report, 2006)

In 2006, child labor was concentrated in agriculture 53.6%, followed by trade, hotels and restaurants 26.6%, thenmining and manufacturing 9.5%, and construction 6.7%. Average weekly working hours were 26.8 for boys and16.6 for girls (PCBS, Child Statistics Series No. 9, Annual Report, 2006).

Youth employment: 14% of the age group 15-19 years and 41.2% of the age group 20-24 years were part of thelabor force as of June 2008. (PCBS, Labor Force Survey Report, April-June 2008).

Publ ic Sector Employment Of the employed workforce, 61.3% were working in the private sector (WB: 66.4%, GS: 45.1%) and 22.7% (WB:

14.9% and GS: 47.5%) in the public sector. As of June 2008, highest public sector employment in the West Bankwas in the Salfit (27.3%) and Tulkarem (23.3%) governorates, lowest in the Jerusalem governorate (3.9%). In Gaza,the largest percentage of public sector employees was found in the Deir Al-Balah (63.8%), the lowest in the Gaza-North (46.4%) governorate (PCBS, Labor Force Survey, April-June 2008).

PA employment averaged 142,000 during the first half of 2008, compared with 150,000153,000 expected in thebudget. (IMF. Macroeconomic and Fiscal Framework for the West Bank and Gaza: Second Review of Progress, Sept. 2008).

The daily average wage in the public sector was NIS 79.5 (West Bank: NIS 82.1, GS: NIS 74.1) compared to NIS74.6 (West Bank: NIS 81.1, GS: NIS 39.7) in the private sector. (PCBS, Labor Force Survey, April-June 2008).

17.114.6

9

20.4

4.6

34.3

12.3

4.60.4

17

4.3

61.4

7.4

14.1

44.9

22.1

1.8

9.7

0

10

20

30

40

50

60

70

Labor Force Distribution by Sector (%)West Bank

Gaza

Israel

(Source: PCBS, Labor Force Survey, April-June

AgricultureFishing

Forestry

MiningQuarryingManufacturing

Construction CommerceRestaurants

Hotels

TransportationStorage

Communication

Servicesand other

branches

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As part of its continued reform efforts under the Palestinian Recovery and Development Plan (PRDP), unveiled in Dec.

2007, the PAreduced govt. employment from over 180,000 in late 2007 to about 141,000 in the first half of 2008, wellbelow the 153,000 limit set in the PRDP. (The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.)

Education, Health and Public Administration accounted for almost 25% ofGDP in the first quarter of 2008. (Ibid.)

IMF estimates of GDP indicate that the PAs wage bill alone is equivalent to over 27% of GDP.

WBGS Laborers in IsraelAccording to PCBS data, 146,000 Palestinians (116,000 from the West

Bank, incl. East Jerusalem, and 30,000 from Gaza) worked in Israel,incl. industrial estates and settlements, during the third quarter 2000.Since then, numerous Palestinian workers have lost their jobs in Israelas a result of Israels closure policy. In 2007, they numbered 63,000(ILO, The Situation of Workers of the Occupied Arab Territories, 2008), themajority of which held an Israeli-ID or foreign passport. The balance inthe number of workers in Israel from the West Bank - excl. EastJerusalem - are believed to be divided roughly equally between thoseholding work permits and those working illegally.

As of Sept. 2008, 16.3% of West Bank employees worked in Israeland Israeli settlements, whereas since April 2006, labor flowsfrom Gaza have been non-existent. The average daily wage wasNIS 138. The majority of workers employed in Israel wereJerusalemites(PCBS, Labor Force Survey, July-Sept. 2008).

According to data by the Israeli DMs Coordination of Government Activities in the Territories (COGAT), the quota forPalestinian workers to access Israel and the settlements was 47,062 in mid-March 2008, while the actual number ofpermits issued was only 44,478 (20,280 for Israel, 21,162 for settlements and 3,036 for Jerusalem). Permits are valid forthree months at a time but are no guarantee of actually being able to get to work, since army-imposed curfews and/or adhoc closures of crossings may prevent access.(ILO, The Situation of Workers of the Occupied Arab Territories, 2008).

8 . 5 T O UR I SM

Hotels and Related Features

Area Hotels Rooms Beds GuestsRoom Bed

OccupancyWorkers engaged

Admin. Operation TotalEnd of1999 WBGS 92 3,752 8,102 316,871 35.5% 30.3% 403 1,234 1,637

WB all- North- Middle- South

4662119

2,477107877

1,493

5,424246

2,0413,137

105,0092,166

44,11161,732

23.7%21.9%18.3%

14.7%14.5%16.4%

Jlem 26 1,089 2,566 104,251 50.5% 36.9%Gaza 10 391 714 1,057 1.3% 2.8%

as ofJune2008

Total 82 4,049 8,885 213,3171 42.5% 38.5% 259 980 1,23921 Since Jan. 2008 (average length of stay in hotels: 2.4 days) 2 incl. 176 female (Source: PCBS, Hotel Activities Surveys, 2008.)

As of June 2008, 19.8% of the employed persons in the WBGS were working in commerce, restaurant and hotels(PCBS, Labor Force Survey, April-June 2008).

Hotel

Gu

Nationality (Jan.-June 2008):

Palestinian (from abroad) 32,289

Arab 1,011Israeli 10,070US/Canada 13,798South/Central America 3,566

Australia/New Zealand 706EU 86,643Other European 40,577

Asia 17,751 Africa 6,916Total: 213,317

(Source: PCBS, Hotel Activities Survey, 2008.)

229712220850

214220

316949335711

6020851357 62725

100,184

131908

81209

124530

213317

0

50000

100000

150000

200000

250000

300000

350000

400000

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ests in Palestine,

1996-June 2008

8 . 6 T RADE

Facts & Figures Besides food and live animals, main trade items of the Palestinian economy are

manufactured goods (exports), as well as manufactured investment goods and rawmaterials (imports).The sector suffers from an underdeveloped industrial base and alack of access to economies of scale, to natural resources, and to an investmenthorizondue to the uncertain political situation and Israels permit and closure policy.

Trade flows represent 85% of Palestinian GDP, with imports of goods and servicesrepresenting over 80% of total flows and exports around 20%. Some 90% ofPalestinian trade is with Israel.(World Bank.An Analysis of the Economic Restrictions Confronting the West Bank and Gaza: Accessto Economies of Scale, to Natural Resources and to Investment Horizon, Sept. 2008.)

The main constraints to trade between the West Bank and the outside world are the internal restrictions, thecommercial crossings along the Separation Barrier and the inefficient operation of the Allenby Bridge. To break theirdependence on Israel, access the wider world markets, and take full advantage of the preferential trade agreements thePA has signed with a number of countries, (incl. the EU and the US) there must be significant improvements in tradelogistics and a relaxation of Israels strict securityregime. (Ibid.)

In 2007, Israel accounted for 92% of the total value ofPalestinian trade with its main partners, representing92% of total imports and 91% of exports. In contrast,Palestines second bilateral trade partner, Europe,accounted for only 3% of Palestinian trade with mainpartners, Jordan and Asian non-Arab countries 2%.(UNCTAD. Report on UNCTADs Assistance to thePalestinian People. July 2007)

Even before the Hamas takeover, Israeli policies such as keeping WBGS goods for 48 hours at Ashdod port or prohibiting air cargo from being shipped on passengerairlines out of Ben Gurion - were rendering Palestinian exports uncompetitive. It took a West Bank firm an average of 10days to clear customs and a Gazan firm 30 days. But it also took as many as 30 days for goods destined for the WestBank and 60 days for goods destined for Gaza to clear. In comparison, goods imported by Israeli firms cleared customswithin a day or two. (The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.)

Trade dependence on Israel persists. The trade deficit with Israel has been persistently high, with over 40% of GDPdevoted to covering it, and peaked in 2007, reaching unprecedented proportions of 73% of GDP, which was equivalent toalmost 90% of total net current transfers (mainly donor support). Israeli closure policies and the loss of local productionto imports, notably from Israel accounts for over half of the Palestinian trade deficit. (UNCTAD. Report on UNCTADsAssistance to the Palestinian People. July 2007 and July 2008).

Alternative Trade Routes: For sea shipments from the West Bankto North America and Europe, Israeli ports offeran advantage while for flows from Asia, Aqaba offers significant savings relative to Haifa. Egyptian ports are noteconomical because of additional road transport costs and the added border crossing with its delays and informalpayments. For air shipments, Ben Gurion Airport offers more flights to Europe and North America and has betterfacilities, but security requirements create a burden. Jordans Queen Alia offers competitive rates and service, but is oftenavoided by shippers because of the complicated procedures for crossing the border, the risk of damage from inspections,and lack of cold storage. For goods from Gaza via the Rafah Crossing, Egypts container terminal at the Suez Canal orCairo Airport are more efficient than Israels ports and airports. Cairo Airport not only allows for direct access to theGulf, other Middle East locations, and Europe, but alo permits the use of cargo capacity on passenger aircraft (notallowed at Ben Gurion). By sea, Egypt offers comparable services in time and cost to Europe, faster times to Asia, lessexpensive and faster service to the Gulf, and greater frequency to all destinations. By land, Rafah offers the possibility oftrucking goods directly to Gulf countries in 4-5 days.(World Bank.An Analysis of the Economic Restrictions, op.cit., Sept. 2008).

Under the Arab Free Trade Area Agreement (AFTAA), Palestinian goods have duty-free access to this burgeoningmarket. According to a Dec. 2006 study by the Peres Center and Paltrade (The Untapped Potential), merchandiseimports into this zone amounted to $170 billion in 2005 and are projected to reach over $500 billion by 2015.

In 2007, wholesale & retail trade accounted for an estimated 10% of the GDP. (PCBS, National Quarterly Accounts, 2008).Wholesale, retail trade and repairs is the main economic activity of 54.0% of all WBGS establishments (PCBS,Establishment Census, 2007).

External Trade (excl. Jerusalem) - Key Indicators (millions of US$)

1995 1999 2002 2003 20041 20051 20062 20073

Exports of goods and services 499 892 465 465 535 587 535 595Imports of goods and services 2,176 3,805 2,536 2,844 3,279 3,596 3,558 3,960Trade balance (% of GDP) -51.2 -64.5 -65.6 -65.6 -67.3 -67.2 -66.7 -66.7

Trade balance with Israel (US$ million) -1,388 -1,766 -1,149 -1,370 -1,618 -1,920 -1,876 -2,119Trade balance with Israel (% of GDP) -42.4 -39.1 -36.4 -37.8 -39.7 -42.9 -41.2 -42.0

92%

2%2% 3% 1%

Israel

Jordan

Asian (non-Arab)

Europe

Others

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Total PA trade with Israel - % of total Israeli

trade

3.7 3.7 2.1 2.2 2.2 2.3 2.1 2.2

PA trade with Israel - % of total PA trade 78.8 58.4 58.6 59.2 59.6 65.7 64.2 691 Revised; 2 preliminary; 3 Estimates Source: UNCTAD. Report on UNCTADs Assistance to the Palestinian People. July 2008.

Total Value of Palestinian Imports and Exports by Group of Countries, 1996-2006 (in US$1,000)

Exports ImportsGroup of Countries

1996 2000 2006 1996 2000 2006

Asian Arab Countries 19,043 28,960 29,867 7,398 25,734 35.052

Asian Countries 319,353 369,988 327,148 1,769,088 1,958,322 2,354,584

African Arab Countries 11 162 4,164 19,172 13,934 31,885

Other African Countries 0 0 27 1,776 2,243 4,425

North American Countries 806 71 2,553 25,450 58,127 24,248

Central American Countries 0 0 0 707 2,392 2,944

Caribbean Countries 0 0 0 15 52 52

South American Countries 9 0 - 2,703 6,396 20,586

EU Countries 244 1,675 2,638 148,625 263,605 225,615

Free Trade Countries 0 0 274 5,592 8,561 16,125

Eastern European 1 0 28 6,534 26,570 27,133 Australian 0 0 7 2,218 16,001 14,888

Sundries 0 0 0 0 871 1,189

Total 339,467 400,857 366,706 2,016,279 2,382,807 2,758,726

Source: PCBS, Foreign Trade Statistics, 1996-2006.

Commercial Crossing Points in the West Bank and Gaza Strip

WEST BANKCrossing Point Location Notes

Qalqilya North Near Qalqilya (Green Line) Workers with permits to enter Israel (usingelectronic palm readers).

Taybeh / Ephraim Near Tulkarem (Green Line) Mayor back-to-back terminal for goods to and fromthe northern West Bank.

Workers with permits to enter Israel.Al-Jalama Near Jenin Back-to-back terminal for Palestinian goods.

Workers with permits to enter Israel.Bisan Near Jordan Valley Back-to-back terminal for produce grown in the

Jordan Valley. Workers with permits to enter Israel.

Meitar Southern West Bank border Workers with permits to enter Israel (usingelectronic palm readers).

Tarqumiya West of Hebron (nearestterminal to Ashdod port)

Back-to-back terminal for Palestinian goods. Workers with permits to enter Israel. Major access point for imports into the West Bank

Al-Jaba Southwest of Bethlehem Workers with permits to enter IsraelMazmouria/An-Numan South of Jerusalem Terminal for goods due to open in late 2008.

Main entry point got West Bank goods to EastJerusalem

Qalandia, Shufat RC,Zaytoun and Gilo

4 checkpoints around Jerusalem Entry points for Palestinians with permit to Jerusa-lem for work, health, education or religious reasons.

Gilo and Qalandia use biometric scanning byelectronic hand-print reading.

Beituniya North of Ramallah Mayor back-to-back terminal for goods to and fromIsrael and East Jerusalem.

GAZA STRIPCrossing Point Location Notes

Beit Hanoun (Eretz) northern Gaza-Israel border Primary crossing for Palestinian workers andhumanitarian personnel

Nahal Oz north-east Gaza-Israel border Entry point for liquid fuelsAl-Muntar (Karni) north-east Gaza-Israel border Primary commercial crossing (import/export)Sufa / Al-Matar southern Gaza-Israel border Entry point predominantly for aggregates and

construction materialsKarem Abu Salem(Karem Shalom)

Gaza-Israel-Egypt border Entry point for goods from Egypt

Rafah Gaza-Egypt border International terminal, crossing point for peopleAl-Ojah (Nitzanah) Egypt-Israel (south of Gaza) used by some Palestinian importers to get cargo

from Egypt to Gaza via Karni crossing

Source: OCHA.

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8 . 7 F I N AN C E S

Taxation The Gaza-Jericho Accord (May 1994) transferred the authority to organize all tax-related issues to the PA, the details of

which were outlined in the Early Empowerment Agreement of 29 Aug. 1994. Taxation is the PAs main source of income;during the current Intifada, Israels refusal to hand over taxes collected on behalf of the PA (for VAT adjustments, import,fuel, income and health taxes) and problems/inefficiency in collecting taxes domestically have reduced the PAs fiscalrevenues considerably. By the end of 2002, the net amount of monies withheld by Israel since Dec. 2000 was estimatedat US$560 million. Israel resumed transfer of revenues in Dec. 2002 following US pressure and PA assurance to imple-ment auditing reforms; however, following the Hamas election victory Israel again suspended payments since March 2006.

Under the quasi-customs union between Israel and the PA, stipulated in the 1994 Protocol on Economic Relations, thePalestinians adopted - with minor exceptions Israels tariffstructure; the PA applies the Israeli VAT rate (17%) withthe option to increase or decrease it by 2% on a limited number of goods. Israel collects tariffs and VAT on Palestinianimports on behalf of the PA.

The PAs revenue remains vulnerable to Israels ability to withhold the tax and customs clearance revenue it collects on itsbehalf, as stipulated in the Paris Protocol signed by the PLO and Israel in 1994. This renders the PAs fiscal position inherentlydependent on Israeli goodwill; in 2002, for instance, Israeli withheld revenue clearance, led to a 66% drop ofPalestinian public revenues. In 2005, total revenue reached $1.2 billion, but collapsed again to $358 million with thewithholding of more than $800 million in clearance revenue in 2006 (OCHA, 2007).Transfer of revenues levied by Israelresumed in July 2007 after the caretaker PA government led by PM Salam Fayyad received the support of the Middle EastQuartet. (UNCTAD. Report on UNCTADs Assistance to the Palestinian People. July 2008).

Budget and Fiscal AccountsThe recurrent deficit on a commitment basis is estimated at about NIS 4,891 million in the second quarter and NIS 5,356million in the first half of 2008, which is within the 2008 budget. In nominal local currency terms the 2008 commitmentbudget deficit is estimated some 18% lower than 2007. The recurrent deficit will be about 22.5% of GDP compared to26.7% in 2007. On a cash basis, the annual deficit is set to be almost 48% more than budgeted because the PA has mademuch larger arrears payments than planned. (The World Bank. West Bank and Gaza Update, Oct. 2008).

WBGS: Central Government Fiscal Operations (in million NIS), 2007-09

2008

2007 budget projected 2009

Total net revenuesGross domestic revenuesClearance revenuesTax refunds

4,8941,3263,673105

5,3491,5073,842

0

6,0142,2883,968243

6,1721,9174,389134

Total recurrent expenditures and net lending(commitment basis)WagesNon-wagesNet lending

10,430

5,2622,9742,193

10,244

5,3333,4711,440

10,247

5,3333,2701,645

10,348

5,4783,3241,546

Recurrent Balance (commitment basis, beforeexternal budgetary support)

-5,535 -4,895 -4,233 -4,176

Recurrent Balance (cash basis, before externalbudgetary support)

-3,901 -5,676 -5,510 -4,388

Recurrent Balance (commitment basis, afterexternal budgetary support)

-1,386 986 2,135 225

Recurrent Balance (cash basis, after externalbudgetary support)

248 205 858 13

Development Expenditures (Public Investment) 1,270 1,771 1,040 1,684Overall Balance (cash basis, incl. developmentexpenditures)

-1,022 -1,566 -182 -1,671

Total Other Financing 1,022 1,566 182 1,671

Source: IMF and Finance Ministry estimates, quoted in The World Bank, West Bank and Gaza Update, Oct. 2008.

The current pension systems for PA employees are insolvent and are operating on funding from the PA budget. The PA isaccumulating pension fund arrears with respect to the payment of the governments contribution averaging nearly $5.8million a month in 2008. (The World Bank. West Bank and Gaza Update, Oct. 2008).

Clearance revenue is with 60-70% of the revenues the cornerstone of the PAs public finance. The frequent withholding byIsrael makes budget planning extremely difficult and has made the PAs reliance on foreign budget support the norm. In2007, international budget support reached $1 billion, accounting for 39% of public expenditure. (UNCTAD. Report onUNCTADs Assistance to the Palestinian People. July 2008).

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In Dec. 2007, the Palestinian Recovery and Development Plan (PRDP) was published, containing a detailed three yearbudget, which laid out a path towards fiscal strengthening. Since, the PA has implemented a number of reforms and madesubstantial progress towards improving its fiscal position. However, the grave fiscal crisis remains and the governmentscrambles every month to scrape together enough bank borrowing and donor budget support to pay salaries and continueoperations. Despite all reform efforts, the fiscal deficit increased from 17% of GDP in 2005 to 27% in 2007, mainly as aresult of Israels withholding of clearance revenue and lower GDP. The gap was financed mainly by the accumulation ofarrears on public wages, pension contributions and private suppliers. (Ibid.)

Less progress than hoped for was made on reducing net lending, which in the first half of the year was about 20% higherthan budgeted, mostly due to the unexpected increase in world fuel prices and larger than anticipated deductions for debtby Israel. (The World Bank. West Bank and Gaza Update. Oct. 2008.)

BankingBefore 1967, there were 32 banks in the WB and 6 in the GS; the period from 1967-1980 was characterized by the totalabsence of a banking system; only in 1981 did a Bank of Palestine branch open in Gaza. During 1986-1989, 10 furtherbranches of the Bank of Palestine and the Cairo-Amman Bank opened in the WBGS, but the real boom started in 1993following the signing of the DoP: currently, there are 21 banks with a total of 140 branches (10 Palestinian banks with 70branches, 1 foreign bank with 1 branch and 10 Arab banks with 69 branches) in the WBGS. The largest national bank is theBank of Palestine with 25 branches and the largest non-Palestinian bank is the Arab Bank with 22 branches (PMA, website).

Throughout 2008, bank deposit growth was sluggish and credit contracted, reflecting subdued economic activity andinvestment. As a result of the declining economy, the Gazan banking sector activity is estimated to have dropped from 40%of total Palestinian banking to about 7%(The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.) Capital MarketPalestine Securities Exchange was established in 1995 and the first trading session took place on 18 Feb. 1997. As of 30Sept. 2008, 35 companies were listed, and as of Nov. 2008, the trade volume was US$1,147,965. The Al-Quds Index, whichhad started at 139.13 in 1997, had its peak in 2005 with 1128.59 and stood in Nov. 2008 at 423.53, Implying a -19.67%

Annual growth.

Donor AssistanceAs of Aug. 2008, the PA govt. had received about $1.2 billion in recurrent budget support (with $1.85 billion needed byyear's end) in addition to some $300 million in development aid. Together, external aid will be at least 32% of the 2008GDP (by comparison: in 2007 it was 25%). The 2009 budget calls for $1.3 billion in budget support (and $0.5 billion ofdevelopment aid) (The World Bank. Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.)

Economic activity would have been even weaker were it not for the exceptionally high level of external budgetary support(albeit with reduced purchasing power due to inflation and shekel appreciation), which amounted to $953 million in the firsthalf of 2008 (14% of annual GDP), more than double the amount disbursed in the second half of 2007.

It is commonly agreed that additional donor assistance aid would have little impact other than alleviating day-to-day hardship,unless there is an end to Israels closure policy. With a freeing-up of the constraints on economic activity and committedPalestinian reform, the World Bank estimated that an additional US$500 million per annum could by 2006 spur a growth in realpersonal incomes of about 12% (and 20% in nominal terms), and could reduce unemployment to levels only slightly higherthan prior to the Intifada.

The Mid-Year-Review of the Consolidated Appeals Process (CAP) (International Humanitarian Action Plan and Appeal for2008) - a coordinated program jointly undertaken by UN organizations and international NGOs stated a total request of US$448.2 million (compared to the original US$ 462.1 million). As of Sept. 2008, the 2008 CAP was 64% funded to cover 135projects in a range of sectors. The largest sectoralassistance in 2007 was required for Jobs and Cash Assistance ($158 millionor 34%), followed by Food Aid ($156.1 million, 33.8%), Water & Sanitation ($42.9 million), Health ($40.1 million), Agriculture($22.2 million), Coordination & Support Services ($18.3 million), Protection/Human Rights/Rule of Law ($8.7 million) andEducation ($7.8 million). Main funder was the European Commission. The budget for the 2009 CAP stands at $462,3 millionfor 159 projects. (CAP Summary 2008,CAP Mid-Year Review, 2008, CAP, 2009).

Because of the ongoing closure policy, no substantial development projects are currently underway in Gaza, with the

exception of a water treatment facility there are.

RecommendedResearchSources:

http://electronicintifada.net/v2/businesseconomy.shtml http://www.pcbs.gov.ps (Economics Statistics)http://www.pma-palestine.org/ (Pal. Monetary Authority) http://www.worldbank.org/pshttp://www.pmof.ps/ (Ministry of Finance) http://www.unctad.org/en/docs/tdb55d2_en.pdfhttp://www.imf.org/external/np/wbg/2008/pdf/072208.pdf http://www.psc.ps/ (Palestinian Shippers Council)

ILO, The Situation of Workers of the Occupied Arab Territories. International Labor Conference, May 2008.IMF. Macroeconomic and Fiscal Framework for the West Bank and Gaza: Second Review of Progress, Sept. 2008.IMF. Macroeconomic and Fiscal Developments in the West Bank and Gaza, Sept. 2007.Nashashibi, Karim. Palestinian Finance under Siege: Economic Decline and Institutional Degradation. OCHA Special Focus Paper, April 2007.Palestinian Monetary Authority. Monthly Statistical Bulletin(various issues).PCHRDestruction of Gazas Economy, August 2008.UNCTAD. Report on UNCTADs Assistance to the Palestinian People. July 2008.West Bank and Gaza Update- A Quarterly Publication of the World Bank WBGS Resident Mission.

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The World Bank. West Bank and Gaza Investment Climate Assessment: Unlocking the Potential of the Private Sector., March 2007.

The World Bank.An Analysis of the Economic Restrictions Confronting the West Bank and Gaza: Access to Economies of Scale, toNatural Resources and to Investment Horizon, Sept. 2008.The World Bank,The Economic Effects of Restricted Access to Land in the West Bank, Oct. 2008.The World Bank.Palestinian Economic Prospects: Aid, Access and Reform. Sept. 2008.