Economic Monitoring Report to the Ad Hoc Liaison Committee - April 2019

Report
from World Bank
Published on 17 Apr 2019 View Original

World Bank Calls for Reform to the Dual Use Goods System to Revive a Stagnant Palestinian Economy

JERUSALEM, April 17, 2019 – A new World Bank report highlights the stalling of the Palestinian economy and calls for a review of the Israeli application of the dual use goods system. The report indicates that the economy, which in 2018 saw no real growth, is now facing a severe fiscal shock because of the standoff over clearance revenue transfers, while dual use goods restrictions have for over a decade hampered the ability of legitimate businesses to generate enough jobs for the growing population.

“Urgent resolution is needed to prevent a further deterioration of economic activity and living standards," said Anna Bjerde, World Bank Acting Country Director for West Bank and Gaza and Director of Strategy and Operations for the Middle East and North Africa Region. Clearance revenues are a major source of budgetary income and the ongoing standoff is felt by all segments of the population in what is already a weak economy. Furthermore, the dual use goods system in its current application limits economic diversification and sustainable growth in the Palestinian territories. A revamp of the application of the restrictions on dual-use goods is critically needed.”

The World Bank report highlights critical challenges facing the Palestinian economy and maps out the impact of restrictions on transfers of key production inputs and modern technology, while providing policy recommendations for moving forward. The report will be presented to the Ad Hoc Liaison Committee (AHLC) on April 30, 2019 in Brussels, a policy-level meeting for coordination of development assistance to the Palestinian people.

The Palestinian economy has witnessed low growth rates that are not able to keep up with the growth in population, resulting in an increase in unemployment and deteriorating living conditions. The absence of growth in the past year is mainly attributed to the steep deterioration in Gaza, where more than half of the population is unemployed and economic activities have contracted by 7percent in 2018—the deepest economic downturn Gaza has witnessed that is not a result of a conflict. However, growth in the West Bank has also slowed below its recent trends.

Against a background of declining aid flows, the recent standoff stemmed from Israel’s unilateral deduction of US$138 million from the PA’s clearance revenues in 2019 to offset estimated payouts to Palestinian martyrs and prisoners’ families. The clearance revenues, collected by Israel and transferred to the PA monthly, amount to 65 percent of the PA’s total revenues. In response, the PA rejected the diminished transfers and was forced to cut the wage bill by 30 percent, reduce expenditures in social assistance, and borrow more from local banks. If not resolved, the standoff will increase the financing gap from US$400 million in 2018 to over US$1 billion in 2019.

In addition to the recent fiscal crisis, the Palestinian economy has suffered for years due to trade-related restrictions. In particular, restrictions on dual use goods, which are chemicals, goods and technologies used for civilian purposes that could have military uses, have exacted a significant toll on the economy. Israel restricts the transfer of 62 items for Gaza on top of an already long list of 56 items for the West Bank, going well beyond standard international practice.

The adverse effect of dual-use restrictions is mostly felt in manufacturing, ICT and agriculture. The agriculture sector contributes significantly to Palestinian food security; however, the dual use restrictions have lowered the concentration of active chemicals in fertilizers making them less effective and lowering land productivity to half of that in Jordan and only 43 percent of the yield in Israel.

The current application of the restrictions on transfer of dual use goods is problematic on several levels. The restrictions do not discriminate sufficiently between legitimate and illicit uses. There is no transparency on the implementation of restrictions and Palestinian businesses do not have the ability to appeal administrative decisions. Further, the definitions of certain restricted goods are too broad. For example, the restriction on ‘communications equipment, communications supporting equipment, equipment containing communication functions’, limits access to modern manufacturing production lines, spare parts, medical equipment and home appliances. It has also stood in the way of developing the Palestinian ICT sector and created a large technological gap with neighboring countries.

Moreover, the cumbersome permitting process for dual use items can take months of review through the Israeli Civil Administration, the Israeli Security Agency, and the Coordinator of Government Activities in the Territories (COGAT) to obtain a dealer permit and a transfer license valid only for 45 days. Entry of goods to Gaza is even more complex, hindering the delivery of public infrastructure projects, as those require multiple items in the dual use list including building materials, machinery and chemicals.

According to World Bank estimates, easing dual use restrictions could bring additional 6 percent growth in the West Bank economy and 11 percent in Gaza by 2025, compared to a scenario with continued restrictions. For this to happen, the report recommends a set of actions.

In the short term, it is key to streamline and simplify the administrative procedures of the dual use system. In the medium term, the report recommends a risk-based approach to provide access to dual use goods for legitimate businesses that have a strong track record to safely and securely handle hazardous materials. In Gaza, this approach could be implemented while ensuring that these goods are not diverted for illicit use either through remote monitoring or physical monitoring by existing UN monitors. In the long term, the Government of Israel should align its dual use list with international practice. At the same time, the PA should build a credible regime of control and verification and be able to assume responsibility for the control of dual use goods within its jurisdictions.