Informing humanitarians worldwide 24/7 — a service provided by UN OCHA

oPt

Note on the Impacts of the Conflict in the Middle East on the Palestinian Economy, February 2024

Attachments

SYNOPSIS

Since the beginning of the conflict in October 2023, hostilities in the Gaza Strip have resulted in massive loss of life.1 The effects of the conflict on the Palestinian economy have been consequential as the loss of life, as well as the speed and extent of damages to fixed assets and reduction in production flows across the Palestinian territories are unparalleled.

The conflict is expected to leave lasting impacts on the affected populations in Israel, Gaza, and the West Bank, extending far beyond any economic assessment. According to United Nations sources, 40 percent of all fatalities involved in the current conflict in the Middle East are children under the age of 18. The conflict has exacerbated the pre-existing humanitarian crisis in Gaza and dramatically augmented the economic and development challenges both in the Strip and in the West Bank. About 1.7 million Palestinians living in Gaza (approximately 75 percent of the total population in Gaza) have been internally displaced, in some cases multiple times, and the Strip’s entire population of 2.3 million is suffering from a shortage of food, water, electricity, fuel and medicine.

The observed level of fixed assets damage and destruction is catastrophic. The conflict has resulted in the destruction of tens of thousands of housing units, with over 1.2 million individuals cur rently without homes. The conflict has also had an impact on the health sector with only one third of Gaza’s 36 hospitals even partially functional, while the rest have shut down due to damage and/or lack of electricity supply.2

Since the start of the conflict, the Palestinian economy experienced one of largest shocks recorded in recent economic history. In Gaza, GDP plummeted by more than 80 percent in Q4-2023—from approximately US$670m in Q3 to roughly US$90m in Q4. Almost all economic activity in Gaza has ground to a halt, with little indication of substantial improvement at the time of publication.

According to initial estimates from the Palestinian Central Bureau of Statistics (PCBS), the GDP in Gaza saw a decline of over 80 percent in the fourth quarter (Q4) of 2023.3 and a drop of 24 percent for the whole year (2023). The private sector is estimated to have faced production losses totaling around US$1.5 billion in the first two months of the conflict or roughly US$25 million per day.4 The economic decline in the Palestinian territories already exceeds the impact of the conflicts in 2008, 2012, 2014, or 2021, and over the past two decades, it is behind only the second intifada in terms of impact.

The combination of preexisting high levels of poverty, widespread internal displacement, the destruction of homes, fixed assets, and productive capacity, coupled with a massive economic downturn, realistically means that nearly every resident of Gaza will live in poverty, at least in the short term. Over the past four months, non-monetary welfare conditions, which are indicative of multidimensional poverty, have rapidly deteriorated. This is reflected in the disruptions to children’s access to education and in the colossal challenges preventing Gazans from obtaining essential health and other basic services. Every person currently in Gaza faces acute food insecurity, with at least one in four experiencing catastrophic hunger,5 with a growing risk of famine. Approximately three in four people are displaced.

Effectively managing a spiraling fiscal crisis remains a top priority for the Palestinian Authority (PA), especially given the knock-on effects of the conflict in the West Bank. A pre-existing structural fiscal crisis has been worsened by a reduction in clearance revenue transfers,6 starting in October 2023. This, together with the decrease in domestic revenues (reflecting lower economic activity) forced the PA to further reduce public salary payments in the last quarter of 20237 , and made the 2023 financing gap grow approximately fivefold vis-a-vis the preconflict baseline, reaching 3.0 percent of GDP. In a context of no access to traditional economic policy instruments, the only alternative sources of financing remain additional accrual of arrears and foreign aid.

The outlook hinges largely on the conflict’s intensity and the level of restrictions. Should the intensity of the conflict remain high beyond the first months of 2024, or should the limits on the movement and access in the West Bank not be removed, the economic downturn could become even more pronounced. Additionally, a protracted absence or sharply reduced clearance revenues may prompt the PA to resort to extreme—and potentially disorderly—fiscal consolidation measures, resulting in further reductions of public salaries. This in turn, would exacerbate the decline in consumption and ultimately depress growth further with long-term adverse effects.