Socioeconomic conditions in the Occupied Palestinian Territory have been moving from bad to worse. High rates of poverty and unemployment have persisted and gross domestic product (GDP) per capita has declined for the third consecutive year. Even before the economic shock due to the coronavirus disease (COVID-19) pandemic, the economy was expected to slip into recession in 2020 and 2021, with Palestinian women continuing to pay an additional toll due to occupation. Economic prospects darkened further as a result of the annexation of large areas of the West Bank, the economic ramifications due to the COVID19 pandemic, faltering aid flows and the loss of hundreds of millions of dollars through deductions or leakage to the treasury of Israel. By April 2020, one month after the start of the COVID-19 pandemic, the fiscal revenues of the Palestinian National Authority (PNA) had declined to their lowest levels in 20 years. The persistence of occupation and current trends in donor aid threaten the very existence of PNA. Donors could enhance financial support and the international community can play a key role in this regard in line with international law.
Despite limited extrabudgetary resources, UNCTAD continued to provide support, training and advisory services to Palestinian public and private sector institutions and civil society. Additional extrabudgetary resources are required for UNCTAD to respond to resolutions 69/20, 70/12, 71/20, 72/13, 73/18 and 74/10 of the General Assembly of the United Nations and to maintain its capacity to support the Palestinian people.
I . Dismal conditions and grim forecasts before the onset of the coronavirus disease pandemic
Before the onset of the COVID-19 pandemic, the performance of the Palestinian economy was weak and the overall environment was unfavourable. The productive base had been hollowed out by recurrent hostilities, geographical and economic fragmentation, technological regression, restrictions on imported inputs and technology, the loss of land and natural resources, settlement expansion, the leakage of fiscal resources and the near collapse of the economy of the Gaza Strip.
The Palestinian economy failed to regain momentum in 2019, registering just 0.9 per cent of real GDP growth, not much better than in the two preceding years. The slowdown was driven by a decline in public and private consumption and investment. Down from 2.3 per cent in 2018, growth in the West Bank was at 1.15 per cent, the lowest since 2012 (see figure). Meanwhile, in Gaza, GDP growth was virtually at zero and Gaza has thus failed to rebound from two consecutive contractions: -7.7 per cent in 2017 and -3.5 per cent in 2018. Therefore, real GDP per capita declined by 1.6 per cent in the Occupied Palestinian Territory for the third year in a row, falling by 1.1 per cent in the West Bank and 2.8 per cent in Gaza.
As in recent years, the weak economic growth relied on the services and construction sectors, which grew by 2.9 and 1.1 per cent, respectively. Meanwhile, the tradable goods sector continued its secular decline, with the agricultural sector contracting by 1 per cent and the industrial sector registering 0.2 per cent growth.
During the last decade, PNA has pursued far-reaching fiscal reforms and succeeded in bringing the fiscal deficit from 23.3 per cent of GDP in 2006 to 6.3 per cent of GDP in 2018. This was achieved mainly via improved revenue collection and reduction of the wage bill from 24 per cent of GDP in 2006 to around 11 per cent. Despite the inability to collect taxes in Gaza, PNA managed to enlarge the tax base, raise public revenue and contain expenditure. The remaining deficit reflects the administrative separation of Gaza, since PNA finances for the West Bank break even.
The Paris Protocol entrenched the dependence of the Palestinian economy on Israel via a customs union that leaves no space for independent Palestinian economic policies. It ties the Occupied Palestinian Territory to the trade policies, tariff structure and value-added tax rate of Israel. Moreover, the authorities in Israel collect trade tax revenues on behalf of PNA and transfer them to PNA. This arrangement allows Israel to control two thirds of Palestinian tax revenue, a leverage frequently used, and entails the leakage of Palestinian fiscal resources to the treasury of Israel, estimated at hundreds of millions of dollars per year.
UNCTAD partially estimates the Palestinian fiscal leakage, from six main sources, at 3.7 per cent of Palestinian GDP or 17.8 per cent of total tax revenue. The cumulative fiscal leakage in 2000–2017 is estimated at $5.6 billion, or 39 per cent of GDP in 2017. Stemming of the leakage of substantial Palestinian fiscal resources to Israel can be an essential component of ensuring fiscal sustainability in the Occupied Palestinian Territory.
The PNA fiscal situation took a sharp negative turn in early 2019. In March 2019, the Government of Israel began to implement its law mandating the deduction of $12 million per month from Palestinian clearance revenue, equivalent to the payments made by PNA to families of Palestinian prisoners in Israel and Palestinians killed in attacks or alleged attacks against Israelis. PNA responded that it would not accept anything less than the full amount of its clearance transfers, which represent two thirds of its total revenue. However, after six months of revenue not being transferred, the ensuing fiscal situation forced PNA to accept reception of the reduced clearance revenue.
Public and private consumption fell in the aftermath of the March–September fiscal dispute and constrained GDP growth on the demand side. The loss was magnified by the presence of a large fiscal multiplier, whereby reductions in public spending generated substantial negative impacts on output. This is confirmed by the brisk recovery that followed the resumption of clearance revenue transfers in September 2019. In the fourth quarter of 2019, depressed expenditure recovered and GDP grew by 3.6 per cent, compared with the third quarter of 2019, and lifted the growth average for the whole year.
The fiscal progress was somewhat reversed in 2019. The budget deficit, on a commitment basis, increased from 6.3 to 9 per cent of GDP as a result of the rise in operational expenses and revenue decrease in the aftermath of the fiscal dispute with Israel. Clearance revenue fell by $65 million, compared with 2018, and the resulting slowdown in economic activity diminished revenue from income tax, value-added tax and customs. Consequently, the already low level of development expenditure further decreased as the government decided to suspend development projects planned to start in 2019. Overall, the fiscal deficit reached $1.4 billion in 2019. With donor support at $590 million, the financing gap of $800 million was the largest in years.
Donor budget support has declined substantially in recent years, falling from 32 per cent of GDP in 2008 to 3.5 per cent of GDP in 2019. The negative trend in aid, combined with unpredictability and fluctuations, has been a constant source of fiscal uncertainty. The recent decline in funding to United Nations agencies operating in the Occupied Palestinian Territory aggravates fiscal stress by constraining economic growth on the demand side and increasing the pressure for transfers to poor households. The social and humanitarian spending of these agencies stimulates the economy and provides jobs and critical services. By stimulating economic growth, such spending increases fiscal revenue and mitigates the pressure on PNA to provide social support to poor households.
Consequently, PNA relied on domestic sources to finance two thirds of the budget deficit. Commercial banks accounted for 64 per cent of domestic financing and net arrears to the private sector accounted for the rest. Public debt rose by 8 per cent, reaching $2.8 billion, or 16.4 per cent of GDP, of which domestic debt accounted for $1.6 billion.
The restrictions by Israel on trade have stunted the Palestinian economy and impacted the production of exports and importable goods. Almost all Palestinian imports and exports transit via ports and crossing points of Israel, at which delays and security measures can increase costs by an average of $538 per shipment.5 This cultivates a significant persistent trade deficit. In 2019, the trade deficit remained high, at 33.7 per cent of GDP (see table).
Meanwhile, Palestinian economic dependence on Israel, as discussed in paragraph 5, deepened in 2019, with the bilateral trade deficit rising from $3.4 billion to $4 billion, as Israel accounted for 63 per cent of total Palestinian trade. While Occupied Palestinian Territory exports to Israel are primary and low valued-added manufactured goods, imports are sophisticated, final consumer goods and durables.