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Despite growth, long-term prospects of the Palestinian economy worsened, report says
Fiscal austerity, food insecurity, increased poverty, agricultural decline, negative impacts of continuing occupation and drop in donor support are causes for concern, study warns

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05 September 2012, 17:00 Geneva Time

Geneva, Switzerland, (04 September 2012)

Long-term prospects for economic development in the Occupied Palestinian Territory have worsened, UNCTAD’s annual Report on Assistance to the Palestinian People warns.

The report says 9.9% economic growth achieved in the Occupied Palestinian Territory in 2011 should not be misinterpreted -- the growth, mainly in the blockaded Gaza Strip, reflects the reconstruction activities after the destruction caused by the Israeli military operation from December 2008 to January 2009. Gaza’s local economy grew by 23% in 2011, while that of the West Bank grew by 5.2%. However, real gross domestic product (GDP) per capita in Gaza was still 10% below the 2005 level, the report notes.

The report says the growth achieved in 2011 and through early 2012 is not sustainable. It reflects the low base at which the economy was functioning at the end of 2010 following the damage caused by the Israeli military campaign in Gaza. The low base also was a result of the economic damage caused by Israeli closures in the West Bank. In addition, much of the growth was aid-driven, the report contends. It notes that economic expansion last year was accompanied by a decline in real wages and labour productivity and that it did not succeed in reducing high unemployment, which persisted at 26%. There is continued severe poverty and chronic food insecurity. Food insecurity affects two of every three Palestinians in the Occupied Palestinian Territory, but is most severe in Gaza. Also alarming is the poverty rate in East Jerusalem, estimated at 78%, higher than the rates in the West Bank and Gaza.

The key obstacle to Palestinian development

Gaza remains under economic siege, and the number of mobility barriers to Palestinian people and goods in the West Bank increased from 500 in 2010 to 523 in 2011, the report says. Demolitions of Palestinian homes and infrastructure increased in 2011, and the expansion of Israeli settlements, particularly in the areas surrounding East Jerusalem and Bethlehem, worsened the existing physical fragmentation between various Palestinian “Bantustans,” or disconnected enclaves.

In recent years, aid has been essential for sustaining the Palestinian economy and preventing the onset of deeper socioeconomic crises. The report argues that the decline in donor support observed in 2011 and early 2012 will have serious socioeconomic ramifications. It adds, however, that economic sensitivity to aid fluctuations is just a symptom of the Palestinian development problem, not the cause.

The real cause is directly related to occupation, and much less to the Palestinian Authority's economic policy, the report contends. Occupation has almost eliminated all domestic and external marketing and investment opportunities, and has eroded the land and natural resources available to Palestinians for economically productive activities. Public and private investment are restricted in 63% of the West Bank land known as Area C, which is under Israeli control, while Gaza is still under economic blockade. Under such conditions, State-building is difficult to achieve, the report says. All efforts should focus on preventing further encroachment by settlements on and occupation of the Palestinian productive base, the report contends. In addition, reversing the status quo could pave the way towards a viable Palestinian State as envisaged by United Nations resolutions.

Falling aid and fiscal crisis cloud the prospects for development

Despite continuous efforts by the Palestinian Authority to reduce expenditure and enhance tax revenues, the Palestinian budget deficit persists, the report notes. It says the Authority’s persistent fiscal weakness is mainly caused by a lack of sovereignty, by revenue leakage to Israel and by the loss of potential output and revenue as a result of measures imposed by the occupation. The effects of weak revenue were compounded by donor budget support that was $520 million short of the Authority’s financing needs in 2011. As a result, it accumulated debt and arrears to the private sector. Arrears grew by $540 million, and debt to domestic banks reached $1.1 billion – 50% of public revenue.

Fiscal austerity, as called for by some international agencies, not only discounts the reasons for the crisis and ignores the reality of occupation, the report contends -- it may well be self-defeating, since further spending cuts will lead to an additional economic slowdown, thus shrinking the tax base and inflating the Palestinian Authority’s social spending bills. Additional pressure on public employment and wages threatens to further depress the economy, undermine social cohesion and jeopardize progress made towards laying the institutional foundation for a viable Palestinian State, the report warns.

Palestinian economic dependence on Israel continues to be significant. Some 83% of total Palestinian trade in 2011 was with or through Israel, while the trade deficit with Israel accounted for 84% of the total Palestinian deficit for 2011. This forced economic dependence deprives Palestinians of more competitive sources for imports, and of markets for their exports. It also heightens the Occupied Palestinian Territory’s vulnerability to Israeli security measures and economic conditions.

Palestinian agriculture under siege

Years of occupation have rendered Palestinian agriculture incapable of realizing its productive and employment potential. The agricultural sector’s contribution to Palestinian GDP shrank from 12% in 1995 to 5.5% in 2011, the report indicates. Only 35% of the irrigable land in the Occupied Palestinian Territory is actually irrigated, which costs the economy 110,000 jobs per year and 10% of GDP. Furthermore, the construction of the Israeli separation barrier leaves 10% of West Bank land trapped in the seam zone between the separation barrier and the 1967 borders. As a result, thousands of Palestinian farmers find it hard to access and cultivate their own land in the zone because it is difficult to obtain Israeli permits for them and for their workers to cross the barrier.

As a result of the Israeli ban on imported, high-quality fertilizers, agricultural productivity has declined by 33%, the report says. The result is that agricultural activities have become less viable, and many Palestinian farmers have lost their source of livelihood. In addition, some 2.5 million fruit trees have been uprooted since 1967.

With fishing off the coast of Gaza restricted beyond 3 nautical miles from the coast, as compared with the internationally recognized limit of 20 miles, the Palestinian fishing industry has collapsed almost completely, the report says. The number of fishermen has declined by 66% since 2000.

Other difficulties are caused by Israeli over extraction of water beyond the share determined by the 1993 Oslo Accords. The water taken is used inside Israeli borders and settlements and is denying the Palestinian Authority and Palestinian farmers the right to construct wells to meet the growing demand of the Palestinian population for water. Excess Israeli extraction of water occurs even when the source of this water is almost entirely within the Occupied Palestinian Territory, the report finds.

Even though Palestinian agriculture is operating at one quarter of its potential, the sector is resilient and capable of achieving a quick and sustainable recovery, the report maintains. But the study says the donor community and the Palestinian Authority have neglected the agricultural sector. It recommends taking corrective measures to compensate for the impact of the occupation. An agricultural development bank should be established to share risk, provide credit and insurance, and support marketing and post-harvest services, as well as funding and guaranteeing investment in agricultural and water infrastructure.

UNCTAD's response

In 2011, UNCTAD launched a three-year technical cooperation project to build the knowledge base of Palestinian shippers (exporters and importers), strengthen the institutional capacity of the Palestinian Shippers' Council and raise awareness on the best internationally recognized practices for trade facilitation. UNCTAD also strengthened the economic modeling and forecasting capacity of Palestinian policymakers, including training staff from the Palestinian Authority and the Palestinian Central Bureau of Statistics to use UNCTAD's econometric model of the Palestinian economy to produce official economic forecasts and to assess alternative economic policy scenarios. Moreover, in 2011, UNCTAD continued its support towards enhancing the Palestinian Authority's diplomatic capacity by hosting and training Palestinian diplomats and introducing them to the United Nations system in Geneva.

Since 2001, UNCTAD has played a pivotal role in building and modernizing Palestinian Customs by introducing and updating the Organization’s Automated System for Customs Data (ASYCUDA) and by providing extensive training in the system’s operation to Palestinian Authority staff and private-sector agents. Building on these achievements, UNCTAD has drawn up a new project to consolidate previous achievements in this field and to hand over the ASYCUDA system to the Palestinian Authority. This project is expected to begin later in 2012. Also, 2011 witnessed the successful completion the UNCTAD project, “Promoting Subregional Growth-Oriented Economic and Trade Policies towards Achieving the Millennium Development Goals in Arab Countries”. The project benefited the Occupied Palestinian Territory and four other Arab countries by providing a platform for the exchange of ideas and experiences among policymakers, UNCTAD staff, and national and international experts.

In April 2012, UNCTAD's mandate to assist the Palestinian people was renewed and extended at the UNCTAD XIII quadrennial conference, held in Doha, Qatar. At UNCTAD XIII, member States requested strengthening of the programme of assistance to the Palestinian people. However, additional resources are necessary to address the special needs of the Palestinian economy under occupation, and to provide substantive advisory services and technical cooperation activities.

For more information, please contact:
UNCTAD Communications and Information Unit
T: +41 22 917 5828
T: +41 79 502 43 11

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