Fiscal standoff with Israel may lead to collapse of Palestinian finances
Environmental degradation imposes a health burden on Palestinians
Suffering is deepening in Palestine as its economy continues to deteriorate and rising poverty levels and increasing environmental degradation exact a heavy toll, according to the latest UNCTAD report on its assistance to the Palestinian people.
In 2018 and early 2019, the Palestinian economy stagnated, per capita income further fell by 1.7%, unemployment increased, poverty deepened, and the environmental toll of occupation rose in the occupied Palestinian territory (Gaza and the West Bank including East Jerusalem).
The short-term economic prospects for Palestine are even grimmer and there are no signs that the negative trends in the key drivers of economic growth will be reversed soon, the report warns.
About one in three Palestinians in the labor market is unemployed. In Gaza, the unemployment rate is above 50% while the poverty level has reached 53%, even though most of the people classified as poor receive aid from the government and international organizations.
Gaza is increasingly becoming unlivable under the severe and worsening socioeconomic conditions. In 2018, its local economy contracted by 7%, leading to a 10% decline in its per capita income.
Reasons behind near collapse of economy
According to the report, the reasons behind the near collapse of the Palestinian economy are the expansion and tightening grip of occupation, suffocation of Gaza’s local economy, a 6% drop in donor support between 2017 and 2018, deterioration of the security situation and lack of confidence as a result of bleak political horizons.
Even though all sectors of the economy are constrained by occupation, agriculture and manufacturing are disproportionately impacted and the ensuing massive trade deficit adversely affects economic growth.
Between 1994 and 2018, the share of manufacturing in the economy shrunk from 20% to 11% of the gross domestic product (GDP), whereas the share of agriculture and fishing dropped from over 12% to less than a paltry 3%, the report says.
The viability and competitiveness of Palestinian producers are undermined by the multilayered system of physical and administrative restrictions deployed by the occupying power.
In the West Bank alone, 705 permanent physical obstacles restrict the movement of Palestinian workers and goods. They include checkpoints, gates, earth mounds, roadblocks and trenches.
In addition, the economy is further weakened by the Israeli ban on the importation of a long list of “dual use” essential technological and intermediate goods as well as other critical production inputs (“dual use” goods are civilian ones deemed, by Israel, to have potential military applications).
Isolated from international markets
The report notes that occupation isolates the Palestinian people from international markets and thus compels them into overwhelming trade and economic dependence on Israel, which accounts for 80% of Palestinian exports and supplies 58% of its imports.
The small Palestinian market ranks fourth among Israel’s top export markets, just behind the United States, China and the United Kingdom - but ahead of trading giants such as France, Germany and India. The resulting trade deficit with Israel cannot be covered by the value of all Palestinian exports.
With respect to the economic cost of occupation, the UNCTAD report suggests that occupation has prevented the Palestinian people from developing their oil and natural gas resources in Gaza and the West Bank.
Consequently, the estimated accumulated losses are worth billions of dollars and the associated opportunity cost of forgone development is staggering. The longer this situation persists, the higher this cost will be and the total economic cost of occupation borne by the Palestinian people will continue to rise.
Multiple fiscal shocks precipitate steeper economic decline
In addition to the unprecedented deterioration in socioeconomic conditions, in July 2018, Israel passed a law mandating deduction, from Palestinian fiscal revenues, of an amount equivalent to the payments made by the Palestinian government to families of Palestinian martyrs and prisoners in Israeli jails.
Subsequently, in 2019, Israel deducted $11.5 million per month (equivalent to $138 million annually) from Palestinian clearance revenues. The Palestinian government responded by refusing to accept anything less than the full amount due to it in fiscal revenue.
The fiscal faceoff thus deprives the Palestinian government of 65% of its revenue (15% of GDP). Deprived of two-thirds of its tax revenue, the Palestinian government coped by implementing painful cuts to social assistance to the neediest and paying public employees only 50% of their salaries.
This fiscal shock will further amplify the already large negative impact of declining donor support on output, employment and socioeconomic conditions. If this fiscal standoff persists, it may well push the economy into recession and instigate the collapse of Palestinian finances, the report warns.
Environmental cost of occupation
Despite several United Nations resolutions, construction of illegal Israeli settlements accelerated in the West Bank, and incidents of settlers’ violence in 2018 were the highest since 2014.
The violence coerces Palestinians to leave their homeland and relocate. Israel also uses the West Bank as a “sacrifice zone” to which it transfers hazardous waste produced inside Israel, thus threatening the health of the Palestinian people and the integrity of their environment and natural resources.
Meanwhile, in Gaza, the destruction and demolition of the sanitation infrastructure has resulted in environmental breakdown.
Every day, over a 100 million liters of untreated sewage is dumped into the Mediterranean Sea; resulting in extensive contamination of beaches to levels four times higher than the international environmental standards.
This pollution imperils public health, undermines the fishing economy and deprives the population of the only affordable recreational possibilities offered by the sea.
“The international community should do more to promote responsible and sustainable industrial practices in Palestine, and to protect the public health of the Palestinian people,” UNCTAD Secretary-General Mukhisa Kituyi said.
The report recommends the reversal of the negative trends in donor support to the Palestinian people as well as further research to ascertain the economic and property rights and identify the Palestinian share in oil and natural gas resources owned by several neighbouring states in the region.
The United Nations continues to work towards the establishment of an independent, democratic, contiguous and viable Palestinian State, living side by side in peace with all its neighbours consistent with all UN resolutions.