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The Palestinian economy – General Outlook
The Palestinian economy is unique in the sense that political economy issues play a much more critical role in gauging economic performance. Since the start of the second Intifada in September 2000, the Palestinian economy has experienced severe structural shocks and adjustments. Unemployment currently stands at 40% of the labor force, almost one half of the population lives below the poverty line of $2 a day, and investment is virtually non-existent. There are at least four explanations for this poor economic performance: closures, withholding of tax revenues, labor flow reductions to Israel, and dependency.
The most detrimental effect of closures, both within the Palestinian Territories and with the rest of the world, is that it increases transaction costs – the cost of doing business. A basic requirement in a market type economy is capital and labor mobility within a country, let alone with the rest of the world. It has been estimated that transaction costs in the Palestinian economy are about 30% higher than in the rest of the world. This has led to severe market imperfections and losses in competitiveness.
A second explanation is that under the Revenue Clearance System in place under the Oslo agreement between the Palestinian Authority (PA) and the government of Israel, the latter is required to transfer to the PA all import duties on products destined to the Palestinian Territories. This source of much needed income has been repeatedly withheld by Israel and has caused severe budget deficits since almost half of the PA revenue is derived from this source of income. To a large extent, this widening budget deficit has been repeatedly financed by donor countries.
The third explanation is the reduction in Palestinian labor flows to Israel. Prior to September 2000, almost 150,000 Palestinian workers commuted daily to their jobs in Israel generating an annual wage income of about $800 million. Today, only about 15,000 workers are allowed to cross into Israel under strict security checks and procedures, further discouraging workers. This dramatic shortfall in wage income has been partially supplemented by foreign aid.
Finally, the traditional dependency of Palestinian trade on the Israeli economy has distorted prices and reduced competitiveness. Almost 90% of our exports are destined to Israel, and 70% of our imports are from Israel. This generated annual export revenues of about $600 million prior to September 2000. Today, this figure is drastically reduced and we are very often forced to import primarily from Israel, through intermediaries, at highly uncompetitive prices. Yet under all these constraints, the Palestinian economy has shown a remarkable degree of resilience. Palestinian Authority institutions are still able to function efficiently and deliver basic services, albeit with the much appreciated assistance of donor countries. The private sector has also adapted to the changing needs of consumers as consumption and expenditure patterns have changed. One of the primary mechanisms through which we have coped under these difficult constraints is through inter-household family transfers and other creative coping strategies. These coping strategies and learning experience under occupation can surely be regarded as a fundamental cornerstone in the establishment of a viable Palestinian State in the near future. Source: Ministry of National Economy
The Ministry of National Economy pays great attention to the implementation of the national strategy for exports in order to increase the volume of exports. Foreign trade data during the year 2018 indicated an increase in the deficit in the Palestinian merchandise trade balance by 12.4% compared to 2017, and this deficit came as a result of an increase in the value of imports by 11.7% to reach To $6.5 billion in 2018, compared to $5.9 billion in 2017, while the value of Palestinian merchandise exports increased by 8.5% to $1,155.6 million in 2018, compared to $1064.9 million in 2017.
As a result of the repressive Israeli measures against the Palestinian economy in order to increase its dependence on the Israeli economy, foreign trade with Israel accounts for the largest share, whether imports or exports. Palestinian merchandise imports from Israel constituted about 55.5% of the total value of imports during 2018, while this percentage was 55.3% In 2017, as for Palestinian merchandise exports to Israel, they accounted for 83.7% in 2018, compared to 82.5% in 2017. It should be noted here that the percentage of Palestinian merchandise imports from Israel (of the total imports) declined by about 14% over the last five years.
Countries from which imports are made (excluding Israel) during 2018, Turkey ranked first, constituting 10.1% of the total value of Palestinian merchandise imports (657.8 million dollars), followed by China with 6.5% (424.9 million dollars), then Germany By 3.2% (209.0 million), and Jordan by 1.7% (188.6 million). As for recipient countries of Palestinian exports during 2018; Jordan cam first with 6.4% (73.9 million dollars), followed by the United Arab Emirates by 2.3% (26.4 million dollars), followed by Saudi Arabia by 1.8% ($21.0 million), and the United States of America by 1.3% (14.5 million).
Main commodities that were exported abroad from Palestine in 2018; building stones came first with 13.0% of the total Palestinian merchandise exports (187 million dollars), followed by furniture by 7.7% (89 million dollars, as well as containers and their covers by 4.6%). 53 million dollars), then olive oil by 3.8% (44 million dollars), while the estimated Palestinian exports of scrap accounted for 3.3% (41 million dollars).
Fuel was the main imported commodity from abroad in 2018, with 8.7% of the total allocated Palestinian merchandise imports (568 million dollars), then electric energy by 8.5% (558 million dollars), and animal feed 3.7% (243 million dollars), automobiles by 3.0% ($197 million), and cement and its derivatives by 3.0% ($194 million). Source: Ministry of National Economy
The industrial sector is one the main pillars of the Palestinian economy. It massively contributes to the process of economical and social development in Palestine.
Even though this sector is facing multiple types of obstacles, it never ceased to grow, especially in the latest years. This growth resulted from the development of some sub-sectors and the formation of chain clusters; which was evident in the leather and shoes, as well as the textiles and clothing sectors. Thus, enriching the Palestinian exports in turn.
Why the industrial sector?
- Number of institutions:
The industrial sector, preceded by the service sector, is the second highest sector in number of institutions; which forms up to 13.5% of the total number of institutions in Palestine. With up to 18,059 institutions by the end of 2015, there has been a 5% growth in the number of institution in Palestine between 2014 and 2015.
- Number of employees and technical efficiency:
In terms of number of employees, preceded by the foreign trade and services sectors, the industrial sector comes in third place with 22% of total employment numbers in Palestine. With a 5% percentage of growth between 2014 and 2015 and a number reaching up to 91 thousand Palestinian employees by the end of 2015, this sector has clearly helped in minimizing the unemployment gap in Palestine.
- Exports capacity and competitiveness:
The industrial sector in Palestine is the leading sector in terms of exports capacity. In reference to the PBS’s report on exports in Palestine and by choosing the top 10 commodities that achieve the highest exports values in Palestine, the industrial sector massively dominated the top 7 commodities which are: stone, marble, plastic bags, cigarettes, shoes, sponge mattresses, and furniture.
With up to 958 million US dollars, the exports value for the aforementioned commodities formed 35% of the total commodities’ exports values in Palestine in 2015. Source: PIPA
Palestine is a first-class agricultural country, where two-thirds of its population worked in the agricultural sector before 1948. The agricultural crops in Palestine before 1948 were citrus fruits, grains, olives, grapes and vegetables. Citrus is the main export crop, accounting for about 80% of total exports.
The area planted with grains “wheat and barley” reached about 60% of the total agricultural lands in Palestine before 1948, while the area of lands planted with fruit trees such as olives, grapes, figs and citruses was about 16.3%, and the lands planted with vegetables accounted for about 23.7%.
The agricultural sector is one of the important economic sectors in the Palestinian economy, as it contributes 4.6% of the gross domestic product and contributes 15% of the total exports abroad, and the percentage of agricultural employment in the governorates of the homeland is 13% of the total Palestinian labor force.
The role of agriculture is not limited to the economic and social aspects. Rather, it is considered a major contributor to the protection of lands from confiscation and settlement, and the protection and use of water rights. The local agricultural production achieves a large percentage of self-sufficiency. It also contributes to the development and supply of other sectors with raw materials. Therefore, it is considered the main supporter of the Palestinian economy. Source: PIPA
Palestinian Central Bureau of Statistics
Palestinian Investment Promotion Agency
Federation of Palestinian Agricultural, Industrial and Chambers of Commerce