World Bank warns on dire state of Palestinian economy

Nablus  credit: Tamar Matsafi
Nablus credit: Tamar Matsafi

The war in the Gaza Strip has hit the economy of the West Bank hard as well, leaving the Palestinian Authority in "a spiralling fiscal crisis."

The gross domestic product (GDP) of the Gaza Strip plummeted by 80% in the fourth quarter of 2023, while the GDP of the West Bank also fell steeply, by 22%, according to a report by the World Bank released today. Because of the continuing war and its effect on employment and consumption on the West Bank, the Palestinian Authority finds itself in "a spiraling fiscal crisis", which it can only cope with by increasing arrears of payments, and through foreign aid.

According to the report, beyond the direct effects of the war in the Gaza Strip, the economy of the West Bank is also in severe trouble: more than 170,000 Palestinian workers who used to work in Israel and earned much more than the norm within the Palestinian economy have been blocked from entering Israel since the war started. This has led to a decline in consumption, leading in turn to further economic contraction. A reduction in remittances of tax revenues that Israel collects on behalf of the Palestinian Authority, because of greater deductions for amounts owed by the Jerusalem District Electricity Company to the Israel Electric Corporation, has exacerbated the Authority’s fiscal difficulties.

"War always slows and damages the economy, and since the war began Palestinian workers are not entering Israel," says Dr. Ido Zelkovitz, head of the Middle East Studies Program at the The Max Stern Yezreel Valley College and a research fellow at the Ezri Center for Iran and the Persian Gulf Studies at The University of Haifa. "Palestinians who work in Israel bring home a great deal of money. Another problem is that, while the West Bank is not at war, there is no atmosphere of business as usual, as can be seen in Jenin and Tulkarm. The West Bank economy is mainly driven by the cities in which there have been the most confrontations, including Nablus, and which are under military pressure from Israel."

Whereas, before the present conflict, the World Bank had projected growth of 3.2% in 2023 for the economies of the Gaza Strip and the West Bank combined, its updated estimate is economic contraction of 6.4%. This means a loss of GDP of $2.5 billion, which is dramatic for the small Palestinian economy. This is the second worst economic contraction ever, exceeded only during the period of the second intifada.

Dr. Zelkovitz says that the key question as far as the Gaza Strip is concerned is who will rule there after the war. "There is no possibility of economic, or even physical, rehabilitation without someone who is acceptable, politically and militarily, first and foremost to the moderate Sunni Arab states and to the Western countries. The Gaza Strip is undergoing an extreme human crisis: destruction of infrastructure, damage not just to housing but also to sewers, electricity, and water. The food industry, including bakeries and preserved food factories, and agriculture, have been severely damaged because of Hamas’s use of agricultural land for launching rockets."

Besides the direct harm to the economic situation of the Palestinians, the Palestinian Authority has itself been hard hit. Its independent revenues (excluding grant aid) fell 10% in 2023 in comparison with estimates before the war, and it would appear that the situation is only growing worse. Its deficit has grown fivefold to over $500 million, and it is already cutting its employees’ pay drastically, and paying only 60% of salaries, two months in arrears.

Nevertheless, the Palestinian banking sector has remained fairly resilient, and the Palestinian Authority is becoming increasingly reliant on it. The banks provided a $400 million syndicated loan to the Authority in December. The total debt on which the Palestinian Authority is in arrears amounts to 41% of Palestinian GDP, which compares with 34% before the war.

External aid looks like the only other source for managing the economic and humanitarian crisis, and for maintaining a minimum level of public services. The World Bank is concerned that if the war and the constraints on the Palestinian economy continue, this "may prompt the PA to resort to extreme-and potentially disorderly-fiscal consolidation measures, including further reductions in employee salaries, thus intensifying the decline in public consumption and household incomes."

"Averting a dramatic recession, a large uptick in poverty, and a continued unparalleled shock to the economy," the World Bank says, will require a cessation of hostilities, reopening of the Palestinian economy, and the transfer of tax revenues to the Palestinian Authority in full. After that, aid will be required from the international community to the Palestinians Authority, and internal reforms within it.

"All the data demonstrate that the Palestinians are not politically ready to run an independent economy," Dr. Zelkovitz concludes.

Published by Globes, Israel business news - - on February 22, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

Nablus  credit: Tamar Matsafi
Nablus credit: Tamar Matsafi
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