Israel/Palestine

ABSTRACT
The Palestinian economic outlook is worrying: recovering slowly from the recession of 2014, the per capita income growth has almost stagnated and projected growth levels will not support animprovement in living standards. The growth rate of the Palestinian economy is projected to hoveraround 3.5 percent in the medium term. Given the high population growth in the Palestinian territories, this implies a near stagnation in per capita incomes. The economy has also not been able to create enough jobs, resulting in stubborn unemployment rates reaching 27 percent in 2016 (18 percent in the West Bank and 42 percent in Gaza), despite recent steps by Israel to increase the number of work permits for West Bank Palestinians. The productive capacity of the Palestinian economy has been eroded over the years with a significant decline in the size of manufacturing and agriculture in the economy.

Today these restrictions have deepened further and according to our estimations in 2010 they are almost equal to the value of the entire Palestinian economy. The total costs imposed by the Israeli occupation on the Palestinian economy which we have been able to measure was USD 6.897 billion in 2010, a staggering 84.9% of the total estimated Palestinian GDP. In other words, had the Palestinians not been subject to the Israeli occupation, their economy would have been almost double in size than it is today.

OUTLOOK AND RISKS
10. The economic outlook is fraught with uncertainty. Staff’s baseline assumes the political impasse and Israeli restrictions continue, but that recent episodic violence will not escalate into a full-fledged conflict. On that basis, GDP growth is projected to reach 3.2 percent in 2016 (2.7 percent in the West Bank and 5 percent in Gaza), and to average about 3½ percent in the medium term. In Gaza, real GDP is unlikely to return to pre-conflict levels until 2018, a year later than previously estimated. Inflation will likely remain subdued, on account of low inflation in Israel, no marked uptick in international oil prices and relatively weak economic activity.

11. However, the status quo will not boost per capita incomes and reduce unemployment, underscoring the critical importance of a political breakthrough. An estimated quarter of a million young people will enter the labor market during 2015–18. Assuming an elasticity of employment with respect to output of around one in the medium term,9 average annual growth of 4.5 percent would be required to absorb the expanding labor force. A continuation of the current conditions would likely see growth hover around 3½ percent in the medium term. Any significant improvement in medium-term prospects therefore hinges on the peace process and donor engagement.

12. As donor support falters and political tensions persist, economic management and prospects for the PA’s longer term viability are increasingly at risk. While concrete steps toward domestic political reconciliation could help boost the outlook, risks are predominantly on the downside (see Annex I). Absent broader political dialogue, ongoing violence could escalate, leading to another war in Gaza and/or a political and security crisis in the West Bank. In Gaza, reconstruction could slow further if donors’ aid falls short of commitments or if restrictions intensify. Further shortfalls in budget support or the inability to contain spending could undermine an already fragile fiscal position, leading to additional arrears (possibly compromising private creditors’ ability to service loans and associated risks to the banking sector), a fall in private demand and, in the extreme, a breakdown of government services. Fiscal risks emanating from litigation in U.S. courts (Sokolow vs. Palestine Liberation Organization) have receded until the PA’s appeal is decided. However, heightened risks concerning Israeli correspondent banking relationships could prove detrimental to the payments system and private economic activity (that has so far proved remarkably resilient).

The economy of the Occupied Palestinian Territory could easily produce twice the gross domestic product (GDP) it generates now, while unemployment and poverty could recede significantly, according to this year's report on UNCTAD assistance to the Palestinian people.

Surveying a number of studies, the report reveals the channels through which occupation deprives the Palestinian people of their human right to development and hollows out the Palestinian economy.

Chief among these are the confiscation of Palestinian land, water and other natural resources; loss of policy space; restrictions on the movement of people and goods; destruction of assets and the productive base; expansion of Israeli settlements; fragmentation of domestic markets; separation from international markets and forced dependence on the Israeli economy.

Moreover, a continuous process of de-agriculturalization and de-industrialization has deformed the structure of the Palestinian economy, the report maintains. From 1975-2014, the share of the tradable goods sector (agriculture and industry) in GDP dropped by half, from 37 per cent to 18 per cent, while its contribution to employment decreased from 47 per cent to 23 per cent.

Area C, which accounts for more than 60 per cent of West Bank land and more than 66 per cent of its grazing land, is not accessible to Palestinian producers.

Occupied Palestinian Territory

It is estimated that the occupation of Area C costs the Palestinian economy the equivalent of 35 per cent of GDP ($4.4 billion in 2015).