The Palestinian economy is divided into two different halves just like the territory itself, where financial and economic accomplishments in the West Bank are erased by its troubled twin in the Gaza Strip.
According to COFACE the structure of the Gaza Strip and West Bank economies, which was essentially similar until the early 2000s, will continue to move in different directions in 2019. Longstanding constraints continue to act as a hindrance to economic growth.
While the West Bank is seeing promising expansion, sharp declines in Gaza have weighed heavily on both sides. The World Bank said that while growth, although weak will be significant in 2019, the overall Palestinian territory result will conceal substantial differences with the West Bank estimated to record a 2.2 per cent growth, while the Gaza Strip is expected to continue its recession because of the economic blockade imposed on the region.
Palestinian Authorities (PA) have pointed to the Israeli occupation as the single biggest impediment to the growth of their economy, along with its restrictions on the movement of people and goods, unpredictable delays, confiscations of property as well as lack of natural resources.
In a 2019 economic forecast report, the Palestine Monetary Authority (PMA) stated that slowdown in the performance of the economy has continued throughout the previous years because of political and economic developments and change, which has had a negative impact on key economic drivers, weakening economic activity.
The Palestine territory is suffering from dwindling donor support, a precarious domestic political impasse, a stifling security situation and a burgeoning humanitarian crisis, just to mention a few. In June 2019, a group of finance ministers and business elites from Europe, Israel and the Arab world gathered in Bahrain to discuss Jared Kushner’s ‘Middle East peace plan’.
The who’s who of the European Union and Arab world together with their US counterparts sought to promote the allegedly imaginative interventions to transform the Israeli-Palestinian conflict, a plan which purportedly fell flat after a boycott from the Palestinians, who distanced themselves from the Trump administration brand since the White House’s decision to move the US Embassy to Jerusalem from Tel Aviv in recognition of the former as the capital of Israel.
The banking industry
The PMA continues to strengthen its Arab, regional, as well as international relations in order to reinforce links between the Palestinian banking sector and its international peers. The aim is to fend off risks and concerns surrounding the country’s banking sector due to the prevailing instability in the country.
The regulator’s continued efforts to strengthen financial inclusion through researches and specialised economic, banking and financial reports have proved to positively impact the financial indicators of Palestine’s banking sector. Additionally, the PMA’s quest to strengthen financial inclusion also saw a significant improvement in liquidity levels amongst banks and this coincided with an increase in assets as well as strong public confidence in a safe and stable banking sector.
The banking industry is possibly seeing more progress than any other sector in Palestine. The IMF said that a new higher limit on transferring shekel cash from the West Bank to Israel, in place since late 2017 should help banks in the West Bank to better manage their liquidity.
The monetary authority also called for the replenishing of banks’ capital buffers to a minimum of $75 million and progress towards implementing Basel III regulatory requirements which are important steps to safeguard the banking system. The Palestinian regulator also helped steer a restructuring of affected loans last year, representing about five per cent of system-wide credit to the private sector.
The Palestinian banking industry is seeing arguably more progress than any other sector.
S&P Global Ratings predicted that the fintech scene in the Middle East was likely to benefit from more regulatory easing and support, especially in the form of sandboxes.
The PMA recently launched its own sandbox jumping on the bandwagon with other governments across the Middle East. According to Azzam Shawwa, the Governor of the PMA, the monetary authority is following in the footsteps of regulators in the UK, Australia and Singapore by creating its own fintech sandbox.
Palestine has a handful of fintech companies, most prominent of which is PalPay, a mobile payments company that is a joint initiative of the Bank of Palestine and Palestinian tech firm, PCNC IT Solutions.The sector also made significant strides towards digitalisation, with the PA vowing to establish a fintech innovation lab curtesy of generous funding from the Government of India.
However, the termination of correspondent banking relationships (CBRs) by Israeli banks could have a significant economic impact on the Palestinian territories due to the highly interlinked structure of the two banking systems and the use of Israeli Shekel as the primary currency in the Palestinian economy.
According to the World Bank, key Israeli banks signaled plans to limit or terminate correspondent banking services to Palestinian banks, citing money laundering and financing of terrorism concerns. Israeli-Palestinian CBRs remains intact but has recently been strained by the two authorities’ diverging positions.
The PA is preparing for a comprehensive evaluation of the World Bank Group’s (WBG) antimoney laundering and combatting the financing of terrorism (AML/CFT) regime which is expected to commence in 2020.
While the banking sector remains generally sound, the frail economy and fiscal position add to vulnerabilities. The IMF stated that Palestine’s banking sector profitability and liquidity remains comfortable although it has declined over the past few years.
According to WBG, while banks’ direct lending to the PA remains comfortably below the regulatory limit, the IMF said that they have a similar level of additional exposures to the PA via credit to PA employees and holdings of promissory notes.
The lenders’ overall exposure to the Palestine territory remains high, reflecting direct financing and indirect (lending to employees and suppliers) that continues to be an issue that adversely impacts the performance of Palestine lenders.
The peace to prosperity
In June 2019, Senior White House adviser and President Donald Trump’s son-in-law, Jared Kushner, proposed a $50 billion package designed to boost the Palestinian economy, presenting a vision of regional prosperity that remains contingent on an Israeli-Palestinian peace agreement.
The Trump administration’s $50 billion economic formula for Israeli-Palestinian peace—which was presented at the Peace to Prosperity Workshop in Manama—stated that an investment programme for the Palestinians was a precondition for ending the decades-old conflict.
Although no Palestinian or Israeli representatives attended the workshop, Washington hoped that wealthy Gulf Arab states will show a concrete interest in the plan which expects donor nations and investors to contribute $50 billion to the Palestinian territories, Jordan, Egypt and Lebanon.
While the Trump administration’s proposal details its 179 target projects remain, it does not include any guaranteed economic assistance to the ailing Palestinian economy nor any financial pledges from assumed Middle East-based companies or regional governments.
The engineers of the ‘Deal of the Century’ theoretically assume that their economic formula will stimulate a discussion about the economic possibilities of regional peace and add pressure on Palestinians to seriously consider a peace agreement with Israel in light of the economic possibilities.
Additionally, the much anticipated but still unreleased Middle East peace plan which called for a mix of public and private financing intending to create at least a million new jobs for Palestinians, is said to be lacking practicality by virtue of leaving out Israel and Palestine, the two main protagonists.
According to a Bloomberg report, the plan calls for projects worth $27.5 billion in the West Bank and Gaza and $9.1 billion, $7.4 billion and $6.3 billion for Palestinians in Egypt, Jordan and Lebanon respectively. The PMA stated that the country’s economic challenges are expected to overshadow the economic prospects, especially if the political stalemate counties to linger on causing more pressure on economic activity.
The PA is facing a crippling financial crisis due to the tax revenues withheld by Israel and the decline of donor countries.
Carnegie Endowment for International Peace stated that in February 2019, the Israeli Government withheld $138 million of the Palestinian tax and customs money—clearance revenues (CRs)— that it collects on behalf of the PA and transfers monthly to the Palestinian coffers, in accordance with the 1994 Paris Protocol.
Estimated at $2.4 billion annually (15 per cent of GDP), the CRs are the backbone of PA’s budget and they account for 65 per cent of total PA revenues, covering over half of government expenditures. According to the IMF, the withholding of clearance revenues under new Israeli legislation is seriously undermining the already fragile fiscal situation in the Palestine territory.
The Anti-Terrorism Clarification Act (ATCA) passed by the US Congress and then signed into law by President Donald Trump in 2017, indirectly supported the nipping of the PA’s international financial aid.
According to media reports, following the signing of ATCA IN 2017, the US Agency for International Development (USAID) ceased all assistance to Palestinians in the occupied West Bank and Gaza. The agency spent $268 million on public projects in the West Bank and Gaza as well as Palestinian private sector debt repayment in 2017.
Earlier in January in 2018, the Trump administration had made drastic cuts to its contribution to the UN agency for Palestinian refugees (UNRWA). The US was the largest donor to UNRWA, giving more than $360 million in 2017.
The relationship between the US administration and the PA deteriorated further when President Trump announced the US’ decision to recognise Jerusalem as Israel’s capital as well as the shifting of the US embassy.
A family affair
The ongoing closure of the Gaza strip, the partial closure of commercial border crossing to Gaza, and the political tension in the Gaza strip is also expected to further impede economic growth for 2019.
Additionally, the continued land seizure and settlement expansion in the West Bank, together with difficulties put in place by Israel authorities to stop the use of resources available to the Palestinian people worsens the humanitarian crisis in the Palestine territory.
Gaza is suffering disproportionately, with its economy shrinking and unfolding humanitarian catastrophe, said the IMF. Similarly, the continued internal schism and hinderance of the Palestinian reconciliation efforts is also weighing on the economic growth in the Palestinian territory. The IMF said that the Fatah Hamas reconciliation is off-track and associated reunification plans, including contingency budgets and institutional mergers, have stalled.
The stand-off between Fatah-Hamas has led the PA to continue with a partial withholding of payments of salaries and allowances to PA employees in Gaza. The intensified mediation efforts by the UN, Egypt and other parties, have yet to bear fruit.
The West Bank is not immune to pressures in Gaza, particularly due to the active financial connections. While the West Bank has seen promising economic growth, sharp declines from its twin, the Gaza strip, will continue to weigh heavily on both sides and the current longstanding constraints such as land seizures, crippling financial conditions and the Israel occupation, will continue to act as a barrier to economic growth.