The Palestinian economy is small and relatively open, with several large holding companies dominating certain sectors. Palestinian businesses have a reputation for professionalism as well as the quality of their products. Large Palestinian enterprises are internationally connected, with partnerships extending to Asia, Europe, the Gulf, and the Americas. Due to the small size of the local market, access to foreign markets through trade is essential for private sector growth.
Since 2007, the West Bank’s investment climate has improved – primarily due to security, economic, and legal reforms; international donor support; and the easing of some Government of Israel (GOI) restrictions. Most of these reforms, however, were only applicable to business concerns in the roughly 40 percent of the West Bank under the civil control of the Palestinian Authority (PA). Restrictions on the movement and access of goods and people between the West Bank, Gaza, and external markets imposed by the GOI continue to have a deleterious effect on the private sector and limit economic growth.
Opportunities for meaningful foreign direct investment in Gaza are few, due to Hamas’s control, the resultant de-coupling with the West Bank economy, and Israeli restrictions on the flow of imports and exports. Numerous consumer goods enter Gaza through Israel, but there are restrictions in place that limit the import of a number of dual-use items, including construction materials, which are only allowed to enter with advance coordination and approval from Israel. Likewise, only a few hundred truckloads of exports can exit each year.
While GDP for West Bank and Gaza growth increased from 3.5 percent in 2015 to 4 percent in 2016, this was not sufficient to generate new jobs and unemployment rose to more than 28 percent. This GDP growth followed a decline in 2014 that international organizations attributed mainly to that summer’s conflict in Gaza, ongoing political disputes with the GOI, uncertainty over the PA’s ability to pay salaries, and accumulation of high levels of private sector arrears.
Budgetary concerns impact business decisions. International donor support is declining. In 2016, donor countries provided the PA with USD 607 million to support its budget. The PA was still left with a $600 million financing gap, which it covered by increasing bank debt and accumulating new private sector and pension fund arrears.
Future economic growth depends on a series of factors: easing Israeli movement and access restrictions, further expanding external trade and private sector growth, improved PA governance on commercial regulation, political stability, the GOI’s prompt release of customs and VAT revenues collected on behalf of the PA, and a general increase in global and regional trade. Economic sectors that are not dependent on traditional infrastructure and freedom of movement, such as information and communications technologies (ICT), are able to grow somewhat independent of these factors and therefore have enjoyed greater success in the Palestinian economy during the past decade, although they are still impeded by factors such as GOI control of the electromagnetic spectrum.
According to the PA, the unemployment rate in 2015 was 18.2 percent in the West Bank and 41.7 percent in Gaza, or 26.9 percent overall. Among women, the overall unemployment rate was 44.7 percent and among youth aged 20-24 it was 43.2 percent (approximately 58 percent in Gaza). The workforce is expected to expand significantly in the coming years, as 50.5 percent of the population is currently below the age of 19. The labor force is relatively well educated, boasting a high literacy rate, with high technology penetration and familiarity with overseas markets. Wages are low relative to Israel but higher than neighboring Arab countries. In January 2013, the PA implemented the first Palestinian minimum wage, at NIS 1,450 (USD 389) per month. Palestinians remain dependent on the public sector, which employs 22.9 percent of the workforce. The PA depends primarily on revenues from customs and value added tax (VAT), which Israel collects on the PA’s behalf per the 1994 Paris Protocol, to cover the bulk of its operational expenses, including its wage bill.
Significant sectors highlighted by the Palestinian Investment Promotion Agency (PIPA) and in the National Export Strategy for 2014-2018 include the following: