West Bank and Gaza
The Palestinian economy is small and relatively open. While 95 percent of firms in the West Bank and Gaza are family owned small- and medium-sized enterprises employing less than 20 people, large holding companies dominate certain sectors. Palestinian businesses have a reputation for professionalism and quality products. The private sector is mostly firms with moderate productivity, low investment, and limited competition, the majority of which are operating in retail and wholesale trade activities. Due to the small size of the local market (about 5 million consumers with relatively low purchasing power), access to foreign markets through trade is essential for private sector growth. Enterprises are highly dependent on Israel for either inputs or as a market, and 90 percent of Palestinian exports are sold to Israel. Preliminary 2019 export statistics obtained from the Palestine Central Bureau of Statistics (PCBS) show total exports of USD 1.068 billion, representing a 3 percent increase over 2018 (USD 1.068 billion).
Large Palestinian enterprises are connected internationally, with partnerships extending to Asia, Europe, the Gulf, and the Americas. However, Israeli government restrictions on the movement and access of goods and people between the West Bank, Gaza, and external markets reflect Israeli security concerns and continue to limit Palestinian private sector growth. Roughly 40 percent of the West Bank falls under the civil control of the Palestinian Authority (PA), referred to as Area A and Area B following the 1993 Oslo Accords and the 1994 economic agreement commonly known as the Paris Protocol. The Israeli government maintains full administrative and security control of Area C, which comprises roughly 60 percent of the West Bank. A recent USAID study found that high transaction costs stemming from limitations on movement, access, and trade are the most immediate impediment to Palestinian economic growth, followed by energy and water insecurity.
The Palestinian labor force is well educated, boasting a 98 percent literacy rate; the West Bank and Gaza enjoy high technology penetration. Nevertheless, already high unemployment persisted in 2019. According to the latest figures available from the PCBS (2019 Q4), the combined West Bank and Gaza (WBG) unemployment rate in the fourth quarter of 2019 was 24 percent. While the 14 percent unemployment rate in the West Bank has remained stable in recent years, in Gaza 43 percent of workers are unemployed, according to the PCBS. The rates were even higher for youth, especially educated youth. The public sector continues to be the largest Palestinian employer, providing 21.3 percent of all jobs. The PCBS projects measures to mitigate Coronavirus could increase unemployment by roughly 36 percent if business closures persist until the end of June.
In 2019, the economy grew by less than 0.9 percent, according to the World Bank. For 2020, the World Bank estimates negative economic growth (-7.6 percent) due to Coronavirus response measures taken by the PA to combat the pandemic, affecting all economic sectors; this decline is expected to continue through 2021. With population growth at roughly 3 percent per year, real per capita GDP is projected to decline as unemployment and poverty rates rise. Ongoing political, economic, and fiscal uncertainty has generally deterred large-scale internal and foreign direct investment. Foreign direct investment, representing 1 percent of GDP, is also very low in comparison with fast-growing economies.
According to the World Bank, in 2019 investment rates remained low, with the majority channeled into non-traded activities that generate low productivity employment and returns that are less affected by political risk, such as internal trade and real estate development. Private investment levels, averaging about 15-16 percent of GDP in recent years, have been low compared with rates of over 25 percent in fast-growing middle-income economies. The manufacturing and agricultural sectors’ contribution to GDP is also in decline. Manufacturing fell from 19 percent of GDP in 1994 to 11 percent in 2018 and agriculture fell from 12 percent of GDP in 1994 to less than 3 percent in 2018. To reverse these trends, the Palestinian Investment Promotion Agency (PIPA) included both sectors in its National Export Strategy. Target sectors include:
- Stone and marble
- Agriculture, including olive oil, fresh fruits, vegetables, and herbs
- Food and beverage, including agro-processed meat
- Textiles and garments
- Manufacturing, including furniture and pharmaceuticals
- Information and communication technology (ICT)
- Renewable energy
In 2019, the PA ran a current account deficit of nearly USD 1.2 billion, of which around USD 500 million was covered by direct budget support from foreign donors. The remaining USD 700 million was converted into new debt to local banks, private sector suppliers of goods and services, and the PA civil servants’ pension fund. The PA remains heavily dependent on Israeli transfers of PA clearance revenues – taxes and import duties collected by Israel on the PA’s behalf, and transferred to the PA on a monthly basis – which comprised 70 percent of all PA revenues in 2019. The PA’s continued practice of making prisoner and “martyr” payments –paying families of Palestinian security prisoners in Israeli jails and Palestinians killed or seriously injured due to the Israeli-Palestinian conflict, including terrorists – jeopardized these transfers, as the United States and Israel each recently passed legislation imposing penalties to deter such payments, known as the Taylor Force Act and Anti-Terrorism Clarification Act (ATCA) in the United States.
Future economic growth depends on a series of factors: further easing of Israeli movement and access restrictions, balanced with Israeli security concerns; expanded external trade and private sector growth; PA approval and implementation of long-pending commercial legislative reforms; political stability; increased water and energy supply to the productive sectors at lower cost; and PA fiscal stability. 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 independently of these factors and therefore have enjoyed greater success in the Palestinian economy during the past decade. The 2018 introduction of Third Generation (3G) communications technology into the West Bank stimulated further development of businesses that benefitted from real-time GPS/location data.
Although the Palestinian economy is in a slow decline, investment opportunities continue to exist in information technology, stone and marble, real estate development, light manufacturing, agriculture, and agro-industry. Coronavirus pandemic response measures have had a significant negative impact on both the stone and marble industry and the tourism sector, previously considered growth areas. While the economy overall should start recovering after Coronavirus response measures are lifted, the tourism sector is projected to continue to be adversely impacted by the loss of inbound tourism throughout 2020, negatively affecting 37,800 tourism industry workers.
This report focuses on investment issues related to areas under the administrative jurisdiction of the PA, except where explicitly stated. Where applicable, this report addresses issues related to investment in the Gaza, although the de facto Hamas-led government’s implementation of PA legislation and regulations may differ significantly from the West Bank’s. For issues where PA law is not applicable, Gazan courts typically refer to Israeli and Egyptian law; however, Hamas does not consistently apply PA, Egyptian, or Israeli law. These inconsistencies in the legal environment, among a number of other, more challenging factors, are strong deterrents to private investment in Gaza.
Due to evolving circumstances, potential investors are encouraged to contact the PA Ministry of National Economy (www.mne.gov.ps), Palestinian Investment Promotion Agency (www.PIPA.ps), the Palestine Trade Center (www.paltrade.org), and the Palestinian-American Chamber of Commerce (www.pal-am.com); as well as the U.S. Embassy in Jerusalem (https://il.usembassy.gov/embassy/ ) and the U.S. Commercial Service (http://export.gov/westbank) for the latest information.
6. Financial Sector
Capital Markets and Portfolio Investment
In 2004, the PA enacted the Capital Markets Authority Law and the Securities Commission Law and created the Capital Market Authority to regulate the stock exchange, insurance, leasing, and mortgage industries. In 2010, a Banking Law was adopted to bring the Palestinian Monetary Authority’s (PMA) regulatory capabilities in line with the Basel Accords, a set of recommendations for regulations in the banking industry. The 2010 law provides a legal framework for the establishment of deposit insurance, management of the Real Time Gross Settlement (RTGS) system, and treatment of weak banks in areas such as merger, liquidation, and guardianship. It also gives the PMA regulatory authority over the microfinance sector. In 2013, the PA passed a Commercial Leasing Law and in 2015 the MONE finalized a registry for moveable assets, intended to facilitate secured transactions, especially for small and medium-sized businesses. In April 2016, the PA passed the Secured Transactions Law, which established the legal grounds and modern systems to regulate the use of movable assets as collateral.
Notwithstanding this regulatory environment, the World Bank’s 2020 Ease of Doing Business report assigned the West Bank and Gaza a particularly low score for protecting minority investors (114 out of 190) and resolving insolvency (168 out of 190). Founders of recently established SMEs complain that loan terms from Palestinian creditors fail to allow the borrower enough time to establish a sustainable business, although the new Moveable Assets Registry, coupled with the Secured Transactions Law and Commercial Leasing Law, led to a substantial improvement in the Getting Credit ranking (25 out of 190) from 2018.
The Palestine Exchange (PEX) was established in 1995 to promote investment in the West Bank and Gaza. Launched as a private shareholding company, it was transformed into a public shareholding company in February 2010. The PEX was fully automated upon establishment – the first fully automated stock exchange in the Arab world, and the only Arab exchange that is publicly traded and fully owned by the private sector. The PEX operates under the supervision of the Palestinian Capital Market Authority. PEX’s 49 listed companies are divided into five sectors: banking and financial services, insurance, investment, industry, and services, with a USD 3.5 billion market capitalization. Shares trade in Jordanian dinars and U.S. dollars. PEX member securities companies (brokerage firms) operations are found across the West Bank and Gaza and authorized custodians are available to work on behalf of foreign investors.
Money and Banking System
The Palestinian banking sector continues to perform well under the supervision of the PMA. World Bank reports to the Ad Hoc Liaison Committee (AHLC) have consistently noted that the PMA is effectively supervising the banking sector. The PMA continues to enhance its institutional capacity and provides rigorous supervision and regulation of the banking sector, consistent with international practice.
An Anti-Money Laundering Law that was prepared in line with international standards with technical assistance from the International Monetary Fund (IMF) and USAID came into force in October 2007. In December 2015, the PA President signed the Anti-Money Laundering and Terrorism Financing Decree Law Number 20 for the PA to join the Middle East and North Africa Financial Action Task Force (MENA/FATF), a voluntary organization of regional governments focused on combating money laundering and the financing of terrorism and proliferation. Improvements contained in the 2015 law make terrorist financing a criminal offense and defines terrorists, terrorist acts, terrorist organizations, foreign terrorist fighters, and terrorist financing (AML/CFT). The PMA completed a National Risk Assessment (NRA)–an AML/CTF self-assessment–in 2018. The PMA is implementing the recommendations from the self-assessment to strengthen the AML/CTF regime in preparation for a MENA/FATF member review of the Palestinian economy’s AML/CFT safeguards scheduled for August 2020. However, the MENA FATF review is postponed due to the current coronavirus pandemic. The PMA is considered a regional leader in AML/CTF safeguards and its representatives provide training to other Arab governments.
Credit is affected by uncertain political and economic conditions and by the limited availability of real estate collateral due to non-registration of most West Bank land. Despite these challenges, the sector’s loan-to-deposit ratio continues to increase towards parity, moving from 58 percent at the end of 2015 to 68 percent at the end of 2019. The PMA has achieved this in part by encouraging banks to participate in loan guarantee programs sponsored by the United States and international financial institutions, by supporting a national strategy on microfinance, and by imposing restrictions on foreign placements. The MONE’s enactment of the Secured Transactions Law in April 2016 allows for use of moveable assets, such as equipment, as collateral for loans. Non-performing loans are less than three percent of total loans, due to credit bureau assessments of borrowers’ credit worthiness and a heavy collateral system.
Palestinian banks have remained stable in general but have suffered from a deterioration in relations with Israeli correspondent banks since the Hamas takeover of Gaza in 2007, at which time Israeli banks cut ties with Gaza branches and gradually restricted cash services provided to West Bank branches. All Palestinian banks were required to move their headquarters to Ramallah in 2008. Israeli restrictions on the movement of cash between West Bank and Gaza branches of Palestinian banks have caused intermittent liquidity crises in Gaza and for all major currencies–U.S. dollars, Jordanian dinars, and Israeli shekels (ILS). An Israeli government decision in late 2018 to increase the deposit transfer amount from Palestinian banks to the Bank of Israel to NIS 1 billion monthly (an increase from NIS 350 million per month) helped reduce the excess amount of shekels in the West Bank and Gaza.
The PMA regulates and supervises 14 banks (6 Palestinian, 7 Jordanian, and 1 Egyptian) with 370 branches and offices in the West Bank and Gaza, with USD 17.2 billion net assets. No Palestinian currency exists and, as a result, the PA places no restrictions on foreign currency accounts. The PMA is responsible for bank regulation in both the West Bank and Gaza. Palestinian banks are some of the most liquid in the region, with net deposits of USD 13.2 billion and gross credit of USD 9 billion as of the end of 2019.
Foreign Exchange and Remittances
The PA does not have its own currency. According to the 1995 Interim Agreement, the Israeli Shekel (NIS/ILS) freely circulates in the West Bank and Gaza and serves as means of payment for all purposes, including official transactions. The exchange of foreign currency for NIS and vice-versa by the PMA is carried out through the Bank of Israel Dealing Room, at market exchange rates.
The Investment Law guarantees investors the free transfer of all financial resources out of the Palestinian territories, including capital, profits, dividends, wages, salaries, and interest and principal payments on debts. Most remittances under USD 10,000 can be processed within a week. In addition to the Israeli Shekel (NIS), U.S. dollars (USD) and Jordanian dinars (JD) are widely used in business transactions. There are no other PA restrictions governing foreign currency accounts and currency transfer policies. Banks operating in the West Bank and Gaza, however, are subject to Israeli restrictions on correspondent relations with Israeli banks and the ability to transfer shekels into Israel, which occasionally limit services such as wire transfers and foreign exchange transactions.
Sovereign Wealth Funds
The privately-run Palestine Investment Fund (PIF) acts as a sovereign wealth fund, owned by the Palestinian people. According to PIF’s 2018 annual report (the most recent available), its assets reached USD 1 billion and net income USD 37 million. PIF’s investments in 2018 were concentrated in infrastructure, energy, telecommunications, real estate and hospitality, micro/small/medium enterprises, large caps, and capital market investments. 90 percent of PIF investments are domestic, but excess liquidity is invested in international and regional fixed income and equity markets. In 2014, the fund established the Palestine for Development Foundation, a separate not-for-profit foundation managing PIF’s corporate social responsibility initiatives, which are primarily focused on support to Palestinians in the West Bank, Gaza, Jerusalem, and abroad. Since 2003, PIF has transferred over USD 797.6 million to the PA in annual dividends, but PIF leadership does not report to the PA per PIF bylaws. International auditing firms conduct both internal and external annual audits of the PIF.
According to the World Bank 2014 Investment Climate Assessment report, Palestinian firms do not consider corruption to be one of the most serious problems they face. Seven percent of the firms surveyed reported having experienced a request from a government official for a bribe. According to USAID’s West Bank and Gaza Inclusive Growth Diagnostic Study conducted in 2017, only 11 percent of the Palestinian firms surveyed reported ever being asked to pay a bribe, compared to 48 percent in Egypt. Private sector businesses assert that the PA has been successful in reducing institutional corruption and local perceptions of line ministries and PA agencies are generally favorable.
The Anti-Graft Law (AGL) of 2005 criminalizes corruption, and the State Audit and Administrative Control Law and the Civil Service Law both aim to prevent favoritism, conflict of interest, or exploitation of position for personal gain. The AGL was amended in 2010 to establish a specialized anti-graft court and the Palestinian Anti-Corruption Commission, which was tasked with collecting, investigating, and prosecuting allegations of public corruption. The Anti-Corruption Commission, first appointed in 2010, has indicted several high-profile PA officials. Palestinian civil society and media are active advocates of anti-corruption measures and there are international and Palestinian non-governmental organizations that work to raise public awareness and promote anti-corruption initiatives. The most active of these is the Coalition for Integrity and Accountability (AMAN), which is the Palestinian chapter of Transparency International (http://www.aman-palestine.org/eng/index.htm ).
UN Anticorruption Convention, OECD Convention on Combatting Bribery
In April 2014, the PA acceded to the UN Anticorruption Convention. The PA is not a party to the OECD Convention on Combatting Bribery.
Resources to Report Corruption:
Contact at U.S. Embassy in Jerusalem:
Palestinian Affairs Unit
+972 2 622 6952
Contact at government agency or agencies responsible for combating corruption:
The Coalition for Accountability and Integrity – AMAN