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West Bank and Gaza

Executive Summary Title

The Palestinian economy is small, and while the internal economy in the West Bank is relatively open, there are significant constraints on movement and access of goods and people both within the West Bank and Gaza. 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 2021 export statistics obtained from the Palestine Central Bureau of Statistics (PCBS) show total exports increased from $1.1 billion in 2020 to $1.4 in 2022. However, the trade deficit remained high at -$4.96 billion because of high levels of imports ($6.42 billion in 2021).

Palestinian businesses have a reputation for professionalism and quality products. Ninety-nine percent of firms in the West Bank and Gaza are family owned small and medium-sized enterprises employing fewer than 20 people. Most private sector firms have moderate productivity, low investment, and limited competition, with the majority operating in retail and wholesale trading activities. Large Palestinian enterprises — only 1 percent of Palestinian companies — dominate certain sectors and 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 – which Israel states are necessary to address its security concerns — 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. Under those agreements, pending a final negotiated peace agreement defining borders and control of territory, the Israeli government maintains full administrative and security control of Area C, which comprises roughly 60 percent of the West Bank. A 2017 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, and the West Bank and Gaza enjoy high technology penetration, despite poor internet service and limited access to modern, high-speed mobile networks. Nevertheless, already high unemployment persisted and worsened in 2021. According to the latest figures available from the PCBS, the combined West Bank and Gaza unemployment rate in the fourth quarter of 2021 was 24.2 percent. While the unemployment rates in both the West Bank and Gaza have remained the same in the last few years, the West Bank’s rate of 13.2 percent pales by comparison with the Gaza’s 44.7 percent, according to the PCBS. The rates were high for youth aged 20-24 years old (37.4percent), and for the educated (28 percent). The unemployment rate among women is 39.2 percent in the West Bank and Gaza compared to 20.4 percent among men. The average daily wage in the West Bank is $32, and $13 in Gaza compared to $82 in Israel. The public sector continues to be the largest Palestinian employer, providing 21.3 percent of all jobs.

In 2021, the economy grew by 6 percent, according to World Bank preliminary estimates, due to the removal of the PA’s severe pandemic measures that affected all economic sectors during the prior year. 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 other economies.

According to the World Bank, in 2021 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 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 2020 and agriculture fell from 12 percent of GDP in 1994 to seven percent in 2020. To reverse these trends, the Palestinian Investment Promotion and Industrial Estates Agency (IPIEA) included both sectors in its National Export Strategy. Target sectors include:

  • Stone and marble
  • Tourism
  • 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

To improve its foreign direct investment policies, the PA enacted a new Companies Law in December 2021, which updates the 1964 Jordanian law, to facilitate business incorporation online, and eliminate costly bureaucratic practices. The new law removes restrictions to foreign investors, such as foreign equity limits and local partner requirements. It improves rules for larger businesses with multiple shareholders. The new law also introduces new business types, including sole proprietorships and limited liability companies, and creates a legal framework for mergers, divisions, and transformations that will allow businesses to adapt their business model as they grow.

In December 2021, the PA’s Ministry of Telecommunications and Information Technology (MTIT) facilitated the soft launch of a $3.5 million e-government initiative to ensure government services are more efficient and accessible to PA residents and the business community. The new e-services include online renewal of driver licenses, applications for government-provided health insurance, and registration for new companies.

In 2021, the PA ran a total fiscal deficit of nearly $ 1.257 billion, of which around $317million ($186 million in recurrent budget support and $131 million in development financing) was covered by foreign donors, leaving the PA with $940 million financing gap. The PA covered its financing gap by taking additional bank loans (reaching unprecedented levels of $2.5 billion) and accumulating further arrears to the private sector suppliers of goods and services (with the stock of arrears exceeding $1 billion), and the PA civil servants’ pension fund (arrears estimated at $2 billion). The Palestinian Monetary Authority and the banking sector have stated that banks can no longer provide further loans, as the PA has already exceeded established lending limits; further, lending to the PA and public sector employees now comprises roughly 40 percent of all banking loans. The PA remains heavily dependent on clearance revenues (customs duties collected on imports by Israel on the PA’s behalf) which comprised 68 percent of all PA revenues in 2021. The PA’s continued practice of making prisoner and “martyr” payments – paying families of Palestinian security prisoners in Israeli jails and the families of Palestinians killed or seriously injured due to the Israeli-Palestinian conflict, including terrorists – jeopardized these transfers. Israel imposes penalties to deter such payments, a position shared by the United States and applied to U.S. assistance through the Taylor Force Act and the Promoting Security and Justice for Victims of Terrorism Act (PSJVTA).

Substantial economic growth in the West Bank and Gaza depends on a number of factors: further easing of Israeli movement and access restrictions balanced with Israeli security concerns; expanded external trade and private sector growth; continued 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, are able to grow somewhat independently of these factors and therefore have enjoyed greater success in the Palestinian economy during the past decade. However, communications technology lags behind and is an impediment to further growth. The West Bank implemented Third Generation (3G) communications technology in 2018, while Gaza is still limited to outdated 2G communications technology. Israel and the PA, with international pressure, are negotiating allowing 4G technology in the West Bank and Gaza.

The Palestinian economy is expected to recover slowly (6 percent growth in 2021 and a projected 3 percent for 2022) after a sharp 11 percent decline in 2020. West Bank investment opportunities continue to exist in information technology, stone and marble, real estate development, light manufacturing, agriculture, and agro-industry. COVID-19 pandemic response measures have led to setbacks in both the stone and marble industry and the tourism sector, previously considered growth areas; the loss of inbound tourism throughout 2022, negatively affecting 37,800 tourism industry workers. It is anticipated that the waning pandemic will allow for eased restrictions and these sectors will flourish again. The increased cost of shipping and global disruptions in supply chains remain challenges despite the lifting of COVID-19 restrictions. The Gaza Strip effectively has been closed to traditional tourism since the 2007 Hamas takeover.

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 Gaza, although the de facto Hamas-led government’s implementation of PA legislation and regulations may differ significantly from PA’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, and businesses in Gaza have reported instances where Hamas courts and officials have employed coercion or have otherwise acted outside the legal system when engaging with private businesses. 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 (MONE) ( www.mne.gov.ps ),IPIEA ( 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 Palestinian Affairs Unit of the U.S. Embassy in Jerusalem ( https://il.usembassy.gov/palestinian-affairs-unit/) and the U.S. Commercial Service ( http://export.gov/westbank ) for the latest information.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index N/A N/A http://www.transparency.org/research/cpi/overview
Global -Innovation Index N/A  N/A https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) N/A N/A https://apps.bea.gov/international/factsheet/
World Bank GNI per capita (USD) 2018 $3,882 https://data.worldbank.org/indicator/NY.GNP.PCAP.KN?locations=PS

1. Openness To, and Restrictions Upon, Foreign Investment

2. Bilateral Investment Agreements and Taxation Treaties

The PA recognizes the international trade agreements listed below, which refer implicitly or explicitly to WTO rules. These include:

Paris Protocol Agreement with Israel (1994) – free trade in products between Israel and Palestinian markets

Technical and Economic Cooperation Accord with Egypt (1994)

Trade Agreement between the PA and Jordan (1995)

Duty Free Arrangements with the United States (1996)

The EuroMed Interim Association Agreement on Trade and Co-operation (1997)

Interim Agreement between European Free Trade Area (EFTA) states and the PLO (1997)

Joint Canadian-Palestinian Framework for Economic Cooperation and Trade (1999)

Agreement on Commercial Cooperation with Russia – extends MFN status

Greater Arab Free Trade Area, to which the PA is a party (2001)

Free Trade Agreement with Turkey (2004)

Trade Agreement with the EU – duty-free access for Palestinian agricultural and fishery goods (2011)

Free Trade Agreement with Mercosur (2011)

Unilateral acts by other Arab trade partners extending preferential treatment to trade with the Palestinians.

Since 1996, duty-free treatment has been available for all goods exported from the West Bank and Gaza to the United States, provided they meet qualifying criteria as spelled out in the U.S.-Israel Free Trade Area (FTA) Implementation Act of 1985, as amended. The benefits for imports provided by all of the trade agreements listed above are subject to the Israeli government’s application of the terms, since all goods destined for the West Bank or Gaza must enter through Israeli-controlled crossings or ports. The Israeli government generally applies duties and tariffs consistent with its trade agreements, not with the PA’s trade agreements.

There is no bilateral taxation treaty with the United States that covers the West Bank and Gaza. The Palestinian Authority is not a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting.

3. Legal Regime

4. Industrial Policies

5. Protection of Property Rights

6. Financial Sector

7. State-Owned Enterprises

Although there are no state-owned enterprises (SOEs), some observers have noted that the PIF essentially acts as a sovereign wealth fund for the PA, and enjoys a competitive advantage in some sectors, including housing and telecommunications, due to its close ties with the PA. The import of petroleum products falls solely under the mandate of the Ministry of Finance’s General Petroleum Corporation, which then re-sells the products to private distributors at fixed prices.

8. Responsible Business Conduct

Most large or multinational businesses in the West Bank include corporate social responsibility (CSR) in their business plans, mainly focusing on philanthropy related to education, health, and youth. Some medium-sized enterprises, particularly in healthcare and the food industry, started CSR initiatives to create goodwill for their products. CSR engagement remains relatively low overall, because over 90 percent of companies are small, family-run businesses.

9. Corruption

The Palestinian public views corruption as the most important issue in their daily lives according to an October 2021 poll by the Coalition for Integrity and Accountability (AMAN), the Palestinian chapter of Transparency International 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. Despite the AGL, the perception that access to power is needed to succeed in business is pervasive according to contacts. The AGL was amended in 2010 to establish both 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 ).

10. Political and Security Environment

Israeli government restrictions on the movement and access of goods and people between the West Bank, Gaza, and external markets – which Israel states are necessary to address its security concerns – continue to limit Palestinian private sector growth. Israeli Defense Forces under the Israeli Ministry of Defense are responsible for the West Bank, but PA Security Forces were granted security control of 17.5 percent (called Area A) under the 1993 Oslo Accords. Area A and Area B together make up the 36 percent of the West Bank and fall under PA civil control. Pending a final negotiated peace agreement defining borders and control of territory, Israel maintains all administrative and security control of Area C, which comprises 61 percent of the West Bank. A 2017 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 security situation can change rapidly. Potential investors should regularly consult the State Department’s latest travel warnings, available at https://travel.state.gov.

Clashes between security forces and Palestinians in the West Bank as well as between Israeli settlers and Palestinians have resulted in deaths and injuries. The Israeli government may restrict access to and within the West Bank and may place some areas under curfew. In June 2007, Hamas, a designated Foreign Terrorist Organization (FTO), seized control of the Gaza. The security environment within Gaza and on its borders is volatile. Violent demonstrations and shootings occur sporadically and with little warning, and the collateral risks are high. While the situation remains calm following a large escalation in May 2021, periodic mortar and rocket fire and Israeli military responses continue to occur. Following the 2007 Hamas takeover, the Israeli government implemented a closure policy that restricted imports to limited humanitarian and commercial shipments, effectively blocking exports from Gaza until 2015, when exports rebounded to an average of 115 truckloads per month.

The economic situation and investment outlook in Gaza have deteriorated since the 2007 takeover, with especially challenging periods following Israeli combat operations there: December 2008-January 2009; November 2012; and July-August 2014; and May 2021. The Israeli government has at times eased its closure policy by lifting some restrictions on goods imported into and exported out of Gaza, most recently following the May 2021 escalation. However, businesses continue to face opaque restrictions on delays in importing and exporting goods, spare parts, and through Israeli-controlled Kerem Shalom crossing, the sole entry and exit point for goods traveling between Israel and Gaza. The Israeli government allows limited exports (transshipments) to overseas markets and to Israel, and some sales to the West Bank.

11. Labor Policies and Practices

With its growing youth population and high rates of attendance across the schooling systems, the West Bank and Gaza have an abundant supply of educated and skilled labor. According to the Palestinian Central Bureau of Statistics (PCBS), the total population of the West Bank and Gaza in December 2020 was approximately 5 million, including 3 million in the West Bank and 2 million in the Gaza. PCBS estimated there were 1,443,000 people in the Palestinian labor force as of the end of 2021, with 939,700 in the West Bank and 503,300 in Gaza. An estimated 143,000 Palestinians from the West Bank worked in Israel and Israeli settlements and an estimated 10,000 from Gaza worked in Israel at the end of 2021.

The most recent PCBS labor statistics estimate 20201unemployment was at 13.2 percent in the West Bank and 44.7 percent in Gaza. According to PCBS, at the end of 2021, the service sector was the largest employer in the local market with more than one-third in the West Bank and more than half in Gaza. The public sector employed 33.9 percent of the employed in 2021(32.6 percent in the West Bank and 52.8percent in Gaza). According to the most recent Labor Force Survey (Q4, 2021), private sector labor distribution in the West Bank and Gaza, by sector, is as follows:

33.9 percent – Services and Other Branches

21.9percent – Commerce, Hotels, Restaurants

18.7percent – Construction

13percent – Mining, Quarrying, Manufacturing

6.7percent – Agriculture, Forestry, Fishing, Hunting

5.8 percent – Transportation, Storage, Communication

Women face additional obstacles to employment opportunities and experience higher unemployment rates and lower labor force participation rates than men, despite comparable education levels. Only 17 percent of Palestinian women, compared to 69 percent of Palestinian men, participate in the labor force, according to a December 2021 PCBS report. The report also estimated that women’s unemployment rate (39 percent) is double that of men’s (20 percent), and female post-secondary graduates experienced 66 percent unemployment compared to the 39 percent experienced by their male counterparts. Many factors contribute to this phenomenon including lacking legal protections against discrimination and sexual harassment; labor regulations prohibiting women’s participation in certain jobs or shift times; cultural attitudes about appropriate work for women and household responsibility expectations; and men’s greater freedom of movement and willingness to take lower wage jobs.

The Palestinian minimum wage remained legally mandated at NIS 1,450 ($381.57) per month throughout 2020. In January 2022 the PA cabinet implemented an increase of the minimum wage to NIS 1,880 ($570) per month. However, according to the PCBS, at the end of 2021, 30 percent of the private sector wage employees received less than the minimum wage. The average daily wage in the West Bank was NIS 123 ($38), compared with NIS 65.6 ($20) in Gaza while for the workers in Israel it was NIS 269 ($84).

PA labor law does not explicitly prohibit forced or compulsory labor, but does forbid the use of child labor, in accordance with international standards. However, there are reports of forced labor and child labor in the West Bank and Gaza, particularly in agricultural work and the informal economy. According to the PCBS, in 2021, 3 percent of children (aged 10-15 years) were employed (4percent in the West Bank and one percent in Gaza). Despite the widespread informal economy, most large Palestinian employers rely on standard, long-term employment contracts with minimal use of temporary workers. Israeli labor law applies to settlements in the West Bank, but authorities do not enforce it uniformly.

PA law provides for the rights of workers to form and join independent unions and conduct legal strikes. The law requires conducting collective bargaining without any pressure or influence but does not explicitly provide for the right to collective bargaining. Anti-union discrimination and employer interference in union functions are illegal, but the law does not specifically prohibit termination due to union activity. Non-governmental organizations do not consider labor unions to be independent of authorities and political parties. The requirements for legal strikes are cumbersome and strikers have little protection from retribution. The PA Ministry of Labor can impose arbitration; in such cases, workers or their trade unions face disciplinary action if they reject the result. If the ministry cannot resolve a dispute, it can be referred first to a committee chaired by a delegate from the ministry and composed of an equal number of members designated by the workers and by the employer, and, if the committee is unsuccessful, it can be referred to a specialized labor court. Teachers, who comprise the most significant portion of the public sector work force, participated in a large-scale strike with demonstrations in early 2016 protesting partial pay.

In early 2016, the PA President approved a new Social Security Law mandating compulsory social security contributions from private sector employees and their employers to a new Palestinian Social Security Fund. It was to be implemented on November 1, 2018; however, in late 2018, the PA President postponed implementation indefinitely due to large-scale private sector opposition. The ILO together with the PA Ministry of Labor, civil society organizations, and the private sector plan continue to hold social dialogue sessions to address specific points of contention. A report to the PA on these points is due by end of March 2022 but contacts tell us they do not expect the PA to resurrect the law.

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