Executive Summary
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 (about 5 million consumers with relatively low purchasing power), 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 the 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), commonly referred to as Area A and Area B following the 1993 Oslo Accords and 1994 economic agreement known commonly as the Paris Protocol. GOI restrictions on the movement and access of goods and people between the West Bank, Gaza, and external markets continue to have a deleterious effect on the private sector and limit economic growth. The GOI maintains full administrative and security control of Area C, which comprises more than 60 percent of the West Bank.
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 and Egyptian restrictions on the flow of people, 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, which have been determined by Israel to represent a security risk given Hamas’s control of the Gaza Strip. This is a broad category of items that includes 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.
In 2017, GDP growth slowed to 3 percent, and in the medium term, the IMF projects that economic growth will hover around 2.3 percent (under the status-quo scenario). With population growth at roughly 3 percent per year, real and per capita GDP is projected to decline.
Budgetary uncertainty impacts business decisions. International donor support is declining. In 2017, donor countries provided the Palestinian Authority (PA) with USD 544 million to support its budget and USD 175 million in development financing. The PA was still left with a roughly USD 750 million financing gap, which it covered by increasing bank debt and accumulating new private sector and pension fund arrears. The PA stock of debt (including international debt) stands at an estimated USD 5 billion. Most of the PA’s revenue (70 percent) comes from import duties and other fees collected by Israel and subsequently transferred to the PA (clearance revenues). The PA and Palestine Liberation Organization (PLO) continued to provide martyr payments to the families of Palestinian individuals killed carrying out a terrorist act. The PA and PLO also provided payments to Palestinians in Israeli prisons, including those convicted of acts of terrorism against Israelis. Israeli government officials criticized this practice as incentivizing acts of terror. These payments and separate canteen stipends that the Israeli government allows for prisoners were first initiated by the PLO in 1965 and have continued under the PA since the Oslo Accords with Israel. Draft Knesset legislation to reduce or suspend these transfers could severely undermine PA capacity and fiscal solvency.
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 value-added tax (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. The recent introduction of Third Generation (3G) communications technology to the West Bank should stimulate further development of businesses that can benefit from real-time GPS/location data.
According to the PA, the unemployment rate in the 4th quarter of 2017 was 13.7 percent in the West Bank and 42.7 percent in Gaza, or 24.5 percent overall. The overall unemployment rate for men was 22.3 percent. Among women, the overall unemployment rate was 48.2 percent and among youth aged 20-24 it was 40.7 percent (approximately 58 percent in Gaza). The workforce is expected to expand significantly in the coming years, as 49.7 percent of the population is currently below the age of 19. The labor force is well educated, boasting a high literacy rate, with high technology penetration and familiarity with overseas markets. Wages in the West Bank and Gaza are low relative to Israel but West Bank wages are higher than in neighboring Arab countries. In January 2013, the PA implemented the first Palestinian minimum wage, at Israeli New Shekel (NIS) 1,450 (USD 389) per month. The poverty line in the WBG for a household (two adults and three children) is NIS 2,293 (USD 649) per month. Palestinians remain dependent on the public sector, which employs 21.3 percent of the workforce.
Despite the decline of manufacturing (from 19 percent of GDP in 1994 to 10 percent in 2017) and agriculture (from 12 percent of GDP in 1994 to 3 percent in 2017) as sectors contributing to GDP growth, significant sectors highlighted by the Palestinian Investment Promotion Agency (PIPA) and in the National Export Strategy for 2014-2018 include the following:
- 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)
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 Strip, although Hamas’s implementation of PA legislation and regulations may differ significantly from the West Bank. In contrast to the West Bank, Gaza was administered by Egypt rather than Jordan from 1948-1967, while Israel occupied both the West Bank and Gaza starting in 1967. For issues where PA law is not applicable, Gazan courts typically refer back to Israeli and Egyptian laws; however, the de facto Hamas-led government in Gaza does not consistently apply PA, Egyptian, or Israeli laws.
Due to the changing 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. Consulate General in Jerusalem (https://jru.usconsulate.gov/ ) and the U.S. Commercial Service (http://export.gov/westbank) for the latest information.
Table 1
Measure | Year | Index or Rank | Website Address |
TI Corruption Perceptions index | 2018 | N/A | N/A |
World Bank’s Doing Business Report “Ease of Doing Business” | 2018 | 114 of 190 | http://www.doing business.org/rankings |
Global Innovation Index | 2018 | N/A | N/A |
U.S. FDI in partner country ($M USD, stock positions) | 2018 | N/A | N/A |
World Bank GNI per capita | 2017 | USD 5,560 | https://data.worldbank.org/ indicator/NY.GNP.PCAP.PP.CD?locations=PS |