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.