The Palestinian economy is small and relatively open. While 99 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 (only 1 percent) 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 2020 export statistics obtained from the Palestine Central Bureau of Statistics (PCBS) show total exports of USD 1.094 billion, representing a 2.4 percent increase over 2019 (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 continue to limit Palestinian private sector growth and reflect Israeli security concerns. 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 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. Nevertheless, already high unemployment persisted and worsened in 2020. According to the latest figures available from the PCBS, the combined West Bank and Gaza unemployment rate in the fourth quarter of 2020 was 23.4 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 14.9 percent pales by comparison with the Gaza’s 43.1 percent, according to the PCBS. The rates were high for youth aged 20-24 years old (40.3 percent), and for the educated (28 percent). The public sector continues to be the largest Palestinian employer, providing 21.3 percent of all jobs.
In 2020, the economy contracted by 11-12 percent, according to World Bank preliminary estimates, due to COVID-19 response measures taken by the PA to combat the pandemic which affected all economic sectors as well as decisions taken for political reasons. The most prominent example of this was the PA’s decision to reject clearance revenues (taxes on imports collected by Israel on the PA’s behalf and transferred to the PA on a monthly basis) for six months (May-November 2020). For 2021, the World Bank estimates a modest economic recovery of 2.5 percent. 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 2020 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 12 percent in 2019 and agriculture fell from 12 percent of GDP in 1994 to 7 percent in 2019. 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)
In 2020, the PA ran a total fiscal deficit of nearly USD 1.6 billion, of which around USD $487 million ($356 million in recurrent budget support and $131 million in development financing) was covered by direct budget support from foreign donors. The PA covered its financing gap by taking an additional $748 million in new bank loans and accumulating more arrears to the private sector suppliers of goods and services (exceeding $1 billion), and the PA civil servants’ pension fund. The PA remains heavily dependent on Israeli transfers of PA clearance revenues which comprised 68 percent of all PA revenues in 2020. 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. 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 Anti-Terrorism Clarification Act (ATCA).
Any short-term growth in the Palestinian economy is connected to ongoing challenges with COVID-19 including delayed efforts to vaccinate the population. Future economic growth, however, 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; 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. 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.
The Palestinian economy is expected to slowly recover after a sharp decline in 2020, and 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 totally lifted, the tourism sector is projected to continue to be adversely impacted by the loss of inbound tourism throughout 2021, 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 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 ( ), Palestinian Investment Promotion Agency ( ), the Palestine Trade Center ( ), and the Palestinian-American Chamber of Commerce ( ), as well as the U.S. Embassy in Jerusalem ( ) and the U.S. Commercial Service ( ) for the latest information.