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
- 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) ( ),IPIEA ( ), the Palestine Trade Center ( ), and the Palestinian-American Chamber of Commerce ( ), as well as the Palestinian Affairs Unit of the U.S. Embassy in Jerusalem ( ) and the U.S. Commercial Service ( ) for the latest information.
|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|