Economic studies
Palestine

Palestine

Population 4.8 million
GDP per capita 2960 US$
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Synthesis

major macro economic indicators

  2014 2015  2016(f) 2017(f)
GDP growth (%) -0.2 3.5 3.3 3.5
Inflation (yearly average) (%) 1.7 1.4 1.3 1.3
Budget balance (% GDP)* -12.5 -11.4 -9.6 -9.3
Current account balance (% GDP)* -15.5 -19.1 -18.8 -16.4
Current account balance (% GDP)** -7.4 -13.5 -13.5 -11.4
Public debt (% GDP) 37.6 40.4 37.5 39.0

 

(e) Estimate (f) Forecast

* Excluding Grants ** Including grants

STRENGTHS

  • Observer State status at the UN since late 2012
  • Scale of international bilateral and multilateral aid
  • Substantial remittances from the diaspora

WEAKNESSES

  • Lack of geographic, political and economic unity
  • Restrictions on movement in the West Bank imposed by Israel, and blockade of the Gaza Strip by Egypt and Israel.
  • Stalemate in the peace process with Israel

RISK ASSESSMENT

Low growth in 2017

The economy of the Palestinian territories remains marked by the repercussions of the 50-day war between Hamas and Israel in 2014, which destroyed a substantial part of the infrastructure in the Gaza Strip. While growth recovered from 2015, it has since stagnated. The dichotomy between growth in Gaza and in the West Bank will linger on in 2017.  In Gaza, growth will continue to be driven by the reconstruction of damaged infrastructure. In contrast, in the West Bank (about 70% of the territories' GDP), growth, mainly sustained by private consumption, will continue to stagnate at around 2.5%, still penalised by the restrictions imposed by Israel on trade and the movement of people.  With the peace process likely to remain frozen in 2017, these restrictions will endure. Moreover, the decline in international aid, triggered by increased competition for regional aid and budget cuts by the Gulf States in response to lower oil prices, is not likely to change in 2017. International aid is crucial for sustaining public infrastructure investment. Renewed tensions in the aftermath of the wave of knife attacks in Israel since September 2015 could also threaten growth. Growth will still be insufficient to significantly reduce unemployment, which affects 27% of the population (19% in the West Bank and 42% in Gaza), despite the Israeli government's plans to deliver more work permits to Palestinians in 2017.

In 2017, inflation is expected to remain weak and stable, reflecting the low prices for food and commodities.

 

The public and external accounts remain fragile

The public finances of the Palestinian Authority (PA) remain dependent on relations with the Israeli government. The reason is that Israel has discretionary power over transfers of clearance revenues, which account for a significant part of the Palestinian budget. After significantly reducing the deficit in 2016, mainly thanks to an exceptional transfer of ILS 500 million in clearance revenues, the PA is expected to find it more difficult to reduce it in 2017. Admittedly, efforts to rationalise current spending are continuing and, combined with stable revenues, should allow a slight improvement in the deficit. Nevertheless, wages, which account for over 50% of the PA's spending, will remain very high. In addition, international aid, a major source of finance, which is likely to remain at relatively low levels, will support a critical budget situation. The Palestinian public debt fell in 2016 following the downward adjustment of the inventory of arrears, which made up almost half the debt. In 2017, this debt is expected to climb again but it should remain sustainable. However, the debt trajectory remains exposed to external shocks.

The external accounts remain dependent on Israel's economic cycle. The reason is that trade with Israel accounts for over 70% of imports and 80% of exports. In 2016, like the trade deficit, the current account deficit improved as a result. Revenues from the many Palestinian workers in Israel contributed positively to the current account deficit in 2016. In 2017, the Palestinian territories will, therefore, benefit from the Israeli recovery but renewed tensions in the West Bank could lead to an intensification of the restrictions of movement and access in the Palestinian territories. Meanwhile, the positive impact of the recovery in the GCC countries on remittances from the diaspora will contribute to an improvement in the current account balance.

 
Persistence of intense internal and external tensions

The resignation of the unity government formed by Fatah, which controls the West Bank and Hamas, which governs Gaza, in June 2015 plunged the country into a new political stalemate. Apart from the divisions between the two parties, splits are appearing within Fatah. Re-elected in November 2016, Mahmoud Abbas, ageing president (81 years) of the PA and the Palestinian Liberation Organisation (PLO) was re-elected as President of Fatah (without a ballot and after having excluded the dissenting voices within the party) but is subject to internal and popular criticism (over 60% of the population wants him to resign). By excluding one of his opponents, Mohammed Dahlan, now exiled to Abu Dhabi, Mr Abbas has risked antagonizing Saudi Arabia, Egypt, Jordan and even the UAE, whose aid is crucial.

Since September 2015, the resurgence of Israeli-Palestinian tensions over the sharing of the Dome of the Rock is at the origin of a wave of violence which started with a spate of knife attacks.  The trend to the right of the Israeli political chessboard, with specifically the incorporation of the Yisrael Beitenout party in the government coalition and the election of Donald Trump, leaves little hope of the peace process restarting, despite an initiative by the French. Thestatus quoin Israeli-Palestinian relations is, therefore, likely to prevail in 2017. Member of the International Criminal Court since 2015, the PA, urged on by Mr Abbas, intends to continue efforts to achieve recognition of a Palestinian State. In 2017, the President hopes to obtain for the State of Palestine, observer status since 2012, full member state status at the UN. 

 

Last update: January 2017

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