Palestinian economy reels under COVID-19 impact, enduring poverty and unemployment

By United Nations Conference on Trade and Development

Palestinian economy reels under COVID-19 impact, enduring poverty and unemployment

The latest report by UNCTAD on its assistance to the Palestinian people shows that the economy of the Occupied Palestinian Territory grew by 7.1% in 2021, following an 11.3% contraction in 2020 in the aftermath of the COVID-19 shock.

But with a significant decline in budgetary support from the international community, the fiscal crisis facing the Palestinian Authority worsened, and the economy is yet to make up for the huge losses it incurred since early 2020.

The report says the long-term drop in budget support since the global financial crisis and the deepening fiscal crisis facing the Palestinian government belie expressions of international support for a two-State solution.

Palestinian GDP in 2021 remained 5.1% below its pre-pandemic level, the report states. And its limited recovery was unevenly concentrated in the West Bank, while Gaza lagged, and the divergence between these two Palestinian regions widened.

In 2021, unemployment remained high, at 26%, in the Occupied Palestinian Territory, while in Gaza over half the workforce was unemployed, and 83% of workers received less than the minimum wage.

As a result, poverty deepened, with the latest data indicating that 36% of the Palestinian population lives below the poverty line. Meanwhile, food insecurity increased from 9% to 23% in the West Bank, and from 50% to 53% in Gaza.

Systematic barriers

The report says the ability of the Palestinian government to effectively respond to the COVID-19 shock has been constrained by systematic barriers imposed by occupation, which deprives it of the policy tools and fiscal and monetary space available to other governments.

If the status quo persists – with occupation entrenched and donor aid dwindling – in the short to medium term, GDP growth will barely keep up with population growth, implying, at best, per capita GDP stagnation and persistent high unemployment and poverty.

The report highlights the role of occupation in fragmenting the Palestinian economy and depriving its producers of access to regional and global markets, essential for a small economy with weak domestic purchasing power.

By increasing transportation and production costs, occupation impairs the competitiveness of Palestinian producers and pre-empts the realization of the benefits of international trade, economies of scale and integration into regional and global value chains, the report states.

This results in import dependence and a weak, undiversified export sector, with 10 labour-intensive products accounting for two thirds of total exports.

The upshot is a massive trade deficit of 37% of GDP in 2021, among the highest in the world, and trade dependence on Israel, which in 2021 accounted for 72% of total Palestinian imports and exports.

Deepening fiscal crisis and vanishing donor aid

The Palestinian government has been implementing far-reaching fiscal reforms, driving down the recurrent budget deficit from 23.9% of GDP in 2007 to 5.6% in 2021, and reducing the ratio of total government expenditure to GDP by more than 20 percentage points, from 50.5% in 2007 to 30.4% in 2021.

Despite the reforms, since 2020, the government has been in the grips of one of the deepest fiscal crises in its history, characterized by a large financing gap and a precipitous decline in foreign aid.

In addition, the occupying Power controls over two thirds of Palestinian fiscal revenues, the transfer of which it can (and often does) suspend and/or to which it applies unilateral deductions before transferring the rest.

In 2021 total donor aid fell to $317 million, or 1.8% of GDP, a precipitous decline from the $2 billion or 27% of GDP in 2008. Meanwhile, budget support halved compared to 2020, amounting to $186 million, or only 1% of GDP, compared to 24% in 2008. Meanwhile, development support declined from a peak 10.6% in 2000 to a paltry 0.73% in 2021.

The dearth of fiscal resources undermines the Palestinian government’s ability to carry out basic state functions and meet its various obligations. It has paid public sector employees partial salaries since November 2021.

The impact of the fiscal crisis is aggravated by the fact that the Palestinian government does not have a proper, full-fledged Central Bank, does not issue a national currency, has little access to international financial markets and has exhausted safe domestic borrowing limits and sources.

The crisis can be overcome by lifting the restrictions imposed by occupation that facilitate the leakage of Palestinian fiscal resources to the treasury of the occupying Power and shrink the tax base by stifling economic activity.

Mobility restrictions widens the gender gap

Palestinian women are disproportionally affected by restrictions on movement, the report highlights. The mobility restrictions imposed by occupation undermine women’s right to equal labour market participation by hampering their access to work, education and health services.

Palestinian women face additional safety concerns during commute and at checkpoints, which restrict many of them to working from home or near home, or to staying unemployed.

Even though Palestinian women boast better education and more years of schooling than men, by the end of 2021, 54% of them were unemployed compared with 30% of men.

Meanwhile, on average, women earned 20 cents of gross national income for every dollar earned by men.

Demolition of assets in the West Bank and mounting suffering in Gaza

The occupying Power controls Area C, which represents more than 60% of the West Bank area, where it is extremely hard for Palestinians to obtain permits to build structures for residence, economic activities or infrastructure, such as roads, water and power networks. If a structure is built without a permit, as is often the case, it is demolished.

In 2021, demolition of Palestinian assets in the West Bank stood at a five-year high: 911 structures were demolished. Donor-funded structures were not spared: 140 humanitarian assets, including residential and livelihood structures funded by donors, were demolished.

Demolition of assets creates intolerable living conditions that push Palestinians out of Area C.

Since 2007, Gaza has been under a blockade that has hollowed out its economy. It has suffered military operations that have devastated much of its infrastructure and forced 80% of its people into dependence on international assistance.

Gaza is caught in a vicious circle where interventions by the international community and donors are typically restricted to immediate, urgent humanitarian and rehabilitation activities, with little resources left for sustainable recovery and long-term development needs.