The Palestinian economy is in a slow decline, but investment opportunities continue to exist. These can be found in real estate development, light manufacturing, agriculture, and agro-industry. Information technology, the stone and marble industry and tourism also remain promising areas for growth.
The Palestinian economy is small and relatively open, with several large holding companies dominating certain sectors. Palestinian businesses have a reputation for professionalism as well as the quality of their products. Large Palestinian enterprises are internationally connected, with partnerships extending to Asia, Europe, the Gulf, and the Americas. 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.
While economic growth slowed in earlier years and experienced an actual decline in 2018, the West Bank’s overall investment climate has slowly improved since 2007– primarily due to Palestinian security, economic, and legal reforms; international donor support; and the easing of some Israeli government restrictions on the movement of people and goods. Most of the reforms were applicable to business concerns in the roughly 40 percent of the West Bank under the civil control of the Palestinian Authority (PA), commonly referred to as Area A and Area B following the 1993 Oslo Accords and 1994 economic agreement known commonly as the Paris Protocol. The Israeli government maintains full administrative and security control of Area C, which comprises more than 60 percent of the West Bank.
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 have a detrimental effect on the Palestinian private sector. According to a recent study conducted by USAID, 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.
Opportunities for meaningful foreign direct investment in Gaza are few, due to the fact that Hamas, (a United States government designated Foreign Terrorist Organization, has controlled the territory since 2007). This has resulted in de-coupling Gaza’s economy with the West Bank economy and Israeli and Egyptian security restrictions on the flow of people, imports, and exports. There are opportunities within the Gaza Industrial Estate, an industrial zone which has been left alone by Hamas, though imports and exports still face the above-noted restrictions. Numerous consumer goods enter Gaza through Israel, but there are restrictions in place that limit the import of a number of dual-use items, which Israel has determined represent a security risk. . This is a broad category of items that includes construction materials, which Israel only allows to enter with advance coordination and approval from Israel. Through the end of February 2019, approximately 380 truckloads of exports per month have exited Gaza, a significant increase over the average of roughly 220 truckloads per month in 2017 and 2018. However, the average monthly volume thus far in 2019 is far below the average monthly volume of 961 truckloads per month in the first half of 2007 – prior to Hamas’ takeover of Gaza.
In 2018, GDP growth in the West Bank and Gaza slowed to 1 percent, and in the medium term, the IMF projects that economic growth will hover around 2.3 percent (under the status-quo scenario). With population growth at roughly 3 percent per year, real and per capita GDP is projected to decline. Despite the overall improvement in the investment climate, ongoing political, economic, and fiscal uncertainty has generally deterred large-scale internal and foreign direct investment. The PA ran a current account deficit of nearly USD 1 billion, roughly half of which was covered by direct budget support from foreign donors. The rest was converted into new debt to local banks, private sector suppliers of goods and services, and the PA civil servant’s pension fund. In 2018, donor countries provided the PA with USD 515 million in direct budget support and USD 160 million for development financing, a USD 46 million decrease from 2017. The PA remained heavily dependent on Israeli transfers of PA clearance revenues – taxes and import duties collected by Israel by agreement on the PA’s behalf, and transferred to the PA on a monthly basis – which comprised 65 percent of all PA revenues in 2018. The PA’s continued practice of 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 both passed legislation in 2018 imposing penalties to deter such payments. As of March 2019, the PA has refused to accept any clearance revenue transfers from Israel in response to the Israeli government’s implementation of a law mandating the withholding from clearance revenue transfers to the PA an amount equal to that paid by the PA to Palestinian prisoners and those the PA deems “martyrs.”
The Palestinian labor force is well educated, boasting a high literacy rate, with high technology penetration. That said, an already high level of unemployment worsened in 2018. According to the PA, the combined West Bank/Gaza (WBG) unemployment rate in the fourth quarter of 2018 was 29 percent. While the unemployment rate has remained stable in the West Bank in recent years, currently at 16 percent, over half of workers are unemployed in Gaza (51 percent), according to the UN’s International Labor Organization (ILO). The rates were even higher for youth, especially educated youth. The public sector continued to be the largest Palestinian employer, providing 21.3 percent of all jobs.
The manufacturing and agricultural sectors’ contribution to GDP growth remained on a long-term decline: from 19 percent of GDP in 1994 to 12 percent in 2018 for manufacturing and from 12 percent of GDP in 1994 to 2.9 percent in 2018 for agriculture. To help reverse these trends, the Palestinian Investment Promotion Agency (PIPA) included both sectors in the National Export Strategy for 2014-2018. Target sectors include the following:
- 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
Preliminary 2018 export statistics obtained from the Palestinian Central Bureaus of Statistics (PCBS) show total exports of USD 1.098 billion, representing a three percent increase over 2017 (USD 1.064 billion). The majority of Palestinian exports are sold to Israel, totaling USD 961 million. Remaining exports, or USD 137 million, were sold to other countries including Jordan, the Gulf States, and the United States.
Future economic growth thus depends on a series of factors: further easing of Israeli movement and access restrictions, while balancing Israeli security concerns; expanding external trade and private sector growth; PA approving and implementing long-pending commercial legislative reforms; political stability; increasing the supply of water and energy to the productive sectors while lowering the 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 independent of these factors and therefore have enjoyed greater success in the Palestinian economy during the past decade. The recent introduction of Third Generation (3G) communications technology into the West Bank stimulated further development of businesses that benefitted from real-time GPS/location data. There has also been an uptick in the tourism sector; according to PCBS, approximately 2.76 million domestic and international tourists visited the Palestinian Territories in 2017.
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 Strip, although Hamas’s implementation of PA legislation and regulations may differ significantly from the West Bank. In contrast to the West Bank, Gaza was administered by Egypt rather than Jordan from 1948-1967. Israel unilaterally withdrew from Gaza in 2005. For issues where PA law is not applicable, Gazan courts typically refer back to Israeli and Egyptian laws; however, the de facto Hamas-led government in Gaza does not consistently apply PA, Egyptian, or Israeli laws. These inconsistencies in the legal environment are strong deterrents to private investment.
Due to the changing 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.
|Measure||Year||Index or Rank||Website Address|
|TI Corruption Perceptions index||2019||N/A|
|World Bank’s Doing Business Report “Ease of Doing Business”||2019||116 of 190||http://www.doingbusiness.org/rankings|
|Global Innovation Index||2019||N/A|
|U.S. FDI in partner country ($M USD, stock positions)||2019||N/A|
|World Bank GNI per capita||2017||$5,560||https://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD?locations=PS|