Data collected in August – September 2009
A Report for the United Nations World Food Programme
Hassan Abu Hassan
Omar Abu Ghosh
Al-Sahel Co. for Institutional Development and Communications
This publication has been produced with financial assistance of the donors of the World Food Programme (WFP). The content of this publication can in no way be taken to reflect the views of the WFP or their donors. Furthermore, the designations employed and the representation of material in this publication do not imply the expression of any opinion whatsoever on the part of the WFP or their donors, concerning the legal or development status of any country, territory, city or area or its authorities, or concerning of delimitation of its frontiers and boundaries
Purpose and Methodology of the Market Study
The Israeli closure of the occupied Palestinian territory (oPt) on the Palestinian population, compounded by the recent global food and fuel price increases, have led to increased unemployment rates in both the West Bank and the Gaza Strip and very high levels of food insecurity and vulnerability, particularly in the Gaza Strip where 77 percent of the population are either food insecure or vulnerable to food insecurity.
Palestinian market resilience is rapidly eroding due to the protracted closure regime which has caused greater market fragmentation and trade localization, resulted in thin profit margins and has increased transaction costs. The global increase in food prices has had several effects on trader’s business operations: more than half of traders felt that the increase in food prices depressed the overall demand for food and forced them to reduce their stock levels while almost three-quarters reported increasing food prices resulting in reduced sales.
Given the significant role that markets may play in food access and availability, and hence in food security, WFP oPt monitors food commodity markets and their functioning in the West Bank and the Gaza Strip. The current study was undertaken to provide such information as well as to make recommendations on future food security programming. The study focuses on two markets, namely: vegetables and fruits; and imported staple food (wheat flour, sugar and rice). It took place during August and September 2009. Market performance is also analyzed by measuring the degree of integration in the market, based on price time-series data from the Palestinian Central Bureau of Statistics (PCBS).
A picture of the markets at the close of 2009:
West Bank markets continue to be localized and fragmented while trade between the West Bank and the Gaza Strip has been suffocated by the blockade. Supply relations between traders in the Gaza Strip have also changed quite considerably in the past 2.5 years and almost half of Gaza’s traders have been forced to change their suppliers during the past two years due to the blockade. The number of traders’ clients has also been shrinking. More then ever, Palestinian trade is heavily concentrated with one partner, namely Israel, accounting for nearly 81 percent of the total value of trade in 2008.
The blockade is affecting all business in the Gaza Strip and the procedures at the commercial crossings are disproportionately affecting Gaza traders compared to their West Bank counterparts. Supplies from Israel are unpredictable and Israeli incursions into the Gaza Strip often coincide with a closure of Gaza’s commercial crossings. The cumulative negative impact of this on Palestinian businesses has been rising over the past two years as delivery times for imports have increased, transportation costs have increased and competition is rising.
In the Gaza Strip, economies of scale have been undermined by reduced demand, increased competition from “cart traders” and limited liquidity, all of which are a byproduct of the Israeli blockade. Trade between West Bank exporters and Israeli clients has been difficult due to delays in payment. Gaza importers have had no credit with Israeli suppliers since June 2007, and are now forced to make payments in advance. Importers have in turn tightened credit to wholesalers, especially in the Gaza Strip, in an attempt to reduce their business risk. West Bank importers on the other hand are finding that Israeli suppliers have considerably reduced their credit lines and are demanding payment be made within two weeks, shorter than ever before.
Traders in the Gaza Strip are experiencing high levels of risk and inflated transaction costs, larger reductions in effective demand and lowered access to credit facilities than their West Bank peers. The depressed state of the economy in the Gaza Strip has forced many people into the informal market, which has resulted in lost incomes for traders (especially retailers). Reduced credit from wholesalers is reducing retailer’s ability to make larger purchases and Gaza retailers are in turn offering less credit to their customers. The reduction in credit availability/facilities, lack of cash in Gaza banks and uncertain business environment for Gaza traders are also reducing traders’ financial capacity to make purchases. Some wholesalers are also reducing forward credit to their clients due to engagement in the tunnel trade (which requires traders to pay in advance for all merchandise bound for smuggling through the Rafah tunnels).
Also households are buying cheaper goods and sales volumes are much reduced; three quarters of traders (mostly in the Gaza Strip) witnessed a decrease in sales volume (30 – 48 percent reduction in sales) due to access restrictions. As a result retailers are selling lower quality, less variety and cheaper products which are more affordable amongst the most vulnerable population; they are also operating with lower stocks (Gaza retailers and wholesalers who indicated a 50 percent decrease in average stock).
Hebron and Gaza traders are applying the lowest markups on goods. Closure related costs – additional expenses incurred by traders as a result of the extra costs associated with back-to-back transport, waiting times, and damages to products at commercial terminals – affect almost half of the traders in the Gaza Strip and these costs have a major effect on their price decisions/profit margins.
Transportation costs for foodstuffs (from the source to their stores) are affecting half of traders and have increased by around 30 percent in the past two years. Transport costs represent more than 70 percent of marketing costs for traders, implying the gravity of the increase in transport cost on consumer prices (in West Bank and Gaza Strip).
Coping strategies for traders include localizing trade activities and marketing to the same governorate, adopting cost reduction measures and reducing credit facilities, and switching to Israeli suppliers. Gaza traders have exhausted more of their coping mechanisms and are thus more vulnerable. Three times more Gaza traders resorted to increasing food prices and reducing of credit sales than in the West Bank. Most Gaza traders are unable to further reduce their business costs or credit facilities, and expressed concern that any further reduction in costs or profit margins would entail additional loss in sales volumes.
While both the Ministry of Trade and National Economy (MoTNE) in the West Bank and the Gaza Strip are regulating food markets, market visits and trader interviews suggest that the latter – possibly as a result of the unpredictable supply caused by the Blockade- is much more proactive in monitoring and stabilizing the availability of staple foods and market prices of these. The de facto government in the Gaza Strip has also been proactive in encouraging private investment in the agricultural areas of the evacuated Israeli settlements and imposing restrictions on the import of fruits and vegetables that have a local substitute. This has improved the market position of these farmers. Export farmers are in a more vulnerable position due to their inexperience with the current conditions and stiff competition as they seek to find an alternative niche. Importers of produce to the Gaza Strip are witnessing severe constraints to their work due to their inability to travel to Israel to negotiate business transactions and inspect their orders. Sales of fruits in the West Bank and Gaza Strip have substantially decreased in the last two years as a result of high prices. The main shortages reported by Gaza retailers were only limited to certain types of Israeli produced fruits.
Staple foods, consisting of wheat flour, rice, sugar, corn oil, pulses, wheat and other cereal preparations, are all almost entirely imported. Local agriculture has been severely and negatively affected by the political and economic decline in the oPt, and its contribution to food availability has declined. Significant yearly variations in food production are not fully offset by subsequent changes in food trade and aid.
Key changes in agricultural production over the last seven years are an increase in irrigated agriculture, especially in vegetables; and a decrease in fruit production. These increases are compromised by the destruction of trees and confiscation of land and water resources by the Israeli authorities and military, the construction of illegal settlements and the West Bank Barrier. Severe restrictions on trade between the West Bank and the Gaza Strip have caused further disruption to markets and food availability.
The oPt is especially vulnerable to external shocks affecting food availability and prices due to three factors: (i) its heavy reliance on imported staple foods, (ii) the Israeli control over the commercial and civilian transport routes to and from the West Bank and the Gaza Strip, and (iii) the lack of policy space for the Palestinian Authority to control and/or regulate markets. As well, the continued closure of the West Bank and the Gaza Strip has fragmented the economy, increased business risks and lead to the emergence of unregulated markets (tunnel trade). Compounding all these negative shocks/effects has been the global increases in prices.
There is an increase in informal trade and market concentration in the Gaza Strip, with the vast majority of the traders progressively relying on tunnel trade resulting in an increasingly unregulated supply chain. The implied risk is a breakdown in formal – and more reliable – supply chain channels and the likelihood of entry of food items that do not meet the minimum safety and health standards.
Despite the heavy Israeli bombardment of the border area between Rafah and Egypt during the 2008/2009 Cast Lead Operation and the many airstrikes against known tunnel areas after the offensive, interviews with tunnel traders suggest that the number of commercial tunnels exceeds 1,000. Essential supplies of diesel fuel are pumped through the tunnels in hoses and pipes. Livestock, flour, rice, milk, cheese, cigarettes, cooking oil, toothpaste, small generators, computers and kerosene heaters also come through the tunnels. Tunnel owners either act as transporters for Gaza traders or engage in trade themselves. Interviews suggest that the majority of tunnel owners fall under the former category, while most of those who smuggle fuel fall under the latter category. Tunnel transport fees range between US$ 200-1,500 per tonne, depending on the type of goods being moved. For food products, tunnel owners charge anywhere between US$300-500, paid in advance by importers who also pay their Egyptian counterparts in advance.
Interviews with several tunnels traders confirmed several media reports suggesting that tunnels employ between 20,000- 25,000 workers (supporting a potential of 140,000-175,000 individuals- almost 10 percent of Gaza’s population), who could earn anywhere between NIS 100-200 for 10 hours of work. Tunnel workers interviewed reported that their wages were much higher (reaching NIS 400 per day) in 2007 and 2008, attributing the drop in wages to the significant increase in the number of tunnels and the increased number of workers seeking employment in the tunnels. The drop in wages may indicate, however, cost reduction strategies among tunnel owners, who reported increased levels of competition and reduced number of clients. All tunnel owners interviewed reported that their tunnels are currently operating near 50 percent capacity. Land lease for tunnel digging purposes ranges between US$ 1000-2000 per month.
The tunnel trade is contributing quite significantly to food availability and is believed to circumvent the effects of supply shortages in basic and non-basic foods resulting from the Blockade and the limited entry of food into the Gaza Strip through the Israeli controlled crossings. The sustainability of tunnels as a pipeline for food is highly uncertain, however, as the Israeli Air Force continues to launch strikes against tunnels. Restriction of the tunnel trade is likely to lead to immediate market shortages for essential items, thus having a direct impact on food security.
Impact on Households food security:
The review of the market indicates clearly that the people of the Gaza Strip have stretched to a maximum their coping mechanisms and are becoming more and more destitute as their means of surviving are disappearing. They are getting less credit from stores and are reluctant to use credit when it is available as their livelihoods are suffocated and they have fewer and fewer assets to fall back on to make the repayment. Most people in the Gaza Strip are relying on buying low quality cheap food items (including some unregulated goods from Egypt) to supplement the food aid they receive from the UN and other organizations and are cutting down on fruits and meat. The FAO/WFP Socio Economic and Food Security Survey Report (SEFSec) shows that 42 % of the population in West Bank reduced their expenditure on food. Among the households reporting a reduction in quantity of food purchased, 49 percent mentioned a reduction in quantity of meat, 43 percent talked about a reduction in quantity of fruits purchased.
Food aid in both regions is also playing a significant role, according to traders, in stabilizing prices of staple foods but at the same time, it is depressing demand for these foods (especially in the Gaza Strip). In both regions, availability and physical access to markets will remain subject to the Israeli restrictions on the ground, rendering monitoring of movement restrictions and entry of food imports through the crossings of paramount importance for market functionality food security analysis.
Key to restoring market functionality and improving market performance is free and unobstructed movement of people and goods within the West Bank, between the West Bank and the Gaza Strip, and between the two regions and the rest of the World. The World Bank recently noted that “without efficient and predictable movement of people and goods, there is very little prospect for a sustainable Palestinian economic recovery.”1 The analysis presented in this report confirmed this by showing various evidence of worsening market conditions over the past two years.
While the Government of Israel has relaxed some internal West Bank restrictions, such incremental steps are not likely, by themselves, to lead to any sustainable improvement. Moreover, sustainable economic recovery will remain elusive if large areas of the West Bank – currently almost 60 percent of the land – remain inaccessible for economic purposes and restricted movement remains the norm for the vast majority of Palestinians and expatriate Palestinian investors. Only through a fundamental reassessment of closure, and a restoration of the presumption of movement, will the Palestinian markets be able to restore their functionality.
In the Gaza Strip, the lifting of the Blockade, including the removal of all restrictions imposed on the banking sector and cash transfers between the West Bank and the Gaza Strip, and the facilitation of movement of imports and exports through the commercial crossings are essential for restoring market functioning.
Food assistance remains a vital safety net to meet the staple food needs of the West Bank and the Gaza Strip populations and maintain food stock levels and prices of these commodities at safe reasonable levels.
There is also a need to support the legal market structures and their workers through voucher programmes and to address vulnerable groups with additional small scale interventions to ensure that resort to low quality foods does not result in nutritional problems amongst these people.
Hence, the appropriate response option, would generally call for food transfers (imports) and market support to vulnerable traders and/or shopkeepers to preclude exit from the sector. Such support could include provision of subsidies, extension of buffer loans and credit guarantee schemes, and advocacy. Support to farmers in the form of input subsidies and foodfor-work would also be prudent.
Work with the MoTNE to improve its market regulation and monitoring capacity. Specifically, provide technical support to the Ministry to improve its price regulation capacity, establish thresholds for monthly import requirements of staple foods, and re-evaluate the effectiveness of establishing strategic stocks of staple cereals.
It is also essential to improve monitoring of markets and prices within the context of the Food Security Monitoring System as well as closely monitor tunnel trade performance. In the case of disruption of the Egypt corridor there will be a need to dramatically increase the inflow of goods through commercial crossings in the Gaza Strip above current levels of type and quantity. Humanitarian agencies should prepare to plan for such contingencies and policy makers need to be aware of this issue in their dialogue with Government stakeholders.
1 World Bank, A Palestinian State in Two Years: Institutions for Economic Revival, Economic Monitoring Report to the Ad Hoc Liaison Committee, September22, 2009.