Situation in the OPT/Closure – UNSCO/World Bank update – Fact sheet

CLOSURE ON THE WEST BANK AND GAZA

AUGUST – SEPTEMBER 1997

FACT SHEET

Following the suicide bombings in Jerusalem on July 30 and September 4, a comprehensive closure was imposed on the West Bank and Gaza (WBG), including external and internal closure.

This fact sheet provides an outline of the state of the closure and its effects on the Palestinian economy.

THE CLOSURE

a. Implementation

Comprehensive closure prevents Palestinians resident in the WBG from traveling into or through Israel, and prevents the movement of a significant number of Palestinians within the West Bank.  Commodity shipments and persons are also prevented from crossing out of or into the WBG through Rafah or Allenby Bridge, even if they would not have to pass through Israel (this measure was lifted on 11 August and reimposed on September 5).

The full closure is maintained by checking of vehicles, passengers and persons on foot at permanent and temporary Israeli checkpoints at the edge of Palestinian controlled areas, within Palestinian controlled areas, and into Israel.  Those Palestinians who do not hold Israeli citizenship or Jerusalem identity cards are refused passage into Israel.

Internal closure (which was lifted fully on 27 August and reimposed on 5 September) denies Palestinians passage through checkpoints, usually from Palestinian areas into Israeli controlled areas, but wider application of this restriction also occurs, including preventing access to and from villages and towns in the West.  This effectively isolates cities and towns from one another. To implement the internal closure, checking of vehicles and persons is also carried out at exits from population centres throughout the West Bank, between villages outside area A, and within areas B and C.  Alternative access routes are regularly blocked.  Residents of the major towns are regularly turned back at the entrance points to those towns by Israeli soldiers or police.

b.        Days of closure

As of September 12 1997 inclusive (255th day of the year), the following provides details on days of closure this year:

1.  Comprehensive closure days since 31 July 1997                44 2.  Effective* closure days since 31 July 1997                 34.5 3.  Comprehensive closure days since 1 January 1997              68 4.  Effective closure days since 1 January 1997                51.5 5.  Potential working and trading days since 1 January 1997   195.5 6.  Effective working and trading days since 1 January 1997     144 7.  Proportion of potential working and trading days
lost since 1 January 1997                                26.3%

*"effective closure days" refers to the actual working week.  
Sunday to Thursday are counted as full working days, and Friday as half a working day, based on numbers of truckloads and workers passing through checkpoints.  

On 17 August, a number of workers were permitted to work in settlements and the Erez Industrial Zone (approximately 2,000 in Gaza and 6,000 – 7,000 in the West Bank).  This ceased on 5 September, then recommenced on 7 September, with about 7800 workers permitted into settlements in the West Bank, and about 3000 permitted into Erez Industrial Zone and settlements in Gaza.

Permits for 4,000 workers, teachers and medical staff, were issued from 1 September until 5 September, when the full closure (including internal closure) was reimposed, following the second bombing.

EFFECTS OF THE CLOSURE

It is difficult to estimate with certainty the costs of closure, as many effects are indirect and lagged.  Economic costs also vary with the duration and intensity of the closure, and are subject to seasonality.  Internal closures increase significantly the overall cost of closure.

a. Direct effects

Employment
The direct loss each working day can be estimated as the number of persons employed prior to closure, multiplied by the average wage.  At end July 1997, approximately 51,000 (daily average) permitted workers from WBG were employed in Israel, and the average take-home daily wage was about NIS 92.5 for such workers.  Each day of comprehensive closure which prevents these workers from reaching their jobs results in a loss of NIS 4,717,500 or about USD 1.35 million in direct household income in the WBG.  From 31 July to 12 September (34.5 effective closure days), there has been a direct loss of USD 46.5 million in income-earning opportunities for these workers.  

Permitted labor in Israel accounts for 12% of the total employed Palestinian labor force.  During closure, the unemployment rate in WBG increases from about 20% to about 30%, or by about 50% (this figure excludes settlements and the Erez Industrial Zone).  A small proportion of workers previously employed in Israel and unemployed as a result of closure find alternative employment inside WBG.  

Trade Income Losses
Direct losses are also accrued through losses of trade income.  The IMF has projected that total exports for 1997 would be USD 366 million which, when divided by the 277 potential workdays in the year, yields average 1997 daily WBG export revenue of USD 1.3 million.  Assuming effective daily losses of USD 1.3 million, to 12 September (34.5 effective closure days) losses are estimated at USD 44.8 million.  Of course, to some extent the export revenue losses may be recouped at a later date when closure ends, but in the meantime adverse repercussions will have worked through the Palestinian economy, the more so the longer the period of closure.  

Towards the end of August, a limited amount of goods were permitted access to Israeli markets.

b. Indirect effects, short and long term

There are additional second round effects that reduced income has on the sales and income of WBG businesses from whom workers purchase goods and services.  These losses can amount to as much as, or more than, the direct income losses, although they are typically lagged.

The restrictions on merchandise import and export flows into and from WBG generate economic losses.  Economic activity in many sectors is disrupted by interruptions in intermediate import supplies.  Export revenue losses can also be significant, particularly for perishable products, and export market opportunities may erode in the longer term as a result of unreliable delivery.  In Gaza, restrictions on the activity of fisheries entail further losses, although such restrictions were not imposed after the second bombing.  Lack of access to markets for agricultural produce results in wasted crops (eg. cucumbers and tomatoes in Gaza and northern West Bank, and grapes in Hebron during August).  Where farmers and labourers are barred from accessing agricultural lands, crops requiring harvesting rot.  

In addition, closure results in lost business sales and unfulfilled contracts, both of which further reduce income earnings.  The lower income will subsequently inhibit private investment in the WBG, which had already declined considerably during 1996.  The Palestinian economy's longer term growth potential is likely to be hampered by the disincentive to private investors as a result of the uncertain business environment.

The fiscal impact of the closure includes a reduction in the collection of customs duties, VAT and excises by the PA and reductions in income tax revenue.  The reduction will be both from revenue clearances and domestic revenue collections.  A reduction of profits will also have a negative fiscal impact on business tax collections.

The length of the closure dictates to some extent the amount of average daily losses.  A comprehensive closure lasting several weeks has a proportionately higher dampening effect on trade.  

In summary, actual and potential losses in the Palestinian economy as a result of closure occur in the following areas:

Short term:
.       reduction in income from external employment;
.       reduction in income from internal employment in West Bank; .       secondary loss in potential income for workers in Israel,   
who are unable to access alternative work internally in the WBG;
.       loss of sales as a result of reduction in expenditure; .       loss of export and other contracts;
.       reduction of inputs for production;
.       fiscal impact of reduction in income tax, customs duties    
and excises.

Long term:
.       contraction of businesses;
.       fiscal impact of contraction of businesses;
.       contracting effect of cumulated political/logistical        
uncertainty on private investment.

It should be noted that many other elements of economic and social cost are added to the direct and indirect effects of loss of income from employment.

Overall, once these various effects are aggregated, it is possible that losses under severe closure could total 40% – 60% of income and output, around USD 4 – 6 million per day.  This figure does not take into consideration the costs of the internal closure in the West Bank, which are difficult to estimate.

The closure threatens what has been a promising improvement in economic conditions beginning in mid-1996.  Based on good fourth quarter 1996 performance, the Ministry of Finance and the IMF projected real GNP growth rates of about 8 per cent for 1997 on the assumption that there would be an average of 35,000 WBG workers in Israel on a daily basis, expanded trade flows and a successful 1997 Palestinian Public Investment Program.

For the first six months of 1997 there was an estimated daily average of 39,000 workers in Israeli-controlled areas and based on preliminary estimates of merchandise exports during the first six months of 1997, the average number of truckloads leaving Gaza was 32 per cent higher on a monthly basis than the monthly average in 1996, as reported by the PA.  

c. Revenue Transfers from Israel

In reaction to the bombing on July 30, the Israeli Cabinet decided to cease payment of revenue "clearances" to the PA.  These clearances are mainly VAT, excise taxes and customs duties, and to a lesser extent income tax, collected by the Government of Israel on behalf of the PA, and remitted to the PA, according to the provisions of the Economic Protocol of the Interim Agreement.  There was NIS 134 million owing to the PA at the end of July.  One third of this sum was transferred in the week commencing 18 August.  Further revenues have accrued during August.  The total sum now owing is approaching USD 100 million.

Article III (Import Taxes and Import Policy) Paragraph 15 of the Protocol states, with respect to import taxes, that "….This revenue clearance will be effected within six working days from the day of collection of the said taxes and levies."  Article VI Paragraph 8 requires clearances of VAT between Israel and the PA to be settled within 6 days from the 25th of each month.  Article V Paragraph 4 requires Israel to transfer 75% of the taxes collected from Palestinians working in Israel and the full amount from those working in settlements.  Israel is also obliged to transfer clearances on petroleum and health stamp tax (see attached schedule from the Israeli Ministry of Finance).

In 1995 and 1996, these clearances accounted for over 60% of the PA's total revenue (63% in 1995 and 61% in 1996).  The 1997 budget projects 63% of revenues coming from clearances.

Non-transferral of revenue to the PA has severely compromised its ability to meet recurrent expenses – particularly the monthly payroll of the Authority's employees.  The Authority increased its exposure to the domestic banking system to pay the July wages bill – after some delay – and also borrowed from the Palestinian Monetrary Authority.  The Palestinian Authority has also severely curtailed non-wage expenditures.  It is currently working on sourcing finance for the next wages bill of USD 40 million, which was due on September 1.  An appeal has been made to donors to advance bridging finance for the amounts required.  Serious delay can be expected in meeting this obligation, despite an Egyptian grant of USD 10 million.

Utilising overdraft facilities or borrowing to cover the resulting has negative downstream effects, e.g. crowding out the private sector from the domestic credit market.

d. Effect on Donor Activities

Closure can have a substantial adverse impact on the implementation of projects funded by donors in WBG.  This includes:

.  shortages of materials;
.  escalating material prices;
.  restricted mobility of project personnel and vehicles.

As a result of the economic and social hardship brought on by closure, donor attention and resources are also typically diverted to immediate relief measures at the expense of the longer term development agenda for the Palestinian economy and community.

A recent contribution from Saudi Arabia to the Holst Fund has been the only contribution made since the commencement of this current closure to counter the effects of closure through employment generation initiatives or support for the PA's budget.  This fund has been vital during past closures to alleviate some of the immediate economic pressures caused by closure.  The Holst Fund has made available almost USD 38 million for employment generation over the past 18 months.  At its peak in June 1996, the fund was supporting over 15,000 full-time-equivalent jobs.  These activities are now winding down.

Prepared by the World Bank and UNSCO, using documentation from the Palestinian Authority, the Israeli Government, the IMF and other bodies.

12 September 1997