Impact on Palestinian economy of recent confrontations, mobility restrictions and border closures – UNSCO report (28 Sept.-19 Oct. 2000)

The Impact on the Palestinian Economy of the

Recent Confrontations, Mobility Restrictions and Border Closures,

28 September—19 October 2000

I.  Introduction

The recent crisis has entailed—in addition to the death or injury of thousands of Palestinians, and several Israelis—serious impediments to personal and vehicular mobility between the West Bank and Gaza and between the Occupied Palestinian Territory as a whole and Israel and the rest of the world.  Furthermore, there have been obstacles to mobility between cities, towns and villages in both the West Bank and Gaza. These were due to reduced levels of security on roads between Palestinian population centers, the imposition of strict internal and comprehensive border closures by the Israeli authorities (including the placing of physical barriers between Palestinian villages and cities), and to the work interruptions in the Palestinian Territory.  The political strife has resulted in significant losses for the Palestinian economy.  The present report seeks to quantify the losses incurred during the last three weeks.

II.  Internal Impact

Since 29 September, travel between the different areas inside the Palestinian Territory (PT) has been severely hindered by confrontations as well as roadblocks and checkpoints established by the Israeli authorities.  The main economic impact of such mobility restrictions has been the disruption of productive activities and the internal circulation of goods.     

The short-term losses in such a situation are difficult to measure.  But they include reduced income to workers, farmers and business people who cannot reach their places of employment in the PT and the reduced output and revenues for commercial and business enterprises which are unable to obtain inputs and/or access output markets.  Moreover, the uncertain security situation has reduced tourist-generated income.  As the crisis persisted, the extent of these types of losses became more pronounced.  

An approximate measure of the internal effects of such disruptions can be derived from estimates of the Gross Domestic Product (GDP)—i.e. the value of goods and services produced in the Palestinian economy.  The value of the GDP is expected to reach about USD 5,000 million this year while the average work year in the Palestinian Territory is about 312 days.  This results in an estimated average domestic product of about USD 16 million for each normal working day. 1/    Assuming that recent events have resulted in a 50 per cent reduction in normal economic activity, the losses are estimated at about USD 8 million for each normal working day during the period 30 September—19 October. 2/

III.  External Impact

Labour Flows and Wage Income

In addition to the internal losses, the border closures have effectively halted the outward flow of Palestinian labour.  In the first half of 2000, there was an average of about 125,000 Palestinians employed in Israel and Israeli settlements and industrial zones on a daily basis.  The average worker was earning a daily wage of about NIS 110 or about USD 27.50.  As a group, these workers were earning approximately USD 3.4 million each day.  

The first three days of confrontations, i.e. 28-30 September, and the general strike called in the PT on 30 September, occurred during the weekend and the beginning of the two-day Jewish holiday Rosh Ha Shana (Saturday, 30 September-Sunday, 1 October).  These are normally times of drastically reduced labour flows between the PT and Israel and, thus, estimated losses are not significant.        

Losses began to be incurred on Monday, 2 October when daily Palestinian labour flows to Israel dropped precipitously.  During 2-5 October, just before the weekend (6-7 October) and the closing of the border for the Yom Kippur holiday (8-9 October), average daily labour flows to Israel were estimated to have declined by 53 per cent as compared to the week prior to the disturbances.  This resulted in an average daily loss of about USD 1.8 million in direct household income for Palestinians during that period.  The border closure imposed on Monday, 9 October, however, resulted in an almost complete cessation of labour flows and an estimated USD 3.4 million loss for each normal working day thereafter.

B. Commodity Flows and External Trade Income

In addition, exports from Gaza have been effectively blocked since the closing of the border at the beginning of the Rosh Ha Shana holiday (30 September-1 October).  Exports from the West Bank have also been severely constrained during this period.3/    Total registered Palestinian non-agricultural exports to Israel (the main market for Palestinian exporters) averaged about USD 45.1 million per month during the first half of 2000.  Assuming that these sales are distributed evenly throughout the working year, this implies a daily loss of about USD 1.9 million in exports, although some portion of these losses can be retrieved once mobility restrictions are removed.4/

Palestinian imports from Israel have also been negatively affected by the border closures mobility restrictions.  The commercial crossings in Gaza have been closed since Saturday, 30 September resulting in a complete halt to goods imports.  Trade between Israel and the West Bank has been severely restricted as well.  Registered non-agricultural imports from Israel averaged USD 135.9 million per month in the first half of 2000 or about USD 5.9 million each working day.  Furthermore, direct Palestinian imports from abroad averaged about USD 3.1 million per day in the first half of the year. 5/

External trade is an integral component of the Palestinian economy and has important effects on the size of the GDP.  Exports contribute to domestic production and income-generation while many imported goods are used as inputs in domestic production.  Likewise, the inability to export dampens domestic production while a lack of imported raw materials and other inputs creates production stoppages for those businesses and farmers who rely on Israeli or foreign-produced inputs.  However, since external (and internal) trade activities are already factored into the calculation of GDP, the trade losses resulting from border closures and movement restrictions are included in the estimated daily GDP losses noted above. 6/

IV.  Destruction of Physical Assets

There has also been the physical destruction of private and public assets—buildings, orchards and vehicles—due to the conflict.  The material losses have been caused by Israel’s use of heavy weapons, including rocket fire, against numerous buildings and vehicles and the destruction of fruit orchards near flash points in the PT.  Israeli settlers have also engaged in the destruction of private property such as numerous Palestinian trucks used to transport goods to and from Gaza which were located in car parks under Israeli control. 7/  While the value of such losses is difficult to calculate, it is almost certainly in the millions of USD.  

V. Aggregate Economic Losses

The estimated economic losses are detailed in Table 1.  Excluding material damage to physical assets, and in the aggregate, the losses to the Palestinian economy are estimated at USD 186.2 million during the 22-day period 28 September—19 October.  These losses exceed the value of donor disbursements to the PA during the first half of the year, which were USD 183 million. 8/  If these losses are distributed over the normal working days in the Palestinian Territory—of which there were 19—the average daily loss is estimated at about USD 9.8 million.   

Table 1

Estimates of Short-Term Economic Losses

in the Occupied Palestinian Territory,

28 September—19 October, 2000 9/

As indicated in Table 1, these losses consist of: 1) the dampening effects on the production and circulation of goods (inputs and outputs) and services in the PT estimated at USD 148.0 million.  These include losses incurred due to impediments to internal and external trade; 2) the labour income lost by workers (and their households) due to their inability to reach job sites in Israel and Israeli settlements and industrial zones.  This loss is estimated at USD 38.2 million.  While lost labour income is irretrievable, some of the domestic output/income losses may be recuperated once internal and external trade resumes.

VI. Losses to the Public Sector

There have also been losses to the public sector in the form of lost domestic, customs and VAT revenues.  These, however, are difficult to quantify as data for the year 2000 have yet to be issued. Most of the losses in revenues related to external trade—the main source of short-term fiscal losses—can be recuperated once the border closures are lifted and trade resumes.  

It is also the case that certain public agencies—the PA Ministry of Health in particular—have had to vastly increase the level of spending to cope with the large number of killed and wounded Palestinians.  This has imposed added costs, some of which have been covered by emergency assistance provided by donor agencies and NGOs (facilitated by the creation of a Humanitarian Task Force for Emergency Needs, under UNSCO chairmanship.)  Such assistance has been partly facilitated by eased restrictions on the movement of emergency care vehicles, workers and medical supplies.  Restrictions were eased beginning on 14 October following the direct intervention of the United Nations Secretary-General. 10/

Moreover, some PA agencies have been closed for most of this period as many employees have been unable to reach their jobs due to internal closures imposed by the Israeli authorities.  This has meant reduced public services and disruptions in capacity-building and institutional development programmes and projects, many of which are supported from donor and multi-lateral sources.  Likewise, the crisis has resulted in a near halt to infrastructural development projects—most of which are donor financed—due to the lack of security, the evacuation of project personnel and to the lack of some materials. 11/

VII. Longer Term Impact

One immediate effect of the comprehensive and internal border closures imposed on the PT is the disemployment of some 125,000 workers formerly employed in Israel.  This has temporarily raised the core unemployment rate from about 11 per cent in the first half of 2000 to nearly 30 per cent. 12/  If such a situation persists, the decline in household incomes will have the secondary effect of reducing domestic purchases of goods and services and thereby further lower income and employment (a reverse multiplier effect).  Rates of poverty will also increase, requiring the PA to raise spending on social assistance at a time when its revenue base is being eroded.  This would adversely affect fiscal conditions.    

Another indirect and lagged cost of the strife is the increased perception of political risk on the part of domestic and foreign investors—both current and potential. The PT (and Israel) will be seen as a riskier place to invest for the long term.  This can threaten the short- and long-term growth of the Palestinian (and Israeli) economy and reduce the rate of income and employment growth.  

As a result of the Sharm Al Sheikh Summit which ended on 17 October, there has been a reduction in confrontations and an easing of internal movement restrictions in the PT.  Should this continue in the coming days, the Palestinian economy may yet resume the significant recovery witnessed over the last 3 years, which has reduced unemployment rates from about 25 per cent in 1996 to about 11 per cent in the first half of 2000.  Moreover, the normalisation of labour and especially trade flows will allow the Palestinian private and public sectors to recuperate some portion of the significant losses incurred in the past three weeks.

Gaza, 19 October 2000

Notes

1/ The GDP estimate is based on Palestinian Central Bureau of Statistics (PCBS) National Accounts in Current Prices 1998, December 1999 (in Arabic) with PA Ministry of Finance and IMF real growth estimates for 1999 and 2000.  Estimates include East Jerusalem and are expressed in 1998 constant prices.  The normal work year in the Palestinian Territory excludes Fridays (the weekend) and the two key Muslim holidays—Eid Al Fitr and Eid Al Adha.

2/ This estimate is based on the observation that the key branches in the Palestinian economy—services (both public and private), internal and external commerce and construction—which collectively account for more than three-quarters of the GDP—have been disproportionately affected by work interruptions.  Since internal and external commerce are components of the GDP, lost or delayed export and import opportunities are already factored into the estimated losses.  See below.  The estimated losses for 29 September are 25 per cent of the average daily GDP or USD 4 million.

3/ The Allenby/Karameh bridge to Jordan was open, except for the Yom Kippur holidays, until Friday, 13 October when it was closed.  Information and assistance provided by the Palestinian crossing authorities, October 2000.  Movement restrictions were made more severe by the closing of the Gaza International Airport on Sunday, 8 October.  The airport was re-opened on 19 October.

4/ Economic interactions between the Palestinian and Israeli economies take place on an average of 277 working days each year (i.e. calendar days minus Muslim and Jewish holidays and weekends)–about 23 days each month.  The export losses are underestimated since they exclude the significant amount of unregistered West Bank exports to Israel, Palestinian exports to third countries and Palestinian agricultural exports (which are not subject to VAT).  Agricultural exports average about USD 150,000 per day according to the Ministry of Agriculture, Ramallah, 17 October 2000.

5/ Data on the value of external trade is from the Palestinian Ministry of Finance, September 2000.

6/ It should be noted that, except for perishable agricultural commodities, part of the trade-related losses will be recuperated once mobility restrictions are lifted.

7/ See Hassan Duhan, “Ninety Palestinian Trucks Torched in Gaza,” (in Arabic) Al Hayat Al Jadidah (website), 11 October, 2000.

8/ See PA Ministry of Planning and International Cooperation, “Quarterly Monitoring Report of Donor Assistance,” 230 June 2000.

9/ Estimates for domestic losses are based on a six-day work week while those related to transactions with Israel are based on a 5.5-day work week.

10/ See 14 October, 2000 press release issued by the Israeli Ministry of Foreign Affairs, Jerusalem.

11/ Based on information from donors and the World Bank, October 2000.  Reports in the press suggest that the Israeli authorities have ordered a halt to cement and construction material shipments related to the Gaza port and Gaza power station projects during the early days of the confrontation.  See Ze’ev Schiff  “Moderate Policies Could Be Tested by Extreme Acts,” Ha’aretz (website), 11 October, 2000.

12/ This estimate is based on the results of PCBS labour force surveys for the first half of the year.