Palestinian Economy – UNSCO report (Autumn 1999)

Notes to the User

The geographic designations used in this report refer to the areas where economic activity of various sorts is conducted by Palestinians. The designations do not imply any judgement on the legal status of current jurisdictional boundaries.

Copies of this report may downloaded from the UNSCO website at: www.unsco.org For more information about this report, please contact UNSCO at 07-2822746 (phone) or 07-2820966 (facsimile). For calls from abroad, use +972-7-2822746. Electronic mail communications should be addressed to: unscoe@un.org

This report is made possible by a special contribution from the Government of Norway.

Acknowledgments

In addition to the Government of Norway, whose generosity has made this report possible, UNSCO would like to extend its gratitude to several institutions which have provided data, information and assistance.

Numerous institutions of the Palestinian Authority have generously provided information and assistance for the preparation of this report. These include: the Palestinian Central Bureau of Statistics (PCBS) and, in particular, the PCBS President, the Economics Statistics Directorate, the Labour Statistics Unit, Foreign Trade Statistics Department and the Living Standards Department; the Ministry of Labour, the Ministry of Economy and Trade, the Ministry of Finance, the Ministry of Agriculture, the Companies Registrar of the Ministry of Justice, the Palestinian Monetary Authority, the Ministry of Planning and International Cooperation, the National Security Service, Northern Area Command–Gaza, the Border Security Service (Muntar), the General Administration for Crossings and Borders Authority (Allenby/Karameh Bridge) and the Technical Support Unit of the Joint Economic Committee. Likewise, we extend our thanks to the Economics Branch of the Co-ordinator of Government Activities in the Territories, Israeli Ministry of Defence, which has provided data and assistance for this report.

This report also benefited from the data, research, publications and advice of our colleagues at the World Bank and the International Monetary Fund, as well as the Palestine Economic Policy Research Institute (MAS).

A number of Non-Governmental Organisations also provided data and assistance for this report. These include the Palestinian Development Fund, FATEN, (formerly Save the Children Foundation), American Near East Refugee Aid, the Arab Center for Agricultural Development, Oxfam-Quebec, CARE International, the Business Support Centre of the Palestinian Agricultural Relief Committees, Culture and Free Thought Society and Catholic Relief Services. Appreciation is also extended to the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) for providing information used in this report.

Special thanks are extended to the Palestinian Development InfoNet at McGill University in Montreal for hosting the UNSCO website.

Any shortcomings in the use of the data and information provided by these sources are the sole responsibility of UNSCO. The Report on the Palestinian Economy is prepared by Salem Ajluni, Husam Zomlot, Khaled Islaih, Rami Wihaidi and Raed Raqeb

List of Tables

Table [1]: Permits Issued to Palestinian Workers for Employment in ISI and Estimates of Average Permitted Daily Labour Flows on a Monthly Basis, QI-QII

Table [2]: Estimates of Average Monthly Value of Registered Palestinian-Israeli Trade on the Basis of VAT Clearances, QI-QII 1999

Table [3]: Estimates of the Average Monthly Value of Palestinian Registered Direct Imports by Port of Entry, QI-QII 1999

Table [4]: Estimates of Average Truckload Movements through Monitored Commercial Crossings, Monthly and Daily Basis, QI-QII 1999

Table [5]: Total New Licensed Construction Area by Project Type, QI 1998 and QI 1999

Table [6]: Registration of New Companies by Legal Type, QI-QII 1998 and QI-QII 1999

Table [7]: Value of Approved Investment Projects Qualifying for Exemptions Under the Palestinian Law for the Encouragement of Investment by Residence of Investor, QI-QII 1999

Table [8]: Value and Relative Distribution of Outstanding Bank Credit to Private Businesses by Economic Branch, June 1998, December 1998 and June 1999

Table [9]: Value and Distribution of Bank Credit among Businesses, Consumers and Public Agencies, June 1998, December 1998 and June 1999

Table [10]: Disbursements as a Portion of Donor Commitments to the Palestinian Authority, 1994–QI-QII 1999

Table [11]: Palestinian Authority Capital Expenditures as a Portion of Donor Disbursements, 1994–QI-QII 1999

Table [12]: Estimates of Average Labour Force, Full Employment, Underemployment and Unemployment, QI-QII 1998 and QI-QII 1999

Table [13]: Estimates of the Average Social Composition of the Employed Palestinian Labour Force, QI-QII 1998 and QI-QII 1999

Table [14]: Estimates of the Average Branch Distribution of the Employed Palestinian Labour Force Including Employment in ISI, QI-II 1998 and QI-QII 1999

Table [15]: Estimates of Average Palestinian Employment in ISI and the Palestinian Territory by Economic Branch, QI-QII 1998 and QI-QII 1999

Table [16]: Comparing Women?s and Men?s Average Labour Force Profiles, QI-QII 1998 and QI-QII 1999

Table [17]: Estimates of Average Monthly Days Worked and Real Wages for Employed Workers by Place of Work, QI-QII 1998 and QI-QII 1999

Table [18]: Inflation Rates for Major Commodity Groups in the Palestinian Territory by Region, December 1998-June 1999

Table [19]: Inflation Rates for Major Commodity Groups, December 1998–June 1999 and QI-QII 1998–QI-QII 1999

An Overview of Macroeconomic Projections, 1998-1999

Palestinian Ministry of Finance (MOF) and the IMF estimates suggest that the Palestinian economy witnessed a significant recovery in 1998. Real Gross Domestic Product (GDP) and real Gross National Product (GNP) are estimated to have grown by about 4.1 and 8.0 per cent respectively, based on strong growth in employment in Israel, the resulting higher domestic consumer demand, continued growth in domestic employment and a reduction in the rate of unemployment. The MOF and IMF also noted moderate increases in the value of Palestinian trade but a significant decline in donor disbursements and, therefore, in public investment.

Given the economic performance in 1998, the MOF and IMF projected real GDP growth of 4 per cent for 1999. The projection was based on the assumption of significant continued Palestinian labour flows to Israel, sustained growth in construction and manufacturing and a reversal of the downward trend in donor disbursements. The MOF report notes, however, that employment growth may be insufficient to absorb the number of new entrants into the labour market. [1] 

Based on preliminary data from the first half of 1999, the MOF and IMF have revised upward their projection of real GDP growth to 4.5 per cent. The MOF reports cited sustained and higher labour flows to Israel, a lower unemployment rate, domestic private sector employment growth, and continued robust growth in tax revenues, in private bank deposits and credit extension. The report points out, however, that public investment–funded wholly by donor assistance–fell far short of its first half-1998 level (USD 62 million during first-half 1999 versus USD 162 million in first-half 1998). The decline in public investment, the reports warn, jeopardises the sustainability of the economic recovery. [2] Projected economic growth would, given population growth, result in a small increase in per capita income levels.

These projections can be more fully assessed by reviewing the performance of key macroeconomic indicators for first-half 1999. These include labour flows to Israel; Israeli-Palestinian trade flows and those between the Palestinian economy and the rest of the world; private investment trends (including trends in credit extension); donor-assisted public investment; and the effects of closures and other restrictive measures.

Endnotes:

[1] The summary of 1998 economic performance and preliminary 1999 projections are from Palestinian Authority (PA) Ministry of Finance "Report on Fiscal Developments in October-December 1998," 23 March 1999, pp. 7, 11-12. The report also points to increases in PA revenues from VAT, customs and domestic sources as other indicators of economic growth (pp. 8-9).

[2] PA Ministry of Finance "Report on Fiscal Developments in January-June 1999," 10 August, 1999, pp. 1-2. Presentation by the MOF at Local Aid Co-ordination Committee meeting, 9 December 1999. The MOF and IMF have projected a real GNP growth rate of 4.7 per cent. PCBS estimates a 3.68 per cent natural population growth rate.

B.  Labour Flows

Labour Flows to Israel, Israeli Settlements and Industrial Zones

Estimates indicate that there were an average of 47,300 permit-holding Palestinian workers employed on a daily basis in Israel and Israeli settlements and industrial zones (ISI) during QI-QII 1999, an increase of 3.2 per cent over the QI-QII 1998 daily average (see Table 1). This constitutes a significant deceleration relative to the 1997-1998 period when such employment increased by 12 per cent. [3] 

Table 1
Permits Issued to Palestinian Workers for Employment in ISI and Estimates of Average

Permitted Daily Labour Flows on a Monthly Basis, QI-QII 1999 [4] 

The average number of permits issued for work inside the pre-1967 borders of Israel declined slightly as between the two periods while those issued for work in Israeli settlements and industrial zones in the Palestinian territories grew by 4.2 per cent. Overall, the average number of work permits issued by Israeli authorities to Palestinians grew by less than 1 per cent as between the two periods. This may indicate saturation in the Israeli labour market for Palestinian workers. It may also indicate a change in Israeli policy toward more permissiveness for informal labour flows.

Excluding Palestinians from East Jerusalem–who are not required to obtain permits for work in Israel–average daily informal, i.e. unpermitted, labour flows to Israel from the Palestinian territories are estimated at 62,800 during QI-QII 1999 as compared to 47,100 for the QI-QII 1998 period, an increase of 33.2 per cent. [5] Therefore, total Palestinian labour flows to ISI, excluding Palestinian Jerusalemites, have risen from an estimated average of 92,900 during QI-QII 1998 to 110,100 in QI-QII 1999, an increase of 18.5 per cent. On average, 23 per cent of the employed Palestinian labour force (excluding East Jerusalem) was working in ISI in QI-QII 1999 as compared to 21.4 per cent in QI-QII 1998.

Endnotes:

[3] See UNSCO Report, Autumn 1998, p. 2.

[4] Labour flow estimates assume that the per cent difference between issued permits and actual labour flows in the West Bank was equal to that in Gaza, for which more accurate data exist. Due to a lack of data on actual labour flows to Israeli settlements in the West Bank, the assumption is made that all permits issued were used. This overestimates actual flows. Since Palestinians in East Jerusalem are not required to obtain permits to work in Israel, they are not included in the estimated labour flows, which underestimates total Palestinian labour flows to Israel. Labour flow averages are calculated exclusive of weekends and officially celebrated holidays. Data and assistance provided by the PA Ministry of Labour, the PA National Security Service-Northern Command Area, Gaza and the Co-ordinator of Government Activities in the Territories (COGAT), Israeli Ministry of Defense, Tel Aviv. The abbreviations QI and QII, used throughout this report, refer to the first and second quarters, respectively, of the relevant year.

[5] Based on PCBS Labour Force Survey; Main Findings, nos. 8, 9, 11 ad 12 and middle-series population estimates for the Palestinian territories as given in PCBS Demography of the Palestinian Population, 1994.

C. Trade Flows

Registered Trade with Israel

Recently-released foreign trade data suggest that about 85 per cent of the value of Palestinian trade transactions are with Israel. [6] The largest component of Palestinian foreign trade can therefore be roughly estimated using the data on the value-added tax (VAT) clearances between MOF and the Israeli Ministry of Finance. As stipulated in the 1994 Economic Protocol between the Government of Israel and the Palestine Liberation Organisation, each side receives a sum equal to about 17 per cent (the common VAT rate) of the value of goods imported from the other side. Dividing the total clearance revenues received by the MOF by .17 therefore yields the approximate value of goods imported by Palestinians from Israel (i.e. Israeli exports). Using the same method, an estimate of the value of goods imported by Israel from Palestinians (i.e. Palestinian exports) can be obtained on the basis of clearances received by the Israeli Ministry of Finance. [7] 

Table 2
Estimates of Average Monthly Value of Registered Palestinian-Israeli
Trade on the Basis of VAT Clearances, QI-QII 1999 [8] 
(in nominal NIS)

The data in Table 2 indicates there was a 9.6 per cent increase in the nominal NIS value of registered Palestinian-Israeli trade transactions (exports plus imports) during first-half 1999, as compared to the same period in 1998. When inflation is factored into the analysis, the real value of such trade flows has grown only slightly during this period. The growth in the value of trade was dominated by Israeli exports, which rose by 12.5 per cent in nominal NIS terms, from a monthly average of NIS 509.6 million during first-half 1998 to NIS 573.7 million per month during first-half 1999. On the other hand, the monthly average value of Palestinian exports to Israel declined by 0.16 per cent over the same period, from NIS 151.6 million to NIS 151.4 million, implying a reduction in the real NIS value of such exports. In nominal USD terms, Palestinian registered exports to Israel amounted to USD 222.6 million in the first half of 1999, while registered imports from Israel were USD 843.5 million. [9] 

Endnotes:

[6] See PCBS Foreign Trade Statistics, 1997; Main Results, February 1999. Palestinian registered transactions with Israel (both exports and imports) accounted for 84.9 per cent of all registered trade which was estimated at USD 2,161.7 million in 1997. PCBS notes, however, that some portion of registered Israeli exports are actually re-exports which have third-country origin. Thus, the share of Palestinian foreign trade with Israel is overestimated. With the assistance of PCBS.

[7] This method underestimates the value of Palestinian-Israeli trade for two reasons: 1) the lack of a customs border–with fixed crossing points–between the West Bank and Israel allows a significant amount of unregistered trade, mainly Israeli exports, to occur and; 2) some Israeli "exports" are, in reality, re-exports which have third-country origin. If such goods are registered as Israeli "exports," the PA receives only the VAT levied–not the customs revenues from the importation of such goods. Unregistered trade may account for more than 30 per cent of the value of Palestinian-Israeli trade flows based on information from MOF. The PA is attempting to rectify this situation through negotiations with the Israeli authorities and by developing better customs procedures. Data and assistance provided by MOF.

[8] Nominal NIS values, rather than USD values, are used to avoid distortions caused by the depreciation of the NIS against the USD. Palestinian exports to Israel include all goods and services, other than the labour services of Palestinians working in Israel. Palestinian imports exclude purchases of electricity, water and telephone services from Israel but include purchases of other Israeli-produced services. Data and assistance provided by MOF, August 1999.

[9] USD values for registered trade were calculated using the average monthly NIS/USD exchange rate for QI-QII 1999–USD1 = NIS4.08. Data on exchange rates are from the PCBS website at: www.pcbs.org 

Registered Direct Imports from Abroad

Available customs clearance data from the MOF indicates a continued increase in Palestinian trade transactions with trading partners other than Israel. Direct registered imports from Egypt, Jordan and other countries via Israeli ports destined for the Gaza Strip during the first half of 1999 were valued at USD 87.4 million. This was a 43.4 per cent increase, in nominal terms, as compared to USD 60.9 million during the same period in 1998, as indicated in Table 3.

Table 3
Estimates of the Average Monthly Value of Palestinian Registered
Direct Imports by Port of Entry, QI-QII 1999 [10] 
(in nominal USD)

Registered direct imports from abroad can be disaggregated by countries of origin. Thus, the nominal USD value of direct Palestinian imports from Jordan through the Allenby/Karameh Bridge grew by 47.5 per cent as between first-half 1998 and first-half 1999, while imports from Egypt through the Rafah crossing grew by only 3.4 per cent over the same period. Imports entering Gaza from abroad (mainly Europe and North America) through Israeli ports rose by 48.3 per cent to USD 64.4 million compared with USD 43.4 million for the same period of 1998. This evidence suggests there was an acceleration of the growth of direct imports through each of the specified ports of entry as compared to 1998. [11] 

Endnotes:

[10] Due to the lack of an effective customs border, this table excludes data on direct imports through Israeli ports destined for final users in the West Bank. With information and assistance from MOF VAT and Customs Directorate, August, 1999.

[11] See UNSCO Report, Spring 1999, p. 6.

Commercial Truckload Movement

A third indicator of Palestinian trade activity, as well as the relative stringency of Israeli border closure measures, is the flow of commercial trucks through monitored commercial crossings. The total number of truckloads of merchandise transiting through such crossings declined an estimated 7.1 per cent between first-half 1998 and first-half 1999, reversing the trend witnessed in 1998. [12] The number of exported truckloads fell by 26.6 per cent while imported truckload traffic fell by 2.3 per cent, as indicated in Table 4.

Table 4
Estimates of Average Truckload Movements through Monitored
Commercial Crossings, Monthly and Daily Basis, QI-QII 1999 [13] 

The significant decline in truck flows was unevenly distributed among the various crossings. Changes in aggregate truckload movements (imports and exports) through the various crossings were as follows: Erez/Beit Hanoun, down 27.7 per cent; Erez Industrial Zone, down 16.9 per cent; Nahal Oz/Shuja?iyeh, down 4.6 per cent; Karni/Muntar, down 11.2 per cent; Sufa/Qararah, up 9.8 per cent; Rafah, up 6.3 per cent; Allenby/Karameh bridge, up 82.2 per cent; Damiyeh/Adam bridge, down 28.2 per cent. These trends suggest a reduction in Palestinian exports, due in part to lower agricultural exports caused by adverse weather conditions. They also indicate some amount of redirection of trade as between the various crossings.

Endnotes:

[12] See UNSCO Report, Spring 1999, p. 3. Monitored crossings include the Gaza Strip crossing points at Erez/Beit Hanoun, the Erez Industrial Zone, Nahal Oz/Shuja?iyeh, Karni/Muntar, Sufa/Qararah and Rafah and the West Bank crossings to Jordan—the Damiyeh/Adam and Allenby/Karamah Bridges. The significant volume of commercial truck traffic between Israel and the West Bank is not monitored at fixed crossing points and is, therefore, excluded in these estimates. Thus data and analysis here are mainly illustrative of trends in Gaza-Israel trade.

[13] Data were gathered by UNSCO researchers with the cooperation of the PA Ministry of Economy and Trade, the PA crossing authorities and COGAT. Estimates exclude exports through the Rafah crossing for which no data were made available. Daily average trade flows are estimated exclusive of weekends and officially celebrated holidays.

D. Private Investment

Trends in Private Construction Activity

As the main component of private investment, construction activity is a key investment indicator. The main measure of planned investment activity is the new surface area licensed by Palestinian local authorities for private residential and non-residential (i.e. business) construction. While data for QII 1999 have not as yet been released, comparing the first quarters of 1999 and 1998 suggests retrogression in planned construction, as indicated in Table 5.

Table 5
Total New Licensed Construction Area by
Project Type, QI 1998 and QI 1999 [14] 
(in square meters) 

There was a 0.6 per cent decline in the total new surface area licensed for construction as between QI 1998 and QI 1999. The fall was due to a decline in residential construction licensing which accounted for 82.3 per cent of the new licensed surface area in QI 1999. Licensing for business construction increased 17.2 per cent. This constitutes a reversal of the trend in 1998 when residential licensing grew slightly. In the case of business construction licensing, it constitutes a reduction in the rate of growth as compared to last year. Given the weight of construction in overall investment activity, the evidence suggests an overall downward trend in planned investment in the near future, despite over two years of general economic recovery. This may reflect a relative surplus of housing after several years of relatively rapid expansion. On the positive side, there is evidence of substantial near-term growth in business construction activity.

Endnotes:

[14] See PCBS Construction Statistics: Building Licenses vol 3, issue 1, 1998 and vol 4, issue 1, 1999. Data exclude the retroactive licensing of already existing buildings or parts of existing buildings.

New Company Registrations

Although new company registration does not always reflect actual investment activity–since some companies may not immediately undertake investment expenditures–they are usually an indicator of planned investment. As shown in Table 6, there were 236 more new companies registered with Palestinian authorities [15] during first-half 1999 as compared to the same period in 1998, a 35.2 per cent increase. Of these new companies, 194 or 82.2 per cent were registered in the Gaza Strip. Total new registrations in Gaza increased by 59.8 per cent and in the West Bank by only 12.1 per cent.

Table 6
Registration of New Companies by Legal Type,
QI-QII 1998 and QI-QII 1999 [16] 

New company registrations were mainly accounted for by private companies–both unlimited and limited liability–which rose by 36.3 and 35.8 per cent respectively. Private unlimited liability companies accounted for 60 per cent of the total new registrations, while 40 per cent were private limited liability companies. In the Gaza Strip, the number of private unlimited companies increased by about 63.5 per cent while the number of private limited companies increased by 50.7 per cent. In the West Bank, the number of newly registered private unlimited companies declined by about 14.4 per cent between the two periods, while the number of newly registered private limited companies increased by about 31.2 per cent. The number of newly registered public and foreign companies remained small with only one public company and one foreign company registered during 1999. This suggests that planned new foreign investment remains limited in the Palestinian economy. [17] 

The different registration patterns between the West Bank and Gaza Strip reflect how entrepreneurs assess the advantages to be gained from each type of company. The data indicate West Bank entrepreneurs preferred to register their businesses as private limited companies, while in Gaza new registrations are almost equally divided between the two types. Each of the private types of companies is associated with the scale and complexity of the business. The smaller the business, the more likely it will be registered as a private unlimited company; the greater the level of capitalisation and sophistication, the greater the likelihood that it will be registered as a private limited company.

Endnotes:

[15] In the West Bank new companies are registered with the Ministry of Economy and Trade while in the Gaza Strip new companies are registered with the Ministry of Justice.

[16] Information in this table and assistance provided by the Companies Controller, West Bank and the Companies Registrar, Gaza, August 1999. For definitions of the various legal types of companies, see UNSCO Report, Spring 1999, p. 8.

[17] Because border closure and movement restrictions are so severe in the Gaza Strip, the surge in new company registrations may be related to the fact that owning a company may facilitate Gaza businessmen obtaining permits to enter Israel and the West Bank. This view is reinforced by the minimal costs for registering private unlimited and limited companies. Because of this phenomenon, the trends in the registration of public limited and foreign companies–for which registration is far more costly–may be a better reflection of planned investment.

Trends in Private Sector Financing

a. Bank Activity in General

The banking system continued to grow in the first half of 1999, albeit at a slower pace than witnessed in recent years. The total number of banks remained unchanged at 22 with the total number of bank branches rising to 105 at mid-1999, up from 100 branches at end-1998. All new branches were established by foreign banks. This raised the number of foreign bank branches to 67 (distributed among 14 banks), while the number of Palestinian bank branches remained at 38 (distributed among 8 domestic banks).

Between June 1998 and June 1999, the value of customer deposits in the banking system grew by 16.9 per cent–about four times as fast as the real economy–reaching USD 2,616.3 million. Nonetheless, this constituted a decline in the growth rate of deposits which rose by 25.4 per cent in the preceding year. Total outstanding credit–including that to households, businesses and public sector entities–grew by 22.4 per cent in the same period to a total USD 879.3 million. Such credit grew at a rate of 38.1 per cent in the preceding year. Thus, there was a significant increase in bank financial intermediation over the June 1998-June 1999 period, but with a deceleration in the growth rates of both deposits and credit.

b. Bank Credit to Businesses

The nominal value of bank credit extended to private businesses grew by 16.3 per cent between June 1998 and June 1999, reaching USD 543.45 million as indicated in Table 8. Thus business credit grew more slowly than credit extension in general. Business credit growth was also well below that during the previous year (June 1997-June 1998) when such credit grew by 38.9 per cent, suggesting a deceleration in bank lending to businesses.

c. Economic Branch Distribution of Bank Credit

Credit absorption in the service branches of the economy, i.e. tourism, transportation and financial services, expanded by 124.7 per cent between June 1998 and June 1999. Credit for financial services grew by 224.5 per cent reaching 22.6 million. This suggests rapid growth in insurance company and stock brokerage activity, the two main borrowers in this branch. Credit for transportation continued the strong growth witnessed last year, growing by 112.5 per cent to USD 31 million. Eased licensing procedures for taxi registration, fewer closures, and brisker economic activity may have accounted for the near doubling in the branch's share of bank credit. The tourism, hotel and restaurant branch received 87.3 per cent more bank credit, rising to USD 25.8 million by June 1999. The rapid, but decelerating, growth of lending in this branch may be related to Bethlehem 2000 celebrations. Despite considerable growth in the amount of credit extended, the service branches accounted for only USD 79.5 million–less than 15 per cent of all outstanding business credit in June 1999.

Credit extended for commerce activities–wholesale and retail trade–grew by nearly 17 per cent on a June-to-June basis, reaching USD 245.3 million. Foreign trade financing grew by more than 40 per cent and accounted for about one-fifth of all commerce lending. Of all foreign trade credit, import financing accounted for 91 per cent. Internal trade financing, which accounts for 80 per cent of commercial credit, grew by only 12 per cent. The observed trend suggests increasing bank involvement in foreign trade financing. Commerce remained the most prominent area of bank lending, accounting for 45.1 per cent of the value of all business credit in June 1999.

Credit absorption in the productive branches–agriculture, manufacturing and construction–declined by about 1.6 per cent. Total bank credit outstanding to these three branches fell from USD 222.2 million in June 1998 to USD 218.5 million in June 1999. Modest increases in lending to agriculture (9.5 per cent) and manufacturing (11.5 per cent) were offset by a decline in lending to construction (-12.2 per cent). The increase in agricultural credit reversed the downward trend witnessed last year. The decline in credit for the construction sector suggests reduced activity after strong growth in borrowing in 1998. This may mean that borrowers are now paying off previously accumulated debt. In all, credit for productive branches accounted for 40.2 per cent of all outstanding credit in June 1999.

Table 8
Value and Relative Distribution of Outstanding Bank Credit to
Private Businesses by Economic Branch,
June 1998, December 1998 and June 1999 [20] 
(in millions of nominal USD) 

Endnotes:

[20] Data in this table exclude consumer loans, loans to public sector entities and purchases of financial assets by the banking system. Data include loans provided by donor-assisted lending programs (e.g. the IFC and the French and German Government programmes) via the banking system. Unpublished data and assistance provided by the Palestine Monetary Authority (PMA), August 1999.

d. Bank Lending Ratio and Credit Repayment Period

The lending-to-deposit ratio, a measure of the degree of financial intermediation on the part of the banking system, increased marginally from 32.1 per cent in June 1998 to 33.6 per cent in June 1999. This means that for every USD 100 in deposits, banks were lending out only USD 33.60 in mid-1999. Data for previous years indicate that the ratio tends to rise seasonally at mid-year and declines in the third quarter. Nonetheless, the ratio for Palestinian banks remains very low by regional standards.

The proportion of loans (with a repayment period of 1-3 years) in total bank credit increased from 32.8 per cent to 41.7 per cent during this period, while overdrafts (with a repayment period of less than one year) decreased from 61.4 per cent to 54 percent. This could be due to increased lending to hotels, tourism and restaurants, transportation and financial services. It may also be that longer term consumer loans are on the increase. [21] 

Despite the significant absolute growth in bank deposits and credit, the proportion of bank credit absorbed by private businesses declined from 65.5 per cent in June 1998 to 62.1 per cent in June 1999, as indicated in Table 9. The improvement over December 1998 seems to be a seasonal adjustment based on recent evidence. The longer-term trend, however, has been toward the declining relative share of business lending with corresponding growth in consumer and public sector financing. Evidence also suggests that, as a borrowing entity, the public sector's share has been growing rapidly.

Table 9
Value and Distribution of Bank Credit among Businesses, Consumers and Public Agencies,

June 1998, December 1998 and June 1999 [22] 
(in millions of nominal USD)

Endnotes:

[21] PMA data on the term maturity of bank credit is not disaggregated by borrowing entity.

[22] Based on unpublished data provided by PMA, August 1999.

e. NGO and UNRWA Credit Programmes

The lending programmes administered by the different NGOs and UNRWA continued to play an important role in the Palestinian credit market. The total value of loans disbursed by these programmes in first-half 1999 reached USD 14.8 million compared to USD 15.8 million in first-half 1998, a decline of about 6.8 per cent in nominal terms. However, as compared to second-half 1998, NGO lending was 18.4 per cent higher in the first half of 1999. [23] These programmes fill credit gaps, providing financing to small and medium enterprises–borrowers to whom commercial banks will generally not lend. Moreover, such programmes generally provide proportionately more credit for productive activities as compared to the private banking system and, in many instances, provide longer term loans than are available from banks.

A prominent feature of micro-lending is solidarity or group lending, a class of programmes which has received more attention in recent years. [24] The share of these programmes in total credit disbursed by the different NGOs was about 18 per cent in June 1999 but had been as much as 24 per cent of the total in 1997 and early 1998. With the introduction of new programmes recently, it is expected that the importance of this type of lending will grow.

Group lending programmes are aimed at poorer women working in micro-enterprises which may be street, home or market-based. Most often, these are found in the informal sector; as a result, these women have no access to formal credit facilities. The programmes entail providing loans to women organised into groups of varying sizes. [25] Loans are provided to individual group members on a rotating basis and the group as a whole guarantees repayment. The average loan size differs from one programme to another but, in general, initial loans begin at between USD 200-400, and increase to higher amounts as previous loans are repaid. Despite the small size of loans, the aggregate effect is to direct credit to a segment of the population that is disproportionately poor. This has had the effect of providing income-generating opportunities to women who are oftentimes widows and single heads of household.

Endnotes:

[23] Lending data and assistance were provided by UNRWA, the Palestinian Development Fund, FATEN (previously Save the Children), American Near East Refugee Aid, Culture and Free Thought Society, the Arab Centre for Agricultural Development, Oxfam-Quebec, Care International and the Business Support Centre of the Palestinian Agricultural Relief Committees, April-July 1999. In addition to these organisations, Catholic Relief Services launched a micro-lending programme in July 1999. Data from this programme are not yet available. Also, the YMCA maintains a lending programme but no data were made available.

[24] UNRWA's solidarity lending programme was established in 1994 and that of Save the Children (now FATEN) in 1995. Last year, CARE International joined with a similar project while Catholic Relief Services began a similar project this year.

[25] For example, the UNRWA solidarity lending program requires a group size of 4-10 women. Information and assistance provided by UNRWA's Income Generation Programme, August 1999.

E. SPECIAL FOCUS: Donor Disbursements and Public Investment

Since the Conference to Support Middle East Peace, convened in Washington DC in October 1993, total donor financial commitments to the development of the Palestinian economy and society has amounted to USD 4,144 million. As of mid-1999 total donor disbursements–both grants and loans–reached USD 2,458 million or 59.3 per cent of commitments. Excluding the Palestinian Jerusalemites, donor disbursements averaged about USD 200 per person per year during the 1994-1998 period–a substantial amount of assistance. [26] 

Table 10
Disbursements as a Portion of Donor Commitments to the Palestinian Authority, 1994–QI-QII 1999 [27] 
(in nominal USD)

While the level of assistance has varied from year to year, as indicated in Table 10, since 1997 there has been a clear downward trend. Thus, while donor commitments in 1998–grants and loans–amounted to USD 654.6 million, disbursements were about USD 330 million, indicating a disbursement-to-commitment rate of 50.4 per cent. This was the lowest rate of disbursement since the Conference to Support Middle East Peace. In absolute terms, the level of donor disbursements in 1998 was about one-third below the 1994-1997 average. As an outcome of the sixth World Bank Consultative Group Meeting in Frankfurt in February 1999, donor countries committed USD 524.4 million in assistance for 1999. As of mid-year, approximately USD 174 million had been disbursed. This was 19.6 per cent below the first-half 1998 level of disbursements. [28] Thus, the slower rate of disbursements which emerged in 1998 has continued in 1999.

In part, the reduction in disbursements can be explained by the changing composition of donor assistance. During 1994-1997, approximately 64 per cent of donor assistance was for budget support, including start-up costs and emergency employment programmes necessitated by severe border closures, as well as for technical assistance. On the other hand, the portion of donor disbursements channelled into public investment accounted for only about 36 per cent of total disbursements during the 1994-1997 period, as indicated in Table 11. The relatively rudimentary nature of funded projects–both start-up and public investment (e.g. rehabilitation of infrastructure)–as well as the political and institutional exigencies during 1994-1997, resulted in less planning and preparation time and, therefore, to quicker disbursement of funds.

Table 11
Palestinian Authority Capital Expenditures as a Portion of Donor Disbursements,

1994–QI-QII 1999 [29] 
(in nominal USD)

After 1997, the need for donor support for the current budget and employment generation programmes receded due to the PA's improved fiscal performance and the macroeconomic recovery due, in large part, to fewer border closures and higher levels of Palestinian employment in Israel. While overall donor disbursements fell in 1998, the decline in non-capital expenditures was greater than the decline in capital expenditures. Of the USD 330 million in disbursements in 1998, about USD 161.8 million–or 49 per cent–was directed to public investment as indicated in Table 11. Thus, despite the fact that the 1998 disbursements-to-commitments ratio was the lowest since 1994, and the absolute level of capital expenditures fell by almost 25 per cent, public investment as a portion of disbursed funds was the highest on record. This suggests that previous institution-building on the part of the PA and donor agencies has permitted a more rapid absorption of such investment. The rate of public investment from disbursements in 1999 has remained relatively high, despite the decline in the overall rate of disbursements.

But further progress in public investment remains constrained by several factors. [30] First, donor uncertainty resulting from the slow and hesitating implementation of the Oslo Accords and the Wye River Memorandum, as well as that stemming from the establishment of a new government after a prolonged occupation. The continuing lack of clarity as to the Palestinian Authority's scope of resource-allocating authority (e.g. with regard to land, water and borders), as well as its ability to access foreign markets, has limited the longer-term, more coherent planning required to implement larger public investment projects, such as the Gaza seaport. Second, the 1994-1997 period witnessed significant progress on small-scale infrastructure rehabilitation projects and, at the end of this period, the transition to development projects. These projects, of larger scale, greater complexity and longer time horizons, require more preparation time and greater amounts of co-ordination.

A third factor in slower disbursement rates has to do with the internal procedures of donor agencies including administrative reorganisation, appraisals and audits, legislative approval processes and more rigorous examination of project proposals. As donor commitments move from relatively simple start-up projects to more complex public investment ones, the degree of oversight by donor governments tends to increase, causing a lengthening of project time frames. Fourth, donors have cited difficulties in harmonising their priorities, procedures and practices with those of the PA and in building consensus between donor and Palestinian stakeholders.

Fifth, the relatively young and evolving Palestinian public agencies, while have developed significant capacity over the past five years, are still characterised by unclear and overlapping mandates leading to difficulties in consensus-building and co-ordination for donor-funded projects. Relative inexperience in administration and management and fragmented systems of land allocation, licensing and the legal framework have also slowed project execution.

To this must be added the fact that, despite an improved fiscal situation, the PA has yet to commit its own funds for public investment while public sector employment has grown beyond sustainable levels. Furthermore, the pace of legal and institutional reforms which would encourage more private involvement in infrastructural development, has been slow. Finally, Israeli measures regarding permits for roads, water projects, industrial estates and physical

planning, especially with regard to Area C, have served to slow public investment project implementation. Furthermore, comprehensive and complex restrictions on the movement of people and goods, as well as limiting Palestinian access to foreign markets have had both delayed actual project implementation and deterred potential projects.

Given the above, the importance of public investment must be reiterated. On the one hand, such expenditures are needed to create a more conducive infrastructural and institutional operating environment for the private sector. Better infrastructure, legal environment and public institutions reduce the transaction costs of doing business and encourages more private investment which can sustain economic growth and buttress social development. On the other hand, public investment serves to increase the efficiency of public service provision, essential in the Palestinian territories where there is rapid population growth. Estimates by World Bank experts suggest that developing countries require an investment in infrastructure alone equal to about 4 per cent of GDP to cover depreciation and new investment. [31] In the Palestinian territories, where population growth is above average for developing countries and where additional public investment is needed to fill institutional and infrastructural deficits bequeathed by 30 years of occupation, even higher levels of public investment are required in order to place the economy and public services on a sustainable growth path and, thereby, to raise living levels.

Endnotes:

[26] Donor disbursements are from PA Ministry of Planning and International Cooperation (MOPIC), Aid Co-ordination Department, "Quarterly Monitoring Report of Donors' Assistance," 30 June, 1999. Population estimates are from PCBS Demography of the Palestinian People in the West Bank and Gaza, 1994. Disbursements refer only to those recorded by MOPIC and exclude those to UNRWA. Per capita donor disbursements to the Palestinian people has been about ten times the average for the Middle East and North Africa region. See IMF "West Bank and Gaza Strip: Economic Developments in the Five Years Since Oslo," Washington, 1999.

[27] Donor commitment and disbursement data are from MOPIC "Quarterly Monitoring Report of Donors' Assistance," 30 June, 1999. Commitments for 1999 are for the entire year, while disbursements are for the first half of 1999.

[28] MOPIC, 4 March 1999. The decline in donor disbursements may be due in part to delays in reporting on the part of some donors on their activities in 1999.

[29] Capital expenditures for 1994-1996 are from IMF, "West Bank and Gaza Strip; Fiscal Developments Since Oslo and Future Challenges," 4 February, 1999. Capital expenditures for 1997-1998 are from MOF, "West Bank and Gaza–Report on Fiscal Developments in January-June 1999," 10 August, 1999. Donor disbursement data and capital expenditures for QI-QII 1999 are from MOPIC, "Quarterly Monitoring Report of Donors' Assistance," 30 June, 1999.

[30] The following analysis relies mainly on Secretariat of the Ad Hoc Liaison Committee, "West Bank and Gaza: Status of Tripartite Action Plan Provisions for the Period January-October 1999," Annex 2, October 1999.

[31] See Ashoka Mody Infrastructure in the West Bank and Gaza Strip: Institutions and Growth MAS Discussion Papers, Palestine Economic Policy Research Institute, Jerusalem and Ramallah, August 1997, pp. 8-9.

F.  General, Comprehensive and Internal Closures

There was no reduction in the severity of the general closure and separation policy applied by Israel to the Palestinian territories in the first half of 1999. Personal mobility has remained severely restricted as Palestinians could not travel between the West Bank and Gaza Strip, or enter East Jerusalem without permits from the Israeli authorities. Palestinian public agencies and private businesses, as well as international agencies, continued to experience significantly higher transactions costs, time delays and lost productivity due to restrictions on personnel and goods at border crossings. [32] 

With regard to comprehensive closure–entailing a virtual halt to personal and commodity movements–there were 7 days of such closure in first-half 1999 as compared to 4 days during the first half of 1998. Excluding weekends and Muslim and Jewish holidays, this meant a loss of 3.6 per cent of the potential working days during first-half 1999, as compared to only a 0.3 per cent loss during the same period in 1998. [33] 

Endnotes:

[32] A recent study comparing Israeli and Palestinian firms in the same industries which conduct business abroad. It showed that transaction costs for Palestinian firms were, on average, 30 per cent higher than for Israeli firms. In addition, time delays for imports and exports of Palestinian firms were about 45 per cent higher. The study concluded that extra costs and delays put Palestinian businesses at a "serious competitive disadvantage" in the international market. See Center for Middle East Competitive Strategy "Transaction Costs for Palestinian Businesses," 1998.

[33] UNSCO estimates based on information from the PA Ministry of Labour. The estimated labour income loss from these closures is about USD 13.5 million, based on average labour flow and wage rate data.

G.  Summarising Macroeconomic Trends

As compared to 1998, the evidence suggests a deceleration in macroeconomic growth for 1999. The only indicators which showed clearly positive trends were Palestinian labour flows to Israel (especially unpermitted flows), planned business construction and credit creation by the banking system. Nearly every other indicator showed retrogression. The most worrisome trend is the stagnancy of private investment and external trade–the two most critical variables for private sector-led sustainable employment growth and development. Also worrisome is the downward trend in public investment, as indicated by the decline in donor disbursements and capital expenditures, which will hamper the building of a conducive physical and institutional infrastructure for the private economy. The number of effective comprehensive closure days, while lower than in years past, were also higher in first-half 1999.

On the positive side, the Palestinian economy continued to generate employment opportunities at a robust pace in first-half 1999 (see section II). At the same time, unemployment rates and levels continued to decline. It should be noted that while the adjusted unemployment rate also fell, the estimated absolute number of unemployed (adjusted) rose for the first time in two years. This was due to the rapid increase in the labour force, which is growing at a rate in excess of the labour-absorbing capacity of the Palestinian economy. The reduction in the growth of real wages and the deflationary trend in consumer prices are other symptoms of this deceleration (see section III). While the MOF/IMF macroeconomic growth estimates for 1999 seem reasonable, slower growth seems to be the order of the day at the turn of the millennium.

Economic Branch Distribution of Employment

In addition to the robust increase in the number of jobs available, there were some changes in the economic branch distribution of total Palestinian employment. Such changes are reflective of the underlying dynamics in the Israeli and Palestinian economies as well as the policy choices of the respective authorities. As indicated in the upper panel of Table 14, and in relative terms, there were employment share increases in services (15 per cent), construction (4.9 per cent) and agriculture (0.48 per cent) with employment share declines in transportation (7.1 per cent), commerce (7.2 per cent) and manufacturing (4.5 per cent).

Table 14
Estimates of the Average Branch Distribution of the Employed Palestinian Labour Force

Including Employment in ISI, QI-II 1998 and QI-QII 1999 [37] 

There were an average of 47,100 net new jobs created for the Palestinian labour force during this period–a 9.6 per cent increase in employment. This compares to 38,300 more jobs in the first-half 1997–first-half 1998 period–a growth rate of 8.8 per cent. [38] There was employment growth in every economic branch (refer to lower panel of Table 14) with particularly large increases in construction and services, which rose 15 and 26.2 per cent respectively. Employment in agriculture grew more than average, while public sector, manufacturing, transport and commerce employment rose less than the average.

About one-third of job growth during this period was accounted for by the construction branch with about one-fourth accounted for by service employment. Public employment contributed 16.6 per cent of the growth and agriculture was responsible for 13.3 per cent of new employment. Manufacturing contributed about 7.9 per cent of the growth while the commerce and transportation branches accounted for 3.2 and 0.9 per cent respectively.

Endnotes:

[37] Estimates are based on PCBS Labour Force Surveys: Main Findings, Nos. 8, 9, 12 and 13. Palestinian Authority employment estimates are from MOF "Report on Fiscal Developments," various issues.

[38] See UNSCO Report, Autumn 1998, p. 20.

B.  Consumer Price Inflation

While the Palestinian economy witnessed a disinflationary trend–a decline in inflation rates in 1996, 1997 and 1998, [48] consumer prices in first-half 1999 showed a deflationary trend –i.e. absolute declines in consumer prices. On average, consumer prices in the Palestinian economy declined by 1.4 per cent between December 1998 and June 1999. On a regional basis, as indicated in Table 18, the consumer price index (CPI) fell by about 0.7 per cent in the West Bank, 2.3 per cent in the Gaza Strip and 1.6 per cent in East Jerusalem. By contrast, consumer prices in the Palestinian economy rose by 3.1 and 1.1 per cent in the first six months of 1997 and 1998 respectively.

Consumer prices witnessed a steep increase during the second half of 1998 and peaked in December, largely the result of the depreciation of the NIS against the USD during the third quarter of the year. [49] Since then, consumer prices have readjusted, perhaps due to the relative strengthening of the NIS during first-half 1999. In addition, the relative increases in lower-cost direct imports from neighbouring countries, [50] may have contributed to the declines in Palestinian price levels.

Table 18
Inflation Rates for Major Commodity Groups in the Palestinian Territory by Region,
December 1998-June 1999 [51] 
(base period = 1996)

Within the overall price level decline of 1.4 per cent, food prices fell at a rate of 4.5 per cent. This is significant as about 40 per cent of the average Palestinian household's expenditures are for food items. The steepest price declines were for recreational, cultural goods and services which may reflect, in addition to price readjustments due to a stronger NIS, the decline in the cost of television sets which account for over 42 per cent of the weight in this commodity group. [52] Prices for other commodity groups, such as furniture, household goods and services, transport and communications and medical care, actually rose reflecting the particularities of the individual markets for these goods and services. The steepest increase was for transport and communications, perhaps reflecting the higher costs of fuel.

On a commodity group basis, the most striking difference between the two regions was for clothing and footwear, where price levels increased by 3.8 per cent in the West Bank and decreased by 3.0 per cent in Gaza. Likewise, there was a significant difference between the two regions with regard to price changes for furniture and household goods. Such differences are illustrative of the fragmented and discontinuous market, due mainly to the mobility restrictions between the two regions.

Moreover, the more rapid deflation in overall prices in Gaza may be due to a higher dependency on imported commodities, whose prices are on a downward trend. In the West Bank, the existence of larger amounts of locally-produced (non-traded) goods, along with greater wage incomes and consumer purchasing power related to informal labour flows to Israel, may be responsible for the lower rate of deflation.

On a year-to-year basis, i.e. first-half 1999 in relation to first-half 1998, the CPI increased an average of 7.5 per cent, as indicated in Table 19. This indicates that the deflationary trend during first-half 1999 was insufficient to return prices to their levels prior to the NIS depreciation of second-half 1998. It also notable that the prices for food items, beverages, housing and miscellaneous goods (e.g. personal care and restaurant meals) grew faster than average over this period. At the same time, the prices of clothing, education and recreational goods and services either grew more slowly or declined during the same period.

Table 19
Inflation Rates for Major Commodity Groups,
December 1998–June 1999 and QI-QII 1998–QI-QII 1999 [53] 
(base period = 1996) 

Endnotes:

[44] The PCBS has temporarily discontinued the household consumption and expenditures surveys which have been used in this section in previous reports.

[48] See UNSCO Report, 30 April 1999, p. 32 and Recent Economic Developments, Prospects, and Progress in Institution Building in the West Bank and Gaza Strip (Washington: IMF, 1997). In fact, the inflation rates in the last several years have been the lowest since the Israeli occupation of the WBGS in 1967. See Israel Central Bureau of Statistics Statistical Abstract of Israel, various issues.

[49] It is important to note that the CPI measures the NIS prices of commodities and services sold in the Palestinian territories. Many of these goods, or components thereof, originate abroad and are paid for in USD. Thus Palestinian consumer prices are sensitive to the NIS/USD exchange rate.

[50] See UNSCO Report, 30 April 1999, p. 6.

[51] Data in this table are based on PCBS Consumer Price Index, Revised Series, various issues. Data in this table cover the period December 1998-June 1999. PCBS notes that the CPI for the Palestinian territories is a separate composite index–not the average of East Jerusalem, the West Bank and the Gaza Strip.

[52] This may be due to the combined effect of declines in the international market prices for TVS, as well as the PA reductions on customs and taxes for TVS.

[53] See PCBS Consumer Price Index, Revised Series, various issues.

IV.  Looking Ahead

Data for the third quarter of 1999 suggest continued modest improvement. The average number of permitted Palestinian workers employed in ISI in the third quarter was about 46,800, a 1 per cent decline relative to first-half 1999 and a 2.7 per cent decline in comparison to the third quarter of 1998. However, labour force data for the third-quarter indicate that the proportion of all employed Palestinians working in ISI remained at about 23 per cent. [54] The labour force continued to grow and there was a slightly higher labour force participation rate in the third quarter. This suggests a further marginal increase in total Palestinian labour flows to ISI in the third quarter, despite 7 days of comprehensive closure imposed on the Occupied Palestinian Territory during that period, as well as continued growth in domestic employment. These contributed to a further decline in the overall rate of unemployment and a modest increase in wages.

Trade indicators show that average monthly Palestinian exports to Israel were about 1.6 per cent higher in nominal NIS terms in the third quarter as compared to first-half 1999. Palestinian imports from Israel for the same period were up 12.5 per cent. Monthly exported truckloads via monitored border crossings declined 4.4 per cent in third-quarter 1999 while imported truckloads declined by about 7.8 per cent as compared to the first half of the year. These trends suggests continued stagnation in Palestinian trade.

Bank intermediation continued to expand in the third quarter. Total deposits in the banking system in September were 6.4 per cent higher relative to June. On a year-to-year basis, total deposits were 18.4 per cent higher in September. Total credit extended during the same period increased by about 5.4 per cent. Overall bank credit in September 1999 was up 28.9 per cent as compared to September 1998. Bank credit to private businesses grew by about 6 per cent in the third quarter and was 34.8 per cent higher than in September 1998. This suggests that bank lending to businesses was growing faster than overall lending growth.

There was virtually no inflation in consumer prices in the third quarter of the year. The CPI rose only 0.02 per cent between June and September 1999, reversing the deflationary trend observed in the first half of the year. On a year-to-year basis, the CPI rose 3.6 per cent, continuing a disinflationary trend.

Donor disbursements, as of mid-October were about USD 250 million, approximately 47.5 per cent of total 1999 donor commitments of USD 524.4 million. The relatively low level of disbursements has raised concern that the significant economic developments in the Palestinian economy in the past two and one-half years will not be buttressed by significant public sector investment and, therefore, not be sustainable. [55] 

Endnotes:

[54] See PCBS "Labour Force Survey, July-September, 1999 Round; Press Conference," November 1999.

[55] Ad Hoc Liaison Committee, "Chair's Summary," Tokyo, 15 October 1999.