UNCTAD report on reviving the Palestinian economy – Alternative trade routes and more predictable public revenues required – UNCTAD press release

UNCTAD REPORT: REVIVING THE PALESTINIAN ECONOMY REQUIRES ALTERNATE TRADE ROUTES AND MORE PREDICTABLE PUBLIC REVENUES

Losses of potential income 2000 – 2005 estimated at more than twice the size of today´s economy; shift in debate needed from security issues to ensuring the flow of trade

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The downward momentum of the Palestinian economy — "de-development" — has led to such a focus on emergency needs that concerns for the viability of the economy has taken a back seat, a new UNCTAD report says. Efforts now should be aimed at limiting the vulnerability of Palestinian households and businesses and on finding new routes for expanding trade.

The annual report on UNCTAD Assistance to the Palestinian People (TD/B/54/3) suggests that minimizing the economic impact of Israeli security measures requires greater Palestinian "policy space" — room for government manoeuvre and decision-making — and greater donor support of national institution-building.

A more favourable environment for private-sector development, especially through trade, should be developed, the report recommends. Palestinian trade should expand beyond the "Rafah trade corridor" for Gaza exports, the annual study argues. It calls for re-assessing existing trade regimes with Israel, Arab countries and the rest of the world, and for establishing alternate trading routes based on regional transport agreements. Alternate routes for Palestinian trade through port facilities in Jordan and Egypt could help break the territory´s isolation and reduce dependence on Israeli port facilities. UNCTAD cost-benefit analysis shows that these alternate facilities provide services which are competitive in terms of time and quality, at costs generally equivalent to, or below, those of Israeli facilities.

Most important is to shift debate from security issues to ensuring a secure flow of trade across the region, the report says.

The report will be reviewed by UNCTAD´s governing body, the Trade and Development Board, in Geneva in October.

Broader efforts to establish alternate trade routes should be guided by a strategic framework that balances immediate and long-term objectives. The framework should be developed based on regional transit agreements and should aim at using modern logistics to connect the occupied Palestinian territories with neighbouring Arab countries. The framework also should streamline national rules and procedures. Despite the current political difficulties, the establishment of a commercial transport link (through opening "safe passage") between the West Bank and Gaza, should remain an objective.

The Palestinian economy: fragmentation and feeble domestic demand

Limitations on the movement of people and goods have isolated Palestinians in the West Bank and Gaza from Arab regional and world markets, and have caused "institutionalized fragmentation" within the occupied Palestinian territories, the report contends. Investment has plummeted. UNCTAD estimates the cumulative economic costs in terms of potential income lost at US$8.4 billion between 2000 and 2005. This is more than twice the size of today´s Palestinian economy. Physical capital loss is estimated at about one third of the territory´s 1998 productive capacity.

Preliminary Palestinian data indicate that per capita gross national income (GNI) dropped by 15% in 2006 and the gross domestic product (GDP) declined by 6.6%. Unemployment remained at 30%. Poverty reached unprecedented levels, with around 53% of households (averaging six persons) living below the poverty line of $385 per household per month in 2005. Many families have exhausted their coping strategies and severe pockets of poverty and unemployment have created dependency on donor aid for large segments of the population.

Long-term structural deterioration is apparent through the territory´s reduced agricultural and manufacturing capacities, despite the importance of these sectors as a source of employment. While agriculture and manufacturing registered 19% and 7% declines in output between 1996 and 2006, employment in those sectors increased by 80% and 3%, respectively.

In 2006, while exports declined 3%, imports rose by 20%. The trade deficit reached the unprecedented proportion of 73% of GDP – 30% over its 30-year average. Imports surged to 86% of GDP, up from 75% in 2005. Reduced domestic demand and continuous loss of local production to imports, especially from Israel, are a direct result of Israeli closure policies. They have increased the territory´s economic isolation. Imports from Israel account for more than 55% of the Palestinian trade deficit.

Fiscal instability and eroded policy space

The withholding of Palestinian tax revenues collected by Israel on behalf of the Palestinian Authority (PA) and the reluctance of donors to support the PA since 2006, on top of the debilitating economic impact of seven years of the Israeli systematic closure policy, have left the PA in a tenuous fiscal position. UNCTAD estimates the PA´s cumulative public revenue loss at US$1.2 billion between 2000 and 2005. The final figure on 2006 revenue losses, excluding tax collections withheld by Israel, could easily exceed $250 million.

Despite a 30% reduction in public expenditures to $655 million, the 2006 deficit is estimated to have increased to $791 million (19% of GDP) from $761 million in 2005 (17% of GDP). The deficit was partly financed by an increase in external budget support in the range of $137 million. Nevertheless, the irregular flow of donor support has prevented the PA from paying the bulk of public employee salaries since April 2006. When salaries have been paid, it has been only partially and irregularly.

The report argues that at least $900 million in capital inflows must have arrived to mitigate the impact of reduced public expenditure and increased imports, and to prevent the Palestinian economy from shrinking by more than the 6.6% reported in 2006. However, a significant portion of these inflows apparently was transferred through decentralized, non-PA channels.

While the fiscal losses are substantial on their own, the uncertainty of public resource availability makes it extremely difficult for policymakers to manage the economy. This undermines the role of the PA and its financial intermediation and monetary supervision systems, and further erodes the already limited policy space available to Palestinian officials.

Offsetting economic vulnerability

Under tightened mobility restrictions and imposed economic isolation, it would be imprudent to rely on changes in private sector behaviour to revive the economy, the report cautions. Rather, the focus should be on rehabilitating the private sector´s productive capacity and re-establishing and strengthening its links to the outside world. This will require government guidance, time and international support. As such, any comprehensive review of PA fiscal expenditures needs to underscore the role of the public sector in overcoming the crisis. The report says reform measures should seek to create the necessary institutions for addressing the population´s growing needs; to ensure the foundation required for the sovereign economic functioning of the envisioned Palestinian State; and to provide Palestinian decision makers with a range of policy instruments much wider than those offered by the 1994 Protocol on Economic Relations between Israel and the Palestine Liberation Organization (Paris Protocol).

UNCTAD´s response

The Secretariat was able to achieve significant progress and continued to develop its selective and flexible operational mode to cope with often extremely adverse field conditions in the occupied Palestinian territories. UNCTAD technical assistance in customs modernization and automation is expected to result soon in the launching of ASYCUDA Phase III. This project will see the complete rollout of the ASYCUDA++ automated customs system over three years to serve as the backbone for modernized customs operations.

The Secretariat was approached by Palestinian Customs and Border Management to contribute to efforts to re route Palestinian trade. An UNCTAD expert mission to Egypt in June 2007 provided advice to the PA delegation in its discussions with Egypt concerning the use of the Rafah crossing point as a trade corridor for Palestinian exports from Gaza. UNCTAD was also requested by the PA Ministry of Finance to support preparations for observer status for Palestine at the World Customs Organization (WCO).

In cooperation with the New Asian-African Strategic Partnership, which reflects the desire of Asian and African countries to contribute to Palestinian development efforts, the Secretariat was requested to develop an outline to guide an exercise for a Palestinian public- and private-sector capacity-building needs assessment. As a follow-up, the Secretariat is planning to pool efforts with the United Nations Economic and Social Commission for Western Asia (UN-ESCWA) to design a framework for providing information on Palestinian capacity-building needs in public finance and development strategies, trade policy and facilitation, and investment promotion and enterprise development.

Steady progress has been made in the ongoing project to establish the Palestinian Shippers´ Council (PSC). The PSC has a growing membership of more than 200 shippers from across the occupied Palestinian territories. The PSC´s technical conference in January 2007 brought together 185 Palestinian shippers and public and private stakeholders for a one-day discussion with national and international experts on Palestine´s complex trade problems. In June 2007, the Constituting Assembly of the PSC was convened and elected the Council´s first board of directors.

Despite Secretariat appeals to donors, several projects remain unfunded, thereby threatening to reverse years of institution building. UNCTAD was forced to suspend planned activities for the Support for Small and Medium-Sized Enterprise Development (EMPRETEC Palestine) programme. The Secretariat also may not be able to implement activities planned for support of the Palestinian Investment Promotion Agency, through the introduction and operationalization of an Investment Retention Programme in the occupied Palestinian territories.