World Bank: Palestinian economy on the verge of collapsing

The World Bank stated that the Palestinian economy is now facing a severe shock in terms of public finances because of the clearance crisis with Israel, calling for an urgent resolution of the crisis.

This came in a report that the World Bank has prepared on Wednesday and is due to be presented to the Ad Hoc Liaison Committee (AHLC) at its next meeting in Brussels on 30 April.

The report quoted Anna Bjerde, World Bank Acting Country Director for West Bank and Gaza and Director of Strategy and Operations for the Middle East and North Africa Region, as saying: “The economy, which in 2018 saw no real growth, is now facing a severe fiscal shock because of the standoff over clearance revenue transfers.”

Bjerde stressed that “Urgent resolution is needed to prevent further deterioration of economic activity and living standards. Clearance revenues are a major source of budgetary income and the ongoing standoff is felt by all segments of the population in what is already a weak economy.”

“Against a background of declining aid flows, the recent standoff stemmed from Israel’s unilateral deduction of US$138 million from the PA’s clearance revenues in 2019 to offset estimated payouts to Palestinian martyrs and prisoners’ families,” the report stated.

According to the World Bank, “the clearance revenues, collected by Israel and transferred to the PA monthly, amount to 65 per cent of the PA’s total revenues. In response, the PA rejected the diminished transfers and was forced to cut the wage bill by 30 per cent, reduce expenditures in social assistance, and borrow more from local banks. If not resolved, the standoff will increase the financing gap from US$400 million in 2018 to over US $1 billion in 2019.”

The report sheds light on the critical challenges the Palestinian economy is facing and focuses on the impacts of restrictions imposed on dual-use goods, which are considered crucial to the production and modern technology. In this report, the World Bank calls Israel to reform its application of the system.

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“The dual-use goods system in its current application limits economic diversification and sustainable growth in the Palestinian territories. A revamp of the application of the restrictions on dual-use goods is critically needed,” said Bjerde.

The report added that “The Palestinian economy has witnessed low growth rates that are not able to keep up with the growth in population, resulting in an increase in unemployment and deteriorating living conditions. The absence of growth in the past year is mainly attributed to the steep deterioration in Gaza, where more than half of the population is unemployed and economic activities contracted by 7 per cent in 2018—the deepest economic downturn Gaza has witnessed that is not a result of a conflict. However, growth in the West Bank has also slowed below its recent trends.”

“In addition to the recent fiscal crisis, the Palestinian economy has suffered for years due to trade-related restrictions. In particular, restrictions on dual-use goods, which are chemicals, goods, and technologies used for civilian purposes that could have military uses, have exacted a significant toll on the economy. Israel restricts the transfer of 62 items for Gaza,” the report continued.

The World Bank referred to an already extended list of 56 items for the West Bank, which is well beyond standard international practice.

The report further stated that: “The adverse effect of dual-use restrictions is mostly felt in manufacturing, ICT and agriculture. The agriculture sector contributes significantly to Palestinian food security; however, the dual-use restrictions have lowered the concentration of active chemicals in fertilisers making them less effective and lowering land productivity to half of that in Jordan and only 43 per cent of the yield in Israel.”

According to the World Bank, “the current application of the restrictions on the transfer of dual-use goods is problematic on several levels. The restrictions do not discriminate sufficiently between legitimate and illicit uses. There is no transparency on the implementation of restrictions and Palestinian businesses cannot appeal administrative decisions.”

Also, the report pointed out that “the definitions of certain restricted goods are too broad. For example, the restriction on ‘communications equipment, communications supporting equipment, equipment containing communication functions’, limits accesses to modern manufacturing production lines, spare parts, medical equipment and home appliances. It has also stood in the way of developing the Palestinian ICT sector.”

The World Bank added: “The cumbersome permitting process for dual-use items can take months of review through the Israeli Civil Administration, the Israeli Security Agency, and the Coordinator of Government Activities in the Territories (COGAT) to obtain a dealer permit and a transfer license valid only for 45 days. The entry of goods to Gaza is even more complex, hindering the delivery of public infrastructure projects, as those require multiple items in the dual-use list including building materials, machinery and chemicals.”

The World Bank estimates that “easing dual-use restrictions could bring an additional 6 per cent growth in the West Bank economy and 11 per cent in Gaza by 2025, compared to a scenario with continued restrictions.”

Correspondingly, the World Bank has recommended a set of actions, including the streamlining and simplification of the administrative procedures of the dual-use system in the short term. In the medium term, the report has recommended replacing the currently adopted approach by “a risk-based approach to provide access to dual-use goods for legitimate businesses that have a strong track record to safely and securely handle hazardous materials.”

The World Bank stated that, in the Gaza Strip, “this approach could be implemented while ensuring that these goods are not diverted for illicit use either through remote monitoring or physical monitoring by existing UN monitors.”

As for the long term, the World Bank considered that the Israeli Government “should align its dual-use list with international practice. At the same time, the PA should build a credible regime of control and verification to be able to assume responsibility for the control of dual-use goods” inside the Palestinian territories.