kredietrisico-beperken-kredietverzekering
Palestinian Territories

Palestinian Territories

Population 5.1 million
GDP 3,051 US$
D
Country risk assessment
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Synthesis

major macro economic indicators

  2019 2020 2021 (e) 2022 (f)
GDP growth (%) 1.4 -11.5 4.4 6.0
Inflation (yearly average, %) 1.6 -0.7 1.3 1.7
Budget balance (% GDP) -4.5 -7.7 -7.7 -7.0
Current account balance (% GDP) -10.4 -6.9 -9.5 -10.0
Public debt (% GDP) 34.5 47.2 44.5 44.0

(e): Estimate (f): Forecast

STRENGTHS

  • Young population
  • Remittances from the diaspora

WEAKNESSES

  • Lack of geographical, political and economic unity
  • Dependence on Israeli supply for key commodities such as water and electricity
  • Dependence on Israel for exports and imports to and from third countries
  • High unemployment
  • Budget performance dependent on international aid and relations with Israel

RISK ASSESSMENT

Economic recovery to continue despite unstable environment 

In line with the easing of COVID-related restrictions and pick up in the vaccination campaign (27% of total population fully vaccinated as of December 2021), the business environment will gradually return to normal and growth will pick up more in 2022. This will benefit the economy, which consists mostly in services, retail, and construction. This should also help creating new jobs that will support domestic demand. However, even though the unemployment rate (27% in Q3 2021 compared with 23% in December 2019) will gradually decline, its level is expected to remain high. Although investors’ sentiment will recover slightly, it will remain  constrained by several factors including high political risks, uncertainty about the continuity of the ceasefire agreement signed between Israel and Gaza Strip’s Hamas in May 2021, and deteriorating social conditions. Budget performance will continue to remain poor, mainly on the back of low external aid from gulf countries, lower EU contribution and high public spending. As a result, the financing need will remain high, increasing domestic borrowing and arrears from/with the private sector, the latter estimated at USD 923 million accumulated along the years according to the World Bank. The domestic debt stock rose from USD 2.3 billion in December 2020 to USD 2.5 billion as of August 2021. As this will withdraw funds from the market, less resources will be available for the private sector. A lack of additional financing would force the authorities to reduce social spending, which would in turn aggravate the health conditions, weigh on domestic economic activity, and increase popular discontent with the authorities. Moreover, significant tax transfers payments from Israel, linked with customs duties and cross-border workers’ income, will remain unstable in line with ups and downs with Israel. Energy shortages in Gaza (17% of Palestinian Territories’ GDP) will persist due to the lack of Israeli energy supply and autonomous power generation, which will restrain local economic growth and improvement of public services and quality of life. Exports (mostly limestone, marble, scrap iron and olive oil) are expected to perform well. The latter, as well as imports, will remain subject to Israeli will, as they are conducted via Israel or Israeli-monitored land crossings through Jordan. They will continue to depend on Israel’s security and health policies, although the pressure of the international community has helped to remove some of the border restrictions. On the other side, restrictions imposed by Israel on access to Gaza Strip for people and goods, as well as the Egyptian blockade, will continue to weigh on its trade activities. The trade deficit will remain huge (around 30%) due to the lack of local production of capital, intermediate and consumer goods, and the lack of competitiveness of local production, billed in strong shekel. It is partially balanced out by international aid, expatriates’ remittances and compensation of employees working in Israel. Inflation will remain tamed, modelled on Israel given the trade and economic intricacies. The Territories have no currency of their own and use the shekel.

 

Political instability will persist

Living standards will continue to remain low. According to the World Bank, 22% of Palestinians lived with less than USD 5.5/day in 2016-2017. The poverty rate has increased since then, reaching nearly 29% in 2020, equivalent to around 1.4 million living in poverty. The conflict between Israel and Gaza in May 2021 added to the latter’s poverty, estimated to affect 59% of its population in 2021. Although economic growth will increase in 2022, economic and social conditions will not improve much for a rapidly growing population. This can increase the risk of social instability. On the other hand, Israel has approved residency for 4,000 Palestinians in October 2021 in a move to strengthen the Fatah-led Palestinian Authority, the legitimacy of which is shaken (as shown by periodic violent demonstrations), by the parliamentary and presidential elections’ indefinite postponement, new Israeli settlements, and competition from Gaza’s Hamas. Additionally, with the improvement in health situation, it should get easier for day workers to cross the border with Israel. Although this can be considered as a positive effort to improve the social and political situation, tensions will remain as Israel rules out a two-state solution. It will stay a major player in the economy and politics of Palestine. Lack of democratic representation, difficult economic conditions and Israel’s occupation of part of the West Bank could easily result in a new intifada. 

 

Last updated: February 2022

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