Putting the Palestinian carriage behind the horse

There is a common notion in the West, Israel, and even in some Palestinian circles that economically, Palestine is doing rather well; that even though the lack of political progress is causing some difficulties on the ground, the current state of affairs is nonetheless manageable and indeed will continue to improve at the economic level. But a deeper analysis of the situation based on the available indicators suggest a much different reality: namely, the ongoing Israeli occupation, and the international aid regime for Palestine that this has spawned, has created a Palestinian economy that is simply impossible to sustain on its own merits.

Consider the two most recent reports put out by the IMF and World Bank in April of this year assessing the macroeconomic and fiscal picture of the Palestinian economy in the West Bank and Gaza. It is true, as they indicate, that in a superficial sense the Palestinian economy has showed some positive indicators recently. The IMF’s report noted that "economic growth in 2009 picked up significantly" and continued "real GDP growth in the West Bank and Gaza (WBG) is estimated at 6.8% for 2009, consisting of 8.5% growth in the West Bank and 1% in Gaza"; whereas real GDP per capita grew by 3.8 percent in 2009 (given the population growth rate of about 3 percent). In real terms, the GDP did grow if computed in Israeli shekels, the currency used in the Occupied Palestinian Territory. Indeed, in spite of Israel maintaining its tight grip on Palestinian lives through their ‘matrix of control’, over the past three years the PA has nonetheless (and quite remarkably) "continued to build a solid track record in institution-building and economic and security reforms, supported by generous aid." Total GDP in the West Bank in 2007 was back to where it was in 1999; and real GDP per capita in 2009.

Yet these statistics, happily spread by the Israeli PR machine and its international supporters abroad, consistently belies the more extensive data contained in the same reports. In USD terms, the situation is quite different. The IMF reported that Nominal (pre inflation adjustment) GDP in 2009 was US$6.117 billion, up from US$6.108 billion in 2008, an increase of only 0.1%. Palestine was given aid over the past three years totaling a sum of more than 120% of its GDP, yet in USD terms there was no real per capita growth! As the reports acknowledge, the government stimulus spending growth witnessed was basically consumption driven.

Moreover, the deficit in 2009 grew. The overall deficit was more than US$1.77 billion, or 29% of the GDP, far exceeding budgetary expectations. The original budget, prepared before the Gaza war in 2008/09, had a recurrent budget deficit of US$1.15 billion; however, the initial budget was subsequently amended to take into account the addition of $300 million for Gaza. The actual deficit on a commitment basis was $1.59 billion, an increase of almost 40% on the original budgeted amount. Aid to the recurrent budget of about $1.36 billion was 100 million short of the $1.45 billion budgeted and around 250 million short of the actually needed amount. The development budget was initially US$ 0.503 billion and was increased to US$1.1 billion to respond to Gaza’s needs in the wake of the latest war, however only US$390 million or 36% materialized.  Hence, while generous, donors’ aid did not cover the deficit. As a result, the PA resorted to bank borrowing and accumulated arrears of US$221 million.

With such a track record, continuing with a ‘business as usual’ attitude, as the situation in 2010 gets even worse, is untenable. The current budget envisaged a deficit of US $1.24 billion-however, external financing fell short in the first quarter as $174 million or 56% of the needed amount materialized. To fill the gap, borrowing from local banks increased to around $750 million according to the IMF. This borrowing translates to 12% of the GDP, up from $180 million or less than 3% in December 2009.

The palliative influx of international aid that such a dire situation requires came in May’s disbursement of $210 million, which resulted in a cumulative disbursement of $470 million during January to May 2010, only slightly lower than the envisaged $500 million. But this is a reflection of our total dependence on aid and the rigorous ‘from hand to mouth’ situation we live in. Unfortunately, this state of affairs that makes independent Palestinian sustainability impossible is not new.

During the "peace" process of the 1990s, for example, exports suffered greatly. We prided ourselves that Palestinian exports in goods and services constituted more than 50% of our GDP before 1994, the highest in the Arab world excluding oil-producing countries. But this figure was dropping drastically even in these ‘high-growth’ years. Exports to Israel, estimated at about three fourths of total exports, declined in 2009 by 23% in dollar terms. As a percentage of GDP, exports were 12.7%, a drop from 14.4% in 2008.

Further, the declining production and the plummeting exports explain why there is no significant drop in unemployment or poverty rates in spite of the billions pumped into the economy. The 2009 unemployment rate is 25%. In Gaza it stood at 39% and 18% in the West Bank. More than 80% of Gaza’s population and 45% of West Bankers live in poverty and are dependent on aid, causing the gap between the haves and the have nots to widen.

It is apparent that in spite of all the progress made, the essential requirements for jump-starting the private sector, the driver of the real, independent economy, have not been met. The "improved" access and movement witnessed between major urban centers in 2009 is not enough, being that access to area ‘C’ and to Jerusalem (some 65% of the West Bank) is still curtailed, exports to Israel are restricted and Gaza is still blockaded. Additionally increased access to high-end technology and markets and reduced costs of doing business, which are essential for a real and sustainable recovery, have not been broadly achieved.  This has had a particularly adverse impact on East Jerusalem, the largest city in Palestine, whose "economy has traditionally relied heavily on its trade links and client base in the West Bank".   

The arguments for ‘economic peace’ and an alleged West Bank ‘miracle’ are not only insufficient on their own merits, however, but also neglect the catastrophic situation of Gaza-a political reality that is bewilderingly left absent from some prevailing economic-first paradigms. The current situation in Gaza (whose GDP in 2009 was 50 percent of what it was in 2000) is both a shame and a crime. Gaza is deprived and is under-developed, and for decades has been denied access to its natural resources, mainly its off-shore gas deposits. It is the most densely populated territory in the world and for years its inhabitants (1.6 million or 40% of the total Palestinian population) have been kept locked up in a veritable open-air prison. Civilian reconstruction of what was damaged by Israel’s war on Gaza, travel, agriculture, industry, decent health care and education are all severely curtailed by the Israeli blockade, which is characterized by restrictions on capital inputs, raw and building materials as well as exports, thus, "impeding the private sector recovery and reconstruction efforts".

To survive, Gaza depends on handouts from the international community and on $1.6 billion, or more than 26% of our GDP, that the PA spends there annually on salaries, water, electricity, medicines and other basic necessities. What is abundantly clear is that no economically ‘sustainable’ Palestine can be achieved unless this massive black hole is addressed, and without changing the situation this catch-22 situation will remain.

Reconciliation in Palestine is the prerequisite for progress, an issue Israel, the West, and many in the political echelons of Palestine continue to adamantly oppose. Highlighting the blockade and its disastrous consequences, much like the Gaza-bound ‘freedom flotilla’ attempted to underscore, are essential for humanitarian reasons–political as well as economic. And any cosmetic alterations of the face of the Gazan blockade, as publicly announced by Netanyahu, change the underlying reality not one iota.

Much of the improvement in lives of the Palestinian people will of course have to take place on an immediate economic level. And to come out of this mess we must implement immediate austerity measures and redirect expenditures towards enhancing the productive base. Real painful readjustments and reforms are needed-the types of which require national consensus. Thus, at an internal level, achieving national unity is a prerequisite to real economic growth and Palestine must put its national interests first. But this cannot take place in a vacuum absent a change in the external situation.

A 2005 World Bank report clearly established the link between ‘access and movement’ restrictions and Israel’s maintenance of its colonial enterprise. The occupation, its relentless colonization drive and the separation wall continue to adversely affect Palestinian economic competitiveness. Indeed, it is clear is that there is no viable economic path going forward absent a political breakthrough first. This fact is also recognized by the IMF, which stated that "a breakthrough in the peace process and removal of restrictions on a wider scale are essential for a durable and regionally balanced growth".

It is thus time to put the Palestinian carriage behind the horse. Only an end to the occupation and the establishment of a sovereign independent Palestine on the 1967 borders can lead to a competitive and sustainable economy. A paramount question is whether the international community, particularly the US, will recognize this and exert the pressures needed to achieve it. But whether it is in Israel, Palestine, or the international community, what is abundantly clear is that now is a time for statesmen, not politicians.

Bassim S. Khoury is the former Minister of National Economy for the Palestinian Authority.  He is a private sector industrialist and human rights activist.