The Palestinian economy in light of the American sanctions

Several reports will be on the table of the Ad Hoc Liaison Committee (AHCL) for coordinating international aid to the Palestinian People, which is chaired by Norway, when it meets in New York on the sidelines of United Nations General Assembly meetings later this month.

The reports, from the International Monetary Fund (IMF), the World Bank and the Palestinian government, agree that 2018 is the worst for the Palestinian economy since Israel has re-occupied the Palestinian cities in the West Bank 16 years ago.

By the beginning of 2018, domestic and international forecasts estimated that growth in the Palestinian economy would range from 2.5% to 3%, reflecting a continuation of the slowdown in the Palestinian economy over the past five years. Over the years and the tense political and security developments as well as an escalation in Israeli measures, these forecasts changed and annual growth estimates were lowered to less than 2%, a figure agreed on by several reports issued between July and September, including the IMF, the United Nations Conference on Trade and Development (UNCTAD), the Palestinian Monetary Authority and the Palestinian Central Bureau of Statistics.

Most, if not all, of these reports agreed on a set of criteria for their growth estimates, notably the continued implementation of certain policy reforms, especially on the fiscal front, the short-term political situation as it stands at present, the continuation of restrictions on the crossings and movement of goods, assuming an increase in government spending, continued decline in the flow of support from donor countries to the Palestinian treasury, the non-governmental organizations (NGOs) and the United Nations Relief and Works Agency for Palestine Refugees (UNRWA), all of which have experienced setbacks over the past nine months that exceeded the most pessimistic outlooks at the beginning of the year.

Public Finance

In the years 2016 and 2017, public revenues witnessed a noticeable growth mainly as a result of a one-time revenue collections, notably from the renewal of licenses for the telecom companies, which is done once every 10 years, Israel's transfer of long-disputed Palestinian workers’ financial rights and an improvement in the Ministry of Finance’s tax collection based on the expansion of the tax base. These revenues were used up and will not be repeated in 2018.

In the end, the net revenues of the Palestinian government by the end of July 2018 amounted to about $2.13 billion, which constitutes 55% of the total net revenue estimated for the entire year’s budget, compared to about $2 billion in the corresponding period of 2017, a growth of only 6%. The total expenditure for the two corresponding periods remained at the same level at $2.47 billion, with a deficit of about $350 million.

The slowdown in revenue growth, while maintaining the same expenditure, was accompanied by a sharp decline in foreign aid. Total budget support was only about $420 million despite the significant increase in the volume of Arab aid, particularly from Saudi Arabia, to compensate for the large drop in international aid, especially after the United States stopped providing all kinds of support, including for the budget, project financing and contribution to the UNRWA budget, not to mention new Israeli legislations to deduct money from the Palestinian clearance fund such as what the Palestinian Authority pays for prisoners, families of those killed by Israel and the wounded, which amounts to more than $300 million annually.

The Banking System

In contrast to the past three years, the financial statements of Palestinian banks show a slowdown in the profits for some banks and a decline in the profits of others, although other indicators of the banking system continue to grow significantly, especially in both deposits and credit facilities.

Financial statements of the Palestinian banks showed a decline in their profits by 8% in the first half of 2018, driven by the commencement of the implementation of Criteria IX in the Basel Criterion, which requires banks to put aside more provisions and reserves to meet the risks, in addition to the impact of the political and security situation on the banks, the absence of a political horizon and the American sanctions, whether those aimed at the general budget, infrastructure projects or UNRWA.

Nevertheless, financial indicators of the banking system continued to grow at a high pace to reach historical levels, both in deposits and credit facilities.

Total assets of banks operating in Palestine, both domestic and foreign, increased to more than $16 billion at the end of July 2018, an increase of 1% since the end of 2017. Total customer deposits increased during the same period to $11.74 billion, up by 1.3%. This came along with an increase in direct credit facilities to reach $8.3 billion, an increase of 4.5%, reflecting confidence by the banks in the feasibility of investing in the local economy despite the existing challenges, and a decline of less than 2.5%, reflecting the wise policies and practices of the Palestinian Monetary Authority.

Palestine Stock Exchange

As in the case of the banking system, the Palestine Stock Exchange (PEX) went against the general trend in some of its indicators, ignoring the difficulties caused by the political and security situation and the liquidity shortage in the economy in general, particularly as a result of the decline in international aid.

In the first seven months of 2018, the total value of trading at the Palestine Exchange was $242 million, an increase of 17% over the corresponding period of 2017, driven by a historic transaction, the highest since the stock exchange began in 1997, in which the banking sector took the largest share.

The listed companies maintained a rising pace of dividend ratios. Total dividends distributed to shareholders amounted to $193 million, an increase of 10% over the previous year. PEX achieved a return on investment of 5.54%, which is higher than the return on investment in most countries in this region.

However, the market value of listed stocks fell at the end of August to $3.758 billion from $3.9 billion at the end of 2017. The decline was driven by profit-generating operations over the past eight months, particularly after the dividends were distributed to the shareholders in May to capitalize on the significant gains made by the shares over the past year. These sales pushed Al-Quds index to go down by 37 points or 6.5%.

Breaking away from the Israeli economy comes from the energy sector

Earlier this year, the Palestinian Central Council and the National Council took decisions to end dependence of the Palestinian economy on the Israeli economy. Experts identified the energy sector as a cornerstone for the implementation of these decisions. These decisions acted as a catalyst for the efforts of the Palestinian government represented by the Energy and Natural Resources Authority to restructure this sector and diversify the electricity sources in Palestine, especially from renewable energy.

So far, 32 MW of solar power plants have entered the service as part of a plan by the Energy Authority to generate 200 MW of solar energy by 2020.

The Palestinian territories require about 1500 megawatts of electricity, of which 1050 megawatts go for the West Bank of which 25 megawatts are produced by renewable energy power plants, 20 megawatts from Jordan, while the rest come from Israel. The Gaza Strip needs about 450 megawatts, of which only 150 megawatts are currently available. Gaza power supply come from Israel at a rate of 120 megawatts, the local power generator produces 23 megawatts and the solar power station generates 7 megawatts, while the power line between Egypt and the Gaza Strip, which was providing the Gaza Strip with about 35 megawatts, has been disrupted for the past seven months due to security conditions in the Sinai.