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Source: World Food Programme (WFP)
21 June 2017

Executive Summary

In the besieged Gaza Strip, almost 40 percent of the population lives below the poverty line and almost half of households are food insecure. UNRWA and WFP assist more than 1.2 million people with some type of food aid: 93 percent receive in-kind food, 6 percent benefit from value-based electronic food vouchers and 1 percent receive both wheat flour and vouchers. Against this backdrop, this report investigates the functionality of the food commodity market in the Gaza Strip to understand whether it is generally conducive to a significant scale-up of cash-based transfer (CBT) interventions. The analysis is based on secondary data as well as primary data collected in November/December 2016 by the Palestinian Central Bureau of Statistics (PCBS) through a trader survey of 859 food shops. The analysis is complemented with qualitative data and information obtained during semi-structured interviews with main stakeholders and partners conducted in January 2017 in the Gaza Strip by the authors of the report.

The overall analysis of the macro-economic environment clearly shows how Gazan socio-economic development struggles with a dismantled productive sector. The positive but shy performance of the economy in 2015 and 2016 has not been enough to improve the living conditions of a growing population: the level of real GDP per capita has not yet returned to pre-blockade levels. Gaza is experiencing one of the highest unemployment rates in the world —42 percent — and 54 percent of the working age population is outside the labour force.

Israeli restrictions and the blockade have curtailed the agricultural and manufacturing sectors, historically considered the backbone of the local economy. The agricultural sector suffers from reduced access to arable land, the rising cost of agricultural inputs and export restrictions. The fishing industry is confronted with water contamination and a fishing area that measures just 6 nautical miles. The high cost of inputs and low productivity also threaten the livestock sector and consequently weaken the Gazan dairy sector, which also struggles to compete with imported products that are diversified and of better quality. Today, local dairy production covers In the besieged Gaza Strip, almost 40 percent of the population lives below the poverty line and almost half of households are food insecure. UNRWA and WFP assist more than 1.2n million people with some type of fjust 20 to 30 percent of total annual needs. Finally, although reliant on imported wheat grain, the milling sector has the potential to satisfy Gaza's needs entirely; however, it is working at only 40 percent of its full capacity because the large inflow of flour in the form of food aid supresses demand for commercial wheat flour.

The constraints on the productive sectors mean the Gaza Strip is heavily dependent on imports. However, the inflow of goods is strictly controlled by Israel and is permitted through one single border crossing point. At the same time, Israel has been severely restricting Gazan exports; thus, Gaza has been running a persistent and increasing trade deficit as its exports — worth US$4 million — are able to finance just 0.6 percent of its imports. Gaza's trade dependency is not only the consequence of a higher volume of trade in relation to its economy, but also the result of its high trade partner concentration: 68 percent of imports (in metric tons) come from Israel. Finally, the Israeli shekel is the main currency in use. Thus, the economic and political dependence on Israel is overwhelming.

Despite the high trade deficit, the food imported in 2016 was not enough to meet the needs of the Gazan population. A lack of reliable data on local food production and food manufacturing as well as difficulties in estimating the goods that come through illegal tunnels make it difficult to gauge the real food deficit/surplus. This report shows that local production of the milling sector may have been enough to fill the gap. However, analysis of the daily movement of trucks in and out of Gaza shows that the actual number crossing Kerem Shalom has never reached the limit set by Israel, i.e. 700 trucks/day; the flow only came close to the limit on a few days of the last quarter of 2016. Thus, this would appear to confirm the opinion of traders interviewed for whom the constraint is not the border but rather low demand. The results from the survey show that the high unemployment rate and poor economic conditions of households are holding back sales and that reduced credit is playing an important role in the drop in sales seen over the past six months. Nevertheless, the complex procedures at the crossing may cause delays, which could also explain the low number of trucks crossing each day.

Other than the general deflationary pressure in the State of Palestine and Israel, low household purchasing power coupled with the large presence of food aid, the likely increase in illegal imports from Egypt and the cancellation of the exclusive-agent deal are pushing food prices down in the Gaza Strip. In 2016, Gazan yearly inflation averaged at -0.8 percent, driven down by a significant fall in prices for medical care (-2.9 percent) and food (-2.7 percent). Average prices for many staple foods have been significantly low in the Gaza Strip compared with prices in the West Bank (rice and oil being the exceptions). However, the benefits of low prices are threatened by uncertainty. In fact, for almost all staples, monthly price volatility is a bigger concern in the Gaza Strip than in the West Bank, and volatility has been increasing over the past two years. In this context, the WFP procedure of setting ceiling prices for the foods included in the voucher programme in combination with a lack of free shop choice is likely to harm beneficiaries, as traders may not have enough incentive to lower prices or offer discounts.

An examination of the supply chain reveals the importance of importers, not just because of Gaza's trade dependency. Importers also play an important role in distribution. In particular, importers dealing with chilled foods deliver direct to retailers. This is mainly because wholesalers lack refrigerator capacity, but also because importers prefer to deal with multiple shops rather than a few wholesalers to mitigate credit default risks. Households across the Strip rely on 4,700 retailers, which is about one shop for every 70 households. In general, these are small shops with no other branches, and only a quarter of them have a warehouse. Generally, shops face no major supply problems: only 28 percent reported encountering difficulties. However, during the 2014 war, half of the shops did face problems and their stocks fell by an average 53 percent.

Local markets play an important and growing role for the humanitarian sector. A conspicuous proportion of humanitarian aid is already absorbed/provided by the Gazan private sector: in 2016, UNRWA procured 47 percent of the food needed for in-kind distribution in the local market; for WFP, the share was 62 percent. The agencies still had to import around 73,000 mt of food to satisfy their operational needs— less than 18 percent of the food entering the Gaza Strip through the commercial sector. A large part of the food imported was wheat flour (46,000 mt), even though local mills have the potential capacity to completely cover the UN food distribution needs. If wheat flour is excluded, the total amount of food that the two humanitarian agencies had to import last year falls to 27,000 mt. In other words, if UNRWA and WFP decided to abandon general food distribution (GFD) and adopt a CBT modality, Gazan importers would need to increase their business by 7 percent to meet the increase in local demand. The Kerem Shalom crossing would probably not become a bottleneck as the overall number of trucks would remain about the same. This report suggests that importers would be able to increase their turnover and the Gazan retail sector would be able to absorb the extra demand. Nevertheless, caution and a gradual increase should be adopted as retailers would need time to adapt to the new market conditions.

However, scaling up the CBT operation could require contracting over 2,000 new shops, which has administrative implications and carries the risk of market distortion. Furthermore, political uncertainty and confrontations with Israel mean that caution would be needed in completely dismantling the in-kind pipeline. Thus, considering that the market is certainly conducive for a large-scale CBT intervention and thinking of the positive secondary impacts of a voucher programme, the report suggests a gradual and partial scale-up of the CBT intervention in the Gaza Strip.

The report also encourages carefully planned price monitoring activities not only to measure the volatility that characterizes food prices in Gaza, but also because the eventual reduction in food aid and the money injected into the Gazan economy will likely push food prices up. Finally, the current practice of fixing a ceiling price in contracted shops and assigning beneficiaries to shops should be closely analysed and eventually reviewed. In fact, the risk of creating market distortion and the deflationary context would suggest relaxing these settings to boost competition across shops and likely offset the potential price increases mentioned above.

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