Question of Palestine home || Permalink || About UNISPAL || Search

Follow UNISPAL RSS Twitter

Source: Special Coordinator in the Occupied Territories (UNSCO)
27 January 2000

Report on the
Palestinian Economy


Special Focus: Donor Disbursements and Public Investment

Autumn 1999



United Nations


Office of the United Nations
Special Co-ordinator



Notes to the User

The geographic designations used in this report refer to the areas where economic activity of various sorts is conducted by Palestinians. The designations do not imply any judgement on the legal status of current jurisdictional boundaries.

Copies of this report may downloaded from the UNSCO website at: www.unsco.org For more information about this report, please contact UNSCO at 07-2822746 (phone) or 07-2820966 (facsimile). For calls from abroad, use +972-7-2822746. Electronic mail communications should be addressed to: unscoe@un.org

This report is made possible by a special contribution from the Government of Norway.






Acknowledgments

In addition to the Government of Norway, whose generosity has made this report possible, UNSCO would like to extend its gratitude to several institutions which have provided data, information and assistance.

Numerous institutions of the Palestinian Authority have generously provided information and assistance for the preparation of this report. These include: the Palestinian Central Bureau of Statistics (PCBS) and, in particular, the PCBS President, the Economics Statistics Directorate, the Labour Statistics Unit, Foreign Trade Statistics Department and the Living Standards Department; the Ministry of Labour, the Ministry of Economy and Trade, the Ministry of Finance, the Ministry of Agriculture, the Companies Registrar of the Ministry of Justice, the Palestinian Monetary Authority, the Ministry of Planning and International Cooperation, the National Security Service, Northern Area Command--Gaza, the Border Security Service (Muntar), the General Administration for Crossings and Borders Authority (Allenby/Karameh Bridge) and the Technical Support Unit of the Joint Economic Committee. Likewise, we extend our thanks to the Economics Branch of the Co-ordinator of Government Activities in the Territories, Israeli Ministry of Defence, which has provided data and assistance for this report.

This report also benefited from the data, research, publications and advice of our colleagues at the World Bank and the International Monetary Fund, as well as the Palestine Economic Policy Research Institute (MAS).

A number of Non-Governmental Organisations also provided data and assistance for this report. These include the Palestinian Development Fund, FATEN, (formerly Save the Children Foundation), American Near East Refugee Aid, the Arab Center for Agricultural Development, Oxfam-Quebec, CARE International, the Business Support Centre of the Palestinian Agricultural Relief Committees, Culture and Free Thought Society and Catholic Relief Services. Appreciation is also extended to the United Nations Relief and Works Agency for Palestine Refugees in the Near East (UNRWA) for providing information used in this report.

Special thanks are extended to the Palestinian Development InfoNet at McGill University in Montreal for hosting the UNSCO website.

Any shortcomings in the use of the data and information provided by these sources are the sole responsibility of UNSCO. The Report on the Palestinian Economy is prepared by Salem Ajluni, Husam Zomlot, Khaled Islaih, Rami Wihaidi and Raed Raqeb





Table of Contents


Executive Summary


I. Macroeconomic Trends

A. Macroeconomic Projections

B. Labour Flows

C. Trade Flows

• Registered Trade with Israel
• Registered Direct Imports from Abroad
• Commercial Truck Load Movement

D. Private Investment

• Private Construction Activity
• New Company Registrations
• Approved Investment Projects
• Private Sector Financing
• a. General Bank Activity
• b. Business Bank Credit
• c. Branch Distribution of Bank Credit
• d. Bank Lending Ratio and Credit
Repayment Period
• e. NGO and UNRWA Credit Programmes

E. SPECIAL FOCUS: Donor Disbursements and Public Investment
F. General, Comprehensive and Internal Closures
G. Summarising Macroeconomic Trends

II. Labour Market Trends

A. Labour Force Growth
B. Employment, Underemployment and Unemployment
C. Underlying Labour Market Dynamics
• Social Composition of Employment
• Branch Employment Distribution
• Employment by Economic Branch and Work Place
• Women in the Labour Market

III. Trends in Living Levels

A. Working Time and Wages
B. Consumer Price Inflation

IV. Looking Ahead


List of Tables

Table [1]: Permits Issued to Palestinian Workers for Employment in ISI and Estimates of Average Permitted Daily Labour Flows on a Monthly Basis, QI-QII

Table [2]: Estimates of Average Monthly Value of Registered Palestinian-Israeli Trade on the Basis of VAT Clearances, QI-QII 1999

Table [3]: Estimates of the Average Monthly Value of Palestinian Registered Direct Imports by Port of Entry, QI-QII 1999

Table [4]: Estimates of Average Truckload Movements through Monitored Commercial Crossings, Monthly and Daily Basis, QI-QII 1999

Table [5]: Total New Licensed Construction Area by Project Type, QI 1998 and QI 1999

Table [6]: Registration of New Companies by Legal Type, QI-QII 1998 and QI-QII 1999

Table [7]: Value of Approved Investment Projects Qualifying for Exemptions Under the Palestinian Law for the Encouragement of Investment by Residence of Investor, QI-QII 1999

Table [8]: Value and Relative Distribution of Outstanding Bank Credit to Private Businesses by Economic Branch, June 1998, December 1998 and June 1999

Table [9]: Value and Distribution of Bank Credit among Businesses, Consumers and Public Agencies, June 1998, December 1998 and June 1999

Table [10]: Disbursements as a Portion of Donor Commitments to the Palestinian Authority, 1994--QI-QII 1999

Table [11]: Palestinian Authority Capital Expenditures as a Portion of Donor Disbursements, 1994--QI-QII 1999

Table [12]: Estimates of Average Labour Force, Full Employment, Underemployment and Unemployment, QI-QII 1998 and QI-QII 1999

Table [13]: Estimates of the Average Social Composition of the Employed Palestinian Labour Force, QI-QII 1998 and QI-QII 1999

Table [14]: Estimates of the Average Branch Distribution of the Employed Palestinian Labour Force Including Employment in ISI, QI-II 1998 and QI-QII 1999

Table [15]: Estimates of Average Palestinian Employment in ISI and the Palestinian Territory by Economic Branch, QI-QII 1998 and QI-QII 1999

Table [16]: Comparing Women?s and Men?s Average Labour Force Profiles, QI-QII 1998 and QI-QII 1999

Table [17]: Estimates of Average Monthly Days Worked and Real Wages for Employed Workers by Place of Work, QI-QII 1998 and QI-QII 1999

Table [18]: Inflation Rates for Major Commodity Groups in the Palestinian Territory by Region, December 1998-June 1999

Table [19]: Inflation Rates for Major Commodity Groups, December 1998--June 1999 and QI-QII 1998--QI-QII 1999






EXECUTIVE SUMMARY

The Office of the United Nations Special Co-ordinator Report on the Palestinian Economy (Autumn 1999) covers developments in the first half of 1999 as compared to the first half of 1998. The report provides updated data and information from Palestinian, Israeli and multilateral sources on trends in three main areas: macroeconomics, the labour market and living levels. The report also contains a special focus on donor disbursements and public investment.

MACROECONOMIC TRENDS

The Palestinian economy, building on a 4.1 per cent real GDP growth rate in 1998, continued to generate employment opportunities at a robust pace in 1999. There were an estimated 47,100 new jobs created between first-half 1998 and first-half 1999 which contributed to further reductions in unemployment and underemployment and an increase in the average real monthly wage. Moreover, while Palestinian labour flows to Israel remained important in overall employment, 6 of 10 new jobs were located in the Palestinian economy where almost three-quarters of new employment was absorbed in the private sector. There were also positive trends in planned business construction and credit creation by the banking system and relative stability in consumer prices. However, other indicators showed retrogression. In particular, there was stagnancy in private investment and exports--the two most critical variables for sustainable private sector-led employment growth. Also worrisome was the downward trend in public investment, the result of reduced levels of donor disbursements in 1999.

Labour Flows

The number of permit-holding Palestinian workers employed in Israel, Israeli settlements and industrial zones (ISI) averaged an estimated 47,300 on a daily basis during first-half 1999, a 3.2 per cent increase relative to the same period last year. Overall, the average number of work permits issued by Israeli authorities to Palestinians grew by less than 1 per cent as between the two periods. This may indicate a saturation in the Israeli labour market for Palestinian workers and/or a policy change toward more permissiveness regarding informal labour flows to ISI. Excluding Palestinians from East Jerusalem--who do not require permits--average daily informal labour flows are estimated at 62,800 during first-half 1999, an increase of 33.2 per cent relative to first-half 1998. Thus, total Palestinian labour flows to ISI--permitted and informal--increased 18.5 per cent to an estimated 110,100 during first-half 1999.

Trade Flows

Estimates based on value-added tax clearances suggest that total Palestinian-Israel registered trade increased by 9.6 per cent in nominal NIS terms in the last year, a slight increase after adjusting for inflation. Israeli exports rose 12.5 per cent in nominal terms while Palestinian exports declined 0.16 per cent, implying a real reduction in the value of Palestinian exports to its main trading partner. In nominal USD terms, Palestinian registered exports to Israel amounted to USD 222.6 million, while registered imports from Israel were USD 843.5 million in first-half 1999. Palestinian direct registered imports from third countries increased to an estimated USD 87.4 million, a 43.4 per cent nominal increase in the last year. Higher transactions costs, border and mobility restrictions, limited access to foreign markets, as well as low levels of investment in productivity continue to hinder export development.

Private Investment

Planned construction activity--the main component of Palestinian private investment activity--as measured by the new surface area licensed by Palestinian local authorities, declined 0.6 per cent as between first-quarter 1998 and first-quarter 1999. The overall decline was due to a fall in residential construction licensing which accounts for the bulk of construction activity. Licensing for business construction, however, increased 17.2 per cent. The evidence suggests an overall decline in construction activity in the near-term.

There were 236 additional companies registered in the West Bank and Gaza Strip during in the last year, a 35.2 per cent increase in new registrations. Of these, 82.2 per cent were registered in Gaza. Private unlimited liability companies accounted for 60 per cent of total new registrations, while 40 per cent were private limited liability companies. The bulk of private companies are partnerships with small amounts of capital investment. There was only one new public and one new foreign company registered during first-half 1999. This suggests that planned larger-scale investment, as well as new foreign investment, in the Palestinian economy remains limited.

The total value of projects approved under the Palestinian Law for the Encouragement of Investment in the first half of 1999 was USD 107.6 million compared to USD 161.0 million for all of 1998. Foreign investment projects accounted for USD 15.1 million or 14 per cent of the total. Projects approved in the Gaza Strip amounted to 53.1 per cent of the total. Data indicate two-thirds of the value of total approved projects in the West Bank were in manufacturing while three-quarters of the value of approved projects in Gaza were in construction activities.

The banking system continued to expand, albeit at a slower pace than witnessed in recent years. Between June 1998 and June 1999, customer deposits grew by 16.9 per cent to a total of USD 2,616.3 million. Deposits grew by 25.4 per cent in the previous year. Total outstanding credit grew by 22.4 per cent in the same period to a total USD 879.3 million. Such credit grew at a rate of 38.1 per cent in the preceding year. Thus, there was a significant increase in bank financial intermediation, but with a deceleration in the growth rates of both deposits and credit.

The value of bank credit extended to private businesses grew by 16.3 per cent, reaching USD 543.45 million. Credit absorption in the service branches of the economy expanded by 124.7 per cent and accounted for USD 79.5 million or 14.6 per cent of all outstanding business credit in June 1999. Credit extended for commerce activities grew by nearly 17 per cent, reaching USD 245.3 million and accounting for 45.1 per cent of all business credit. Foreign trade financing grew by more than 40 per cent and accounted for about one-fifth of all commerce lending. Credit absorption in the productive branches declined by about 1.6 per cent to USD 218.5 million, accounting for 40.2 per cent of all outstanding credit. The lending programmes administered by the different NGOs and UNRWA disbursed USD 14.8 million in first-half 1999 compared to USD 15.8 million in first-half 1998, a decline of about 6.8 per cent in nominal terms. Compared to second-half 1998, however, such lending was 18.4 per cent higher in the first half of 1999.

Despite healthy growth in employment and income, non-construction private investment in the Palestinian economy has continued to lag behind. This is especially true of foreign investment as indicated by the very low level of new foreign company registrations and approved foreign investment projects. Political uncertainty about the shape of the permanent status and the still weak legal and institutional environment--particularly from the point of view of foreign capital--constitute continuing obstacles to investment in the Occupied Palestinian Territory.

Public Investment

Donor commitments in 1998 were USD 654.6 million while disbursements reached USD 330 million, indicating a disbursement-to-commitment rate of 50.4 per cent. This was the lowest rate of disbursement since the Conference to Support Middle East Peace in 1993. In absolute terms, the level of donor disbursements in 1998 were about one-third below the 1994-1997 average. Donor countries have committed USD 524.4 million in assistance for 1999. As of mid-year, approximately USD 174 million had been disbursed. This was 19.6 per cent below the first-half 1998 level of disbursements. Thus the slower rate of disbursements which emerged in 1998 has continued into 1999.

The portion of donor disbursements channeled into public investment for vital infrastructural and capacity development has been on the rise in the last two years. Of the USD 330 million in disbursements in 1998, about USD 161.8 million--or 49 per cent--was directed to public investment. Thus, despite the fact that the 1998 disbursements-to-commitments ratio was the lowest since 1994, public investment as a portion of disbursed funds was the highest on record. This was due to the achievement of recurrent budget balance by the PA, progress in institution-building and the reduced severity of comprehensive closures which would necessitate diversions of funds from investment to consumption. For similar reasons, the rate of public investment from donor disbursements has remained relatively high in 1999 despite the decline in the level of donor disbursements.

Nonetheless, given the low levels of private investment, donor assistance for public investment in infrastructure and for strengthening the legal and institutional capacities of the Palestinian Authority, will be especially important. Such investment will contribute to reducing business transactions costs and creating a more stable environment for private investment--both domestic and foreign--and thus to sustaining the significant positive developments in the Palestinian economy in the past two and one-half years.


LABOUR MARKET

Labour Force, Employment and Unemployment

The combined effect of a larger working-age population and a higher labour force participation rate resulted in the growth of the Palestinian labour force to an estimated average of 619,445 persons in first-half 1999--a 7.4 per cent increase. At the same time, the average full-employment rate increased from 77.3 per cent to 80.4 per cent while the absolute number of fully-employed persons increased by 11.7 per cent. The underemployment rate--the proportion of the labour force working less than 35 hours per week--fell from 7 per cent to 5.6 per cent, while the number of underemployed persons declined by 13 per cent.

The standard unemployment rate declined from 15.6 per cent to 13.8 per cent, a continuation of the observed trend of the last two years, while the absolute number of unemployed persons declined by 4.5 per cent to an average of about 85,950. The standard unemployment rate in the West Bank was 11.3 per cent while it was 20.1 per cent in Gaza. The more broadly defined adjusted unemployment rate--which includes discouraged workers--declined to 23.9 per cent. Using this broader definition, the absolute number of unemployed increased by about 0.5 per cent to about 159,250 persons, the first such increase since first-half 1996.

Employment Growth by Economic Branch and Place of Work

There were a total of 47,100 net new jobs for Palestinian workers as compared to the first half of 1998; 39.7 per cent of new employment was located in ISI. Including Palestinians from East Jerusalem, total employment in ISI--permitted and unofficial--increased by 18 per cent to an estimated 122,700 persons. About 60.3 per cent of total job growth was located in the Palestinian economy, where employment increased 7.4 per cent to an average of 410,750 persons. The domestic contribution to total job creation rose from 34.7 per cent in the period first-half 1997--first-half 1998 to 60.3 per cent in the period first-half 1998-first-half 1999, a significant increase in the labour-absorbing capacity of the economy.

Moreover, the Palestinian private sector accounted for a higher share of domestic employment creation as between the two periods. Private employment growth accounted for only 38.2 per cent of total job creation in the 1997-1998 period as compared to 72.3 per cent in 1998-1999. In absolute terms, average domestic private sector employment grew by only 1.8 per cent in the earlier period and by 6.9 per cent in the latter period. In first-half 1999, 76.7 per cent of all employment in the Palestinian economy was in the private sector. The service, agriculture and construction branches of the economy accounted for 32 per cent, 21.7 per cent and 19.2 per cent of net job growth respectively, while there were absolute declines in employment in manufacturing and commerce. Employment in the public sector grew 8.9 per cent to an average of 95,484 persons, accounting for 27.6 per cent of domestic employment growth during this period.

Women in the Labour Market

Women's labour force participation rate increased to 12.4 per cent from 11.4 from in first- half 1998, reversing the downward trend of the previous year-to-year period. This resulted in a 14.5 per cent increase in the size of the women's labour force which averaged some 89,656 persons. This exceeded the growth in the men's labour force. Nonetheless, the full-employment rate for women declined slightly while their underemployment rate increased. Greater labour force participation for women coincided with a slight decline in their unemployment rate over the last year--from 15.4 to 15.2 per cent. But due to growth in population and labour market participation, the absolute number of unemployed women increased by 12.6 per cent. This was quite different from the experience of men whose unemployment rate fell from 15.8 to 13.7 per cent and for whom the absolute number of unemployed declined 6.3 per cent.

The latest period has therefore witnessed a change in womens labour market profile. In particular, there has been increased participation despite the fact that womens full-employment rate has declined and their underemployment rate has risen. This suggests a tendency for women to participate in the labour market even if full-employment is not available, a reversal of the trend of the last several years.

LIVING LEVELS

The real daily wage for an average fully-employed Palestinian worker increased by 3.6 per cent to about NIS 61.8. Due to the decline in the average monthly days worked, real monthly wages increased by only 2.9 per cent to about NIS 1,366. Monthly real wages for West Bank workers rose 7 per cent, those for workers in Gaza increased 1.9 per cent, while those for Palestinians working in Israel declined 2.9 per cent. Real average monthly wages in first-half 1999 were NIS 1,251 in the West Bank, NIS 1,010 in Gaza and NIS 1,711 for Palestinians working in Israel.

The disinflationary trend of the last several years was replaced by a deflationary trend in the first half 1999--i.e. absolute declines in consumer prices. On average, consumer prices declined 1.4 per cent between December 1998 and June 1999. The consumer price index (CPI) fell by about 0.7 per cent in the West Bank, 2.3 per cent in the Gaza Strip and 1.6 per cent in East Jerusalem. Food prices fell by 4.5 per cent, a significant trend since food occupies about 40 per cent of expenditures in the average Palestinian family.

On a year-to-year basis, i.e. first-half 1999 versus first-half 1998--the CPI increased 7.5 per cent. This indicates that the deflationary trend during first-half 1999 was insufficient to return prices to their levels prior to the NIS depreciation of second-half 1998. It also notable that the prices for food items, beverages, housing and miscellaneous goods (e.g. personal care and restaurant meals) grew faster than average over this period. At the same time, the prices of clothing, education and recreational goods and services either grew more slowly or declined during the same period.

LOOKING AHEAD

Data for the third quarter of 1999 suggest continued economic improvements. Labour force data for the third quarter indicate that the proportion of all employed Palestinians working in ISI remained at about 23 per cent. Given labour force growth and a slightly higher participation rate, there was a marginal increase in Palestinian labour flows to ISI, despite 7 days of comprehensive closure imposed on the Occupied Palestinian Territory, and continued growth in domestic employment. There was a further decline in the overall rate of unemployment and a modest increase in wages.

Trade indicators show that average monthly Palestinian exports to Israel were about 1.6 per cent higher in nominal NIS terms in the third quarter as compared to first-half 1999. Palestinian imports from Israel for the same period were up 12.5 per cent. Monthly exported truckloads via monitored border crossings declined 4.4 per cent in third-quarter 1999 while imported truckloads declined by about 7.8 per cent as compared to the first half of the year. This data suggests continued stagnation in trade and a growing trade deficit for the Palestinian economy.

Bank intermediation continued to expand in the third quarter. Total deposits in the banking system in September were 6.4 per cent higher (in nominal USD terms) relative to June and 18.4 per cent higher than last September. Total credit extended during the same period increased by about 5.4 per cent in the third quarter, raising bank credit to 28.9 per cent above its September 1998 level. Bank credit to private businesses grew by about 6 per cent in the third quarter and was 34.8 per cent higher than the third quarter of 1998.

There was virtually no inflation in consumer prices in the third quarter of the year. The Palestinian consumer price level rose only 0.02 per cent between June and September 1999, reversing the deflationary trend observed in the first half of the year. On a year-to-year basis, consumer prices increased by 3.6 per cent.

Donor disbursements, as of mid-October were about USD 250 million, approximately 47.5 per cent of total 1999 donor commitments of USD 524.4 million. The relatively low level of disbursements has raised concerns that the positive developments in the Palestinian economy in the past two and one-half years will not be buttressed by significant public sector investment.


-----------


Arabic text attached (MS Word 97 format)
UNSCO Arabic Summary.doc




A. Macroeconomic Trends

An Overview of Macroeconomic Projections, 1998-1999

Palestinian Ministry of Finance (MOF) and the IMF estimates suggest that the Palestinian economy witnessed a significant recovery in 1998. Real Gross Domestic Product (GDP) and real Gross National Product (GNP) are estimated to have grown by about 4.1 and 8.0 per cent respectively, based on strong growth in employment in Israel, the resulting higher domestic consumer demand, continued growth in domestic employment and a reduction in the rate of unemployment. The MOF and IMF also noted moderate increases in the value of Palestinian trade but a significant decline in donor disbursements and, therefore, in public investment.

Given the economic performance in 1998, the MOF and IMF projected real GDP growth of 4 per cent for 1999. The projection was based on the assumption of significant continued Palestinian labour flows to Israel, sustained growth in construction and manufacturing and a reversal of the downward trend in donor disbursements. The MOF report notes, however, that employment growth may be insufficient to absorb the number of new entrants into the labour market. [1]

Based on preliminary data from the first half of 1999, the MOF and IMF have revised upward their projection of real GDP growth to 4.5 per cent. The MOF reports cited sustained and higher labour flows to Israel, a lower unemployment rate, domestic private sector employment growth, and continued robust growth in tax revenues, in private bank deposits and credit extension. The report points out, however, that public investment--funded wholly by donor assistance--fell far short of its first half-1998 level (USD 62 million during first-half 1999 versus USD 162 million in first-half 1998). The decline in public investment, the reports warn, jeopardises the sustainability of the economic recovery. [2] Projected economic growth would, given population growth, result in a small increase in per capita income levels.

These projections can be more fully assessed by reviewing the performance of key macroeconomic indicators for first-half 1999. These include labour flows to Israel; Israeli-Palestinian trade flows and those between the Palestinian economy and the rest of the world; private investment trends (including trends in credit extension); donor-assisted public investment; and the effects of closures and other restrictive measures.

Endnotes:

[1] The summary of 1998 economic performance and preliminary 1999 projections are from Palestinian Authority (PA) Ministry of Finance "Report on Fiscal Developments in October-December 1998," 23 March 1999, pp. 7, 11-12. The report also points to increases in PA revenues from VAT, customs and domestic sources as other indicators of economic growth (pp. 8-9).

[2] PA Ministry of Finance "Report on Fiscal Developments in January-June 1999," 10 August, 1999, pp. 1-2. Presentation by the MOF at Local Aid Co-ordination Committee meeting, 9 December 1999. The MOF and IMF have projected a real GNP growth rate of 4.7 per cent. PCBS estimates a 3.68 per cent natural population growth rate.





B. Labour Flows

Labour Flows to Israel, Israeli Settlements and Industrial Zones

Estimates indicate that there were an average of 47,300 permit-holding Palestinian workers employed on a daily basis in Israel and Israeli settlements and industrial zones (ISI) during QI-QII 1999, an increase of 3.2 per cent over the QI-QII 1998 daily average (see Table 1). This constitutes a significant deceleration relative to the 1997-1998 period when such employment increased by 12 per cent. [3]



Table 1
Permits Issued to Palestinian Workers for Employment in ISI and Estimates of Average

Permitted Daily Labour Flows on a Monthly Basis, QI-QII 1999 [4]

Total Number of
Total Permits Issued to
Estimated
Permits Issued to
Work in Settlements
Total Permits Issued
Daily Labour
Month
Work in Israel
and Industrial Zones
to Work in ISI
Flows to ISI
January
44,348
12,514
56,862
45,881
February
44,589
12,627
57,216
49,541
March
44,201
10,238
54,439
43,960
April
43,243
12,725
55,968
45,389
May
43,954
13,057
57,011
47,671
June
44,027
13,243
57,270
51,309
QI-QII 1999 Averages
44,060
12,401
56,461
47,292
QI-QII 1998 Averages
44,075
11,895
55,969
45,826
Change
-0.03%
4.25%
0.88%
3.20%

The average number of permits issued for work inside the pre-1967 borders of Israel declined slightly as between the two periods while those issued for work in Israeli settlements and industrial zones in the Palestinian territories grew by 4.2 per cent. Overall, the average number of work permits issued by Israeli authorities to Palestinians grew by less than 1 per cent as between the two periods. This may indicate saturation in the Israeli labour market for Palestinian workers. It may also indicate a change in Israeli policy toward more permissiveness for informal labour flows.

Excluding Palestinians from East Jerusalem--who are not required to obtain permits for work in Israel--average daily informal, i.e. unpermitted, labour flows to Israel from the Palestinian territories are estimated at 62,800 during QI-QII 1999 as compared to 47,100 for the QI-QII 1998 period, an increase of 33.2 per cent. [5] Therefore, total Palestinian labour flows to ISI, excluding Palestinian Jerusalemites, have risen from an estimated average of 92,900 during QI-QII 1998 to 110,100 in QI-QII 1999, an increase of 18.5 per cent. On average, 23 per cent of the employed Palestinian labour force (excluding East Jerusalem) was working in ISI in QI-QII 1999 as compared to 21.4 per cent in QI-QII 1998.

Endnotes:

[3] See UNSCO Report, Autumn 1998, p. 2.

[4] Labour flow estimates assume that the per cent difference between issued permits and actual labour flows in the West Bank was equal to that in Gaza, for which more accurate data exist. Due to a lack of data on actual labour flows to Israeli settlements in the West Bank, the assumption is made that all permits issued were used. This overestimates actual flows. Since Palestinians in East Jerusalem are not required to obtain permits to work in Israel, they are not included in the estimated labour flows, which underestimates total Palestinian labour flows to Israel. Labour flow averages are calculated exclusive of weekends and officially celebrated holidays. Data and assistance provided by the PA Ministry of Labour, the PA National Security Service-Northern Command Area, Gaza and the Co-ordinator of Government Activities in the Territories (COGAT), Israeli Ministry of Defense, Tel Aviv. The abbreviations QI and QII, used throughout this report, refer to the first and second quarters, respectively, of the relevant year.

[5] Based on PCBS Labour Force Survey; Main Findings, nos. 8, 9, 11 ad 12 and middle-series population estimates for the Palestinian territories as given in PCBS Demography of the Palestinian Population, 1994.





C. Trade Flows

Registered Trade with Israel

Recently-released foreign trade data suggest that about 85 per cent of the value of Palestinian trade transactions are with Israel. [6] The largest component of Palestinian foreign trade can therefore be roughly estimated using the data on the value-added tax (VAT) clearances between MOF and the Israeli Ministry of Finance. As stipulated in the 1994 Economic Protocol between the Government of Israel and the Palestine Liberation Organisation, each side receives a sum equal to about 17 per cent (the common VAT rate) of the value of goods imported from the other side. Dividing the total clearance revenues received by the MOF by .17 therefore yields the approximate value of goods imported by Palestinians from Israel (i.e. Israeli exports). Using the same method, an estimate of the value of goods imported by Israel from Palestinians (i.e. Palestinian exports) can be obtained on the basis of clearances received by the Israeli Ministry of Finance. [7]

Table 2
Estimates of Average Monthly Value of Registered Palestinian-Israeli
Trade on the Basis of VAT Clearances, QI-QII 1999
[8]
(in nominal NIS)



Registered Palestinian
Registered Palestinian
Month
Exports to Israel
Imports from Israel
January
156,443,388
562,482,924
February
136,924,218
540,300,065
March
133,607,406
572,174,382
April
158,567,782
524,364,135
May
170,644,141
622,114,276
June
152,200,894
620,671,794
QI-QII 1999 Total
908,387,829
3,442,107,576
QI-QII 1999 Averages
151,397,972
573,684,596
QI-QII 1998 Averages
151,639,456
509,611,335
Changes
-0.16%
12.57%

The data in Table 2 indicates there was a 9.6 per cent increase in the nominal NIS value of registered Palestinian-Israeli trade transactions (exports plus imports) during first-half 1999, as compared to the same period in 1998. When inflation is factored into the analysis, the real value of such trade flows has grown only slightly during this period. The growth in the value of trade was dominated by Israeli exports, which rose by 12.5 per cent in nominal NIS terms, from a monthly average of NIS 509.6 million during first-half 1998 to NIS 573.7 million per month during first-half 1999. On the other hand, the monthly average value of Palestinian exports to Israel declined by 0.16 per cent over the same period, from NIS 151.6 million to NIS 151.4 million, implying a reduction in the real NIS value of such exports. In nominal USD terms, Palestinian registered exports to Israel amounted to USD 222.6 million in the first half of 1999, while registered imports from Israel were USD 843.5 million. [9]

Endnotes:

[6] See PCBS Foreign Trade Statistics, 1997; Main Results, February 1999. Palestinian registered transactions with Israel (both exports and imports) accounted for 84.9 per cent of all registered trade which was estimated at USD 2,161.7 million in 1997. PCBS notes, however, that some portion of registered Israeli exports are actually re-exports which have third-country origin. Thus, the share of Palestinian foreign trade with Israel is overestimated. With the assistance of PCBS.

[7] This method underestimates the value of Palestinian-Israeli trade for two reasons: 1) the lack of a customs border--with fixed crossing points--between the West Bank and Israel allows a significant amount of unregistered trade, mainly Israeli exports, to occur and; 2) some Israeli "exports" are, in reality, re-exports which have third-country origin. If such goods are registered as Israeli "exports," the PA receives only the VAT levied--not the customs revenues from the importation of such goods. Unregistered trade may account for more than 30 per cent of the value of Palestinian-Israeli trade flows based on information from MOF. The PA is attempting to rectify this situation through negotiations with the Israeli authorities and by developing better customs procedures. Data and assistance provided by MOF.

[8] Nominal NIS values, rather than USD values, are used to avoid distortions caused by the depreciation of the NIS against the USD. Palestinian exports to Israel include all goods and services, other than the labour services of Palestinians working in Israel. Palestinian imports exclude purchases of electricity, water and telephone services from Israel but include purchases of other Israeli-produced services. Data and assistance provided by MOF, August 1999.

[9] USD values for registered trade were calculated using the average monthly NIS/USD exchange rate for QI-QII 1999--USD1 = NIS4.08. Data on exchange rates are from the PCBS website at: www.pcbs.org




Registered Direct Imports from Abroad

Available customs clearance data from the MOF indicates a continued increase in Palestinian trade transactions with trading partners other than Israel. Direct registered imports from Egypt, Jordan and other countries via Israeli ports destined for the Gaza Strip during the first half of 1999 were valued at USD 87.4 million. This was a 43.4 per cent increase, in nominal terms, as compared to USD 60.9 million during the same period in 1998, as indicated in Table 3.

Table 3
Estimates of the Average Monthly Value of Palestinian Registered
Direct Imports by Port of Entry, QI-QII 1999
[10]
(in nominal USD)



Gaza Strip via
Month
Allenby/Karamah
Rafah
Israeli Ports
Total
January
2,183,758
772,081
6,622,212
9,578,051
February
2,114,705
1,148,613
8,504,124
11,767,442
March
3,021,717
1,127,921
10,887,748
15,037,387
April
2,931,255
1,230,458
13,862,467
18,024,180
May
3,168,223
1,391,135
13,450,455
18,009,813
June
2,956,451
915,715
11,112,280
14,984,446
QI-QII 1999 Totals
16,376,110
6,585,924
64,439,286
87,401,320
QI-QII 1999 Averages
2,729,352
1,097,654
10,739,881
14,566,887
QI-QII 1998 Averages
1,850,199
1,061,782
7,239,908
10,151,889
Changes
47.52%
3.38%
48.34%
43.49%

Registered direct imports from abroad can be disaggregated by countries of origin. Thus, the nominal USD value of direct Palestinian imports from Jordan through the Allenby/Karameh Bridge grew by 47.5 per cent as between first-half 1998 and first-half 1999, while imports from Egypt through the Rafah crossing grew by only 3.4 per cent over the same period. Imports entering Gaza from abroad (mainly Europe and North America) through Israeli ports rose by 48.3 per cent to USD 64.4 million compared with USD 43.4 million for the same period of 1998. This evidence suggests there was an acceleration of the growth of direct imports through each of the specified ports of entry as compared to 1998. [11]

Endnotes:

[10] Due to the lack of an effective customs border, this table excludes data on direct imports through Israeli ports destined for final users in the West Bank. With information and assistance from MOF VAT and Customs Directorate, August, 1999.

[11] See UNSCO Report, Spring 1999, p. 6.



Commercial Truckload Movement

A third indicator of Palestinian trade activity, as well as the relative stringency of Israeli border closure measures, is the flow of commercial trucks through monitored commercial crossings. The total number of truckloads of merchandise transiting through such crossings declined an estimated 7.1 per cent between first-half 1998 and first-half 1999, reversing the trend witnessed in 1998. [12] The number of exported truckloads fell by 26.6 per cent while imported truckload traffic fell by 2.3 per cent, as indicated in Table 4.

Table 4
Estimates of Average Truckload Movements through Monitored
Commercial Crossings, Monthly and Daily Basis, QI-QII 1999
[13]


Monthly
Monthly
Daily
Daily
Exported
Imported
Exported
Imported
Month
Truckloads
Truckloads
Truckloads
Truckloads
January
2,137
11,110
95
494
February
2,728
14,206
130
676
March
3,096
12,562
135
546
April
2,904
11,261
135
524
May
2,341
14,494
100
617
June
1,710
16,116
71
672
QI-QII 1999 Averages
2,486
13,291
111
588
QI-QII 1998 Averages
3,388
13,611
143
572
Changes
-26.61%
-2.35%
-22.48%
2.84%

The significant decline in truck flows was unevenly distributed among the various crossings. Changes in aggregate truckload movements (imports and exports) through the various crossings were as follows: Erez/Beit Hanoun, down 27.7 per cent; Erez Industrial Zone, down 16.9 per cent; Nahal Oz/Shuja?iyeh, down 4.6 per cent; Karni/Muntar, down 11.2 per cent; Sufa/Qararah, up 9.8 per cent; Rafah, up 6.3 per cent; Allenby/Karameh bridge, up 82.2 per cent; Damiyeh/Adam bridge, down 28.2 per cent. These trends suggest a reduction in Palestinian exports, due in part to lower agricultural exports caused by adverse weather conditions. They also indicate some amount of redirection of trade as between the various crossings.

Endnotes:

[12] See UNSCO Report, Spring 1999, p. 3. Monitored crossings include the Gaza Strip crossing points at Erez/Beit Hanoun, the Erez Industrial Zone, Nahal Oz/Shuja?iyeh, Karni/Muntar, Sufa/Qararah and Rafah and the West Bank crossings to Jordan---the Damiyeh/Adam and Allenby/Karamah Bridges. The significant volume of commercial truck traffic between Israel and the West Bank is not monitored at fixed crossing points and is, therefore, excluded in these estimates. Thus data and analysis here are mainly illustrative of trends in Gaza-Israel trade.

[13] Data were gathered by UNSCO researchers with the cooperation of the PA Ministry of Economy and Trade, the PA crossing authorities and COGAT. Estimates exclude exports through the Rafah crossing for which no data were made available. Daily average trade flows are estimated exclusive of weekends and officially celebrated holidays.




D. Private Investment

Trends in Private Construction Activity

As the main component of private investment, construction activity is a key investment indicator. The main measure of planned investment activity is the new surface area licensed by Palestinian local authorities for private residential and non-residential (i.e. business) construction. While data for QII 1999 have not as yet been released, comparing the first quarters of 1999 and 1998 suggests retrogression in planned construction, as indicated in Table 5.

Table 5
Total New Licensed Construction Area by
Project Type, QI 1998 and QI 1999
[14]
(in square meters)



Type of Licensed
Total
Construction Project
QI 1998
QI 1999
Change
Residential
453,095
435,962
-3.78%
Non-Residential
80,278
94,088
17.20%
Total
533,373
530,050
-0.62%

There was a 0.6 per cent decline in the total new surface area licensed for construction as between QI 1998 and QI 1999. The fall was due to a decline in residential construction licensing which accounted for 82.3 per cent of the new licensed surface area in QI 1999. Licensing for business construction increased 17.2 per cent. This constitutes a reversal of the trend in 1998 when residential licensing grew slightly. In the case of business construction licensing, it constitutes a reduction in the rate of growth as compared to last year. Given the weight of construction in overall investment activity, the evidence suggests an overall downward trend in planned investment in the near future, despite over two years of general economic recovery. This may reflect a relative surplus of housing after several years of relatively rapid expansion. On the positive side, there is evidence of substantial near-term growth in business construction activity.

Endnotes:

[14] See PCBS Construction Statistics: Building Licenses vol 3, issue 1, 1998 and vol 4, issue 1, 1999. Data exclude the retroactive licensing of already existing buildings or parts of existing buildings.




New Company Registrations

Although new company registration does not always reflect actual investment activity--since some companies may not immediately undertake investment expenditures--they are usually an indicator of planned investment. As shown in Table 6, there were 236 more new companies registered with Palestinian authorities [15] during first-half 1999 as compared to the same period in 1998, a 35.2 per cent increase. Of these new companies, 194 or 82.2 per cent were registered in the Gaza Strip. Total new registrations in Gaza increased by 59.8 per cent and in the West Bank by only 12.1 per cent.

Table 6
Registration of New Companies by Legal Type,
QI-QII 1998 and QI-QII 1999
[16]


QI-QII
QI-QII
Total
Legal Type
1998
1999
Change
Private Unlimited
396
540
36.36%
Private Limited
268
364
35.82%
Public Limited
2
1
-50.00%
Foreign
4
1
-75.00%
Total
670
906
35.22%

New company registrations were mainly accounted for by private companies--both unlimited and limited liability--which rose by 36.3 and 35.8 per cent respectively. Private unlimited liability companies accounted for 60 per cent of the total new registrations, while 40 per cent were private limited liability companies. In the Gaza Strip, the number of private unlimited companies increased by about 63.5 per cent while the number of private limited companies increased by 50.7 per cent. In the West Bank, the number of newly registered private unlimited companies declined by about 14.4 per cent between the two periods, while the number of newly registered private limited companies increased by about 31.2 per cent. The number of newly registered public and foreign companies remained small with only one public company and one foreign company registered during 1999. This suggests that planned new foreign investment remains limited in the Palestinian economy. [17]

The different registration patterns between the West Bank and Gaza Strip reflect how entrepreneurs assess the advantages to be gained from each type of company. The data indicate West Bank entrepreneurs preferred to register their businesses as private limited companies, while in Gaza new registrations are almost equally divided between the two types. Each of the private types of companies is associated with the scale and complexity of the business. The smaller the business, the more likely it will be registered as a private unlimited company; the greater the level of capitalisation and sophistication, the greater the likelihood that it will be registered as a private limited company.

Endnotes:

[15] In the West Bank new companies are registered with the Ministry of Economy and Trade while in the Gaza Strip new companies are registered with the Ministry of Justice.

[16] Information in this table and assistance provided by the Companies Controller, West Bank and the Companies Registrar, Gaza, August 1999. For definitions of the various legal types of companies, see UNSCO Report, Spring 1999, p. 8.

[17] Because border closure and movement restrictions are so severe in the Gaza Strip, the surge in new company registrations may be related to the fact that owning a company may facilitate Gaza businessmen obtaining permits to enter Israel and the West Bank. This view is reinforced by the minimal costs for registering private unlimited and limited companies. Because of this phenomenon, the trends in the registration of public limited and foreign companies--for which registration is far more costly--may be a better reflection of planned investment.




Approved Investment Projects

Certain large investment projects may qualify for customs and tax exemptions as stipulated by the Palestinian Law for the Encouragement of Investment of 1995. [18] To qualify, investment projects must be submitted to the PA Ministry of Economy and Trade for approval. Projects must have a minimum of USD 100,000 in fixed assets. Fixed capital assets and spare parts are exempted from customs duties and taxes. Projects are also exempted from net profit taxes for the first five years after the commencement of activities. After this period, net profits are taxed at the low rate of 10 per cent for a period ranging from 8-16 years, depending on the value of fixed assets invested; the greater the value of declared fixed assets, the longer the duration of the low profits tax. Benefits from the Law accrue to resident and foreign investors equally.


Table 7
Value of Approved Investment Projects Qualifying for Exemptions Under the Palestinian Law

for the Encouragement of Investment by Residence of Investor, QI-QII 1999 [19]
(in nominal USD)



Residence
of Investor
West Bank
Gaza Strip
Total
Local
40,223,542
52,259,640
92,483,182
Foreign
10,198,265
4,961,000
15,159,265
Total
50,421,807
57,220,640
107,642,447

As indicated in Table 7, the total value of approved projects in the first half of 1999 was USD 107.6 million. This compares to USD 161.0 million for all of 1998. Foreign investment projects accounted for USD 15.1 million or 14 per cent of the total. Projects approved in the Gaza Strip amounted to 53.1 per cent of the total, with the West Bank accounting for the remainder. This was due to the higher value of local projects approved in Gaza as compared with the West Bank, which may be related to the existence of the Gaza Industrial Estate. Approved foreign investment projects, on the other hand, were more prominent in the West Bank, accounting for 20.2 per cent of the total, compared to 8.7 per cent for the Gaza Strip. The data indicate that 66.6 per cent of approved projects in the West Bank were in manufacturing while 74.8 per cent of approved projects in Gaza were in the construction activities.

Endnotes:

[18] The first such law was promulgated in 1995. The revised version of the law was published in the Official Gazette in June 1998. See PA Ministry of Economy and Trade "Law for the Encouragement of Investment," No. 1, 1998 (in Arabic).

[19] Unpublished data and assistance from the Investment Department, PA Ministry of Economy and Trade, September-October 1999. Foreign investment in this table includes approved joint projects, i.e. those partly owned by non-residents of the Palestinian territories. It is important to note that project approval does not ensure project execution. Thus the data provided should be interpreted as a measure of planned investment based on investor expectations about the future, rather than actual investment spending.




Trends in Private Sector Financing

a. Bank Activity in General

The banking system continued to grow in the first half of 1999, albeit at a slower pace than witnessed in recent years. The total number of banks remained unchanged at 22 with the total number of bank branches rising to 105 at mid-1999, up from 100 branches at end-1998. All new branches were established by foreign banks. This raised the number of foreign bank branches to 67 (distributed among 14 banks), while the number of Palestinian bank branches remained at 38 (distributed among 8 domestic banks).

Between June 1998 and June 1999, the value of customer deposits in the banking system grew by 16.9 per cent--about four times as fast as the real economy--reaching USD 2,616.3 million. Nonetheless, this constituted a decline in the growth rate of deposits which rose by 25.4 per cent in the preceding year. Total outstanding credit--including that to households, businesses and public sector entities--grew by 22.4 per cent in the same period to a total USD 879.3 million. Such credit grew at a rate of 38.1 per cent in the preceding year. Thus, there was a significant increase in bank financial intermediation over the June 1998-June 1999 period, but with a deceleration in the growth rates of both deposits and credit.


b. Bank Credit to Businesses

The nominal value of bank credit extended to private businesses grew by 16.3 per cent between June 1998 and June 1999, reaching USD 543.45 million as indicated in Table 8. Thus business credit grew more slowly than credit extension in general. Business credit growth was also well below that during the previous year (June 1997-June 1998) when such credit grew by 38.9 per cent, suggesting a deceleration in bank lending to businesses.


c. Economic Branch Distribution of Bank Credit

Credit absorption in the service branches of the economy, i.e. tourism, transportation and financial services, expanded by 124.7 per cent between June 1998 and June 1999. Credit for financial services grew by 224.5 per cent reaching 22.6 million. This suggests rapid growth in insurance company and stock brokerage activity, the two main borrowers in this branch. Credit for transportation continued the strong growth witnessed last year, growing by 112.5 per cent to USD 31 million. Eased licensing procedures for taxi registration, fewer closures, and brisker economic activity may have accounted for the near doubling in the branch's share of bank credit. The tourism, hotel and restaurant branch received 87.3 per cent more bank credit, rising to USD 25.8 million by June 1999. The rapid, but decelerating, growth of lending in this branch may be related to Bethlehem 2000 celebrations. Despite considerable growth in the amount of credit extended, the service branches accounted for only USD 79.5 million--less than 15 per cent of all outstanding business credit in June 1999.

Credit extended for commerce activities--wholesale and retail trade--grew by nearly 17 per cent on a June-to-June basis, reaching USD 245.3 million. Foreign trade financing grew by more than 40 per cent and accounted for about one-fifth of all commerce lending. Of all foreign trade credit, import financing accounted for 91 per cent. Internal trade financing, which accounts for 80 per cent of commercial credit, grew by only 12 per cent. The observed trend suggests increasing bank involvement in foreign trade financing. Commerce remained the most prominent area of bank lending, accounting for 45.1 per cent of the value of all business credit in June 1999.

Credit absorption in the productive branches--agriculture, manufacturing and construction--declined by about 1.6 per cent. Total bank credit outstanding to these three branches fell from USD 222.2 million in June 1998 to USD 218.5 million in June 1999. Modest increases in lending to agriculture (9.5 per cent) and manufacturing (11.5 per cent) were offset by a decline in lending to construction (-12.2 per cent). The increase in agricultural credit reversed the downward trend witnessed last year. The decline in credit for the construction sector suggests reduced activity after strong growth in borrowing in 1998. This may mean that borrowers are now paying off previously accumulated debt. In all, credit for productive branches accounted for 40.2 per cent of all outstanding credit in June 1999.

Table 8
Value and Relative Distribution of Outstanding Bank Credit to
Private Businesses by Economic Branch,
June 1998, December 1998 and June 1999
[20]
(in millions of nominal USD)



Value of Credit
Total Change
Total Change
June
December
June
December 1998-
June 1998-
Economic Branch
1998
1998
1999
June 1999
June 1999
Agriculture
12.01
12.38
13.16
6.28%
9.53%
Manufacturing and Mining
87.71
90.51
97.83
8.08%
11.54%
Construction
122.54
104.61
107.57
2.83%
-12.22%
Commerce
209.73
205.83
245.38
19.21%
16.99%
Transportation
14.62
23.78
31.07
30.68%
112.52%
Tourism, Hotels & Restaurants
13.80
21.96
25.85
17.71%
87.33%
Financial Services
6.97
5.46
22.61
314.25%
224.51%
Total
467.38
464.53
543.45
16.99%
16.28%



Distribution of CreditRelative ChangeRelative Change
JuneDecemberJuneDecember 1998-June 1998-
Economic Branch199819981999June 1999June 1999
Agriculture2.57%2.67%2.42%-9.16%-5.80%
Manufacturing and Mining18.77%19.49%18.00%-7.62%-4.08%
Construction26.22%22.52%19.79%-12.11%-24.51%
Commerce44.87%44.31%45.15%1.90%0.62%
Tourism, Hotels & Restaurants3.13%5.12%5.72%11.70%82.77%
Transportation2.95%4.73%4.76%0.62%61.10%
Financial Services1.49%1.17%4.16%254.09%179.08%
Total100.00%100.00%100.00%----


Endnotes:

[20] Data in this table exclude consumer loans, loans to public sector entities and purchases of financial assets by the banking system. Data include loans provided by donor-assisted lending programs (e.g. the IFC and the French and German Government programmes) via the banking system. Unpublished data and assistance provided by the Palestine Monetary Authority (PMA), August 1999.


d. Bank Lending Ratio and Credit Repayment Period

The lending-to-deposit ratio, a measure of the degree of financial intermediation on the part of the banking system, increased marginally from 32.1 per cent in June 1998 to 33.6 per cent in June 1999. This means that for every USD 100 in deposits, banks were lending out only USD 33.60 in mid-1999. Data for previous years indicate that the ratio tends to rise seasonally at mid-year and declines in the third quarter. Nonetheless, the ratio for Palestinian banks remains very low by regional standards.

The proportion of loans (with a repayment period of 1-3 years) in total bank credit increased from 32.8 per cent to 41.7 per cent during this period, while overdrafts (with a repayment period of less than one year) decreased from 61.4 per cent to 54 percent. This could be due to increased lending to hotels, tourism and restaurants, transportation and financial services. It may also be that longer term consumer loans are on the increase. [21]

Despite the significant absolute growth in bank deposits and credit, the proportion of bank credit absorbed by private businesses declined from 65.5 per cent in June 1998 to 62.1 per cent in June 1999, as indicated in Table 9. The improvement over December 1998 seems to be a seasonal adjustment based on recent evidence. The longer-term trend, however, has been toward the declining relative share of business lending with corresponding growth in consumer and public sector financing. Evidence also suggests that, as a borrowing entity, the public sector's share has been growing rapidly.


Table 9
Value and Distribution of Bank Credit among Businesses, Consumers and Public Agencies,

June 1998, December 1998 and June 1999 [22]
(in millions of nominal USD)



Value of Loans
June
December
June
Borrowing Entity
1998
1998
1999
Businesses
467.38
464.53
543.45
Consumers
227.84
328.88
280.60
Public Agencies
17.72
28.98
50.45
Total
712.93
822.39
874.51
Distribution of Loans
June
December
June
Borrowing Entity
1998
1998
1999
Businesses
65.56%
56.48%
62.14%
Consumers
31.96%
39.99%
32.09%
Public Agencies
2.49%
3.52%
5.77%
Total
100.00%
100.00%
100.00%


Endnotes:

[21] PMA data on the term maturity of bank credit is not disaggregated by borrowing entity.

[22] Based on unpublished data provided by PMA, August 1999.



e. NGO and UNRWA Credit Programmes

The lending programmes administered by the different NGOs and UNRWA continued to play an important role in the Palestinian credit market. The total value of loans disbursed by these programmes in first-half 1999 reached USD 14.8 million compared to USD 15.8 million in first-half 1998, a decline of about 6.8 per cent in nominal terms. However, as compared to second-half 1998, NGO lending was 18.4 per cent higher in the first half of 1999. [23] These programmes fill credit gaps, providing financing to small and medium enterprises--borrowers to whom commercial banks will generally not lend. Moreover, such programmes generally provide proportionately more credit for productive activities as compared to the private banking system and, in many instances, provide longer term loans than are available from banks.

A prominent feature of micro-lending is solidarity or group lending, a class of programmes which has received more attention in recent years. [24] The share of these programmes in total credit disbursed by the different NGOs was about 18 per cent in June 1999 but had been as much as 24 per cent of the total in 1997 and early 1998. With the introduction of new programmes recently, it is expected that the importance of this type of lending will grow.

Group lending programmes are aimed at poorer women working in micro-enterprises which may be street, home or market-based. Most often, these are found in the informal sector; as a result, these women have no access to formal credit facilities. The programmes entail providing loans to women organised into groups of varying sizes. [25] Loans are provided to individual group members on a rotating basis and the group as a whole guarantees repayment. The average loan size differs from one programme to another but, in general, initial loans begin at between USD 200-400, and increase to higher amounts as previous loans are repaid. Despite the small size of loans, the aggregate effect is to direct credit to a segment of the population that is disproportionately poor. This has had the effect of providing income-generating opportunities to women who are oftentimes widows and single heads of household.

Endnotes:

[23] Lending data and assistance were provided by UNRWA, the Palestinian Development Fund, FATEN (previously Save the Children), American Near East Refugee Aid, Culture and Free Thought Society, the Arab Centre for Agricultural Development, Oxfam-Quebec, Care International and the Business Support Centre of the Palestinian Agricultural Relief Committees, April-July 1999. In addition to these organisations, Catholic Relief Services launched a micro-lending programme in July 1999. Data from this programme are not yet available. Also, the YMCA maintains a lending programme but no data were made available.

[24] UNRWA's solidarity lending programme was established in 1994 and that of Save the Children (now FATEN) in 1995. Last year, CARE International joined with a similar project while Catholic Relief Services began a similar project this year.

[25] For example, the UNRWA solidarity lending program requires a group size of 4-10 women. Information and assistance provided by UNRWA's Income Generation Programme, August 1999.




E. SPECIAL FOCUS: Donor Disbursements and Public Investment

Since the Conference to Support Middle East Peace, convened in Washington DC in October 1993, total donor financial commitments to the development of the Palestinian economy and society has amounted to USD 4,144 million. As of mid-1999 total donor disbursements--both grants and loans--reached USD 2,458 million or 59.3 per cent of commitments. Excluding the Palestinian Jerusalemites, donor disbursements averaged about USD 200 per person per year during the 1994-1998 period--a substantial amount of assistance. [26]

Table 10
Disbursements as a Portion of Donor Commitments to the Palestinian Authority, 1994--QI-QII 1999
[27]
(in nominal USD)


Commitments
Disbursements
Ratio
1994
819,225,000
515,313,000
62.90%
1995
638,222,500
416,719,000
65.29%
1996
888,047,000
536,822,900
60.45%
1997
620,143,000
485,791,000
78.34%
1998
654,601,000
330,069,500
50.42%
1999 (QI-QII)
524,412,600
174,040,360
33.19%
Grand Total
4,144,651,100
2,458,755,760
59.32%
Annual Average 1994-1998
724,047,700
456,943,080
63.11%

While the level of assistance has varied from year to year, as indicated in Table 10, since 1997 there has been a clear downward trend. Thus, while donor commitments in 1998--grants and loans--amounted to USD 654.6 million, disbursements were about USD 330 million, indicating a disbursement-to-commitment rate of 50.4 per cent. This was the lowest rate of disbursement since the Conference to Support Middle East Peace. In absolute terms, the level of donor disbursements in 1998 was about one-third below the 1994-1997 average. As an outcome of the sixth World Bank Consultative Group Meeting in Frankfurt in February 1999, donor countries committed USD 524.4 million in assistance for 1999. As of mid-year, approximately USD 174 million had been disbursed. This was 19.6 per cent below the first-half 1998 level of disbursements. [28] Thus, the slower rate of disbursements which emerged in 1998 has continued in 1999.

In part, the reduction in disbursements can be explained by the changing composition of donor assistance. During 1994-1997, approximately 64 per cent of donor assistance was for budget support, including start-up costs and emergency employment programmes necessitated by severe border closures, as well as for technical assistance. On the other hand, the portion of donor disbursements channelled into public investment accounted for only about 36 per cent of total disbursements during the 1994-1997 period, as indicated in Table 11. The relatively rudimentary nature of funded projects--both start-up and public investment (e.g. rehabilitation of infrastructure)--as well as the political and institutional exigencies during 1994-1997, resulted in less planning and preparation time and, therefore, to quicker disbursement of funds.


Table 11
Palestinian Authority Capital Expenditures as a Portion of Donor Disbursements,

1994--QI-QII 1999 [29]
(in nominal USD)


Capital
Disbursements
Expenditures
Ratio
1994
515,313,000
121,100,000
23.50%
1995
416,719,000
195,100,000
46.82%
1996
536,822,900
173,600,000
32.34%
1997
485,791,000
214,400,000
44.13%
1998
330,069,500
161,800,000
49.02%
1999 (QI-QII)
174,040,360
80,000,000
45.97%
Grand Total
2,458,755,760
946,000,000
38.47%
Annual Average 1994-1998
456,943,080
173,200,000
37.90%

After 1997, the need for donor support for the current budget and employment generation programmes receded due to the PA's improved fiscal performance and the macroeconomic recovery due, in large part, to fewer border closures and higher levels of Palestinian employment in Israel. While overall donor disbursements fell in 1998, the decline in non-capital expenditures was greater than the decline in capital expenditures. Of the USD 330 million in disbursements in 1998, about USD 161.8 million--or 49 per cent--was directed to public investment as indicated in Table 11. Thus, despite the fact that the 1998 disbursements-to-commitments ratio was the lowest since 1994, and the absolute level of capital expenditures fell by almost 25 per cent, public investment as a portion of disbursed funds was the highest on record. This suggests that previous institution-building on the part of the PA and donor agencies has permitted a more rapid absorption of such investment. The rate of public investment from disbursements in 1999 has remained relatively high, despite the decline in the overall rate of disbursements.

But further progress in public investment remains constrained by several factors. [30] First, donor uncertainty resulting from the slow and hesitating implementation of the Oslo Accords and the Wye River Memorandum, as well as that stemming from the establishment of a new government after a prolonged occupation. The continuing lack of clarity as to the Palestinian Authority's scope of resource-allocating authority (e.g. with regard to land, water and borders), as well as its ability to access foreign markets, has limited the longer-term, more coherent planning required to implement larger public investment projects, such as the Gaza seaport. Second, the 1994-1997 period witnessed significant progress on small-scale infrastructure rehabilitation projects and, at the end of this period, the transition to development projects. These projects, of larger scale, greater complexity and longer time horizons, require more preparation time and greater amounts of co-ordination.

A third factor in slower disbursement rates has to do with the internal procedures of donor agencies including administrative reorganisation, appraisals and audits, legislative approval processes and more rigorous examination of project proposals. As donor commitments move from relatively simple start-up projects to more complex public investment ones, the degree of oversight by donor governments tends to increase, causing a lengthening of project time frames. Fourth, donors have cited difficulties in harmonising their priorities, procedures and practices with those of the PA and in building consensus between donor and Palestinian stakeholders.

Fifth, the relatively young and evolving Palestinian public agencies, while have developed significant capacity over the past five years, are still characterised by unclear and overlapping mandates leading to difficulties in consensus-building and co-ordination for donor-funded projects. Relative inexperience in administration and management and fragmented systems of land allocation, licensing and the legal framework have also slowed project execution.

To this must be added the fact that, despite an improved fiscal situation, the PA has yet to commit its own funds for public investment while public sector employment has grown beyond sustainable levels. Furthermore, the pace of legal and institutional reforms which would encourage more private involvement in infrastructural development, has been slow. Finally, Israeli measures regarding permits for roads, water projects, industrial estates and physical

planning, especially with regard to Area C, have served to slow public investment project implementation. Furthermore, comprehensive and complex restrictions on the movement of people and goods, as well as limiting Palestinian access to foreign markets have had both delayed actual project implementation and deterred potential projects.

Given the above, the importance of public investment must be reiterated. On the one hand, such expenditures are needed to create a more conducive infrastructural and institutional operating environment for the private sector. Better infrastructure, legal environment and public institutions reduce the transaction costs of doing business and encourages more private investment which can sustain economic growth and buttress social development. On the other hand, public investment serves to increase the efficiency of public service provision, essential in the Palestinian territories where there is rapid population growth. Estimates by World Bank experts suggest that developing countries require an investment in infrastructure alone equal to about 4 per cent of GDP to cover depreciation and new investment. [31] In the Palestinian territories, where population growth is above average for developing countries and where additional public investment is needed to fill institutional and infrastructural deficits bequeathed by 30 years of occupation, even higher levels of public investment are required in order to place the economy and public services on a sustainable growth path and, thereby, to raise living levels.
Endnotes:

[26] Donor disbursements are from PA Ministry of Planning and International Cooperation (MOPIC), Aid Co-ordination Department, "Quarterly Monitoring Report of Donors' Assistance," 30 June, 1999. Population estimates are from PCBS Demography of the Palestinian People in the West Bank and Gaza, 1994. Disbursements refer only to those recorded by MOPIC and exclude those to UNRWA. Per capita donor disbursements to the Palestinian people has been about ten times the average for the Middle East and North Africa region. See IMF "West Bank and Gaza Strip: Economic Developments in the Five Years Since Oslo," Washington, 1999.

[27] Donor commitment and disbursement data are from MOPIC "Quarterly Monitoring Report of Donors' Assistance," 30 June, 1999. Commitments for 1999 are for the entire year, while disbursements are for the first half of 1999.

[28] MOPIC, 4 March 1999. The decline in donor disbursements may be due in part to delays in reporting on the part of some donors on their activities in 1999.

[29] Capital expenditures for 1994-1996 are from IMF, "West Bank and Gaza Strip; Fiscal Developments Since Oslo and Future Challenges," 4 February, 1999. Capital expenditures for 1997-1998 are from MOF, "West Bank and Gaza--Report on Fiscal Developments in January-June 1999," 10 August, 1999. Donor disbursement data and capital expenditures for QI-QII 1999 are from MOPIC, "Quarterly Monitoring Report of Donors' Assistance," 30 June, 1999.

[30] The following analysis relies mainly on Secretariat of the Ad Hoc Liaison Committee, "West Bank and Gaza: Status of Tripartite Action Plan Provisions for the Period January-October 1999," Annex 2, October 1999.

[31] See Ashoka Mody Infrastructure in the West Bank and Gaza Strip: Institutions and Growth MAS Discussion Papers, Palestine Economic Policy Research Institute, Jerusalem and Ramallah, August 1997, pp. 8-9.


F. General, Comprehensive and Internal Closures

There was no reduction in the severity of the general closure and separation policy applied by Israel to the Palestinian territories in the first half of 1999. Personal mobility has remained severely restricted as Palestinians could not travel between the West Bank and Gaza Strip, or enter East Jerusalem without permits from the Israeli authorities. Palestinian public agencies and private businesses, as well as international agencies, continued to experience significantly higher transactions costs, time delays and lost productivity due to restrictions on personnel and goods at border crossings. [32]

With regard to comprehensive closure--entailing a virtual halt to personal and commodity movements--there were 7 days of such closure in first-half 1999 as compared to 4 days during the first half of 1998. Excluding weekends and Muslim and Jewish holidays, this meant a loss of 3.6 per cent of the potential working days during first-half 1999, as compared to only a 0.3 per cent loss during the same period in 1998. [33]

Endnotes:

[32] A recent study comparing Israeli and Palestinian firms in the same industries which conduct business abroad. It showed that transaction costs for Palestinian firms were, on average, 30 per cent higher than for Israeli firms. In addition, time delays for imports and exports of Palestinian firms were about 45 per cent higher. The study concluded that extra costs and delays put Palestinian businesses at a "serious competitive disadvantage" in the international market. See Center for Middle East Competitive Strategy "Transaction Costs for Palestinian Businesses," 1998.

[33] UNSCO estimates based on information from the PA Ministry of Labour. The estimated labour income loss from these closures is about USD 13.5 million, based on average labour flow and wage rate data.


G. Summarising Macroeconomic Trends

As compared to 1998, the evidence suggests a deceleration in macroeconomic growth for 1999. The only indicators which showed clearly positive trends were Palestinian labour flows to Israel (especially unpermitted flows), planned business construction and credit creation by the banking system. Nearly every other indicator showed retrogression. The most worrisome trend is the stagnancy of private investment and external trade--the two most critical variables for private sector-led sustainable employment growth and development. Also worrisome is the downward trend in public investment, as indicated by the decline in donor disbursements and capital expenditures, which will hamper the building of a conducive physical and institutional infrastructure for the private economy. The number of effective comprehensive closure days, while lower than in years past, were also higher in first-half 1999.

On the positive side, the Palestinian economy continued to generate employment opportunities at a robust pace in first-half 1999 (see section II). At the same time, unemployment rates and levels continued to decline. It should be noted that while the adjusted unemployment rate also fell, the estimated absolute number of unemployed (adjusted) rose for the first time in two years. This was due to the rapid increase in the labour force, which is growing at a rate in excess of the labour-absorbing capacity of the Palestinian economy. The reduction in the growth of real wages and the deflationary trend in consumer prices are other symptoms of this deceleration (see section III). While the MOF/IMF macroeconomic growth estimates for 1999 seem reasonable, slower growth seems to be the order of the day at the turn of the millennium.




II. Labour Market Trends

A. Labour Force Growth

The population of the Palestinian territory reached an estimated average of 2,976,596 persons in the first half of 1999, an increase of about 5.6 per cent as compared to the first half of 1998. As a result, the working-age population is estimated to have grown by 5.6 per cent reaching an average of 1,447,675 persons. Over the same period, the labour force participation rate--the proportion of the working-age population which was working or seeking work--increased from 42 per cent to 42.7 per cent in 1999. The combined effect of population growth and higher labour force participation was a 7.4 per cent increase in the absolute size of the labour force, to an estimated average of 619,445 persons in the first half of 1999.

Table 12
Estimates of Average Labour Force, Full Employment,
Underemployment and Unemployment,
QI-QII 1998 and QI-QII 1999
[34]


QI-QII 1998
QI-QII 1999
Relative
Ratios
Average
Average
Change
Labour Force Participation
42.08%
42.79%
+ 1.69%
Full Employment
77.33%
80.42%
+ 4.00%
Underemployment
7.02%
5.69%
- 19.06%
Unemployment
15.64%
13.89%
- 11.20%
Adjusted Unemployment
24.89%
23.99%
- 6.48%
Total
Totals
Change
Working-Age Population
1,369,848
1,447,675
+ 5.68%
Labour Force
576,457
619,445
+ 7.46%
Fully Employed
445,881
498,270
+ 11.75%
Underemployed
40,506
35,217
- 13.06%
Unemployed
90,070
85,958
- 4.56%
Adjusted Unemployed
158,404
159,242
+ 0.53%

Endnotes:

[34] Estimates are based on PCBS Labour Force Survey: Main Findings, Nos. 8, 9, 12 and 13. Labour force participation, full-employment, underemployment and unemployment rates are weighted by age group. Population data used to calculate magnitudes are the middle-series estimates in PCBS Demography of the Palestinian Population, 1994.



B. Employment, Underemployment and Unemployment

There was continued improvement in labour market conditions, as shown in Table 12, reflected in a higher full-employment rate and lower underemployment and unemployment rates. The average full-employment rate--defined as the proportion of the labour force working at least 35 hours per week--increased from 77.3 per cent to 80.4 per cent. The absolute number of fully-employed persons increased by 11.7 per cent to an estimated average of 498,270 persons in first-half 1999.

The underemployment rate--the proportion of the labour force working less than 35 hours per week--fell from an average of 7 per cent in first-half 1998 to 5.6 per cent in first-half 1999, a relative decline of about 19 per cent. The number of the underemployed declined by 13 per cent to an estimated 35,217 persons.

Over the same period, the average standard unemployment rate declined from 15.6 per cent to 13.8 per cent, a relative decline of about 11.2 per cent and--exclusive of periods of significant border closures--a continuation of the observed trend of the last two and one-half years. Due to relatively rapid growth of the labour force, however, the absolute number of the unemployed declined by only about 4.5 per cent to an average of about 85,958. On a regional basis, the standard unemployment rate in the West Bank remained substantially lower than that in the Gaza Strip--11.3 per cent versus 20.1 per cent respectively.

The more broadly defined adjusted unemployment rate--which includes the standard definition of unemployment plus those in the working-age population who did not seek work during the survey week due to their belief that no work could be found--declined about 6.4 per cent in relative terms to 23.9 per cent. Using this broader definition, the absolute number of unemployed increased by about 0.5 per cent to an average of 159,242 persons in first-half 1999, the first such increase since first-half 1996. It is also significant that the percentage point difference between the standard and adjusted unemployment rates is still rising, suggesting a growing number of discouraged workers. [35]

Endnotes:

[35] See UNSCO Report, Spring 1999, p. 18. The difference between standard and adjusted unemployment rates from an average of 9.2 per cent in the first half of 1998 to 9.3 per cent in the first half of 1999



C. Underlying Labour Market Dynamics

Social Composition of Employment

Regarding the social categories of employment, and on a proportional basis, the share of the employed who were employers rose 14.7 per cent, the share who were unpaid family workers declined 7.3 per cent, the share of self-employed fell 12.2 per cent and the share of wage-workers increased 3.8 per cent (see Table 13). Thus, in relative terms, the proportions of employers and wage-workers in the labour force grew while those of unpaid family workers and the self-employed declined.

In absolute terms, overall employment, i.e. the fully-employed and the underemployed, increased by 9.6 per cent between first-half 1998 and first-half 1999 to an average of 533,487 persons. About 86 per cent of net new Palestinian employment was wage-work, 12.8 per cent were employers and 1.2 per cent was unpaid family labour. There was a net decline in the number of self-employed during this period.

Table 13
Estimates of the Average Social Composition of the Employed Palestinian Labour Force,
QI-QII 1998 and QI-QII 1999
[36]


QI-QII 1998
QI-QII 1999
Relative
Ratios
Average
Average
Change
Employers
5.25%
6.00%
+ 14.75%
Unpaid Family Labour
8.15%
7.55%
-7.36%
Self-employed
21.60%
18.95%
- 12.23%
Wage-workers
65.00%
67.50%
+ 3.85%
Total Employed
100.00%
100.00%
--
Total
Total
Change
Employers
25,543
32,009
+ 25.84%
Unpaid Family Labour
39,693
40,326
+ 1.59%
Self-employed
104,954
101,048
- 3.68%
Wage-workers
316,197
360,104
+ 13.90%
Total Employed
486,387
533,487
+ 9.68%

Growth in the number of employers is suggestive of improved business conditions--at least small, family-owned businesses. Increased business construction activity, company registrations and bank credit may be related to the estimated 25.8 per cent growth in the number of Palestinian employers. The secondary effects of income generated by workers in Israel, especially in the West Bank, as well as public sector spending and employment, may also have boosted domestic sales and growth. Higher labour flows to Israel and continued domestic employment growth explains the 13.9 per cent growth rate in wage-employment. The absolute increase in unpaid family labour is consistent with the growth in agricultural employment (see below). The decline in self-employment may be due to higher labour flows to Israel and more lucrative opportunities in the domestic labour market.

Endnotes:

[36] Estimates are based on PCBS Labour Force Survey: Main Findings, Nos. 8, 9, 12,13.



Economic Branch Distribution of Employment

In addition to the robust increase in the number of jobs available, there were some changes in the economic branch distribution of total Palestinian employment. Such changes are reflective of the underlying dynamics in the Israeli and Palestinian economies as well as the policy choices of the respective authorities. As indicated in the upper panel of Table 14, and in relative terms, there were employment share increases in services (15 per cent), construction (4.9 per cent) and agriculture (0.48 per cent) with employment share declines in transportation (7.1 per cent), commerce (7.2 per cent) and manufacturing (4.5 per cent).


Table 14
Estimates of the Average Branch Distribution of the Employed Palestinian Labour Force

Including Employment in ISI, QI-II 1998 and QI-QII 1999 [37]


QI-QII 1998
QI-QII 1999
Relative
Ratios
Average
Average
Change
Agriculture, Fishing
12.86%
12.98%
+ 0.48%
Manufacturing, Quarrying
16.05%
15.31%
- 4.59%
Construction
21.02%
22.05%
+ 4.90%
Commerce, Hotels, Restaurants
18.19%
16.88%
- 7.21%
Transport, Communication
4.59%
4.26%
- 7.10%
Services and Other
9.28%
10.68%
+ 15.09%
Palestinian Authority
18.02%
17.90%
- 0.66%
Total Employed Persons
100.00%
100.00%
--
Total
Total Growth
Totals
Change
Contribution
Agriculture, Fishing
62,656
68,941
+ 10.04%
13.34%
Manufacturing, Quarrying
77,985
81,718
+ 4.79%
7.93%
Construction
102,326
117,744
+ 15.07%
32.73%
Commerce, Hotels, Restaurants
88,392
89,936
+ 1.74%
3.27%
Transport, Communication
22,313
22,739
+ 1.91%
0.90%
Services and Other
45,083
56,925
+ 26.28%
25.14%
Palestinian Authority
87,626
95,484
+ 8.97%
16.68%
Total Employed Persons
486,387
533,487
+ 9.68%
100.00%

There were an average of 47,100 net new jobs created for the Palestinian labour force during this period--a 9.6 per cent increase in employment. This compares to 38,300 more jobs in the first-half 1997--first-half 1998 period--a growth rate of 8.8 per cent. [38] There was employment growth in every economic branch (refer to lower panel of Table 14) with particularly large increases in construction and services, which rose 15 and 26.2 per cent respectively. Employment in agriculture grew more than average, while public sector, manufacturing, transport and commerce employment rose less than the average.

About one-third of job growth during this period was accounted for by the construction branch with about one-fourth accounted for by service employment. Public employment contributed 16.6 per cent of the growth and agriculture was responsible for 13.3 per cent of new employment. Manufacturing contributed about 7.9 per cent of the growth while the commerce and transportation branches accounted for 3.2 and 0.9 per cent respectively.

Endnotes:

[37] Estimates are based on PCBS Labour Force Surveys: Main Findings, Nos. 8, 9, 12 and 13. Palestinian Authority employment estimates are from MOF "Report on Fiscal Developments," various issues.

[38] See UNSCO Report, Autumn 1998, p. 20.




Employment by Economic Branch and Place of Work

Separating the data by place of employment indicates that 39.7 per cent of the 47,100 net new jobs for Palestinians--about 18,700--were located in ISI, [39] as shown in Table 15 (lower left panel). Average Palestinian employment in ISI--permitted and unofficial--reached an estimated average of 122,730 persons in first-half 1999. [40] Over the same period, 60.3 per cent of job growth--28,382 new positions in absolute terms--was located in the Palestinian territories, where employment increased to an average of 410,757 persons.

On average, job growth in ISI was slower, while job growth in the Palestinian territories was more robust as compared to the previous year-to-year period. Palestinian employment in ISI grew 33 per cent as between first-half 1997 and first-half 1998, while it grew 18 per cent in the same 1998-1999 year-to-year period. During the same two periods, employment located in the Palestinian territories grew by 3.7 and 7.4 per cent respectively. Thus, the domestic contribution to total job creation grew from 34.7 per cent in 1997-1998 [41] to 60.3 per cent in 1998-1999, a significant increase in the labour-absorbing capacity of the Palestinian economy.

It is also significant that a much higher share of domestic employment creation was accounted for by the Palestinian private sector as between the two periods. The private sector contribution to total domestic employment growth was only 38.2 per cent in the 1997-1998 period (about 5,100 jobs) as compared to 72.3 per cent in the 1998-1999 period (about 20,500 jobs). In absolute terms, average domestic private sector employment grew by only 1.8 per cent in the earlier period and by 6.9 per cent in the latter period. In first-half 1999, the private sector accounted for 76.7 per cent of all domestic Palestinian employment.

At the same time, average employment growth in the Palestinian public sector declined from 10.3 per cent in the 1997-1998 (about 8,212 additional jobs) to 8.9 per cent in the 1998-1999 period (about 7,858 additional jobs). On average, there were 95,484 persons employed by the Palestinian Authority in the first half of 1999, accounting for 23.3 per cent of all domestic employment. Thus, while the public sector continued to grow more rapidly than the private sector, the growth rate of the latter has accelerated in the last year while public sector growth has moderated.



Table 15
Estimates of Average Palestinian Employment in ISI and the Palestinian Territory

by Economic Branch, QI-QII 1998 and QI-QII 1999 [42]


Palestinians Working in ISI
Palestinians Working in PT
QI-QII 1998
QI-QII 1999
Relative
QI-QII 1998
QI-QII 1999
Relative Change
Ratios
Average
Average
Change
Average
Average
Change
Agriculture, Fishing
11.30%
9.41%
-16.77%
13.27%
13.98%
+5.28%
Manufacturing, Quarrying
11.50%
12.96%
+12.72%
17.27%
16.01%
-7.31%
Construction
56.85%
55.89%
-1.68%
11.32%
11.95%
+ 5.55%
Commerce, Hotels, Restaurants
12.15%
12.96%
+ 6.68%
19.82%
18.03%
- 9.00%
Transport, Communication
1.45%
1.28%
- 11.44%
5.44%
5.15%
-5.32%
Services and Other
6.75%
7.49%
+ 11.01%
9.95%
11.61%
+ 16.67%
Palestinian Authority
n.a.
n.a.
--
22.92%
23.26%
+ 1.51%
Total
100.00%
100.00%
--
100.00%
100.00%
--
QI-QII 1998
QI-QII 1999
Total
QI-QII 1998
QI-QII 1999
Total
Totals
Average
Average
Change
Average
Average
Change
Agriculture, Fishing
11,832
11,542
- 2.46%
50,821
57,399
+ 12.94%
Manufacturing, Quarrying
11,974
15,909
+ 32.87%
66,008
65,809
- 0.30%
Construction
58,991
68,593
+ 16.28%
43,331
49,151
+ 13.43%
Commerce, Hotels, Restaurants
12,661
15,911
+ 25.67%
75,734
74,025
- 2.26%
Transport, Communication
1,489
1,576
+ 5.79%
20,823
21,164
+ 1.63%
Services and Other
7,045
9,199
+ 30.57%
38,033
47,726
+ 25.49%
Palestinian Authority
n.a.
n.a.
--
87,626
95,484
+ 8.97%
Total Employed Persons
103,992
122,730
+ 18.02%
382,375
410,757
+ 7.42%

The share of Palestinian employment in the different branches of the ISI economy remained relatively stable during this period, as indicated in the upper left panel of Table 15. Construction remained the main source of employment, accounting for 55.8 per cent of all Palestinian jobs in ISI and there were significant proportional declines in employment in agriculture and transportation with increases in the relative share of employment in manufacturing and services.

In absolute terms, as indicated in the lower left panel of Table 15, the construction branch absorbed about 9,602 more workers, a 16.2 per cent increase for the branch, accounting for 50.4 per cent of net new Palestinian job growth in ISI. There were an estimated 3,935 new manufacturing jobs, a 32.8 per cent increase for the branch which accounted for 20.6 per cent of net job growth in ISI. The Israeli commerce, hotel and restaurant branch absorbed about 3,250 more Palestinian workers--a 25.6 per cent increase--and contributed 17 per cent of net job growth. The service branch added about 2,154 new jobs, a 30.5 per cent increase in a branch that contributed about 11.3 per cent of net employment growth. Employment in transport grew slightly while agricultural employment declined. In the aggregate, 71 per cent of new Palestinian employment in ISI was in the construction and manufacturing branches.

The branch distribution of employment in the Palestinian territories was relatively stable, as indicated in the upper right panel of Table 15, although there were share increases in the service, construction, agriculture and public employment branches. There were declines in the employment shares in commerce, manufacturing and transport.

The service branch contributed 32 per cent of net job growth, with an average of 9,693 new jobs created in 1999--a 25.4 per cent increase for the branch. Agriculture added an average of 6,578 new jobs, accounting for 21.7 per cent of all jobs created and a branch increase of about 12.9 per cent. Construction employed 9,602 more people, contributing 19.2 per cent of net job growth and increasing branch employment by 13.4 per cent. The transport and communication branch expanded employment by about 341 new jobs, 1.1 per cent of net job growth and increasing employment in the branch by 1.6 per cent. Absolute employment in manufacturing and commerce, hotels and restaurants declined by a total of some 1,908 jobs. The public sector added and average of 7,858 jobs, contributing to 27.6 per cent of employment growth during this period.

Endnotes:

[39] ISI includes Israel as well as Israeli settlements and industrial zones in the Occupied Palestinian Territory.

[40] All estimates in this section include the Palestinian population of East Jerusalem as given in PCBS Demography of the Palestinian People, 1994. Because PCBS labour force surveys only partly cover East Jerusalem, and because the proportion of the East Jerusalem labour force working in ISI is probably higher than that for the rest of the West Bank, this figure underestimates total Palestinian employment in ISI.

[41] See UNSCO Report, Autumn 1998, p. 20.

[42] Calculations are based on PCBS Labour Force Survey: Main Findings, Nos. 8,9,12 and 13 and population estimates in PCBS Demography of the Palestinian Population, 1994. Palestinian Authority employment estimates are from MOF "Report on Fiscal Developments," various issues.



Women in the Labour Market

Women's labour force participation rate (LFPR)--the proportion of working-age women active in the labour market--increased to 12.4 per cent as compared to 11.4 in the first half of 1998, reversing the trend witnessed in the previous year-to-year period. The higher women's LFPR, combined with the growth in the working-age population, resulted in a 14.5 per cent increase in the size of the women's labour force which averaged some 89,656 persons. Women's labour force growth exceeded that of men as indicated in Table 16.

Despite the increase in the women's formal labour market participation, the portion who were fully-employed declined by about 0.7 per cent in relative terms to 81 per cent. The full-employment rate for women, however, remained higher than that for men and, reflecting higher participation, the absolute number of fully-employed women grew faster than for men--13.8 per cent versus 12.6 per cent respectively.

Women's underemployment rate--the portion of working women employed for less than 35 hours per week--increased to 3.6 per cent translating into a 25.1 per cent relative increase. On the other hand, men's underemployment rate declined to 6 per cent representing a 20.9 per cent relative reduction. Nonetheless, the women's underemployment rate remained significantly lower than that of men. In absolute terms, the number of underemployed women increased by 43.5 per cent to over 3,300.

Greater labour force participation for women coincided with a slight decline in their unemployment rate from 15.4 per cent in first-half 1998 to 15.2 per cent in first-half 1999. At the same time, there was an average of 1,500 more unemployed women in first-half 1999, an increase of 12.6 per cent. This was quite different than the experience for men whose unemployment rate fell from 15.8 per cent to 13.7 per cent and for whom the absolute number of unemployed declined 6.3 per cent. This continued the trend witnessed over the past two years; namely, the significant gains in the labour market--higher levels of employment and full-employment and lower levels of underemployment and unemployment--have been obtained disproportionately by men. For example, men filled over 80 per cent of the new job opportunities for Palestinians in 1999 relative to 1998. This is in large part due to the fact that nearly all employment in Israel is accounted for by men, but also to the fact that there are structural and cultural impediments to women?s labour market participation. A second factor might be the deceleration in growth of public sector employment--a major source of jobs for women--relative to the last several years. A third factor might be the relative decline in certain manufacturing activities, like textiles and garments, where women have been concentrated.

The latest period has therefore witnessed a reversal in the observed trend in women?s labour market profile. In particular, there has been an increased level of labour force participation despite the fact that women's full-employment rate has declined marginally, while their underemployment rate has risen. This suggests a tendency for women to participate in the labour market even if full employment is not always available, a reversal of the trend seen in the last several years.

Table 16
Comparing Women's and Men's Average Labour Force Profiles,
QI-QII 1998 and QI-QII 1999
[43]


Ratios
QI-QII 1998
QI-QII 1999
Relative
LFPR
Average
Average
Change
Men
71.47%
72.51%
+ 1.46%
Women
11.41%
12.40%
+ 8.65%
Full Employment
Men
76.48%
70.14%
- 8.28
Women
81.66%
81.07%
- 0.72%
Underemployment
Men
7.70%
6.09%
- 20.91%
Women
2.94%
3.68%
+ 25.17%
Unemployment
Men
15.82%
13.77%
- 12.94%
Women
15.40%
15.25%
- 0.97%
Totals
Total
LFPR
Change
Men
489,019
525,568
+ 7.47%
Women
78,275
89,656
+ 14.54%
Full Employment
Men
374,082
421,248
+ 12.61%
Women
63,873
72,719
+ 13.85%
Underemployment
Men
37,676
31,988
- 15.10%
Women
2,301
3,304
+ 43.59%
Unemployment
Men
77,260
72,331
- 6.38%
Women
12,102
13,633
+ 12.65%

Endnotes:

[43] Based on PCBS Labour Force Survey: Main Findings, Nos. 8, 9, 12 and 13. Labour force participation, full employment, underemployment and unemployment rates are weighted by age group for persons 15-64 years of age.




III. Trends in Living Levels [44]

A. Working Time and Wages

As indicated by Table 17, on average, Palestinian workers put in slightly fewer days of work per month in first-half 1999 than in first-half 1998, a reversal of the trend witnessed in the previous year-to-year period. Despite the decline in working time, there was an increase in real daily and monthly wages. The real daily wage for an average fully-employed Palestinian worker increased by 3.6 per cent to about NIS 61.81. However, due to the decline in the average monthly days worked, real monthly wages increased by only 2.9 per cent to about NIS 1,366. This was a reduction in the growth rate of real monthly wages, which rose by 10.1 per cent in the previous year-to-year period. [45]

The main element behind the overall increase in real NIS wages was the estimated 7 per cent increase in daily and monthly wages for West Bank workers. Real daily NIS wages for workers in the Gaza Strip increased by only 3.4 per cent to NIS 42.46 which, when combined with the decline in monthly days worked, produced an increase of only about of 1.9 per cent in the average real monthly NIS wage. For Palestinians working in Israel, real daily NIS wages declined by about 0.3 per cent to NIS 86.68, with a corresponding decline in monthly wages of 2.9 per cent. Real average monthly wages in the first half of 1999 were NIS 1,251.34 in the West Bank, NIS 1,010.21 in Gaza and NIS 1,711.46 for Palestinians working in Israel.

The better wage performance in the West Bank labour market is due to several factors. First, the significant level of unpermitted labour flows from the West Bank to Israel in the last two years has served to considerably reduce unemployment there. West Bank unemployment rates have generally been about 10 percentage points lower than in Gaza over this period. Second, higher labour flows to ISI has led to faster income growth and greater secondary employment effects in the West Bank. The combination of these effects has tended to boost real daily wage rates.

Relatively high unemployment rates in Gaza are due in part to restricted access to the Israeli labour market, enforced by tight border control measures, and in part to a faster growing working-age population. This explains to a large extent the slower growth in the average real daily wage there. The real decline in daily NIS wages in ISI may be the result of two related factors. The first is the increase in the number of unpermitted labourers, workers who do not benefit from minimum wage laws in Israel and, therefore, earn less on average. The second factor may be the changing branch distribution of Palestinian labour, and unpermitted labour flows in particular. About half the new jobs available for Palestinians in the ISI were in non-construction branches of the economy where wages are generally lower. With regard to construction, the economic recession in Israel seems to have disproportionately affected this branch--the main employer of Palestinians and a relatively well-paying line of work. [46] This may explain the slower growth of Palestinian employment in Israeli construction and the shift toward other, less well-paying branches.


Table 17
Estimates of Average Monthly Days Worked and Real Wages for Employed Workers

by Place of Work, QI-QII 1998 and QI-QII 1999 [47]
(wages in real NIS with 1996 base year)


QI-QII 1998
QI-QII 1999
Total
All PT Workers
Average
Average
Change
Monthly Days
22.25
22.10
- 0.67%
Real Daily Wage (NIS)
59.62
61.81
+ 3.68%
Real Monthly Wage (NIS)
1,326.88
1,366.11
+ 2.96%
West Bank
Monthly Days
23.15
23.15
0.00%
Real Daily Wage (NIS)
50.48
54.05
+ 7.08%
Real Monthly Wage (NIS)
1,168.76
1,251.34
+ 7.07%
Gaza Strip
Monthly Days
24.15
23.80
- 1.45%
Real Daily Wage (NIS)
41.05
42.46
+ 3.43%
Real Monthly Wage (NIS)
991.37
1,010.21
+ 1.90%
PT Workers in ISI
Monthly Days
20.15
19.75
- 1.99%
Real Daily Wage (NIS)
86.95
86.68
- 0.31%
Real Monthly Wage (NIS)
1,752.13
1,711.46
- 2.32%

The greater increase in the daily wage rate in the West Bank relative to Gaza has widened the real wage gap between the two regions, continuing the trend seen in the last two years. West Bank daily wage rates were, on average, 27.4 per cent higher than those in Gaza in first-half 1999 compared to a 22.9 per cent difference in first-half 1998. On the other hand, the gap between wages earned in ISI relative to Gaza declined from 111.8 per cent to 104.1 per cent as between the two periods, continuing the trend of the past two years, but wages in ISI remain more than twice the average wage in Gaza. In the most recent period, this was due to the decline in wages earned in ISI. Due to the rise in the West Bank daily wage rate, the wage premium for those working in ISI declined from about 72.3 per cent in first-half 1998 to 60.3 in first-half 1999. The overall wage differential has continued to decline. In first-half 1998 average daily wages in ISI were 45.9 per cent above the average in the Palestinian territory. This premium declined to 40.2 per cent in first-half 1999.

Endnotes:

[44] The PCBS has temporarily discontinued the household consumption and expenditures surveys which have been used in this section in previous reports.

[45] Real daily and monthly wages measured in USD continued to decline due to the continued depreciation of the NIS. Real USD daily wages in the Palestinian territories declined by 7.1 per cent to about USD 15.15 while monthly wages declined 7.8 per cent to USD 334.83 in the first half of 1999. Real USD daily wages are approximated by converting the real NIS wage rates using the average NIS/USD exchange rate for the relevant periods.

[46] Total new licensed construction area (public and private) in Israel declined by 11.4 per cent between first-half 1998 and first-half 1999. See Israeli Central Bureau of Statistics Monthly Bulletin of Statistics, vol. 50, August 1999.

[47] PCBS Labour Force Survey series. Nominal NIS daily and monthly wages deflated using the average regional CPI with a 1996 base period. Monthly wage income is the product of the average daily wage rate and the average number of days worked.



B. Consumer Price Inflation

While the Palestinian economy witnessed a disinflationary trend--a decline in inflation rates in 1996, 1997 and 1998, [48] consumer prices in first-half 1999 showed a deflationary trend --i.e. absolute declines in consumer prices. On average, consumer prices in the Palestinian economy declined by 1.4 per cent between December 1998 and June 1999. On a regional basis, as indicated in Table 18, the consumer price index (CPI) fell by about 0.7 per cent in the West Bank, 2.3 per cent in the Gaza Strip and 1.6 per cent in East Jerusalem. By contrast, consumer prices in the Palestinian economy rose by 3.1 and 1.1 per cent in the first six months of 1997 and 1998 respectively.

Consumer prices witnessed a steep increase during the second half of 1998 and peaked in December, largely the result of the depreciation of the NIS against the USD during the third quarter of the year. [49] Since then, consumer prices have readjusted, perhaps due to the relative strengthening of the NIS during first-half 1999. In addition, the relative increases in lower-cost direct imports from neighbouring countries, [50] may have contributed to the declines in Palestinian price levels.

Table 18
Inflation Rates for Major Commodity Groups in the Palestinian Territory by Region,
December 1998-June 1999
[51]
(base period = 1996)


Major Groups
PT
West Bank
Gaza Strip
Food
-4.51%
-4.88%
-6.12%
Beverages and Tobacco
0.57%
1.00%
0.51%
Textiles, Clothing and Footwear
-2.38%
3.86%
-3.05%
Housing
0.14%
0.37%
0.12%
Furniture, Household Goods & Services
1.55%
-0.75%
3.40%
Transport and Communications
4.95%
7.01%
3.13%
Education
-0.69%
-0.59%
0.76%
Medical Care
1.92%
3.56%
3.13%
Recreational, Cultural Goods & Services
-10.17%
-10.80%
-8.97%
Miscellaneous Goods & Services
-1.18%
0.80%
-1.93%
All-Item CPI
-1.49%
-0.73%
-2.37%

Within the overall price level decline of 1.4 per cent, food prices fell at a rate of 4.5 per cent. This is significant as about 40 per cent of the average Palestinian household's expenditures are for food items. The steepest price declines were for recreational, cultural goods and services which may reflect, in addition to price readjustments due to a stronger NIS, the decline in the cost of television sets which account for over 42 per cent of the weight in this commodity group. [52] Prices for other commodity groups, such as furniture, household goods and services, transport and communications and medical care, actually rose reflecting the particularities of the individual markets for these goods and services. The steepest increase was for transport and communications, perhaps reflecting the higher costs of fuel.

On a commodity group basis, the most striking difference between the two regions was for clothing and footwear, where price levels increased by 3.8 per cent in the West Bank and decreased by 3.0 per cent in Gaza. Likewise, there was a significant difference between the two regions with regard to price changes for furniture and household goods. Such differences are illustrative of the fragmented and discontinuous market, due mainly to the mobility restrictions between the two regions.

Moreover, the more rapid deflation in overall prices in Gaza may be due to a higher dependency on imported commodities, whose prices are on a downward trend. In the West Bank, the existence of larger amounts of locally-produced (non-traded) goods, along with greater wage incomes and consumer purchasing power related to informal labour flows to Israel, may be responsible for the lower rate of deflation.

On a year-to-year basis, i.e. first-half 1999 in relation to first-half 1998, the CPI increased an average of 7.5 per cent, as indicated in Table 19. This indicates that the deflationary trend during first-half 1999 was insufficient to return prices to their levels prior to the NIS depreciation of second-half 1998. It also notable that the prices for food items, beverages, housing and miscellaneous goods (e.g. personal care and restaurant meals) grew faster than average over this period. At the same time, the prices of clothing, education and recreational goods and services either grew more slowly or declined during the same period.

Table 19
Inflation Rates for Major Commodity Groups,
December 1998--June 1999 and QI-QII 1998--QI-QII 1999
[53]
(base period = 1996)



DEC 1998--QI-QII 1998--
Major GroupsJUN 1999QI-QII 1999
Food-4.51%8.25%
Beverages and Tobacco0.57%9.87%
Textiles, Clothing and Footwear-2.38%3.24%
Housing0.14%8.16%
Furniture, Household Goods & Services1.55%7.78%
Transport and Communications4.95%7.28%
Education-0.69%4.38%
Medical Care1.92%7.60%
Recreational, Cultural Goods & Services-10.17%-1.73%
Miscellaneous Goods & Services-1.18%11.23%
All-Item CPI-1.49%7.53%


Endnotes:

[44] The PCBS has temporarily discontinued the household consumption and expenditures surveys which have been used in this section in previous reports.

[48] See UNSCO Report, 30 April 1999, p. 32 and Recent Economic Developments, Prospects, and Progress in Institution Building in the West Bank and Gaza Strip (Washington: IMF, 1997). In fact, the inflation rates in the last several years have been the lowest since the Israeli occupation of the WBGS in 1967. See Israel Central Bureau of Statistics Statistical Abstract of Israel, various issues.

[49] It is important to note that the CPI measures the NIS prices of commodities and services sold in the Palestinian territories. Many of these goods, or components thereof, originate abroad and are paid for in USD. Thus Palestinian consumer prices are sensitive to the NIS/USD exchange rate.

[50] See UNSCO Report, 30 April 1999, p. 6.

[51] Data in this table are based on PCBS Consumer Price Index, Revised Series, various issues. Data in this table cover the period December 1998-June 1999. PCBS notes that the CPI for the Palestinian territories is a separate composite index--not the average of East Jerusalem, the West Bank and the Gaza Strip.

[52] This may be due to the combined effect of declines in the international market prices for TVS, as well as the PA reductions on customs and taxes for TVS.

[53] See PCBS Consumer Price Index, Revised Series, various issues.




IV. Looking Ahead

Data for the third quarter of 1999 suggest continued modest improvement. The average number of permitted Palestinian workers employed in ISI in the third quarter was about 46,800, a 1 per cent decline relative to first-half 1999 and a 2.7 per cent decline in comparison to the third quarter of 1998. However, labour force data for the third-quarter indicate that the proportion of all employed Palestinians working in ISI remained at about 23 per cent. [54] The labour force continued to grow and there was a slightly higher labour force participation rate in the third quarter. This suggests a further marginal increase in total Palestinian labour flows to ISI in the third quarter, despite 7 days of comprehensive closure imposed on the Occupied Palestinian Territory during that period, as well as continued growth in domestic employment. These contributed to a further decline in the overall rate of unemployment and a modest increase in wages.

Trade indicators show that average monthly Palestinian exports to Israel were about 1.6 per cent higher in nominal NIS terms in the third quarter as compared to first-half 1999. Palestinian imports from Israel for the same period were up 12.5 per cent. Monthly exported truckloads via monitored border crossings declined 4.4 per cent in third-quarter 1999 while imported truckloads declined by about 7.8 per cent as compared to the first half of the year. These trends suggests continued stagnation in Palestinian trade.

Bank intermediation continued to expand in the third quarter. Total deposits in the banking system in September were 6.4 per cent higher relative to June. On a year-to-year basis, total deposits were 18.4 per cent higher in September. Total credit extended during the same period increased by about 5.4 per cent. Overall bank credit in September 1999 was up 28.9 per cent as compared to September 1998. Bank credit to private businesses grew by about 6 per cent in the third quarter and was 34.8 per cent higher than in September 1998. This suggests that bank lending to businesses was growing faster than overall lending growth.

There was virtually no inflation in consumer prices in the third quarter of the year. The CPI rose only 0.02 per cent between June and September 1999, reversing the deflationary trend observed in the first half of the year. On a year-to-year basis, the CPI rose 3.6 per cent, continuing a disinflationary trend.

Donor disbursements, as of mid-October were about USD 250 million, approximately 47.5 per cent of total 1999 donor commitments of USD 524.4 million. The relatively low level of disbursements has raised concern that the significant economic developments in the Palestinian economy in the past two and one-half years will not be buttressed by significant public sector investment and, therefore, not be sustainable. [55]

Endnotes:

[54] See PCBS "Labour Force Survey, July-September, 1999 Round; Press Conference," November 1999.

[55] Ad Hoc Liaison Committee, "Chair's Summary," Tokyo, 15 October 1999.




Follow UNISPAL RSS Twitter