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Source: United Nations Special Coordinator in the Occupied Territories (UNSCO)
30 April 1999

UNSCO REPORT on

ECONOMIC and SOCIAL CONDITIONS in the

WEST BANK and GAZA STRIP

Spring 1999

UNITED NATIONS

OFFICE OF THE SPECIAL COORDINATOR IN THE OCCUPIED TERRITORIES

Gaza, 30 April 1999



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 and the Department of Living Standards; 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 Coordinator of Government Activities in the Territories, Israeli Ministry of Defense, which has provided data and assistance for this report.

This report also benefitted 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) and the Women's Studies Program, Bir Zeit University.

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

Sincere 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 UNSCO Report is prepared by Salem Ajluni, Husam Zomlot, Khaled Islaih and Rami Wihaidi.

Note: To obtain copies of UNSCO Reports , please call 07-2860074. From outside the West Bank and Gaza Strip and Israel, call +972-7-2860074. UNSCO Reports can also be accessed and downloaded from the UNSCO website at: www.arts.mcgill.ca/mepp/unsco/unfront.html.

For electronic mail communications, please use: ajluni@un.org



TABLE of CONTENTS

Executive Summaryi

I. MACROECONOMIC TRENDS

A. An Overview of Macroecnomic Projections

B. Labour Flows to Israeli-Controlled Areas

C. Trade Flows

1. Commercial Truckload Movement

2. Registered Trade with Israel by Value

3. Registered Direct Imports from Abroad by Value

D. Private Investment

1. Trends in Private Construction Activity

2. New Company Registrations

3. Approved Investment Projects

4. Trends in Private Sector Financing

a. Bank Credit Extension to Businesses

b. Economic Branch Distribution of Business Credit

c. Bank Lending Ratio and Credit Repayment Period

d. NGO and UNRWA Credit Programmes

E. Public Investment: Donor Disbursements and the Palestinian Development Plan

F. General, Comprehensive and Internal Closures ..

G. Summarising Macroeconomic Trends

II. POPULATION, LABOUR FORCE and WAGES

A. Population and Labour Force Growth

B. Employment, Underemployment and Unemployment

C. Underlying Labour Market Dynamics

1. Social Composition of Employment

2. Economic Branch Distribution of Employment

3. Women in the Labour Market

4. Working Time and Wages

III. HOUSEHOLD EXPENDITURES and the LEVEL of LIVING

A. Household Expenditures

B. A Note on "Other Cash Expenditures@

C. Household Wage Incomes and the Level of Living

D. Consumer Price Inflation

E. A Note on Relative Price Dynamics: A Three-Year Overview

IV. LOOKING AHEAD



LIST of TABLES

Table 1: Permits Issued to WBGS Workers for Employment in Israeli-Controlled Areas and Estimates of Average Permitted Labour Flows on a Monthly Basis, 1998

Table 2: Estimates of Average WBGS Truckload Movements through Monitored Commercial Crossings on a Monthly and Daily Basis, 1998

Table 3: Estimates of Average Monthly Value of Registered WBGS-Israel Trade on the Basis of VAT Clearances, 1998

Table 4: Total New Licensed Construction Area in the WBGS by Project Type, QI-QIII 1997 and QI-QIII 1998

Table 5: Registration of New Companies in the WBGS by Legal Type, 1997 and 1998

Table 6: Value of Approved Investment Projects Qualifying for Exemptions Under the Law for the Encouragement of Investment by Residence of Investor, 1997 and 1998

Table 7: Value and Relative Distribution of Outstanding Bank Credit to Private Businesses in the WBGS by Economic Branch, December 1997, June 1998 and December 1998

Table 8: Value and Distribution of Bank Credit in the WBGS Among Private Businesses, Consumers and Public Agencies, End-1996, End-1997 and End-1998

Table 9: Estimates of the Labour Force, Full Employment, Unemployment and Underemployment for the WBGS, Average 1997 and Average 1998

Table 10: Social Composition of the Employed WBGS Labour Force, Average 1997 and Average 1998

Table 11: Estimates of the Employment Branch Distribution of the WBGS Labour Force Including Employment in Israeli- Controlled Areas, Average 1997 and Average 1998

Table 12: Estimates of Palestinian Employment in Israel-Controlled Areas and the WBGS by Economic Branch, Average 1997 and Average 1998

Table 13: Comparing Women = s and Men = s Labour Force Profiles in the WBGS, Average 1997 and Average 1998

Table 14: Estimates of Monthly Days Worked and Real Daily and Monthly Wages for Employed WBGS Workers by Place of Work, Average 1997 and Average 1998

Table 15: Estimates of Real Monthly Expenditures on Basic and Secondary Commodities and Services in Seven-Persons Households in WBGS, Average 1997 and 1998 Average

Table 16: Estimates of Other Cash Expenditures by Component for Seven-Person Households in the WBGS, Average 1997 and Average 1998

Table 17: Estimates of Real Monthly Wage as a Proportion of Households Expenditures in Seven-Person Households in the WBGS, Average 1997 and Average 1998

Table 18: Inflation Rates for Major Commodity Groups in the WBGS, 1998

Table 19: Cumulative Inflation Rates and Relative Price Changes for Major Commodity and Service Groups in the WBGS, 1996-1998


I. MACROECONOMIC TRENDS

A. An Overview of Macroeconomic Projections

The Palestinian Ministry of Finance (MOF) and the International Monetary Fund (IMF) estimate that real Gross Domestic Product (GDP) and Gross National Product (GNP) grew by about 1.0 and 2.0 per cent respectively in 1997. These were downward revisions of earlier, more optimistic growth forecasts, necessitated by two comprehensive closures imposed by Israel on the West Bank and Gaza Strip (WBGS) in the first and third quarters of 1997. Macroeconomic growth projections for 1998 were even more optimistic with initial MOF/IMF estimates for real GDP and GNP growth of 2.1 and 3.5 per cent respectively. 1

Better than expected trends in the first half of the year resulted in an upward revision of these estimates. In particular, permitted and non-permitted Palestinian labour flows to Israel and donor disbursements were higher than expected, while imports--which may reduce domestic growth--were reported to have fallen. As a result, the MOF and the IMF revised upward their real GDP and GNP growth estimates to 3.0 and 5.5 per cent respectively.2 These growth rate estimates were reaffirmed at the end of the third quarter, despite the imposition of 22 comprehensive closure days during September and October.3

If accurate, the estimated growth rates would be sufficient to marginally raise per capita income levels in the WBGS for the first year since the beginning of the interim period in 1994. The projections, and the estimates of the components on which they are based, can be more fully assessed by reviewing the performance of key macroeconomic indicators for 1998. These include WBGS labour flows to Israeli-controlled areas; trade flows between Israel and the WBGS and between the latter 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 on these macroeconomic indicators.


B. Labour Flows to Israeli-Controlled Areas

Estimates suggest there were an average of 44,400 permit-holding WBGS workers employed on a daily basis in Israel and Israeli settlements and industrial zones during 1998, an increase of 16.9 per cent over the 1997 daily average of 38,000 workers. The average number of permits issued on a monthly basis grew by 8.2 per cent or about half as much as estimated labour flows. This suggests that the higher flows were the product of more permits issued and fewer closure-induced disruptions as compared to 1997. Issued permits to work in Israel (i.e., across the Green Line) registered an increase of only 4.1 per cent as compared to a 24.8 per cent increase in those issued for work in Israeli-controlled settlements and industrial zones in the WBGS.


Table 1
Permits Issued to WBGS Workers for Employment in Israeli-Controlled Areas and Estimates of Average Permitted Labour Flows on a Monthly Basis, 1998
4


Total Permits
Total Permits Issued
Total Number of Permits
Estimated
Issued for
for Work in Settlements
Issued to Work in All
Labour Flows to All
Month
Work in Israel
and Industrial Zones
Israeli-Controlled Areas
Israeli-Controlled Areas
January
44,051
11,272
55,323
44,354
February
44,387
11,328
55,715
44,934
March
44,168
11,475
55,643
47,109
April
43,180
11,769
54,949
42,568
May
44,014
12,605
56,619
50,983
June
44,647
12,920
57,567
45,010
July
45,228
13,911
59,139
49,612
August
45,323
14,091
59,414
48,216
September
23,374
14,087
37,461
27,277
October
38,177
13,227
51,404
31,906
November
42,659
13,131
55,790
49,898
December
44,010
12,688
56,698
51,302
Averages 1998
41,935
12,709
54,644
44,431
Averages 1997
40,283
10,179
50,462
38,007
Changes
+ 4.10%
+ 24.85%
+ 8.29%
+ 16.90%

Average labour flows were sharply reduced during comprehensive closures imposed in September and October but rebounded relatively quickly in November and December by comparison to border closures imposed in recent years.5 In addition to registered labour flows, unofficial labour flows are estimated at an average of more than 55,000 on a daily basis in 1998 (excluding periods of closure), a 60 per cent increase over 1997. On average, nearly 22 per cent of the employed WBGS labour force was working in Israeli-controlled areas in 1998 as compared to about 17 per cent in 1997 (see section II below).

C. Trade Flows

1. Commercial Truckload Movement

The total number of truckloads of merchandise transiting through the monitored commercial crossings in the WBGS6 grew an estimated 12.4 per cent in 1998 relative to 1997. Aggregate truck flow growth was only 3 per cent in 1997. Growth in 1998 was due mainly to expanded import traffic, which grew 14.7 per cent (see Table 2). By comparison, the number of exported truckloads grew only 1.9 per cent. The more rapid rise in in-bound truckload flows may be partly explained by the relative growth in income due to higher labour flows to Israel, as noted above.

The slow growth of export flows, despite fewer border closures in 1998, may be due to structural production constraints, non-tariff barriers imposed by Israeli authorities and/or slower income growth in Israel, which would reduce demand for WBGS products.



Table 2
Estimates of Average WBGS Truckload Movements through Monitored Commercial Crossings on a Monthly and Daily Basis, 1998
7

Monthly
Monthly
Daily
Daily
Exported
Imported
Exported
Imported
Month
Truckloads
Truckloads
Truckloads
Truckloads
January
3,570
11,735
155
510
February
3,485
13,782
158
626
March
3,543
13,982
142
559
April
2,100
11,244
91
489
May
2,742
13,887
117
591
June
3,808
17,062
146
656
July
3,035
18,081
124
738
August
2,626
16,604
109
692
September
2,240
12,846
97
559
October
1,937
13,892
88
631
November
2,280
15,871
95
661
December
2,497
14,728
100
589
Averages 1998
2,822
14,476
119
609
Averages 1997
2,769
12,620
120
544
Changes
+ 1.90%
+ 14.71%
-1.26%
+ 11.90%

2. Registered Trade with Israel by Value

In addition to truck traffic, trade with Israel--which accounts for the bulk of total WBGS trade--can be estimated in value terms using the value-added tax (VAT) clearances remitted by each side to the other, as stipulated in the Economic Protocol of 1994. Under the agreement, 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 value of clearances received by the PA from Israel by .17 yields the approximate value of goods imported by WBGS residents from Israel (i.e. Israeli exports to the WBGS). Likewise, dividing the value of clearances received by Israel from the PA by .17 provides an estimate of the value of goods imported by Israeli residents from the WBGS (i.e. WBGS exports to Israel).8


Table 3
Estimates of Average Monthly Value of Registered WBGS-Israel Trade on the Basis of VAT Clearances, 1998
9
(in nominal NIS)


WBGS Registered
WBGS Registered
Month
Exports to Israel
Imports from Israel
January
151,192,888
469,300,700
February
149,380,406
475,020,800
March
83,716,224
491,836,400
April
151,137,847
496,439,882
May
181,774,276
549,124,047
June
192,635,094
575,946,182
July
79,856,794
539,469,106
August
250,000,676
545,629,141
September
54,261,076
517,164,659
October
226,504,994
604,105,394
November
140,442,388
676,690,141
December
214,587,859
590,154,206
Averages 1998
156,290,877
544,240,055
Averages 1997
133,233,902
507,368,059
Changes
+ 17.31%
+ 7.27%

In nominal NIS terms, the VAT clearance method indicates a 9.3 per cent increase in the total value of WBGS-Israel trade. WBGS goods and service exports to Israel grew 17.3 per cent while WBGS imports from Israel grew a 7.2 per cent as between 1997 and 1998. The truck movement data presented above indicates a more rapid increase in imports relative to exports. The discrepancy may be due to the fact that the truck movement data entirely excludes West Bank-Israel trade while the VAT clearance method includes a significant amount of such trade. This implies that West Bank exports to Israel grew at a significant pace, while West Bank imports from Israel may have been lower in nominal NIS terms in 1998 relative to 1997. The growth in the value of WBGS exports may be partly due to the lifting of all quantitative restrictions on agricultural commodities in early 1998.10


In nominal USD terms, the VAT clearance data indicates registered WBGS exports to Israel of about USD 492 million and WBGS imports from Israel of approximately USD 1,714 million in 1998.11

3. Registered Direct Imports from Abroad by Value

In addition to trade with Israel--and indirect imports from other countries passing through Israel-- the WBGS has limited trading relations with Egypt, Jordan and the rest of the world. Customs clearance data provide an approximation of the level of WBGS imports from non-Israeli trading partners. Direct registered imports from Egypt, Jordan and other countries via Israeli ports destined for the Gaza Strip in 1998 were valued at USD 143 million as compared to USD 115 million during 1997--an increase of about 24.3 per cent.

Such imports can be disaggregated by country of origin. Thus, the USD value of direct Jordanian exports entering over the Allenby/Karameh Bridge grew by 40.3 per cent to USD 26.1 million, while that transiting through the Rafah crossing from Egypt declined 6.6 per cent to USD 13 million. Imports entering Gaza from abroad and via Israeli ports rose 26 per cent to USD 103 million as between the two periods.12 While value data on Palestinian exports by port of exit are difficult to obtain, there was a 1.8 per cent increase in truck flows exiting the WBGS across the Allenby/Karameh and Damiyeh Bridges in 1998, relative 1997. This suggests a small increase in the level of WBGS exports to Jordan.13

D. Private Investment

1. Trends in Private Construction Activity

Construction activity remains the main component of private investment in the WBGS. One measure of planned private investment activities is the new surface area licensed by Palestinian local authorities for private residential and non-residential (i.e. business) construction projects. The total new area licensed for such projects in the WBGS increased 4.6 per cent in the first three quarters of 1998,14 relative to the same period in 1997. This compares to a 13 per cent increase in the same period in 1997 relative to 1996.15



Table 4
Total New Licensed Construction Area in the WBGS by Project Type, QI-QIII 1997 and QI-QIII 1998
16
(in square metres)

Type of Licensed
Construction Project
QI-QIII 1997
QI-QIII 1998
Total Change
Residential
1,477,851
1,479,403
0.11%
Non-Residential
211,395
288,108
36.29%
Total
1,689,246
1,767,511
+ 4.63%

Residential construction in 1998 increased by only 0.1 per cent while non-residential construction increased by about 36.2 per cent. This is a reversal of the trend witnessed in 1997 when residential construction increased by 15.7 per cent and non-residential construction decreased by about 2.9 per cent. Thus, the overall trend is of much slower growth in planned residential construction, with an acceleration in planned business construction activity. Slower growth in overall construction licensing, despite the relative improvement in economic conditions in 1998, may be due to increased uncertainty regarding the political environment and, in particular, the peace process. It may also reflect a relative surplus of housing after several years of rapid expansion.

2. New Company Registrations

The formal registration of new companies is another important indicator of planned investment activity as it suggests new business expenditures. 17 In the aggregate, the number of newly-registered companies in the WBGS rose from 1,195 in 1997 to 1,346 in 1998, an increase of 12.6 per cent. While a nominally positive trend, it is significant that the total number of such registrations actually declined 12 per cent in the West Bank; thus all growth in this indicator was accounted for by new registrations in the Gaza Strip. It is also significant that 90 per cent of new registrations were private unlimited-liability companies--generally smaller businesses. 18 The number of newly-registered private limited-liability companies declined by about 28 percent in 1998 relative to 1997.19 The best capitalised, and typically the largest businesses are public limited and foreign companies.20 New registrations of these types of businesses declined 50 and 75 per cent, respectively, in 1998.


Table 5

Registration of New Companies in the WBGS by Legal Type, 1997 and 1998 21


1997-1998
Legal Type
1997
1998
Changes
Private Unlimited
414
790
+ 90.82%
Private Limited
761
550
- 27.73%
Public Limited
4
2
- 50.00%
Foreign
16
4
- 75.00%
Total
1,195
1,346
+ 12.64%

As all net growth in this indicator was in the Gaza Strip, where general border closure measures have had their most devastating impact, it appears that the surge in new company registrations there may be related to the increase in the number of businessmen=s permits issued by the Israeli authorities. Company registration activity there may, therefore, not closely reflect growth in planned business investment. Rather, it may be that people are registering companies in the least costly way possible because it allows them to apply for a business permit to enter Israel.22


3. Approved Investment Projects

Since 1995, certain investment projects may qualify for customs and tax exemptions as stipulated by the Palestinian Law for the Encouragement of Investment.23 In order to qualify for such exemptions, investment projects must be submitted to the PA Ministry of Economy and Trade for approval. Benefits from the Law accrue equally to resident and foreign investors.

The minimum value of fixed assets for approved projects is USD 100,000.24 Thus, approved projects are--in the context of the WBGS economy---relatively large. In general, fixed capital assets and spare parts are exempted from customs and taxes and there are income tax exemptions on profits from such projects which increase as the value of the fixed assets rise. All approved projects are exempted from net profit taxes for five years after the commencement of the projects= activities. After this period, net profits are taxed at the low nominal 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 net profits tax.


Table 6
Value of Approved Investment Projects Qualifying for Exemptions Under the Law for the Encouragement of Investment by Residence of Investor, 1997 and 1998

(in nominal USD)
25


Residence of
Investor
1997
1998
Total Change
Local
129,123,048
123,990,280
- 4.14%
Foreign
61,185,784
37,077,750
- 65.02%
Total
190,308,832
161,068,030
-18.15%

As indicated in Table 6, the total value of projects approved by the Ministry in 1998 was USD 161 million, as compared to USD 190.3 million in 1997, a decline of 18.1 per cent. The value of approved foreign investment projects declined by about 65 per cent.26 Within the overall decline in the value of projects approved, there were different trends in the West Bank and the Gaza Strip. In the West Bank, the value of all approved projects fell 35.9 per cent from USD 160.3 million to USD 102.7 million. Approved foreign investments fell by 66.8 per cent to USD 2.3 million. In Gaza there was a 94.3 per cent increase in the overall value of approved projects--from USD 29.9 million to USD 58.3 million-- with the value of approved foreign projects more than tripling in value to USD 18.1 million. The growth in Gaza may be related to the completion of the first phase of the Gaza Industrial Estate. No such estate has yet been established in the West Bank. The branch distribution of the combined value of approved projects in 1998 was as follows: 49.4 per cent in manufacturing; 21.5 per cent in tourism; 14.7 per cent in construction; 12.4 per cent in services; and 1.8 per cent in agriculture.

4. Trends in Private Sector Financing

a. Bank Credit Extension to Businesses

The banking system continued to expand in the second half of 1998 with the opening of one new bank and five new bank branches, bringing the total number of banks operating in the WBGS to 22 with a total of 100 bank branches. Of these, there were 8 domestic banks with 38 branches and 14 international banks with a total of 62 branches in the WBGS. The total value of deposits rose 15.5 per cent to USD 2,414 million. At the same time, total outstanding credit--including that extended to households, businesses and public sector entities--increased to USD 833 million at end-1998, a 35.9 per cent increase relative to end-1997.

The total value of bank credit extended to private business alone grew to USD 467.3 million at end-1998--an increase of 9.3 per cent relative to end-1997, despite the slight decline in such credit in the second half of the year. The pace of growth in bank lending to businesses in 1998 was well below that in 1997, when such lending grew by more than 40 per cent. It was also far below the growth rate in overall bank lending. This suggests a deceleration in business lending activities after several years of rapid growth, with relatively more credit being directed to households (consumers).



Table 7
Value and Relative Distribution of Outstanding Bank Credit to Private Businesses in the WBGS by Economic Branch,
December 1997, June 1998 and
December 199827
(in millions of nominal US$)

Value of Credit
Total Change
Total Change
December
June
December
June 1998-
December 1997-
Economic Branch
1997
1998
1998
December 1998
December 1998
Agriculture
22.57
12.01
12.38
+ 3.06%
- 45.15%
Manufacturing and Mining
79.28
87.71
90.51
+ 3.20%
+ 14.17%
Construction
75.32
122.54
104.61
- 14.63%
+ 38.89%
Commerce
227.67
209.73
205.83
- 1.86%
- 9.59%
Tourism, Hotels & Restaurants
8.49
13.80
21.96
+ 59.14%
+ 158.65%
Transportation
6.20
14.62
23.78
+ 62.63%
+ 283.67%
Financial Services
5.23
6.97
5.46
- 21.66%
+ 4.42%
Total
424.76
467.38
464.53
- 0.61%
+ 9.36%
Distribution of Credit
Relative Change
Relative Change
December
June
December
June 1998-
December 1997-
Economic Branch
1997
1998
1998
December 1998
December 1998
Agriculture
5.31%
2.57%
2.67%
+ 3.69%
- 49.85%
Manufacturing and Mining
18.67%
18.77%
19.49%
+ 3.83%
+ 4.39%
Construction
17.73%
26.22%
22.52%
- 14.11%
+ 27.00%
Commerce
53.60%
44.87%
44.31%
- 1.26%
- 17.33%
Tourism, Hotels & Restaurants
2.00%
2.95%
4.73%
+ 60.12%
+ 136.50%
Transportation
1.46%
3.13%
5.12%
+ 63.63%
+ 250.83%
Financial Services
1.23%
1.49%
1.17%
- 21.18%
- 4.52%
Total
100.00%
100.00%
100.00%
--
--

b. Economic Branch Distribution of Business Credit

On a branch basis, credit for transportation activities grew by more than 280 per cent while that for tourism, hotel and restaurant activities grew by more than 150 per cent. The eased licensing procedures of the PA for driving and taxi registration, and fewer clousres, may account for the rapid growth in transportation branch borrowing, while preparations for Bethlehem 2000 celebrations may be responsible for the surge in credit for tourism-related activities. Credit for business construction activities grew by nearly 39 per cent, consistent with the growth in newly licensed construction area noted above. Lending for manufacturing and mining activities grew about 14 per cent indicating moderate growth in this branch.

Credit extended for commerce, which includes internal and external trade, declined about 9.5 per cent. However, financing for external trade, which accounted for about one-fifth of total credit extended for commerce in 1998, grew about 13.2 per cent with most of this growth attributable to import activities. The level of credit absorbed by WBGS agriculture at end-1998 was 45.1 per cent less than at end-1997, perhaps reflecting weather-related dislocations in the winter of 1998.

The figures suggest banks were providing proportionally less credit for commercial activities and more credit for productive and service activities in 1998 relative to 1997. In 1998, an average of 46.3 per cent of outstanding credit was absorbed by commercial activities, as compared to 57.2 per cent in 1997. Nonetheless, commerce remains the single most important area of bank lending in the WBGS. By contrast, 44.1 per cent of bank lending to businesses in 1998 was received by agriculture, manufacturing and construction--the three productive economic branches. This represents a significant increase over the 1997 average of 36.2 per cent, most of this growth being accounted for by construction lending activities.

Service branches--tourism, hotels and restaurants, transportation and financial services--accounted for an average of 9.5 per cent of outstanding bank credit in 1998, as compared to a 1997 average of 6.5 per cent. Although a relatively small share of total bank lending, the average absolute level of outstanding credit extended to services increased from USD 25.1 million in 1997 to USD 43 million in 1998--an increase of 71.2 per cent. Most of this increase was accounted for by the growth in transportation lending.

c. Bank Lending Ratio and Credit Repayment Period

The loan-to-deposit ratio of the Palestinian banking system--a measure of the relative confidence of banks to lend and bank customers to borrow--grew from 29.3 per cent at end-1997 to 34.5 per cent at end-1998. As indicated above, this was due to more rapid growth of loans relative to deposits.28 The loan-to-deposit ratio among banks operating in the Palestinian Territories remains one of the lowest in the region. This is probably due to continuously high levels of perceived risk on the part of both banks and borrowers.

Risk perceptions may also account for the decline in the proportion of total bank credit consisting of loans (defined as medium-term credit with a repayment period between 1-3 years). The proportion of loans in total bank credit rose from 34.5 per cent at end-year 1996 to 41.2 per cent at end-1997 and declined to 39.3 per cent at end-year 1998. On the other hand, the share of bank credit extended in the form of overdrafts (defined as short-term credit with a repayment period of less than 1 year) declined from 60.2 per cent at the end of 1996 to 53.1 per cent at end-1997 and rose slightly to 53.8 per cent at end- 1998.29

Another fundamental weakness in the intermediation process is the significant decline in the proportion of total bank credit absorbed by private businesses, as compared to consumers and public agencies. There was a particularly sharp decline in 1998 when the proportion of total credit extended to businesses declined to 56.4 per cent, as compared to 69.8 per cent in 1997. There was a corresponding increase in the proportion of credit extended in the form of consumer loans, as indicated in Table 8. This implies that banks are providing relatively more credit for consumption--as compared to investment--activities.30


Table 8
Value and Distribution of Bank Credit in the WBGS Among Private Businesses, Consumers and Public Agencies,
End-1996, End-1997 and End-1998
31
(values in USD millions)

Value of Loans
December
December
December
Borrowing Entity
1996
1997
1998
Businesses
302.17
424.76
464.53
Consumers
118.66
168.30
328.88
Public Agencies
2.97
15.41
28.98
Total
423.80
608.46
822.39
Distribution of Loans
December
December
December
Borrowing Entity
1996
1997
1998
Businesses
71.30%
69.81%
56.48%
Consumers
28.00%
27.66%
39.99%
Public Agencies
0.70%
2.53%
3.52%
Total
100.00%
100.00%
100.00%

Bank financing of household consumption tends to increase market demand, rather than production and market supply. This exacerbates the historic imbalance in the WBGS economy; namely, total consumption far exceeds total production, leading to a significant balance of trade deficit. Correcting this imbalance will require, among other things, that banks find creative ways to play a more active role in financing production, particularly for export-oriented goods and services.

d. NGO and UNRWA Credit Programmes

The lending programmes administered by the different NGOs and UNRWA continued to expand in 1998. These lending agencies complement the role of the banking system by lending to those who are either not bank customers or whose businesses do not qualify under bank lending criteria. NGOs and UNRWA have aims, guarantee and monitoring methods that enable them to lend to projects that are seen as too risky or too difficult to administer by the banking system.

The total value of loans disbursed to small and medium-sized businesses by NGOs and UNRWA in 1998 was USD 28.2 million, compared to USD 23.5 million in 1997--an increase of 20 per cent.32 Data for the period 1992-1997 indicate that more than 50 per cent of NGO loans were extended for manufacturing, 25 per cent for agriculture, about 10 per cent for tourism and about 15 per cent for other service and commercial activities. This pattern differs significantly from the distribution of bank credit 33 which is more heavily weighted toward commercial activity and with far less emphasis on manufacturing and agriculture. Thus, not only have NGOs and UNRWA provided loans to borrowers to whom banks will generally not lend, they have also served to partially correct the imbalance in the branch distribution of bank credit activity.

E. Public Investment: Donor Disbursements and the Palestinian Development Plan

Donor disbursements in 1997 were USD 550.6 million, about 4 per cent below their 1996 level and slightly below their 1994-1996 average.34 At the Fifth World Bank Consultative Group Meeting in Paris in December 1997, donor countries pledged USD 750 million in grants, loans and equity for development activities in the WBGS in addition to USD 150 million in political risk guarantees for private investment for 1998.35 Reported donor disbursements during 1998 were USD 399.8 million, about 27.4 per cent below disbursements in 1997.36

Estimates suggest that, of nearly USD 400 million in disbursements, about USD 215 was directed to public investment, a nearly 11 per cent decline relative to 1997. However, public investment represented about 53.8 per cent of total disbursements in 1998, a substantial proportional increase as compared to 1997 when only 43.7 per cent of disbursements were absorbed as public investment. The proportion of total disbursements directed to physical infrastructure, relative to technical assistance, has been on the increase since 1996.37 The higher proportions of funds dedicated to public investment are due in part to the fact that the PA recurrent budget was balanced in 1998--the first year this has occurred during the interim period.

Donor assistance in 1998 is being integrated into Palestinian Development Plan for 1999-2003 (PDP)--the PA = s five-year economic development framework. The PDP = s priority areas are the development of infrastructure, especially water and transportation (including the airport, harbour and roads), the establishment of a sound legal and regulatory framework, more appropriate systems of education and health and the revitalisation of the private economy, especially manufacturing, agriculture and tourism. United Nations agencies are involved as donors or implementing agencies in more than 170 PDP projects worth some USD 286 million.38

F. General, Comprehensive and Internal Closures

During 1998, there was no reduction in the severity of the general closure and separation policy applied in the WBGS by the Israeli authorities. The mobility of Palestinians in the WBGS remained severely restricted as West Bank residents cannot enter East Jerusalem or Gaza without permits from the Israeli authorities. Likewise, residents of the West Bank cannot enter East Jerusalem, nor residents of the Gaza Strip enter the West Bank, including East Jerusalem, without such permits. Moreover, 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 Israeli movement restrictions on personnel and goods at border crossings.

However, there were significantly fewer comprehensive and internal closure days imposed by the Israeli authorities on the WBGS during 1998, as compared to 1997. Excluding weekends and Muslim and Jewish holidays, there were 277 potential days during which labour and commodity flows could take place between the WBGS and Israel. Comprehensive closures were imposed on 26 days during 1998, two days in the first half of the year and 24 days in the second half, mainly in September and October. Excluding weekends and holidays, there were 14.5 effective closure days, a loss of 5.2 per cent of total potential work days, as compared to a 20.5 per cent loss in 1997.39 In addition, internal closures were imposed on several Palestinian cities in the West Bank--especially around Hebron and Nablus--for various periods during the year, restricting movement of persons, vehicles and goods to and from these areas.40

G. Summarising Macroeconomic Trends

Trends in most of the indicators suggest continued improvement in the WBGS macroeconomic situation in 1998--especially in relation to the 1995-1996 period. In this light, the revised MOF/IMF growth estimates for real GDP and GNP do not seem unreasonable. Most clearly, labour and trade flows exceeded expectations in large part due to the reduced number of comprehensive closure days. Private investment activity registered mixed results. There was reduced growth in overall construction activity but significant growth in business construction; nominal growth in the number of new companies registered but a decline foreign companies registered; and a decline in the value of relatively large approved investment projects.

Bank intermediation continued to expand, albeit at slower rates than in the past several years. This may mean that the banking system is maturing and the local credit market becoming relatively saturated. The share of bank business credit extended for job-sustaining productive and service branches of the economy rose, while that for commercial activity declined. But the low loan-to-deposit ratio, the reduction in the average term maturity of credit extended and the proportional growth in consumer financing--at the expense of business credit--give cause for concern. These trends reflect, in part, the significant risks in the operating environment as perceived by banks and borrowers. From the point of view of longer term private sector development, this is a formidable constraint. NGO and UNRWA micro-lending to businesses, however, continued to grow at a significant pace. On the other hand, donor disbursements were lower in 1998 relative to 1997.

Labour market conditions, in tandem with macroeconomic progress, improved in 1998, as noted in the next section. Employment levels rose, unemployment levels declined and real wages rose. This was due in part to the increased flows of labour to Israel and in part to the expansion of domestic employment in the WBGS. The labour situation in the Gaza Strip remains substantially worse with a core unemployment rate of about double that in the West Bank. Economic growth and higher incomes, however, did not translate into higher levels of current household expenditures which, on average and in real terms, declined about 2 per cent as noted in section III. Like other areas in the economic landscape, uncertainty about the future continues to constrain consumer confidence, resulting in higher levels of foregone consumption.


II. POPULATION, LABOUR FORCE and WAGES

A. Population and Labour Force Growth

The population of the WBGS reached an estimated average of about 2,858,021 in 1998, constituting an increase of about 6.4 per cent relative to 1997.41 The working-age population increased over the same period to an estimated average of 1,389,208 persons, an increase of about 6.5 per cent.42 Despite the decrease in the labour force participation rate from 42.3 in 1997 to about 42.1 in 1998, the labour force, defined as the number of persons working or seeking work, increased by about 5.9 per cent to more than 585,000 persons as between 1997 and 1998. Labour force growth, therefore, was the result of the growth of the population, and especially the working-age population, and not of greater levels of labour force participation.

B. Employment, Underemployment and Unemployment

There was continued improvement in labour market conditions in 1998 as reflected in the increase in the full-employment rate and further declines in the underemployment and unemployment rates. The average full-employment rate--defined as the proportion of the labour force working at least 35 hours per week--grew to 77.8 per cent in 1998 from an average of 69.4 per cent in 1997. The absolute number of fully-employed persons increased by an estimated 18.9 per cent to about 456,240 persons in 1998. The growth of full-employment was responsible for the decline in the underemployment rate--the proportion of the labour force working less than 35 hours per week--which decreased from an average of 9.4 per cent 1997 to about 6.5 per cent in 1998. The total number of underemployed persons declined by an estimated 27.1 per cent to about 37,950 persons.

The improvement in labour market conditions in 1998 was due in large part to a reduction in the standard unemployment rate--defined as the proportion of the labour force actively seeking, but unable to find, work. The average unemployment rate fell from 20.9 per cent in 1997 to 15.6 per cent in 1998-- the lowest rate recorded since 1995. In absolute terms, the number of unemployed persons decreased by about 21.5 per cent to about 91,000 persons. Nonetheless, there remained a significant difference between unemployment rates in the West Bank relative to the Gaza Strip. The average unemployment rate in the West Bank in 1998 was 12.3 per cent while in Gaza it was nearly twice this at 23.5 per cent.



Table 9
Estimates of the Labour Force, Full Employment, Unemployment and Underemployment for the WBGS,
Average 1997 and Average 1998
43

Relative
Ratios
AVG 1997
AVG 1998
Change
Labour Force Participation
42.36%
42.10%
- 0.63%
Full Employment
69.44%
77.89%
+ 12.16%
Underemployment
9.42%
6.51%
- 30.92%
Unemployment
20.98%
15.60%
- 25.62%
Adjusted Unemployment
30.31%
25.15%
-17.01%
Total
Totals
Change
Working-Age Population
1,304,183
1,389,208
+ 6.52%
Labour Force
552,661
585,220
+ 5.89%
Fully-Employed
383,630
456,243
+ 18.93%
Underemployed
52,097
37,942
- 27.17%
Unemployed
116,073
91,035
- 21.57%
Adjusted Unemployed
190,183
168,819
- 11.23%

The standard definition of unemployment excludes persons of working age who did not seek work due to their belief that no work could be found, commonly referred to as discouraged workers. Including such persons in the estimates of unemployment results in an average adjusted unemployment rate of about 25.1 per cent in 1998, compared to 30.3 per cent in 1997. Using the broader definition, the estimated number of unemployed persons in 1998 was about 165,700, a decline of about 12.8 per cent relative to 1997. The adjusted unemployment rates for the West Bank and Gaza Strip in 1998 were 23.2 and 31.4 per cent respectively.

It is important to note, however, that the difference between the unemployment rate and the adjusted unemployment rate has increased in recent years, rising from 8.7 percentage points in 1996 to 9.5 percentage points in 1998. In absolute terms, the number of discouraged workers increased about 8.4 per cent from an estimated 68,850 in 1996 to 74,650 in 1998. This suggests a growing core of discouraged workers, despite relative improvement in the labour market. The growth in the number of discouraged workers may be due in part to changing skill requirements in the Palestinian economy over the last several years.

C. Underlying Labour Market Dynamics

1. Social Composition of Employment

Overall employment in the WBGS--which includes the fully-employed and the underemployed--is estimated to have grown by about 13.4 per cent in 1998. Growth, however, was unevenly distributed as between the different social categories of employed persons. As indicated in Table 10 there were increases in the proportions of employers and wage workers and declines in those of unpaid family laborers and self-employed persons. In absolute terms, there were significant increases in the estimated number of employers and wage-workers, a small increase in the number of self-employed persons and a decline in the number of unpaid family laborers.

Growth in the number of employers, which accelerated in the second half of the year, suggests improved business conditions. Increased business construction activity, company registrations and exports suggest some factors behind the nearly 20 per cent growth in the number of WBGS employers. Secondary effects of income generated by workers in Israel, as well as public sector spending and employment, may have also bolstered domestic sales, thereby encouraging business formation and growth. Fewer comprehensive closures, higher labour flows to Israel and continued progress in the domestic employment--particularly in commerce, public employment and construction--explains the 20.7 per cent growth in wage-employment.


Table 10
Social Composition of the Employed WBGS Labour Force,
Average 1997 and Average 1998
44

Relative
Ratios
AVG 1997
AVG 1998
Change
Employers
5.37%
5.65%
+ 5.28%
Unpaid Family Labour
10.07%
8.15%
- 19.04%
Self-employed
23.13%
20.88%
- 9.76%
Wage-workers
61.43%
65.33%
+ 6.33%
Total Employed
100.00%
100.00%
Total
Total
Change
Employers
23,399
28,068
+ 19.95%
Unpaid Family Labour
43,960
40,383
- 8.14%
Self-employed
100,890
102,797
+ 1.89%
Wage-workers
267,479
322,936
+ 20.73%
Total Employed
435,728
494,185
+ 13.42%

Unpaid family labour in the WBGS is concentrated in agriculture and commerce activities.45 The decline in the share and the estimated number of unpaid family laborers seems to be related to the reduction in agricultural employment and slower than average growth in commerce branch employment. The growth of employment opportunities in Israel--both permitted and unofficial--may be the reason behind the reduction in unpaid family labour, especially in the West Bank, the source of nearly all unofficial labour flows to Israel. The decline in the portion of self-employed persons, may be attributable to the same phenomenon. The self-employed, defined as individuals who are neither employed by--nor employ--others, tend to be concentrated in informal activities. In periods of lower unemployment, when more jobs in formal activities are available, their numbers grow more slowly or decline.

The improved labour market over the last year resulted in the reversal of a trend witnessed in 1996, when more frequent border closures and economic disruptions resulted in a decline in the proportion of employers and wage-workers and an increase in the proportion of unpaid family labour and self-employed. The combined proportion of employers and wage-workers in 1996 was 66.5 per cent, while the proportion of employed persons who were unpaid family laborers and self-employed was 33.5 per cent. With improved conditions and a larger engaged labour force in 1998, the proportions changed to 71 and 29 per cent respectively, indicating a reduction in the portion of the employed population engaged in informal activities, and a relative increase in those engaged in formal activities where remuneration tends to be higher.

2. Economic Branch Distribution of Employment

There was an estimated average of 58,450 new jobs for WBGS workers in 1998--a 13.4 per cent increase over 1997. In relative terms, there were employment share declines in all economic branches except in construction. In absolute terms, there was employment growth in every economic branch. The largest absolute increases were in construction (37.1 per cent), followed by the public sector (11.4 per cent), manufacturing, commerce and transportation (7.5 - 9 per cent) and services (5.4 per cent).

As indicated in Table 11, construction contributed to more than 50 per cent of employment growth in 1998, followed by PA institutions which contributed to about 15.7 per cent of average employment growth. Manufacturing contributed 11.9 per cent of growth, commerce 11.3 per cent, agriculture 3.5 per cent and transportation about 3.1 per cent. Unlike the first half of 1998 when service branch employment declined, it contributed about 3.8 per cent to overall growth for the year as a whole.



Table 11
Estimates of the Employment Branch Distribution of the WBGS Labour Force Including Employment in Israeli-Controlled Areas,

Average 1997 and Average 1998
46

Relative
Ratios
AVG 1997
AVG 1998
Change
Agriculture, Fishing
13.43%
12.28%
- 8.60%
Manufacturing, Quarrying
16.43%
15.92%
- 3.10%
Construction
18.23%
21.96%
+ 20.45%
Commerce, Hotels, Restaurants
19.23%
18.32%
- 4.76%
Transport, Communication
4.80%
4.62%
- 3.78%
Services and Other
9.40%
8.75%
- 6.86%
Palestinian Authority
18.47%
18.15%
- 1.74%
Total Employed Persons
100.00%
100.00%
Total
Total Growth
Totals
Change
Contribution
Agriculture, Fishing
58,699
60,760
+ 3.51%
3.53%
Manufacturing, Quarrying
71,590
78,579
+ 9.76%
11.96%
Construction
79,378
108,848
+ 37.13%
50.41%
Commerce, Hotels, Restaurants
83,807
90,453
+ 7.93%
11.37%
Transport, Communication
20,951
22,817
+ 8.91%
3.19%
Services and Other
41,171
43,405
+ 5.43%
3.82%
Palestinian Authority
80,132
89,319
+ 11.47%
15.72%
Total Employed Persons
435,728
494,185
+ 13.42%
100.00%

Disaggregated data by place of employment indicates that about 56 per cent of new jobs-- approximately 32,900--were located in Israeli-controlled areas (ICA),47 as shown in Table 12 Overall average Palestinian employment in ICA--permitted and unofficial--increased by about 44.2 per cent relative to 1997, climbing to an estimated average of 107,300.48 By contrast, overall employment in the WBGS rose by about 7 per cent, to an estimated 386,875 persons. In absolute terms, there were about 25,500 new jobs located in the WBGS--44 per cent of total employment growth in 1998.



Table 12
Estimates of Palestinian Employment in Israel-Controlled Areas and the WBGS by Economic Branch,
Average 1997 and Average 1998
49

Palestinians Working in ICA Palestinians Working in the WBGS
1997
1998
Relative
1997
1998
Relative Change
Ratios
AVG 1997
AVG 1998
Change
AVG 1997
AVG 1998
Change
Agriculture, Fishing
10.63%
11.18%
+ 5.09%
14.00%
14.14%
+ 0.96%
Manufacturing, Quarrying
14.27%
13.00%
- 8.88%
16.89%
16.99%
+ 0.63%
Construction
52.47%
54.48%
+ 3.83%
11.16%
11.22%
+ 0.54%
Commerce, Hotels, Restaurants
14.47%
13.23%
- 8.58%
20.21%
20.02%
- 0.97%
Transport, Communication
1.70%
1.65%
- 2.94%
5.44%
5.53%
+ 1.69%
Services and Other
6.47%
6.48%
+ 0.13%
10.10%
9.29%
- 7.98%
Palestinian Authority
n.a.
n.a.
--
22.20%
23.16%
+ 4.34%
Total
100.00%
100.00%
--
100.00%
100.00%
--
1997
1998
Total
1997
1998
Total
Totals
AVG 97
AVG 98
Change
AVG 97
AVG 98
Change
Agriculture, Fishing
7,903
11,324
+ 43.28%
50,795
49,435
- 2.68%
Manufacturing, Quarrying
10,613
12,425
+ 17.07%
60,977
66,154
+ 8.49%
Construction
39,035
60,559
+ 55.14%
40,343
48,289
+ 19.70%
Commerce, Hotels, Restaurants
10,758
13,720
+ 27.53%
73,049
76,733
+ 5.04%
Transport, Communication
1,258
1,514
+ 20.31%
19,693
21,303
+ 8.18%
Services and Other
4,807
7,765
+ 61.54%
36,364
35,640
-1.99%
Palestinian Authority
n.a.
n.a.
--
80,132
89,319
+ 11.47%
Total Employed Persons
74,375
107,308
+ 44.28%
361,352
386,874
+ 7.06%

The share of Palestinian employment in the different branches of the ICA economy remained relatively stable in 1998, despite significant absolute employment growth, as indicated in the left panel of Table 12. Construction remained the dominant source of employment, accounting for 54.4 per cent of all Palestinian jobs in ICA and there were small proportional increases in employment in agriculture and services.

In absolute numbers, as indicated in the lower left panel of Table 12, the construction branch absorbed about 21,500 more workers, a 55.1 per cent increase for the branch, which accounted for 65.3 per cent of total Palestinian job growth in ICA. Agriculture generated an estimated 3,400 new jobs, a 43.2 per cent increase, and accounted for about 10.3 per cent of overall employment growth. The service branch added about 2,950 new jobs, a 61.5 per cent increase in a branch that contributed about 9 per cent of total employment growth. Israeli commerce, hotels and restaurants also absorbed about 2,950 more Palestinian workers, a 27.5 per cent increase over 1997, accounting for about 9 per cent of total job growth. Palestinian employment in ICA manufacturing rose by about 1,800 jobs, a 17 per cent increase, contributing about 5.5 per cent of overall job growth, while the transport branch added about 250--or 0.7 per cent of new jobs. Overall, 75 per cent of new Palestinian employment in ICA was in the construction and agriculture branches, both of which are relatively labour-intensive.

The branch distribution of employment in the WBGS in 1998 was for the most part unchanged, as indicated in the upper right panel of Table 12, although the proportion of total employment accounted for by the public sector rose 4.3 per cent. Overall absolute employment growth in the domestic WBGS labour market was an estimated 25,500 jobs during this period, an increase of about 7 per cent. The public sector contributed an average of 9,200 new jobs--an 11.4 per cent increase over 1997. Public employment accounted for 36 per cent of total new employment in the WBGS in 1998, a decline in its share of job creation as compared to 1997.

Construction contributed 31.1 per cent of new employment, with an average of 7,950 new jobs created in 1998--a 19.7 per cent increase for the branch. Manufacturing added an average of 5,200 new jobs, accounting for 20.2 per cent of all jobs created and a branch increase of about 8.4 per cent. Commerce, hotels and restaurants employed 3,650 more people, contributing 14.4 per cent of total job growth and increasing branch employment by 5 per cent. The transport and communication branch expanded employment by about 1,600 new jobs, 6.3 per cent of total estimated job growth and increasing employment in the branch by 8.1 per cent. Absolute employment in agriculture and services declined by a total of some 2,000 jobs.

While the total number of new jobs created for Palestinians in the WBGS was greater in 1998 relative to 1997, the domestic share of total job creation was lower. There were an estimated 33,100 new jobs created in 1997--an 8.4 per cent increase over 1996--with 52.6 per cent of such jobs located in the WBGS. By contrast, there were an estimated 58,450 new jobs created in 1998--a 13.4 per cent increase over 1997--but only 44 per cent were located in the WBGS.

The private sector accounted for a larger share of total domestic employment growth in 1998. In absolute terms, private sector employment grew by 3.2 and 5.8 per cent in 1997 and 1998 respectively. At the same time, the private sector contribution to total domestic employment growth was about 51.2 per cent in 1997, rising to about 64 per cent in 1998. This indicates growth in the labour-absorbing capacity of the WBGS private economy during 1998.

3. Women in the Labour Market

Women = s labour force participation rate (LFPR)--the proportion of women active in the labour market--continued to decline in 1998, falling to 11.7 per cent from 12.3 per cent in 1997, as indicated in Table 13. Due to population growth, the absolute number of women working or seeking work increased 1.4 per cent to an estimated 81,725. While the female LFPR declined, that of men increased about 0.4 per cent and the absolute level of men = s participation rose an estimated 7.3 per cent. Thus despite generally rising employment opportunities, there was a decline in women = s LFPR, continuing the observed trend in 1997.50

Although the women = s formal labour market participation rate decreased, the portion who were fully employed increased by about 8 per cent in relative terms in 1998 to 80.1 per cent. The full- employment rate for women grew faster and remained higher than that for men. However, the absolute number of women fully-employed increased by only 9.4 per cent, compared to a 21.2 per cent increase for men, reflecting the decline in overall women = s participation.

The underemployment rate of women declined by about 29.2 per cent in relative terms between the two periods to just 3 per cent of employed women. This paralleled a decline of 31.4 per cent for men whose rate fell to 7.1 per cent. The female underemployment rate remained significantly lower than that of men. In absolute terms, the number of underemployed women declined by 27.8 per cent. Higher full-employment and lower underemployment rates for women--in the context of declining participation rates--suggests a tendency for women to leave the formal labour market if full-time work is unavailable. This may be due to both structural and cultural constraints on female employment.51

Reflecting the general trend, women = s unemployment rate declined by 21.3 per cent in relative terms to a level of 16.9 per cent in 1998 but remained above that for men which fell to 15.5 per cent. This continued the trend witnessed in 1997, which reversed the relationship seen in 1996, when numerous and severe border closures drove men = s unemployment rates to historically high levels. The regeneration of significant labour flows to Israel in 1997-1998 was a main factor behind the restitution of the historic pattern of generally higher unemployment rates among women. Likewise, the absolute number of unemployed men decreased more rapidly than that of women.

Overall, men filled over 92 per cent of the new job opportunities for WBGS Palestinians in 1998 relative to 1997. This may be explained by the fact that most new jobs created were in ICA and in construction, where women = s participation--for cultural and structural reasons--is insignificant. Another factor is the decline in agricultural and service employment where there are significant concentrations of women workers. A third factor may be the deceleration in growth of public sector employment--another major source of employment for women--relative to the last several years.



Table 13
Comparing Women's and Men's Labour Force Profiles in the WBGS,
Average 1997 and Average 1998
52

Ratios
AVG
AVG
Relative
LFPR
1997
1998
Change
Men
71.92%
72.20%
+ 0.39%
Women
12.30%
11.75%
- 4.41%
Full Employment
Men
68.52%
77.34%
+ 12.86%
Women
74.19%
80.14%
+ 8.02%
Underemployment
Men
10.37%
7.11%
- 31.43%
Women

Females

4.34%
3.07%
- 29.25%
Unemployment
Men
21.11%
15.55%
- 26.31%
Women
21.47%
16.90%
- 21.30%
Totals
Total
LFPR
Change
Men
467,066
501,344
+ 7.34%
Women
80,580
81,738
+ 1.44%
Full Employment
Men
319,941
387,900
+ 21.24%
Women
59,838
65,467
+ 9.41%
Underemployment
Men
48,453
35,573
- 26.58%
Women
3,465
2,501
- 27.82%
Unemployment
Men
98,671
77,871
- 21.08%
Women
17,276
13,848
- 19.85%

While women's formal labour market profile improved in 1998, it did not keep pace with improvements for men. In addition, successive labour force surveys suggest that women= s wages remain consistently below men = s and that average wages in the economic branches where women are disproportionately represented have below-average wages.53 This suggests continuing social and structural constraints on women = s formal labour force participation and employment opportunities.


4. Working Time and Wages

Table 14 indicates that the average employed Palestinian worked 1.3 per cent more days in 1998 than in 1997. The increase in work days during the first half of 1998 was 3.6 per cent, suggesting that the border closures in September-October had a negative effect on the annual average which was 22.6 days per month in 1998. Average days worked grew fastest among those employed in Israel (5.1 per cent) and fell in Gaza (-3.7 per cent). In the West Bank, where labour market improvements have exceeded those in Gaza, average days worked expanded by 2.9 per cent.


Table 14
Estimates of Monthly Days Worked and Real Daily and Monthly Wages for Employed WBGS Workers by Place of Work,
Average 1997 and Average 1998
54


Place of Work
AVG
AVG
Total
All Places of Work
1997
1998
Change
Monthly Days
22.33
22.63
+ 1.31%
Daily Wage (USD)
15.93
15.70
- 1.44%
Daily Wage (NIS)
54.83
59.53
+ 8.57%
Monthly Wage (USD)
354.97
354.92
- 0.01%
Monthly Wage (NIS)
1,222.72
1,347.09
+ 10.17%
West Bank
Monthly Days
22.67
23.33
+ 2.90%
Daily Wage(USD)
13.79
13.36
- 3.07%
Daily Wage (NIS)
47.50
50.71
+ 6.76%
Monthly Wage (USD)
312.77
311.80
- 0.31%
Monthly Wage (NIS)
1,078.07
1,182.93
+ 9.73%
Gaza Strip
Monthly Days
25.00
24.08
- 3.70%
Daily Wage (USD)
11.20
10.79
- 3.62%
Daily Wage (NIS)
38.57
40.90
+ 6.02%
Monthly Wage (USD)
279.30
259.79
- 6.99%
Monthly Wage (NIS)
961.93
984.58
+ 2.35%
Israel
Monthly Days
19.33
20.33
+ 5.13%
Daily Wage(USD)
25.09
22.88
- 8.83%
Daily Wage (NIS)
85.05
86.72
+ 1.96%
Monthly Wage (USD)
485.16
465.24
- 4.10%
Monthly Wage (NIS)
1,643.37
1,763.05
+ 7.28%

More job opportunities and fewer closure days in 1998 led to an increase in real daily and monthly wages. The average real NIS daily wage rate for a fully-employed WBGS worker increased by about 8.5 per cent to NIS 59.5, while the monthly wage increased by about 10.1 per cent to NIS 1,347. Due to the depreciation of the NIS in the second half of 1998, the average real USD daily wage rate declined 1.4 per cent to USD 15.70 while the real USD monthly wage stagnated at about USD 355.

Wage gains were unevenly distributed. Real daily NIS wages grew most rapidly for workers employed in the West Bank (6.7 per cent), followed by workers in Gaza (6 per cent) and Israel (1.9 per cent). The lower real wage rate growth in Israel may reflect the relative saturation of the Israeli labour market as the rate of unemployment among Israeli workers has grown in 1998. Real monthly NIS wages reflect changes in the daily wage and the average number of days worked per month. Average monthly wages of workers employed in the West Bank increased 9.7 per cent, those employed in Israel earned 7.2 per cent more and those employed in Gaza received an average of 2.3 per cent more on a monthly basis.

The better wage rate and monthly income performance for workers in the West Bank relative to Gaza--a trend which emerged in 1997--has widened the real wage gap between the two regions. West Bank average daily wage rates were, on average, 23.9 per cent higher than those in Gaza in 1998, a slightly larger differential than in 1997. However, the differential between wages earned in Israel versus those earned in Gaza narrowed to 112 per cent in 1998 compared to 120 per cent in 1997. The Israel-West Bank daily wage differential also declined from 79 per cent in 1997 to 71 per cent in 1998. Lower rates of unemployment in the WBGS, and slower daily wage growth in Israel, have reduced real wage differentials as between the two labour markets over the last year.


III. HOUSEHOLD EXPENDITURES and the LEVEL of LIVING

A. Household Expenditures

Due to declines in national and per capita income, real household spending in the WBGS generally declined in 1996 and 1997.55 Despite the relative economic recovery in 1997 and especially 1998, the downward trend has continued as indicated in Table 15. Real expenditures for a Palestinian household in WBGS decreased from a monthly average of NIS 2,634 in 1997 to NIS 2,579 in 1998--a decline of 2.1 per cent .56 There was virtually no change in average real basic expenditures relative to 1997, while secondary expenditures declined by 6.2 per cent.

Among basic expenditures, there were small real increases in housing and food expenditures (1 and 1.3 per cent respectively) and a 4.5 per cent increase in education expenditures. Expenditures on clothing and footwear, medical care, transportation and communication and taxes all declined. As education expenditures reflect tuition and fees, expanded attendance in more expensive private schools and colleges may account for the increase in this item. The significant decline in tax expenditures may be an indicator of lower income tax collections by the Palestinian Authority.57 On balance, average basic expenditures were nearly identical as between 1997 and 1998, with small increases in some items offset by small gains in others.



Table 15
Estimates of Real Monthly Expenditures on Basic and Secondary Commodities and Services in Seven-Persons Households in WBGS,
Average 1997 and Average 1998
58
(in constant 1996 NIS)

Total Change
Basic Expenditures
AVG 1997
AVG 1998
AVG 97-98
Housing
NIS 192
NIS 195
+ 1.08%
Food
1,021
1,034
+ 1.31%
Clothing and Footwear
216
202
- 6.35%
Medical Care
102
99
- 2.63%
Transportation and Communications
285
275
- 3.38%
Education
96
100
+ 4.53%
Taxes
9
5
- 48.29%
Basic Expenditures Sub-Total
1,921
1,910
- 0.55%
Secondary Expenditures
Household Operations
34
33
- 4.46%
Furniture and Utensils
113
103
- 9.12%
Personal Care
53
55
+ 4.08%
Recreation
74
80
+ 7.15%
Tobacco
124
115
- 7.10%
Other Cash Expenditures
315
283
- 9.98%
Secondary Expenditures Sub-Total
713
669
- 6.25%
Total Expenditures
2,634
2,579
- 2.10%

Among secondary expenditures, there were declines in households operations, furniture and utensils and tobacco declined between 4.5 - 7 per cent each. Expenditures on personal care and recreation increased by about 4 and 7.1 per cent respectively, which may reflect re-adaptation to relatively improved economic conditions. Other cash expenditures, the second largest category in overall expenditures, declined 9.8 per cent, accounting for about 70 per cent of the decline in secondary expenditures and more than 50 per cent of the drop in total expenditures.


B. A Note on "Other Cash Expenditures"

A closer examination of "other cash expenditures@ helps to clarify changes in living levels. The category consists of three components59 : 1) other non-food consumption expenditures, e.g. financial and legal services, advertisement fees, copy service, translation and printing, writing and drawing equipment, tickets for travel abroad, jewelry and precious stones; 2) remittances in cash given away, e.g. inter- households transfers of cash and; 3) other cash non-consumption expenditures, e.g. interest on loans, fees, taxes, fines and transfer payments such as zaka (Islamic tithing) and insurance payments.


Table 16
Estimates of Other Cash Expenditures by Component for Seven-Person Households in the WBGS,
Average 1997 and Average 1998

(in constant 1996 NIS)

Total
Other Cash Expenditures Components
AVG 1997
AVG 1998
Change
Other Non-Food Consumption Expenditures
NIS 140
NIS 107
- 23.68%
Remittances in Cash Given Away
87
74
- 14.51%
Other Cash Non-Consumption Expenditures
88
102
+ 15.42%
Totals
NIS 315
NIS 283
- 9.98%

Table 16 indicates that expenditures on "other non-food items" --the largest of the components-- declined 23.7 per cent. While the details on the sub-components of this item are unavailable, the decline may be due to reduced travel abroad and gold jewelry purchases, which probably form the bulk of expenditures in this category. Jewelry purchases have--in the absence of a banking system--traditionally served as one form of savings. Such traditional savings may be on the decline as the habit of using banks has increased--along with the development of the banking system--in the past several years. Thus increased saving through formal financial intermediaries, may be responsible for part of the decline in household expenditures in 1998. Higher economic growth estimates, lower unemployment, higher wages and continued growth in commercial bank deposits all suggest higher household incomes and saving levels.

The "remittances in cash given away" component of other cash expenditures declined by an average of 14.5 per cent in real terms in 1998 relative to 1997. As such expenditures mainly reflect seasonal gift-giving and informal social assistance provided between households, the decline may be due to improvements in economic conditions in the last year. Seasonally-adjusted estimates of this item indicate higher levels of expenditures in 1996, with successive reductions in 1997 and 1998.

"Other cash non-consumption expenditures" increased by 15.4 per cent, suggesting that households paid more interest, fees, fines, insurance payments and contributions to zaka in 1998 relative to 1997. Downward pressure on household incomes during 1996 and 1997 resulted in more informal and formal borrowing in order to maintain living levels--referred to as consumption smoothing--resulting in higher current interest payments. There may also be more use of private insurance services for automobiles in recent years, as well as more payments in fees for licenses and public services as the civil institutions of the PA have expanded.

It is important to note that while "other cash non-consumption expenditures" includes the interest payment on loans, it does not include the repayment of loan principal . Payments of principal are considered expenditures on goods received in a previous period--not as current expenditures.60 Thus, as households used their generally higher incomes to repay loans in 1998, they have reduced current expenditures. The repayment of loans may therefore account for part of the decline in household expenditures in 1998.

C. Household Wage Incomes and the Level of Living

The 10 per cent growth in average real monthly wage, and the 2.1 per cent decline in average real household expenditures has resulted in an increase in wage sufficiency--i.e. an average fully-employed wage-earners = relative ability to pay for household living expenses--in 1998. The average wage in 1997 could cover 63.7 per cent of basic household needs and 46.4 per cent of total household expenditures. These ratios rose to 70.5 and 52.2 per cent respectively in 1998.


Table 17
Estimates of Real Monthly Wage as a Proportion of Households Expenditures in Seven-Person Households in the WBGS,
Average 1997 and Average 1998
61
(in constant 1996 NIS)


1997 AVG
1998 AVG
Average Basic Expenditures
NIS 1,921
NIS 1,910
Average Total Expenditures
2,634
2,579
Real Monthly Wage
1,223
1,347
Real Monthly Wage as a Percentage of Basic Expenditures
63.7%
70.5%
Real Monthly Wage as a Percentage of Total Expenditures
46.4%
52.2%

The evidence in Table 17 therefore suggests that the level of economic distress has declined for households whose main source of income is wages. The notable increase in wage sufficiency is due to the fact that households continued to reduce their expenditures while real wages increased as a result of improvements in labour market conditions during 1998. It also implies that households, given the political uncertainties about the future, were saving more of additional labour income.


D. Consumer Price Inflation

Consumer price increases in the WBGS have moderated in the last several years. With a small economy with a heavy import bias, the WBGS has been affected by the disinflationary trend in the regional and global economies.62 In addition, moderated consumer price increases are symptomatic of the type of macroeconomic compression which the WBGS economy has experienced in recent years. Slower economic growth rates, high levels of unemployment and falling wages, reduced levels of consumer spending and underutilised productive capacity, have all contributed to lower inflation rates. The general inflation rate, which averaged 11.9 per cent per year during the 1993-1995 period, declined to 7.7 per cent in 1996 and 6.1 per cent in 1997. The inflation rate in the first half of 1998 was 1.1 per cent.63

The disinflationary trend was reversed in the second half of 1998. Under the impact of relative economic improvements and the sharp depreciation of the NIS/USD exchange rate in the autumn, the rate of inflation in the consumer price index (CPI) in the WBGS rose to 9.7 per cent for the year. The CPI rose by 10.3 per cent in East Jerusalem, 9.7 per cent in rest of the West Bank and by 9.3 per cent in the Gaza Strip. Given the Israeli economy= s integration in global markets, the depreciation of the NIS had an almost immediate effect on the prices of Israel = s imports of inputs and finished goods, many of which are sold to Palestinian consumers--a main market for Israeli exports.

The differences in inflation rates in the three areas, as indicated in Table 18, are due to the different characteristics of their markets. Inflation in East Jerusalem, the area whose labour and commodity markets are most closely integrated into the Israeli economy, tends to closely reflect Israeli inflation rates. Both the West Bank and Gaza Strip have more domestically produced goods and services whose costs reflect the lower wage rates in the two regions and, thus, have tended to have lower rates of inflation than those of Israel and East Jerusalem in recent years. Reductions in consumer spending in the West Bank and Gaza have also tended to reduce price increases from the demand side.

Unlike 1997, the West Bank CPI increased more rapidly than that of the Gaza Strip. This may be due to more rapid economic growth in the West Bank, in part due to significant flows of unofficial labour to Israel. However, the inflation rates for beverages and tobacco, housing, transport and communications and medical services were higher in Gaza than in the West Bank. Price increases for food, the largest single spending item, were the highest of any item in both regions. The prices of educational services and recreation increased in West Bank, while they declined in Gaza. The largest divergence in price inflation between the two regions were in textiles, clothing and footwear and miscellaneous goods and services (which include such items as personal care and restaurant meals).



Table 18
Inflation Rates for Major Commodity Groups in the WBGS, 1998 64
(Base period: 1996)

Major Groups
WBGS
West Bank
Gaza Strip
Food
14.53%
16.07%
14.07%
Beverages and Tobacco
12.14%
11.71%
11.70%
Textiles, Clothing and Footwear
4.55%
2.71%
8.51%
Housing
7.13%
6.02%
7.49%
Furniture, Household Goods and Services
7.60%
6.13%
2.11%
Transport and Communications
2.69%
1.42%
3.57%
Education
4.29%
5.60%
-0.21%
Medical Care
6.97%
6.14%
11.01%
Recreational, Cultural Goods and Services
4.60%
3.47%
-1.17%
Miscellaneous Goods and Services
11.46%
11.05%
5.84%
All-Item CPI
9.70%
9.70%
9.35%

Given the evidence, the major concern is the above-average increase in food prices which rose about 5 percentage points faster than the general price level. One common measure of living levels is the proportion of food in total household expenditures; the higher the proportion, the poorer the household. 65 The rapid rise in food prices places an added burden on household budgets and, given income constrains, households are spending proportionally more on food items. For example, as indicated in Table 15, food purchases accounted for 38.7 per cent of total expenditures in 1997 and increased to 40.1 per cent in 1998. By definition, this leads to reduced living levels.


E. A Note on Relative Price Dynamics: A Three-Year Overview

Consumer price inflation, as measured by increases in the CPI, reflects changes in the average price of a representative group of goods and services. However, specific goods and services may be subject to higher or lower than average inflation rates. Goods and services whose specific inflation rates are above the average CPI inflation have rising relative prices , the opposite being the case for goods whose prices grow less than average.

Changing relative prices reflect changes in underlying conditions of market supply and demand. Goods whose supplies are relatively limited for whatever reason,66 and/or for which there is growing consumer demand, tend to experience more rapid price increases, making them more expensive relative to other goods . Goods whose market supplies are growing, and/or the market demand for which is declining, tend to decline in relative price.

The evidence from three years of price data collected by the PCBS indicates that the all-item CPI-- that is the average price of a representative basket of goods and services--rose 25.38 per cent as between December 1995 and December 1998. However, there were substantial variations in the average price increases of specific goods and service as shown in Table 19. This is indicated by the percentage point differences in the price increases for the various groups in relation to overall CPI inflation. A positive term indicates a relative price increase; a negative term indicates a relative price decrease.

The relative prices of food, beverages and tobacco, clothing and footwear, furniture, and medical care rose while those for housing, transportation, education, miscellaneous goods and recreation declined. From the demand, or consumer, side of the market, relative price changes may be the result of--or lead to--reallocations of household expenditures between different items. For example, buying food, beverages, clothing and medical care has become relatively more expensive in the WBGS. This may be due to relative supply scarcities and/or relatively higher demand for such items. On the other hand, the relative price declines in the prices housing services (which include rents, and the prices of water, electricity and fuel) may be due to a decrease in the ability of consumers to rent homes and flats or an increase in the relative supply of such services.



Table 19
Cumulative Inflation Rates and Relative Price Changes for Major Commodity and Service Groups in the WBGS, 1996-1998
67
(with 1996 base period)

Percentage Point
Difference Relative
Inflation
to All-Item CPI
Major Groups
Rates
Inflation Rate
Food
27.95%
+ 2.57
Beverages and Tobacco
32.55%
+ 7.17
Textiles, Clothing and Footwear
31.13%
+ 5.74
Housing
16.48%
- 8.91
Furniture, Household Goods and Services
28.08%
+ 2.71
Transport and Communications
18.96%
- 6.41
Education
13.23%
- 12.15
Medical Care
29.15%
+ 3.76
Recreational, Cultural Goods and Services
16.89%
- 8.49
Miscellaneous Goods and Services
23.41%
- 1.96
All-Item CPI
25.38%
0.00

From the supply--or producer (vendor)--side of the market, relative price increases imply relative prosperity. Higher relative prices for food, clothing, furniture and medical care suggest that the businesses producing and/or selling such commodities (e.g. farmers, clothing merchants, carpentry shops, medical offices) may have experienced higher sales revenues, profits and/or employment. However, the relative price increases may reflect a decline in the number of producers and/or non-competitive practices (such as explicit or implicit price-fixing) which give greater pricing power to sellers. Lower relative prices for housing, transportation, education, personal care and recreation imply that the numbers of producers of such services may have increased, resulting in greater price competition.

From the point of view of potential investors, relative price increases may offer opportunities. Higher relative prices may indicate restricted supply and, therefore, relatively high profits to be earned in such activities. On the other hand, lower relative prices may be indicative of greater price competition and associated lower profitability. Likewise, rising relative costs of medical care may indicate more lucrative opportunities for medical professionals, while relatively lower education prices may suggest lagging salaries for teachers, professors and/or administrators in the schools, colleges and universities.


IV. LOOKING AHEAD

WBGS official labour flows to Israeli-controlled areas in the first quarter of 1999 averaged about 47,100 workers on a daily basis, about 3.5 per cent higher than during the same period in 1998 and slightly more than the 1998 average as a whole. The slower growth in labour flows may be the result of a recessionary trend in Israel. Commercial truck movements through monitored crossings during first- quarter 1999 were about 1.3 per cent below their first-quarter 1998 level. Exported truckloads were about 10 per cent below the first-quarter 1998 level while the number of imported truckloads was about 1 per cent higher on an average monthly basis. There were also no comprehensive closures imposed during first- quarter 1999.

These indicators suggest slower growth for 1999. Moreover, the end of the interim period in May 1999 will raise the level of uncertainty about the near future. This may hinder further progress in private investment which is sensitive to increased political uncertainty. Continued cooperation among the parties to the social and economic development process in the WBGS--the Palestinian Authority, the Government of Israel, donors, multilateral institutions and NGOs--will be crucial in instilling confidence in the private sector in the coming months and years.



Notes

1 Palestinian Authority (PA) Ministry of Finance "Report on Fiscal Developments in January-June 1998", 3 August 1998, p. 3. The MOF/IMF projections assumed a daily average of 35,000 workers employed in Israel; that household consumption would grow by about 4 per cent; that there would be limited growth in public investment; and weak private investment and 4-5 per cent growth in the value of imports and exports. The projections implicitly assumed that comprehensive and internal closures would be no more severe in 1998 than in 1997.

2 Ibid., p. 5.

3 PA Ministry of Finance "Report on Fiscal Developments in July-September 1998," 9 November 1998, p. 6. The more optimistic revisions were based on higher estimated labour flows to Israel, which averaged 44,500, as compared to the 35,000 assumed under the initial growth estimates and the assumption that this would lead to higher amounts of household consumption in the aggregate. Moreover, the MOF/IMF pointed to lower imports and higher exports, as well as higher donor disbursements, to support the estimates, despite a expected sluggishness in private investment and domestic employment. The upward revision may also have been due to fewer comprehensive and internal closures as compared to 1997.

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 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 Coordinator of Government Activities in the Territories (COGAT), Israeli Ministry of Defense, Tel Aviv.

5 See UNSCO Report 1 April, 1997, p. 48 and Local Aid Coordination Committee Secretariat, A Closure on the West Bank and Gaza, August- September 1997" 6 October, 1997.

6 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 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 .

7 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. Trade flows are estimated exclusive of weekends and officially celebrated holidays.

8 This method underestimates the value of Israel-WBGS 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, third-country exports to Israel which are re-exported to the WBGS. If this occurs, and the goods are registered as Israeli "exports," the PA receives only the VAT levied, not the customs revenues from the importation of such goods to Israel. Unregistered trade may account for more than 30 per cent of the value of Israel-WBGS trade flows based on information from MOF. Data and assistance provided by MOF. The PA is attempting to rectify this situation through negotiations with the Israeli authorities and by developing better customs procedures and administration. See MOF Report on Fiscal Developments in January-June 1998, 3 August 1998.

9 Nominal NIS values, rather than USD values, are used to avoid distortions caused by the depreciation of the NIS against the USD in 1998. Palestinian exports to Israel include all goods and services, other than the value of labour services provided by 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.

10 The lifting of quantitative restrictions, in accordance with the Israel-PA Protocol on Economic Relations (Paris Protocol) of 1994, has not removed other non-tariff barriers, such as extensive security, health and standards procedures. Information and assistance provided by the Technical Support Unit, Joint Economic Committee and the PA Ministry of Economy and Trade, March 1999.

11 USD values for registered WBGS-Israel trade were calculated using the average 1998 NIS/USD exchange rate of 3.81. Data on exchange rates are from PCBS Consumer Price Index Revised Series, various issues.

12 Data for third country goods entering the WBGS through Israeli ports pertain only to those passing through the Gaza Strip crossing points. The absence of customs borders between Israel and the West Bank makes estimating imports destined for the West Bank difficult. In addition to formal imports, a significant amount of imports enter the WBGS informally in the baggage of travelers. See UNSCO Report Autumn 1998, 25 October 1998. Based on unpublished data and assistance provided by the MOF.

13 Information on truckload exports to Egypt or to other countries via Israeli ports is not available.

14 As of April 1999, the PCBS had not released construction statistics for fourth-quarter 1998.

15 See UNSCO Report , Spring 1998, p. 7

16 See PCBS Construction Statistics: Building Licenses vol 2, issues 1-3 (1997); vol 3, issues 1-3 (1998). Data exclude the retroactive licensing of already existing buildings or parts of existing buildings. "QI" and "QIII" refer to the first and third quarters of the year respectively.

17 Most businesses in the WBGS are sole-proprietorships which are not registered with the Companies Registrar. Rather, sole proprietors are required to open VAT and income tax files with the MOF. Furthermore, there is a lack of data on the number of company bankruptcies which would provide a more complete picture of business formation. Thus, information in this section should be interpreted with care.

18 Private unlimited-liability companies consist of two or more proprietors whose financial liability in legal proceedings includes their assets in the company, as well as their personal assets. The registration fee is about USD 10. There is no minimum registered capital requirement for the registration of such companies. Proprietors are subject to income taxes according to their individual levels of income and on the basis of a graduated tax rate schedule. Such companies are typically small, family-owned retail trade businesses. Given the typically small capital base, such companies are more easily liquidated but involve higher risks, due to the unlimited liabilities of the partners.

19 Private limited-liability companies consist of two or more proprietors whose financial liability in legal proceedings is limited to company assets. The required minimum level of registered capital assets for such companies is USD 100,000. However, the authorities do not require registered capital to be paid up in advance, nor proof of capital assets. The registration fee is 0.5 per cent of the declared level of capital assets; at minimum, the registration fee is USD 500, considerably more than for private unlimited companies. The income tax on such companies, until end-1998, was fixed at 37.5 per cent of net profit and, as of January 1999, was reduced to 20 per cent. Most private limited-liability companies are small to medium-sized businesses engaged in manufacturing and wholesale trade. The significant registration fee and heavier tax liability tend to deter businesses with small capital assets, such as those in retail trade. The typically larger capital base, and the nature of economic activities of such companies, usually implies a more specialised management structure.

20 Public limited-liability companies consist of at least seven proprietors (there is no upper limit), whose financial liability in legal proceedings is limited to company assets. The required minimum level of registered capital assets for such companies is USD 1,000,000. The registration fee is 0.5 per cent of the declared level of capital assets; at minimum, the registration fee is USD 5000. Most public limited-liability companies are large-sized businesses engaged in manufacturing and services.

21 Information and assistance provided by the Companies Controller, West Bank and the Companies Registrar, Gaza, March 1999.

22 With information and assistance from the Companies Registrar, Gaza.

23 The first such law was promulgated in 1995. The revised version of the law was published in the Official Gazette in June 1998.

24 See PA Ministry of Economy and Trade "Law for the Encouragement of Investment," No. 1, 1998 (in Arabic).

25 Unpublished data and assistance from the Investment Department, Ministry of Economy and Trade, March 1999. Foreign investment in this table includes approved joint projects, i.e. those which are partly owned by non-residents of the WBGS.

26 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.

27 Data in this table exclude consumer credit, 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 loan programmes) via the banking system. Unpublished data and assistance provided by the Palestinian Monetary Authority (PMA), February 1999.

28 In part, the increase in the loan-to-deposit ratio is due to a PMA regulation (Circular No. A20-98, 6 May 1998) which requires banks to raise their loan-to-deposit ratio to a minimum of 40 per cent by end-1998. Information and assistance provided by the PMA.

29 The remainder of bank credit--about 6 per cent of the total--was directed toward bank acceptances and discounted bills. Information and assistance provided by the PMA.

30 Business expenditures, whether undertaken with internally-generated or borrowed funds are, by definition, investment activities.

31 Total value of loans excludes the purchase by banks of financial securities. Such purchases were valued at USD 10.7 million at end-1998.

32 Lending data were provided by the Palestinian Development Fund, UNRWA, the Save the Children Foundation, American Near East Refugee Aid, the Arab Center for Agricultural Development, Oxfam-Quebec, CARE International and the Business Support Centre of the Palestinian Agricultural Relief Committees, March-April 1999. Data and assistance provided by the respective organizations. In addition to these organizations, the YMCA maintains a lending program but no information was available for this report.

33 See UNSCO Report , Autumn 1998, 25 October 1998.

34 Palestinian Ministry of Planning and International Cooperation (MOPIC), Aid Coordination Department, 4 March 1999. Average annual disbursements during 1994-1996 were about USD 563.3 million. Disbursement figures include both grant and loan components of foreign assistance to the WBGS.

35 World Bank Group Press Release, Paris, 15 December 1997. Donors estimated that actual disbursements for 1998 would be USD 500-600 million.

36 MOPIC, Aid Coordination Department, 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 1998.

37 Unpublished IMF estimates, April 1999.

38 See Palestinian National Authority Palestinian Development Plan, 1999-2003, January 1999.

39 UNSCO estimates based on data from the PA Ministry of Labour. The estimated labour income loss from these closures is USD 38 million, based on average labour flow and wage rate data. This loss is equal to about 10 per cent of the value of donor disbursements in the WBGS in 1998.

40 See LAW: Palestinian Society for the Protection of Human Rights and the Environment Annual Report on Human Rights Violations in Palestine , Jerusalem, 1998, (in Arabic), p. 87.

1 Throughout this section, average labour force data for 1997 refer only to the first three quarters of the year since PCBS did not conduct a full labour force survey in the fourth quarter of that year.

42 Population data are de facto medium series estimates from PCBS Demography of the Palestinian Population , 1994 and include East Jerusalem. Such estimates are based on demographic and net migration assumptions made by PCBS in 1994 and should be treated as an upper limit. More recent evidence suggests slower rates of population growth. See UNSCO The Economy of the West Bank and Gaza Strip: A Retrospective on the 1990s and Future Challenges , Ad Hoc Liaison Committee, Frankfurt, 4 February, 1999.

43 Calculations are based on PCBS Labour Force Survey: Main Findings , Nos. 5-11. Labour force participation, full-employment, underemployment and unemployment rates are weighted by age group for persons 15-64 years of age. Population data used to calculate absolute magnitudes are middle-series estimates as given in PCBS Demography of the Palestinian Population , 1994.

44 Calculations are based on PCBS Labour Force Survey: Main Findings , Nos. 5-11. Demography of the Palestinian Population, 1994.

45 See UNSCO The West Bank and Gaza Strip Private Economy: Conditions and Prospects , February 1998.

46 Calculations are based on PCBS Labour Force Survey: Main Findings , Nos. 5-11 and population estimates in PCBS Demography of the Palestinian Population , 1994. Palestinian Authority employment estimates are from MOF "Report on Fiscal Developments," various, 1997, 1998.

47 Israeli-controlled areas include Israel and Israeli settlements and industrial zones in the occupied territories of the WBGS.

48 These estimates, like those in other parts of this section, include the Palestinian population of East Jerusalem who are included in the PCBS demographic estimates in Demography of the Palestinian People , 1994. Because the PCBS labour force surveys effectively exclude East Jerusalem, and because the proportion of the East Jerusalem labour force working in ICA is presumably higher than that for the rest of the WBGS, the estimate of total Palestinian employment in ICA is understated.

49 Calculations are based on PCBS Labour Force Survey: Main Findings , Nos. 5-11 and population estimates in PCBS Demography of the Palestinian Population , 1994. Palestinian Authority employment estimates are from MOF "Report on Fiscal Developments," various, 1997, 1998.

50 UNSCO Report , Spring 1998, 15 April 1998. It is important to note that the low female LFPR is partly the result of a tendency to undercount women engaged in informal activities where there are large concentrations of older, less educated women especially. Rema Hammami, "Gender Segmentation in Palestinian Economic Life," Palestinian Women: A Status Report , (Bir Zeit University: Women's Studies Program, 1997).

51 See UNSCO Report , Spring 1998, 15 April 1998.

52 Based on PCBS Labour Force Survey: Main Findings, Nos. 5-11. Labour force participation, full employment, underemployment and unemployment rates are weighted by age group for persons 15-64 years of age.

53 See PCBS Labour Force Surveys , Nos. 5-11.

54 Data are from PCBS Labour Force Survey Nos. 5-11. Nominal NIS daily and monthly wages were deflated using the average regional CPI with a 1996 base period. See PCBS Consumer Price Index , various issues. Real daily and monthly USD wages were derived using average exchange rates. Monthly wage incomes are calculated by multiplying the average daily wage rate by the average number of days worked per month.

55 See UNSCO Report , Spring 1998, 15 April 1998.

56 Unlike previous issues of the UNSCO Report, all household expenditure data are presented in NIS -- rather than USD -- terms. The change is necessitated by several considerations. First, nearly all wage payments and household expenditures in the WBGS are made in NIS. Second, the price indexes used to deflate nominal expenditures are based on NIS prices in the WBGS markets. Finally, converting expenditures to USD introduces exchange rate distortions into the estimates, a particularly severe problem in 1998 when the NIS lost an average of 9.8 per cent of its value against the USD. For approximate USD eqivalents, divide 1997 NIS data by 3.47 and 1998 NIS data by 3.81.

57 This is consistent with income tax revenue estimates for 1997 and 1998 as given in Ministry of Finance "Report on Fiscal Development, July-September 1998," 9 November 1998.

58 Expenditures data for the first and second quarter of 1998 are from PCBS Expenditure and Consumption Levels; Semi-annual Report (January-June 1998) , November 1998. Third and fourth quarter expenditures are from unpublished PCBS data. Original survey data, expressed in nominal JDs, were converted to NIS using the average JD/NIS exchange rates. Expenditures are deflated using the average CPI for each expenditure group with a 1996 base period. Taxes and other cash expenditures were deflated using the overall CPI. See PCBS Consumer Price Index (Revised Series), 1998.

59 See PCBS Expenditure and Consumption Levels.

60 Information and assistance provided by PCBS, April 1999.

61 Household expenditure calculations are from Table 15. Monthly wages are from Table 14.

62 See UNSCO Report , Autumn 1998, 25 October 1998.

63 See IMF Recent Economic Developments , February 1997 and UNSCO Report , Spring 1998, 15 April 1998 and Autumn 1998, 25 October 1998.

64 Inflation in this table is measured as the per cent increase in price levels for each commodity group as between December 1997 and December 1998. CPI inflation for the WBGS is a separate composite index--which includes East Jerusalem, the West Bank and the Gaza Strip. See PCBS Consumer Price Index , Revised Series, 1998, various issues. Fourth quarter data is unpublished.

65 See PCBS Expenditures and Consumption Levels.

66 Relative supply scarcity may be a result of, among other things, production bottlenecks, a limited number of sellers--e.g. oligopoly or monopoly--or policies which effectively limit the importation of goods.

67 Data in this table are derived from PCBS Consumer Price Index , Revised Series, various issues and unpublished data for the fourth quarter of 1998 using a 1996 base period. Inflation rates and relative price changes refer to the period December 1995-December 1998. Inflation rates include price changes in East Jerusalem markets.



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