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REPORT ON UNCTAD’S ASSISTANCE TO THE PALESTINIAN PEOPLE
Prepared by the UNCTAD secretariat
The realities on the ground have imposed new priorities, which require promoting dynamic synergies between rehabilitation, reconstruction and strategic development needs. This framework will guide UNCTAD’s technical assistance programme in the short and medium term. Despite increasing difficulties in the provision of technical assistance, UNCTAD was able to initiate a new research project in 2002, while also achieving concrete progress on five other capacity-building projects. In consultation with Palestine, the secretariat is examining possibilities of initiating targeted technical assistance in new areas: food security and commodity trade; trade logistics and facilitation; trade promotion; trade policy and preferential market access; and investment promotion.
I. DEVELOPMENTS IN THE PALESTINIAN ECONOMY, 2001-2002
Palestinian economy (West Bank and Gaza Strip) – Key indicators 1994, 1997-2001
Sources : Data for 1994 are from Palestinian Central Bureau of Statistics (PCBS), National accounts, 1994; Data for 1997-1999 from PCBS, Statistical abstract of Palestine No. 2 , November 2001; Data for 2000-2001 are from PCBS, Impact of the Israeli Siege on National accounts indicators , preliminary report, April 2002, while trade indicators for the period 1999-2001 are estimates based on Vadirieso, R.A. et al. West Bank and Gaza: Economic Performance, Prospects, and Policies , Washington, D.C., IMF, 2001, Table 4.1, p.85, and on Economist Intelligence Unit, Country Report: Israel and the Palestinian Territories , April 2002. Fiscal data are based on Alnoso-Gamp, P. et al. W est Bank and Gaza: Economic Development in the Five Years Since Oslo , Washington, D.C., IMF, 1999 and Vadirieso, R.A. et al. “ West Bank…”, while data on ODA is based on Alnoso-Gamp, P. et al. “West Bank…” andWorld Bank, Fifteen Months - Intifada, Closures and Palestinian Crisis , West Bank and Gaza Resident Mission, Palestine, March 2002.
2. A cycle of “de-development”
9. Direct economic losses are compounded by the profound changes that have taken place in the functioning of economy as a result of the closures, which are unlikely to be reversed easily once stability is attained. In particular, the purchasing power of the Palestinian population has been depleted as households have adopted different coping strategies to withstand the reduced levels of income. This has entailed the rationalization of consumption, the suspension of payment for many public services, and increased recourse to savings and other assets, including selling of property. By 2002, it appears that the protracted conflict had exhausted those coping strategies, rendering dependency on emergency support in the form of food packages and financial support more common. This has led to the expansion of the informal economy, especially in the West Bank villages and to some extent in the Gaza Strip, as impoverished households have resorted to survival activities to maintain their subsistence. 18
10. The situation prevailing in the occupied Palestinian territory is a telling example of “complex humanitarian emergencies” associated with conflicts, where coping strategies are exhausted so that vulnerability is greater and the impact on the productive capacity, institutional set-up and confidence in the economy is severe. 19 Prolonged occupation and the protracted economic crisis since 2000 have set the Palestinian economy on a path of “de-development”, 20 posing threats to its short and medium-term viability, with serious ramifications for the saving-investment gap, the trade balance and public services.
11. While the private sector and most households have exhausted their savings, declining household incomes and the economy’s weakened supply capacity means that domestic savings will fall in absolute terms in the coming few years. Total market capitalization is estimated to have dropped by 40 per cent between 2000 and 2001. 21 In the absence of political stability, private investment will continue to decline, while restrictions on mobility will discourage investments in activities requiring considerable amounts of capital and those with significant transport requirements.
12. It is unlikely that efforts to reactivate exports will generate positive results in the medium term, especially in view of enterprises’ weakened production capacity, prohibitive transport and transaction costs, and the difficulties of getting access to finance for local enterprises seeking to resume their activities. The banking sector is becoming more stringent in offering credit to local enterprises, while private lending from abroad will be even more difficult with the loss of confidence in the Palestinian economy.
3. Impact on PA institutional capacity
13. The destruction of public infrastructure aside, the PA’s administrative and planning capacity has been seriously undermined by heightened uncertainty, repeated disruption of government services and the loss of part of its institutional memory. The databases of a number of governmental departments were subjected to considerable losses, with computers, software and vital records either damaged or stolen in the key Ministries of Education, Interior and Finance. The escalating budgetary pressures are also threatening PA payrolls and operating budgets, while the tight closure prevents most staff from reaching work places.
14. The PA is awkwardly placed to confront the threat of maintaining basic services because it is already effectively bankrupt and increasingly dependent on donor aid to maintain current expenditures. The real threat to the PA’s capacity to maintain basic services in both the immediate future and the medium run stems from its weakened revenue-raising capacities, the significant erosion of the economy’s tax base and the diminishing income from fees on public services. Furthermore, the inability of the PA to access tax revenues collected on its behalf by Israel meant an additional loss of $507 million by the end of February 2002. 22 PA tax, customs and excise revenues declined on a monthly basis by almost 80 per cent from $88 million in the third quarter of 2000 to $20 million in 2001. This raised the budget deficit from $19 million in September 2000 to $73 million in December 2001, with a much larger deficit expected for 2002. This has increased the pressure for austerity measures by the PA to rationalize expenditures, including cutting salaries, delaying payment of bills and borrowing from commercial banks. By the end of 2001, the PA had accumulated around $430 million in arrears, mainly to commercial banks, with the result that it can no longer resort to domestic borrowing to finance its activities. 23 This means that the PA will be fully dependent on donor support for maintaining its activities at least over the current fiscal year. To the extent that the donor community shifts to loan-based aid, this would increase debt obligations and could further strain the PA’s ability to maintain social services. Already, PA public debt has risen from $600 million in 1999, equivalent to 13 per cent of GDP, to $1.2 billion by mid-2002 24 , equivalent to around 34 per cent of projected GDP, 25 a proportion which is likely to register further increases in coming years in view of declining GDP and new public debt obligations.
4. Impact on official development assistance
15. Over the period 1994-June 2000, the Palestinian economy received foreign aid amounting to $3 billion, equivalent to around 14 per cent of GNI per annum and $175 per capita. 26 Indeed, donor disbursements over the period 1994-1998 of $2.3 billion exceeded the $2.2 billion pledged for that period at the first donor conference held in 1993. Almost 82 per cent of aid was provided in the form of grants, with the members of the European Union together providing 42 per cent of total aid and the United States of America standing as the largest single donor, with 15 per cent of total aid. 27 The allocation of these funds reflects a gradual shift towards funding development projects in physical infrastructure, health and education, while budgetary support dropped from 31 per cent of total aid in 1994-1995 to 4 per cent in 1999, only to rise again sharply since. 28
16. Since 2000, increasing damage has been inflicted upon donor-funded infrastructure projects, an example being the destruction of facilities at Gaza International Airport and the Gaza Seaport project. 29 Meanwhile, the humanitarian crisis is diverting donors’ attention again to budgetary support and emergency assistance, which absorbed around 80 per cent of disbursements over the period September 2000-December 2001. This crisis has also been accompanied by an increase in foreign aid. Total disbursements rose by 93 per cent in 2001 and commitments by 77 per cent compared with 1999, bringing total disbursement to $929 million by the end of 2001 and commitments to $1,228 billion. These funds were mainly grant-based, with the League of Arab States and the European Union providing 47 per cent and 26 per cent of total aid respectively and the United States of America providing 20 per cent. 30
1. Food security and commodity trade
52. Subject to resources availabilities, UNCTAD is ready to assist the PA in the design of: (i) financing mechanisms for farmers who are not involved in export activities; (ii) export/import finance facilities; (iii) warehouse and related trade facilities; and (iv) training activities in international procurement and trade of strategic food commodities.
2. Trade logistics and facilitation
53. In the light of the findings of an UNCTAD study on alternatives for the PA in regional maritime transportation, the secretariat could further examine options for routing Palestinian trade through neighbouring seaports in the region, as well as the feasibility of establishing a temporary maritime landing facility in Gaza. At the same time, UNCTAD can advise the PA on installing an automated system for security clearance of goods at the borders with Egypt and Jordan so as to reduce clearing time and damage caused by security control operations.
3. Trade promotion
54. UNCTAD will continue to assist Paltrade/TPPR in preparing and disseminating information on export opportunities, especially at the regional level. This includes linking Palestinian enterprises with regional export promotion agencies that are ready to assist Palestinian exporters in regional and global markets. Moreover, in collaboration with ITC, UNCTAD can assist the PA in developing appropriate strategies for improving supply-chain management.
4. Trade policy: preferential market access
55. UNCTAD could assist the PA in developing an agenda for obtaining the special and differential treatment accorded to the least developed countries. The need to extend such treatment to the occupied Palestinian territory was recognized by the General Assembly as early as 1988 in resolution 43/178, while the economy’s development continues to meet structural impediments to growth, many of which are common with LDCs. Meanwhile, as Palestine considers the possible benefits of observer status at the WTO, the UNCTAD secretariat’s previous advisory services to the PA in the area of trade policy can serve as a useful basis for further technical assistance that it may require.
5. Investment promotion
56. The Palestinian Investment Promotion Agency (PIPA) is developing new approaches to respond to the private sector’s emergency needs and has requested UNCTAD’s assistance in revising the PIPA business plan and in developing some of the agency’s core programmes. UNCTAD has also expressed its readiness to assist PIPA in developing a consistent framework for stimulating domestic investment and attracting foreign direct investment.
2. World Bank, "Fifteen Months - Intifada, Closures and Palestinian Crisis", West Bank and Gaza Resident Mission, Palestine, March 2002.
3. Palestinian Central Bureau of Statistics (PCBS), "Impact of the Israeli Measures on the Economic Conditions of Palestinian Households on the Eve of Israeli Incursion", 4th round, January-February 2002, Palestine, April 2002.
4. According to PCBS, "Labour Force Survey", first round, January-March 2002, Palestine, the number of Palestinian workers in Israel ranged between 125,000 and 130,000 workers on the eve of the conflict. This number has since declined by over 50 per cent, as only 50,000 workers now work in Israel, according to the World Bank, "Fifteen Months...".
5. See Security Council resolution 1402 (2002) of 30 March 2002 and General Assembly resolution ES 10/10 of 7 May 2002.
6. Since March 2002, Gaza has been divided into three areas, while the West Bank cities have been separated by permanent checkpoints.
7. PCBS, "Impact of the Israeli Siege on National Accounts Indicators", preliminary report, Palestine, April 2002.
8. PCBS, "Impact of the Israeli Siege...".
9. The Local Aid Coordination Committee (LACC), press release, Jerusalem, 15 May 2002.
10. The Palestinian Economic Council for Development and Reconstruction (PECDAR), "People Under Siege: Palestinian Economic Losses, September 2000-September 2001", Palestine, September 2001. By the end of February 2002, the Israeli forces had destroyed 31,283 hectares of agricultural land and 485,665 trees, leaving 5,243 farmers without any source of income. PA Ministry of Agriculture, "Report on Palestinian agriculture losses due to recent Israeli actions: September 2000- February 2002", Palestine.
11. World Bank, "Fifteen Months. . .".
12. PCBS, "Monthly Consumer Price Index", Quarterly Reports, different issues, Palestine, 2000-2001.
13. UNCTAD, "Cooperation between the Palestinian Authority, Egypt and Jordan to entrance subregional trade-related services", UNCTAD/GDS/SEU/3, Geneva, 14 February 2000. For further discussions on transport arrangements and their impact on transaction costs, see R.A. Vadirieso, et al. West Bank and Gaza: Economic Performance, Prospects, and Policies, Washington, D.C., IMF.
14. The figure for Palestinian trade deficit in 2001 is based on estimates in R.A. Vadirieso, et al. "West Bank and Gaza...", table 4.1, p.85, and Economist Intelligence Unit, "Country Report: Israel and the Palestinian Territories", April 2002.
15. PCBS, "Monthly Consumer Price Index".
16. This includes 22 banks and 115 branches.
17. Palestinian Monetary Authority (PMA), Statistical Bulletin, No.40-42, Palestine, 2001.
18. UNSCO, "Paying a Price: Coping with Closure in Jericho, Gaza City and in Two Palestinian Villages", Gaza, January 2002.
19. See Fitzerald, S., War and Underdevelopment, Oxford, Queen Elizabeth House, 2001, Chapters 1 and 9.
20. Sara Roy first used this term to analyse the economic performance of the Gaza strip in "The Gaza Strip: The Political Economy of De-Development", Washington, D.C., Institute for Palestine Studies (IPS), 1995.
21. Center for Private Sector Development (CPSD), "The state of the private sector", Palestine, 2001.
22. These taxes include import taxes collected by the Israeli authorities on behalf of the PA under the clearance system.
23. Total budget commitments from donors amounted to $589 million by the end of 2001. World Bank, "Fifteen Months....
24. MAS, MAS Economic Monitor, No.6, April 2000; Al-Ayyam, "Interview with PA Finance Minister Salam Fayyad", Ramallah, 6 July 2002 (in Arabic).
25. According to PCBS, GDP is expected to decline by 4 per cent by the end of 2002 as compared to the previous year, to stand at $3,574 billion. PCBS, "Impact of Israeli...".
26. PA Ministry of Planning and International Cooperation (MOPIC), "Quarterly Matrix on Foreign Aid", different issues, Palestine.
28. World Bank, "Aid Effectiveness in the West Bank and Gaza", West Bank and Gaza Resident Mission, Palestine, June 2000.
29. These projects are funded by the EU, which has accrued US$ 14.7 million in losses as a result of the destruction of its project facilities. World Bank, "Fifteen Months...".
31 PCBS, General Education Indicative 1994/1995-1998/1999, Palestine, 2001.
32. In 1999, the PA launched the "National Economic Dialogue" on such issues as identifying the development interests of the private sector and the needed policies for enhancing the role of the private sector in economic development. The PA has also developed a strategic framework for guiding legal reform, "Rule of Law Strategic Development Plan". By mid-2000, the PA had enforced 40 laws with a direct bearing on the economic on business spheres. See UNSCO, Rule of Law Development in the West Bank and Gaza Strip: Survey and State of the Development Effort, Gaza, May 1999.
33. See UNCTAD. "The Palestinian economy: achievements of the interim period and tasks, for the future". UNCTAD/GDS/APPU/I, Geneva, 19 January 2001; and, World Bank, "West Bank and Gaza: Strengthening Public Sector Management", West Bank and Gaza Resident Mission, 1999.
34. The PA may share the attributes of a "soft state" in that it lacks the institutional capacity to push through its development agenda. See Myrdal, G., Asian Drama: An Enquiry into the Poverty of Nations, New York, Pantheon Books, 1968, chapters 2, 19 and Appendix 4.
35. R.A. Vadirieso et al., "West Bank and Gaza. . .", p.22.
36. The underpinnings of the PA reforms are outlined in the "Reform Charter" that was presented by the Palestinian Legislative Council (PLC) to the President in mid-May 2002 following the approval of the Basic Law (constitution) and the judicial legislation. Jerusalem Times, May 2002, Jordan.
37. UNCTAD. "The Palestinian economy...".
38. Comparisons between sectoral shares of agriculture and other sectors for the pre- and post-1994 periods should be made with caution owing to different statistical methodologies and measurement criteria applied by the Israeli Central Bureau of Statistics and PCBS, respectively.
39. Under the terms of existing accords, Gaza International Airport is not allowed to operate cargo flights.
40. Basim Makhool, "Economic growth and employment in the West Bank and Gaza Strip", Arab Economic Journal, 27:11, Spring 2002.
41. See UNSCO, "Report on the Palestinian Economy", Gaza, Spring 2001; and, Palestinian Securities Exchange (PSE), "Market Activity Report: Fourth Quarter ", 2000 at http://www.p-s-c.com.
42. This has been fully covered in previous UNCTAD studies, in particular UNCTAD. "The Palestinian economy and prospects for regional cooperation". UNCTAD/GDS/SEU/2, Geneva, 30 June 1998; GDS/SEU/3 and GDS/APP/1.
43. UNCTAD. "The Palestinian economy...".
44. For detailed discussions on the currency issue and future Palestinian monetary arrangements, see: UNCTAD. "Prospects for sustained development of the Palestinian economy: strategy and policies for reconstruction and development". UNCTAD/ECDC/SEU/12, Geneva, 21 August 1996; "Cooperation..."; and, "The Palestinian economy....".
45. This highly inefficient and costly "back-to-back" system, in operation at a number of crossing points for many years, is widely regarded as a major impediment to trade capitalization. UNCTAD. "Cooperation...".
46. See Hoddinott, J., "The shift from development to emergency assistance and its impact on poverty and nutrition: a conceptual framework", Washington, D.C., International Food Policy Research Institute, 1999.
47. UNCTAD's Macroeconomic Simulation Framework (MSF) of the Palestinian economy estimates that such a path can be attained with a significant infusion of external transfers. in the form of investment and aid. Over an 11- years projection period, this reconstruction and reform program would call for a total of around $16 billion in net transfers or an average of $1.4 billion per annum. This is equal to some $10 billion over and above current flows of external aid and investment.
48. World Bank, " Aid Effectiveness...".
49. See Buchanan-Smith and Maxwell, "Linking relief and development: an introduction and overview", Institute of Development Studies Bulletin (IDS), Vol. 25; Bruck, T., Fitzerald, S., and Grisby, A., "Enhancing the private sector contribution to post-war recover in poor countries", Working Paper no. 45(1), Oxford: Queen Elizabeth House, 2000.
50. For a thorough analysis of market dynamism and the evolution of world trade over the last two decades, see UNCTAD, Trade and Development Report, 2002, United Nations publication, New York and Geneva, chapter 3.
51. Shafaeddin, M., (2000), "Free Trade or Fair Trade? An enquiry into the Cause of Failure in Recent Trade Negotiations", UNCTAD Discussion Paper, No.153, Geneva, December, p.20.