Palestine Economy

Palestine Economy

Subchapters:

  • Basic data
  • Public finances and the state budget
  • Banking system
  • Tax system

Basic data

The Palestinian economy has been stagnant for a long time, and in 2020 it was also deeply affected by the crisis caused by the COVID-19 pandemic, as a result of which the GDP of Palestine fell by almost 12% compared to the previous year. There was a significant recovery in 2021, with 6.5% GDP growth exceeding experts’ expectations. In the following years, growth is expected to slow down to 3.3% of GDP in 2022 and 2.9% in 2023. State debt is relatively low in relation to GDP, and in 2021 it even fell slightly to approx. 22% (compared to 24, 2% of GDP in 2020). Palestine does not have access to loans on international financial markets, and the problem of Palestinian debt is both its sudden increase, which occurred in connection with the pandemic in 2020, and also the high level of indebtedness of domestic banks, which, moreover, continues to increase. Further loans from domestic banks could threaten the stability of the banking sector. The budget for 2022 envisages a deficit of more than USD 1 billion (approx. 6.4% of GDP). The inflation rate in 2020 was 1.2%, in 2022 it should reach 5%, according to the EIU’s estimate, in connection with the global increase in food and energy prices. Unemployment has long been high in Palestine, reaching 25% in 2021. The situation is significantly different in the West Bank, where unemployment stood at 13%, while in Gaza it was 45%. Women and young people, especially graduates, are more affected by unemployment. After a slump in 2020 related to the pandemic, most sectors except tourism surpassed 2019 levels in 2021. Tourism saw a slow recovery only after the opening of Israel’s borders in early 2022.

Services accounted for the largest share of GDP, which accounted for 79.7% in 2019, followed by industry at 13% and agriculture at 7.3%. The industry is mainly consumer. The trade balance is in deficit, by far the largest trading partner is Israel, where more than 50% of the goods imported to Palestine come from and where around 85% of Palestinian exports go, with a significant part being re-exports (especially with regard to imports to Palestine). Tourism plays a significant role in the Palestinian economy (especially in Bethlehem Governorate). The main export item is building and facing stone, as well as agricultural and food products, plastics and their products, steel and steel products. The largest items of Palestinian imports are food and food products (approximately 30% of total imports), fossil fuels, construction materials, machinery or automobiles.

Pointer 2019 2020 2021 2022 2023
GDP growth (%) 1.4 -12 6.2 3.3 2.9
GDP/population (USD/PPP) 3,039 3,319 3,252 3,285 ON
Inflation (%) 1.6 -0.7 1.2 5.0 3.6
Unemployment (%) 25.4 25.9 25 24 23
Export of goods (billion USD) 1.7 1.8 1.8 ON ON
Import of goods (billion USD) -7.2 -6.4 -6.8 ON ON
Trade Balance (Billion USD) -5.5 -4.6 -5 -5.5 -6
Industrial production (% change) 3.9 -12.0 14.1 ON ON
Population (millions) 5 5.1 5.3 5.4 5.5
Competitiveness ON ON ON ON ON
OECD export risk ON ON ON ON ON

Source: EIU, OECD, IMD

Public finance and state budget

Public finance 2021
State budget balance (% of GDP) -4.7
Public debt (% of GDP) 22
Current account balance (billion USD) -0.7
Taxes 2022
AFTER 15%
F.O 5-15%
VAT 16%

Public finances are in a state of deepening crisis. The recovery after the pandemic in 2021 brought more money from taxes and customs, on the other hand, income from foreign donors continued to fall, and Israel decided from August 2021 to deduct from Palestinian income an amount that, according to it, corresponds to the funds paid by the PNS to the families of terrorists. The budget has been in deficit for a long time, spending is largely mandatory, and if the government does not reform spending or find new sources of financing, the crisis will continue to deepen.

In the long term, imports exceed exports by three to four times, and the balance of payments deficit reaches more than 30% of GDP. Foreign exchange reserves according to the Palestinian Monetary Authority (PMA), which performs some of the functions of the central bank (in a situation where Palestine does not have its own currency), have been steadily growing since 2016, currently the PMA has reserves of approximately USD 860 million (5% of GDP ). Despite deficit budgets, the national debt in relation to GDP is relatively low. As a result of the crisis in 2020, however, there was a jump, from 1to 24.2% of GDP. In 2021, as the economy grew, the debt-to-GDP ratio fell to 22%, although in absolute terms it increased by 2% year-on-year. The 2022 budget also foresees a deficit of more than USD 1 billion (i.e. 6.4% of GDP). It is assumed that further debt increases will be more difficult than before. Gross foreign debt reached USD 1.319 billion at the end of 2021 against a total debt of USD 3.85 billion, representing a slight year-on-year decrease. Domestic banks are by far the largest creditor to the public sector, and their ability to provide additional funding to the government is limited – if the government were to become unable to pay its debts, the banking sector would be at risk. According to data from the World Bank, at the end of 2020 government debt already reached 22.5% of the total amount of loans provided by Palestinian banks, together with loans from civil servants, this share rose to 40%. The current account balance reached a deficit of $1.37 billion in 2021, according to data from the Palestinian Monetary Authority. This deficit is primarily caused by the negative balance of foreign trade in goods (of approx. 85%), and to a lesser extent in services.

Banking system

Palestine does not have its own currency and thus has no tools to influence monetary policy. Israeli shekels (ILS) are used by default, in addition to US dollars (USD) and Jordanian dinars (JOD). The development of interest rates reflects the events in Israel, namely the monetary interventions of the Bank of Israel. The Palestinian Monetary Authority (PMA) monitors and publishes quarterly bank interest rates on loans and deposits in the above currencies. Interest rates on deposits at the end of 2021 were slightly above 2% in all monitored currencies, while interest rates on loans ranged between 5 and 7% depending on the currency.

The Palestinian banking system can be classified as moderately developed. Supervision is entrusted to the PMA, which, in coordination with the IMF and the World Bank, as well as the Central Bank of Israel, works to improve regulation. The capital minimum was increased from USD 35 million to USD 50 million in 2010, measures were taken against fluctuations in the financial markets. Banking inclusiveness and the system of providing loans and leasing are developing. In Gaza the PMA has no control, the financial flows to Gaza are effectively controlled by Israel. The non-banking financial sector, including insurance companies, is regulated by the Palestine Capital Market Authority (PCMA).

There are currently 13 banks operating at PAÚ, namely seven local (3 of them Islamic) and six foreign (5 Jordanian, 1 Egyptian). Some of them also have branches in Gaza, while not all of them operate in all regional centers of the West Bank. The largest banks are Bank of Palestine and The National Bank, which is also the fastest growing bank in the Palestinian market. The largest foreign bank is the Jordanian Arab Bank. All three provide all the basic services of modern banking, including export guarantees and letters of credit. Among the five largest Palestinian banks are also two Islamic banks – Palestine Islamic Bank and Arab Islamic Bank.

Tax system

The collection of taxes, duties and fees at PAÚ is governed by the so-called Paris Protocol from 1994, which is part of the Oslo Agreements. The system is linked to the Israeli one and does not allow PNS to make major rate changes. PNS collects taxes at PAÚ, while Israel collects customs duties and taxes on imports from third countries, and after deducting deductions and fees, transfers the funds to PNS accounts. The PNS is struggling with low efficiency in tax collection, but in recent years this negative trend has been reversed. Due to the Hamas government there, the PNS has no income from the Gaza Strip. For political reasons, it happens that Israel withholds part of the funds or the PNS temporarily refuses to take them over (most recently in 2021). Due to the existence of a quasi-customs union, customs duties are not applied to imports from Israel, and as a result of the current practice, when most goods from third countries are re-exported from Israel at the PAU,

The following taxes are applied to PAÚ: income tax of natural and legal persons, tax on foreign dividends, VAT, consumption and import tax, property, real estate, gift and inheritance tax. The tax period corresponds to the calendar year. Personal income tax is progressive – incomes up to 75,000. ILS are taxed at 5% per year, income from 75 to 150 thousand. ILS 10% and over 150 thousand ILS 15%. Tax rebates can be applied to the taxpayer, when purchasing real estate, studying, transportation, etc. Tax is paid by the employer for employees, employees with income outside of employment and self-employed persons submit a tax return, the tax applies only to income in Palestine. The tax applies to all natural persons who resided in Palestine for at least 183 days in a given year. With some exceptions, legal entities are taxed at 15% of net profit. New investors can receive tax incentives (tax reductions for a certain period) subject to the approval of the Palestinian Investment Promotion Agency PIPA. The standard amount of VAT is 16%, some transactions are exempt from VAT payment. The amount of VAT must not differ by more than 2% from the VAT in Israel. A number of imported products (for example, motor vehicles) are also subject to excise duty, which can reach up to 95%.

The Paris Protocol is outdated, efforts to update it have been going on for a long time, but the proposed amendments are rather minor (they mainly concern the lists of imported goods in the annexes to the protocol), so fundamental changes to the tax system cannot be expected.

Palestine Economy