Contrary to the impression sometimes created by media reports, the Palestinian economy did not collapse. After five to six years of prosperity and growth at enviable rates in the latter half of the 1990s, the economies of the West Bank and Gaza Strip were hit hard by the outbreak of the intifada at the end of September 2000. That blow was absorbed, however, and like the Israeli economy, this year the Palestinian economy is showing clear signs of recovery.
Last Shabbat, two economists from the International Monetary Fund held an orientation seminar in Dubai (the site of the fund's annual conference) for journalists covering the Palestinian economic situation. The main conclusion reached by Karim Nashashibi and Adam Bennett, the two economists in charge of the portfolio for the West Bank and Gaza, is that the closures and other restrictions imposed on the territories harmed the Palestinian economy less than people tend to assume.
Conventional estimates suggested that, during the three years of the intifada, the gross domestic product of the Palestinian economy shrank by 50 percent or more. Based on various information sources, Nashashibi and Bennett figure the damage to the GNP was 30 percent or less.
Even that is a very heavy blow (the Israeli GDP shrank by only 1 or 2 percent over the same period due to the recession, and the cries of the crisis rise heavenward), but all in all the Palestinians have proved their durability in the face of economic hardship far beyond what could be expected considering the closures and roadblocks.
Economic activity continues, even with its limited scope, thanks in large part to the continued functioning of the banking system, which continuously provided services under harsh conditions. Branches opened for a few hours during the lifting of curfews and even on holidays. The banks did not fall on hard times despite the fact that close to a third of the credit they extended was not repaid on a regular basis. That is a high rate, but the unpaid debts account for a relatively small share of the banks' total assets.
It turns out that during the prosperous years before the intifada, the banks maintained an extremely conservative credit policy, thanks to which they were not overexposed when the situation deteriorated (unlike the Israeli banks, which extended credit recklessly during the good years and found themselves in trouble when the recession hit).
This policy somewhat clarifies the matter of Yasser Arafat's secret funds. In order to illustrate the improvements in the money management thanks to the work of Palestinian Finance Minister Dr. Salam Fayad, Nashashibi provided details of the $900 million that were "diverted" in the late 1990s from the Palestinian Authority's revenues (mainly the transfer of taxes that Israel collected for the authority) to a bank account controlled by Arafat.
In 1996, close to $700 million of this sum was invested in the PA's "business activities," which were identified and audited by international auditors. The fate of the other $200 million is still under investigation. The PA continues to provide services to the education system (a million students) and the health system (22 hospitals) and to pay the salaries of some 130,000 public employees (including security bodies) from a budget that is based mainly on transfers from the Israeli government - customs and VAT collected for the PA - and support from Arab governments. The latter donated about $500 million in each of 2001 and 2002.
The functioning of the PA effectively depends on the continuation of these transfers (the money from the "donor countries" is meant for investments). This year, the PA's budget has a deficit of $250 million, and it is still unclear how this will be covered. The cost of rehabilitating the infrastructure damaged in the past three years in the West Bank and Gaza is estimated at $1 billion.
The IMF representatives praised the coordination and cooperation with the Israelis working opposite them and are promoting the concept of the tremendous gains that the residents of the West Bank and Gaza can achieve from cooperating with the "enormous market" adjacent to them.
Such gains could be mutual, even when taking into account the big gap between the two economies (a GDP of $5 billion versus a GDP of $110 billion). Above all, however, one must hope - and act accordingly - that the orderly functioning of the PA in all civilian matters will continue, and that no administrative vacuum is created that will cause the responsibility for the daily lives of 3 million Palestinians to revert to Israel.
