Frisky Palestinian Economic Growth Hides Worrying Reality

Despite the positive spin of most news stories showcasing economic growth in Ramallah, the Palestinian economy has hit a tight spot and is about to plunge.

The Palestinian cellphone company al-Wataniya, one of the biggest players in the Palestinian economy, has kicked off a splashy new ad campaign during the month-long festival of Ramadan.

"With a sense of kindheartedness and generosity, Ramadan will be upon us again," is the company's new advertising slogan. To make good on its new catchphrase, the company is offering savings on its subscribers’ regular calling plans, rolling back fees, proffering free incoming calls in Jerusalem ("in order to encourage visits") and giving out free downloads of religiously-themed music and quotes from the Koran.

It certainly is a welcome consolation gift to the West Bank's 2.5 million Palestinian residents, many of whom struggle to cover the basic necessities during the most expensive month of the year. During the month of Ramadan, average families’ wallets groan under the traditional burden of hosting regular, sumptuous evening meals that, every night for four long weeks, cap off a long day of fasting.

And in the Palestinian Authority, which employs 160,000 workers, this years’ celebrations are also tempered. June salaries were broken into two installments, the second of which remains on hold until Saudi Arabia fulfills a contribution pledge of $100 million.

But what will happen the next month?

"Just because we can’t pay salaries doesn’t mean we’re going to start layoffs," Nabil Kassis, the Palestinian finance minister, told the magazine Arabian Business in an interview. His as-yet-unsubstantiated hope is that the PA will successfully raise close to $1 billion in donor contributions to help overcome its massive budget deficit of $1.25 billion.

So while newspapers gush about the economic success of the West Bank, which does look rosy in comparison to the dreadful reality in Gaza, reporters are missing the important details. Yes, the shimmering new cafés, shopping centers and luxury buildings in Ramallah are open for business, and they make lovely feature stories. But zoom in on the economic data, and things are much more frightening.

A bubble about to burst

At the heart of the PA’s economic problems is a gnawing, massive budget deficit. Adding to all that red ink is gap – half a million dollars wide – between the amounts pledged by Arab and European states, and the actual cash coming in.

As a non-state entity, the PA isn’t eligible for loans from international financial institutions, so there’s no hope of attaining credit to cover the difference. And the PA has a pervasive problem of enticing investors to bankroll the local economy’s private sector, further magnifying the issue.

In his interview, Kassis also delivered some good news. There has been a significant reduction in non-performing loans in the West Bank, from 15 percent of total outstanding loans in 2007 to roughly 2.8 percent of outstanding loans today. He also pointed to a drastic increase in gross national income, by $6.3 billion, and the growth in local banks' capital.

By the same token, however, he warned that the figures for 2012 will take a turn for the worse due. There will be a shortage of investment capital, he said, and banks will be forced to recalibrate their loan policies, which until now have held the ratio of loans to deposits steady, at 53 percent.

His warning means, simply put, that economic activity is expected to contract this year. The growth rate that already shrunk this year to 5.3 percent will dip even further. With this reduction in economic growth, unemployment will increase along with the threats of political disturbances, public dissatisfaction and the fear of civil disobedience.

The looming economic doom is directly related to Israel’s continued occupation of the West Bank, which according to Kassis has expropriated PA control over water resources – resources crucial to developing local industry. And despite the fact that several check points and road blocks have been removed in recent years, there are still massive impediments to the free flow of traffic, and thus the import and export of goods, which are subject to Israeli regulations.

The movement of goods is especially crucial because more than 65 percent of Palestinian imports either originate or arrive in the Palestinian territories via Israel, and approximately 90 percent of Palestinian exports are sent to or reach their final destination through Israel.

But we're not just dealing with trade issues. To develop a modern economy, there needs to be a fully modernized infrastructure, like for example an advanced cellphone network. But what kind of stock can we place in the words of Industry, Trade and Labor Minister Shalom Simhon, who called on British companies to invest in the West Bank economy, hold when Israel prevents the PA from acquiring 3G cellphone technology?

"We removed the roadblocks in Judea and Samaria and the economy is blossoming [in the Palestinian areas] there," Simhon told the Wall Street Journal last month. His enthusiam fails to convince Kassis, and rightly so. The West Bank is no economic miracle. Brightly-packaged calling plans offered on an antiquated cellphone network or packed coffee shops don’t provide enough smoke and mirrors to hide a growing economic crisis.

There may be new luxury cars with shiny rims rolling along the streets of Ramallah, but look at their purchase agreements and you will find unfulfilled bank loans and ballooning debt. But when the unemployment rate shoots past 20 percent, which it is on track to do, who will be getting the loans then?