Gaza Economy in 'Free Fall' and External Aid Won't Help, World Bank Warns

The Strip's economic deterioration is accelerating, the report says: Every second Gazan lives in poverty

Palestinians children play outside a house in the al-Shati refugee camp, Gaza City, January 4, 2018.
MOHAMMED ABED/AFP

The economy of the Gaza Strip is in "free fall," with every second resident living in poverty, the World Bank warned in a report released on Tuesday. The Strip's economy has contracted 6 percent in the first quarter of 2018, and its deterioration is accelerating, the report said.

The World Bank's “Economic Monitoring Report to the Ad Hoc Liaison Committee” will be presented on Thursday at the committee’s meeting, which is held every two years. It is a policy-level meeting for development assistance to the Palestinians, comprised of donor countries to the Palestinian Authority.

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According to the report, unemployment among the young population in the Strip has topped 70 percent. While the main cause is Israel's decade-plus-long blockade, other factors negatively impact the situation in Gaza. These include the PA’s move to reduce its monthly transfers to Gaza by $30 million, the U.S. decision to cancel financial support to the PA worth $50-$60 million and funding cuts to UNRWA, the UN agency that supports Palestinian refugees.

The report’s authors stress that the situation in the West Bank is not as dire as in Gaza, but that growth there is stalling and the West Bank economy is liable to slow significantly in the near future.

A Palestinian outside the UNRWA office in Khan Younis, Gaza, September 2018.
IBRAHEEM ABU MUSTAFA/Reuters

It is no longer possible to halt the economic deterioration in the Palestinian territories through the flow of external aid, which is on the decline, according to the report. Neither can the business sector, which still suffers from limitations on movement and access to raw materials and trade, save the economy.

The decline in the fiscal situation prevents the PA, which suffers from a drop in contributions from abroad, from providing assistance to Gaza. Its deficit is projected to hit $1.24 billion in 2018, resulting in a financing gap of around $600 million. Adding to the problem, according to the report, is the recent Israeli decision to reduce clearance revenues (income tax and VAT that Israel collects from Palestinians for the PA) by an estimated $350 million this year, “which would have a hugely detrimental impact on the fiscal position and the economy."

“A combination of war, isolation, and internal division has left Gaza in a crippling economic state and exacerbated the human distress. A situation where people struggle to make ends meet, suffer from worsening poverty, rising unemployment and deteriorating public services such as health care, water and sanitation, calls for urgent, real and sustainable solutions,” said Marina Wes, World Bank country director for West Bank and Gaza.

“The economic and social situation in Gaza has been declining for over a decade but has deteriorated exponentially in recent months and has reached a critical point. Increased frustration is feeding into the increased tensions which have already started spilling over into unrest and setting back the human development of the region’s large youth population,” added Wes.

The World Bank report stresses the need to take a balanced approach combining an immediate response to the crisis with steps to create an atmosphere conducive to sustainable development. It stated that the short-term supply of essential services, including electricity, water, education and health, must be ensured. These basic services are essential both for the well-being of the population and for the functioning of the economy. The report also points to the urgent need to increase the buying power of households to enable them to return to basic economic activity, and to strengthen the traditional income sources by expanding the fishing zone beyond the current three-mile limit to 20 miles as was agreed to in the 1990s.

“Even though the Palestinian economy will not be able to reach its full potential without a final political resolution, actions by the Government of Israel to ease the restrictions and efforts by the PA to accelerate fiscal and economic reforms could significantly improve the economic outlook and fuel private sector activity,” the report noted.

"The private sector is the only sustainable engine for growth, and the focus should be on removing the constraints and creating the right conditions for it to flourish and create jobs for the youth. A key element could be the potential offered by the digital economy to create hope, jobs and the basis for a completely different growth model," the report said.