Analysis

The Palestinian Economy Is Collapsing. Its Future Depends on Israel

The minister of national economy is ambitious and as capable as can be, but when it comes to trade, industry and Palestinian Authority's revenues, he doesn't call the shots

Demonstrators place a Palestinian flag during a protest against the planned visit of Israeli Prime Minister Benjamin Netanyahu, Hebron, West Bank, September 4, 2019.
\ MUSSA ISSA QAWASMA/ REUTERS

The Palestinian Authority's Minister of National Economy Khaled al-Osaily still believes in his ability to get Arab states and foreign businessmen to invest in the West Bank. “We expect a vision of Arab investment and active cooperation in building our economy and increasing commercial cooperation that will enable us to get to Arab and international markets,” he remarked at the closing of the Arab League Economic and Social Council conference last week, which was held in Cairo at the Palestinians’ request.

Meanwhile, Osaily only secured a monthly $100 million from Arab states to overcome the PA’s deep financial deficit caused by Israel's withholding of Palestinians custom duties.

Israel's withholding of tax funds violates the Paris economic agreement that was signed following the Oslo Accords, and is based on an Israeli law passed in July 2018, whose implementation began in February. The law requires Israel to deduct a sum equivalent to what the PA says it pays to Palestinian families of prisoners and those killed in violent actions. The deducted sum is approximately 500 million shekels ($141 million) a month. Because President Mahmoud Abbas decided not to accept partial tax transfers from Israel but only the full sum, which constitutes 60 percent of the PA's budget, it is now in deep economic crisis.

>> Read more: 'There is no purely economic solution to the Palestinian economy’s problems'

The PA’s budget, whose approval has been delayed for more than three months, included cuts in salary payments and reimbursement by PA officials of funds that had been paid to them, but these are not enough to bridge the income gap. Following the establishment of the new Palestinian government led by Mohammad Shtayyeh, and with Egyptian mediation and Israel’s approval based on the recommendations of its security forces, Israel transferred 2 billion shekels ($565 million) to the PA in August, as part of the agreement under which Israel will absolve the PA from the excise tax it charges it for fuel, and refund it retrospectively for seven months. In addition, the authority will be able to collect its own fuel tax.

According to Osaily, the transfer of funds indeed gives the PA some breathing room and will allow it to top up employees' salaries, but it isn’t enough to allow the authority to direct resources to development plans or build industrial infrastructure. To realize Osaily’s ambition of turning Palestine into a significant economic center that can manufacture and export to Arab countries, the PA needs some $10 billion in investment over the next three years, sums that the PA can only dream of at this time.

Osaily was a wise choice for his position. He’s a successful businessman, who followed in the footsteps of his late father Zuhair al-Osaily, and founded a number of large and profitable companies in the territories. He is also an experienced and talented manager. As a city councilor and later mayor of Hebron, he updated the municipal tax collection system, set up a computerized system for providing services and created the first model in the West Bank for a digital municipality.

Palestinian President Mahmoud Abbas tours the exhibition hall of the Fourth National Forum for the Fourth Industrial Revolution, Ramallah, West Bank, September. 9. 2019.
Nasser Nasser,AP

His wide connections in Jordan, Israel and with international businessmen, the support he’s getting from Abbas and his qualities as a restless entrepreneur give him the potential to advance the PA’s economy, if only he can win Israel’s cooperation.

One of his first decisions was to delete around 3,000 companies from PA Companies Registrar because they did not meet the legal requirements. He seeks to provide benefits to efficient, export-oriented companies, to reduce the number of civil servants, to increase the private sector’s involvement in the economic recovery, and, in particular, to recruit foreign investors. Last year, only $203 million were invested directly in the West Bank, about $50 million less than in 2017. His goal is to reach $1 billion.

To this end, Osaily has initiated an Economic Conference for Palestine which is scheduled to convene in Cairo in November. Until then he has been working on drafting development and investment plans to be presented to businessmen and the country representatives who will attend the conference.

Osaily's primary obstacle is the complete dependence of the Palestinian economy on Israel. At issue is not just Israeli control of export routes or the fact that Palestinians prefer to work in Israel, where they get paid on average twice as much as what they can earn in the West Bank. According to Bank of Israel data, about 83 percent of Palestinian exports are to Israel and about 60 percent of its imports come from Israel. The ban on importing raw materials that Israel fears could be used for military purposes, restrictions on movement between Israel and the West Bank and vice versa, restrictions on production, and the halting of the agreement to purchase oil from Iraq, make any investment in the West Bank less appealing.

According to the World Bank report from April, the removal of certain Israeli restrictions on transportation alone could add 6 percent to Palestinian GDP, which is currently only 4 percent of Israeli GDP.

Palestinian women walk in a street where shops have been closed for a few years in the Israeli controlled part of Hebron, West Bank, March 6, 2019.
Ariel Schalit,AP

Anyone who wants to replace diplomatic peace with economic peace, and whoever sees the Bahrain conference initiated by U.S. President Donald Trump as a proper foundation for starting a diplomatic process, cannot suffice with mere fundraising. Changing the territories’ structural economic dependence on Israel, drafting trade agreements that will allow the PA independence in managing its economy and drastically reducing restrictions are essential conditions for growth that will also serve Israel’s security interests.