EXECUTIVE SUMMARY

The Office of the United Nations Special Co-ordinator Report on the Palestinian Economy (Autumn 1999) covers developments in the first half of 1999 as compared to the first half of 1998. The report provides updated data and information from Palestinian, Israeli and multilateral sources on trends in three main areas: macroeconomics, the labour market and living levels. The report also contains a special focus on donor disbursements and public investment.

MACROECONOMIC TRENDS

The Palestinian economy, building on a 4.1 per cent real GDP growth rate in 1998, continued to generate employment opportunities at a robust pace in 1999. There were an estimated 47,100 new jobs created between first-half 1998 and first-half 1999 which contributed to further reductions in unemployment and underemployment and an increase in the average real monthly wage. Moreover, while Palestinian labour flows to Israel remained important in overall employment, 6 of 10 new jobs were located in the Palestinian economy where almost three-quarters of new employment was absorbed in the private sector. There were also positive trends in planned business construction and credit creation by the banking system and relative stability in consumer prices. However, other indicators showed retrogression. In particular, there was stagnancy in private investment and exports--the two most critical variables for sustainable private sector-led employment growth. Also worrisome was the downward trend in public investment, the result of reduced levels of donor disbursements in 1999.

Labour Flows

The number of permit-holding Palestinian workers employed in Israel, Israeli settlements and industrial zones (ISI) averaged an estimated 47,300 on a daily basis during first-half 1999, a 3.2 per cent increase relative to the same period last year. Overall, the average number of work permits issued by Israeli authorities to Palestinians grew by less than 1 per cent as between the two periods. This may indicate a saturation in the Israeli labour market for Palestinian workers and/or a policy change toward more permissiveness regarding informal labour flows to ISI. Excluding Palestinians from East Jerusalem--who do not require permits--average daily informal labour flows are estimated at 62,800 during first-half 1999, an increase of 33.2 per cent relative to first-half 1998. Thus, total Palestinian labour flows to ISI--permitted and informal--increased 18.5 per cent to an estimated 110,100 during first-half 1999.

Trade Flows

Estimates based on value-added tax clearances suggest that total Palestinian-Israel registered trade increased by 9.6 per cent in nominal NIS terms in the last year, a slight increase after adjusting for inflation. Israeli exports rose 12.5 per cent in nominal terms while Palestinian exports declined 0.16 per cent, implying a real reduction in the value of Palestinian exports to its main trading partner. In nominal USD terms, Palestinian registered exports to Israel amounted to USD 222.6 million, while registered imports from Israel were USD 843.5 million in first-half 1999. Palestinian direct registered imports from third countries increased to an estimated USD 87.4 million, a 43.4 per cent nominal increase in the last year. Higher transactions costs, border and mobility restrictions, limited access to foreign markets, as well as low levels of investment in productivity continue to hinder export development.

Private Investment

Planned construction activity--the main component of Palestinian private investment activity--as measured by the new surface area licensed by Palestinian local authorities, declined 0.6 per cent as between first-quarter 1998 and first-quarter 1999. The overall decline was due to a fall in residential construction licensing which accounts for the bulk of construction activity. Licensing for business construction, however, increased 17.2 per cent. The evidence suggests an overall decline in construction activity in the near-term.

There were 236 additional companies registered in the West Bank and Gaza Strip during in the last year, a 35.2 per cent increase in new registrations. Of these, 82.2 per cent were registered in Gaza. Private unlimited liability companies accounted for 60 per cent of total new registrations, while 40 per cent were private limited liability companies. The bulk of private companies are partnerships with small amounts of capital investment. There was only one new public and one new foreign company registered during first-half 1999. This suggests that planned larger-scale investment, as well as new foreign investment, in the Palestinian economy remains limited.

The total value of projects approved under the Palestinian Law for the Encouragement of Investment in the first half of 1999 was USD 107.6 million compared to USD 161.0 million for all of 1998. Foreign investment projects accounted for USD 15.1 million or 14 per cent of the total. Projects approved in the Gaza Strip amounted to 53.1 per cent of the total. Data indicate two-thirds of the value of total approved projects in the West Bank were in manufacturing while three-quarters of the value of approved projects in Gaza were in construction activities.

The banking system continued to expand, albeit at a slower pace than witnessed in recent years. Between June 1998 and June 1999, customer deposits grew by 16.9 per cent to a total of USD 2,616.3 million. Deposits grew by 25.4 per cent in the previous year. Total outstanding credit grew by 22.4 per cent in the same period to a total USD 879.3 million. Such credit grew at a rate of 38.1 per cent in the preceding year. Thus, there was a significant increase in bank financial intermediation, but with a deceleration in the growth rates of both deposits and credit.

The value of bank credit extended to private businesses grew by 16.3 per cent, reaching USD 543.45 million. Credit absorption in the service branches of the economy expanded by 124.7 per cent and accounted for USD 79.5 million or 14.6 per cent of all outstanding business credit in June 1999. Credit extended for commerce activities grew by nearly 17 per cent, reaching USD 245.3 million and accounting for 45.1 per cent of all business credit. Foreign trade financing grew by more than 40 per cent and accounted for about one-fifth of all commerce lending. Credit absorption in the productive branches declined by about 1.6 per cent to USD 218.5 million, accounting for 40.2 per cent of all outstanding credit. The lending programmes administered by the different NGOs and UNRWA disbursed USD 14.8 million in first-half 1999 compared to USD 15.8 million in first-half 1998, a decline of about 6.8 per cent in nominal terms. Compared to second-half 1998, however, such lending was 18.4 per cent higher in the first half of 1999.

Despite healthy growth in employment and income, non-construction private investment in the Palestinian economy has continued to lag behind. This is especially true of foreign investment as indicated by the very low level of new foreign company registrations and approved foreign investment projects. Political uncertainty about the shape of the permanent status and the still weak legal and institutional environment--particularly from the point of view of foreign capital--constitute continuing obstacles to investment in the Occupied Palestinian Territory.

Public Investment

Donor commitments in 1998 were USD 654.6 million while disbursements reached USD 330 million, indicating a disbursement-to-commitment rate of 50.4 per cent. This was the lowest rate of disbursement since the Conference to Support Middle East Peace in 1993. In absolute terms, the level of donor disbursements in 1998 were about one-third below the 1994-1997 average. Donor countries have committed USD 524.4 million in assistance for 1999. As of mid-year, approximately USD 174 million had been disbursed. This was 19.6 per cent below the first-half 1998 level of disbursements. Thus the slower rate of disbursements which emerged in 1998 has continued into 1999.

The portion of donor disbursements channeled into public investment for vital infrastructural and capacity development has been on the rise in the last two years. Of the USD 330 million in disbursements in 1998, about USD 161.8 million--or 49 per cent--was directed to public investment. Thus, despite the fact that the 1998 disbursements-to-commitments ratio was the lowest since 1994, public investment as a portion of disbursed funds was the highest on record. This was due to the achievement of recurrent budget balance by the PA, progress in institution-building and the reduced severity of comprehensive closures which would necessitate diversions of funds from investment to consumption. For similar reasons, the rate of public investment from donor disbursements has remained relatively high in 1999 despite the decline in the level of donor disbursements.

Nonetheless, given the low levels of private investment, donor assistance for public investment in infrastructure and for strengthening the legal and institutional capacities of the Palestinian Authority, will be especially important. Such investment will contribute to reducing business transactions costs and creating a more stable environment for private investment--both domestic and foreign--and thus to sustaining the significant positive developments in the Palestinian economy in the past two and one-half years.

LABOUR MARKET

Labour Force, Employment and Unemployment

The combined effect of a larger working-age population and a higher labour force participation rate resulted in the growth of the Palestinian labour force to an estimated average of 619,445 persons in first-half 1999--a 7.4 per cent increase. At the same time, the average full-employment rate increased from 77.3 per cent to 80.4 per cent while the absolute number of fully-employed persons increased by 11.7 per cent. The underemployment rate--the proportion of the labour force working less than 35 hours per week--fell from 7 per cent to 5.6 per cent, while the number of underemployed persons declined by 13 per cent.

The standard unemployment rate declined from 15.6 per cent to 13.8 per cent, a continuation of the observed trend of the last two years, while the absolute number of unemployed persons declined by 4.5 per cent to an average of about 85,950. The standard unemployment rate in the West Bank was 11.3 per cent while it was 20.1 per cent in Gaza. The more broadly defined adjusted unemployment rate--which includes discouraged workers--declined to 23.9 per cent. Using this broader definition, the absolute number of unemployed increased by about 0.5 per cent to about 159,250 persons, the first such increase since first-half 1996.

Employment Growth by Economic Branch and Place of Work

There were a total of 47,100 net new jobs for Palestinian workers as compared to the first half of 1998; 39.7 per cent of new employment was located in ISI. Including Palestinians from East Jerusalem, total employment in ISI--permitted and unofficial--increased by 18 per cent to an estimated 122,700 persons. About 60.3 per cent of total job growth was located in the Palestinian economy, where employment increased 7.4 per cent to an average of 410,750 persons. The domestic contribution to total job creation rose from 34.7 per cent in the period first-half 1997--first-half 1998 to 60.3 per cent in the period first-half 1998-first-half 1999, a significant increase in the labour-absorbing capacity of the economy.

Moreover, the Palestinian private sector accounted for a higher share of domestic employment creation as between the two periods. Private employment growth accounted for only 38.2 per cent of total job creation in the 1997-1998 period as compared to 72.3 per cent in 1998-1999. In absolute terms, average domestic private sector employment grew by only 1.8 per cent in the earlier period and by 6.9 per cent in the latter period. In first-half 1999, 76.7 per cent of all employment in the Palestinian economy was in the private sector. The service, agriculture and construction branches of the economy accounted for 32 per cent, 21.7 per cent and 19.2 per cent of net job growth respectively, while there were absolute declines in employment in manufacturing and commerce. Employment in the public sector grew 8.9 per cent to an average of 95,484 persons, accounting for 27.6 per cent of domestic employment growth during this period.

Women in the Labour Market

Women=s labour force participation rate increased to 12.4 per cent from 11.4 from in first- half 1998, reversing the downward trend of the previous year-to-year period. This resulted in a 14.5 per cent increase in the size of the women=s labour force which averaged some 89,656 persons. This exceeded the growth in the men=s labour force. Nonetheless, the full-employment rate for women declined slightly while their underemployment rate increased. Greater labour force participation for women coincided with a slight decline in their unemployment rate over the last year--from 15.4 to 15.2 per cent. But due to growth in population and labour market participation, the absolute number of unemployed women increased by 12.6 per cent. This was quite different from the experience of men whose unemployment rate fell from 15.8 to 13.7 per cent and for whom the absolute number of unemployed declined 6.3 per cent.

The latest period has therefore witnessed a change in women=s labour market profile. In particular, there has been increased participation despite the fact that women=s full-employment rate has declined and their underemployment rate has risen. This suggests a tendency for women to participate in the labour market even if full-employment is not available, a reversal of the trend of the last several years.

LIVING LEVELS

The real daily wage for an average fully-employed Palestinian worker increased by 3.6 per cent to about NIS 61.8. Due to the decline in the average monthly days worked, real monthly wages increased by only 2.9 per cent to about NIS 1,366. Monthly real wages for West Bank workers rose 7 per cent, those for workers in Gaza increased 1.9 per cent, while those for Palestinians working in Israel declined 2.9 per cent. Real average monthly wages in first-half 1999 were NIS 1,251 in the West Bank, NIS 1,010 in Gaza and NIS 1,711 for Palestinians working in Israel.

The disinflationary trend of the last several years was replaced by a deflationary trend in the first half 1999--i.e. absolute declines in consumer prices. On average, consumer prices declined 1.4 per cent between December 1998 and June 1999. The consumer price index (CPI) fell by about 0.7 per cent in the West Bank, 2.3 per cent in the Gaza Strip and 1.6 per cent in East Jerusalem. Food prices fell by 4.5 per cent, a significant trend since food occupies about 40 per cent of expenditures in the average Palestinian family.

On a year-to-year basis, i.e. first-half 1999 versus first-half 1998--the CPI increased 7.5 per cent. This indicates that the deflationary trend during first-half 1999 was insufficient to return prices to their levels prior to the NIS depreciation of second-half 1998. It also notable that the prices for food items, beverages, housing and miscellaneous goods (e.g. personal care and restaurant meals) grew faster than average over this period. At the same time, the prices of clothing, education and recreational goods and services either grew more slowly or declined during the same period.

LOOKING AHEAD

Data for the third quarter of 1999 suggest continued economic improvements. Labour force data for the third quarter indicate that the proportion of all employed Palestinians working in ISI remained at about 23 per cent. Given labour force growth and a slightly higher participation rate, there was a marginal increase in Palestinian labour flows to ISI, despite 7 days of comprehensive closure imposed on the Occupied Palestinian Territory, and continued growth in domestic employment. There was a further decline in the overall rate of unemployment and a modest increase in wages.

Trade indicators show that average monthly Palestinian exports to Israel were about 1.6 per cent higher in nominal NIS terms in the third quarter as compared to first-half 1999. Palestinian imports from Israel for the same period were up 12.5 per cent. Monthly exported truckloads via monitored border crossings declined 4.4 per cent in third-quarter 1999 while imported truckloads declined by about 7.8 per cent as compared to the first half of the year. This data suggests continued stagnation in trade and a growing trade deficit for the Palestinian economy.

Bank intermediation continued to expand in the third quarter. Total deposits in the banking system in September were 6.4 per cent higher (in nominal USD terms) relative to June and 18.4 per cent higher than last September. Total credit extended during the same period increased by about 5.4 per cent in the third quarter, raising bank credit to 28.9 per cent above its September 1998 level. Bank credit to private businesses grew by about 6 per cent in the third quarter and was 34.8 per cent higher than the third quarter of 1998.

There was virtually no inflation in consumer prices in the third quarter of the year. The Palestinian consumer price level rose only 0.02 per cent between June and September 1999, reversing the deflationary trend observed in the first half of the year. On a year-to-year basis, consumer prices increased by 3.6 per cent.

Donor disbursements, as of mid-October were about USD 250 million, approximately 47.5 per cent of total 1999 donor commitments of USD 524.4 million. The relatively low level of disbursements has raised concerns that the positive developments in the Palestinian economy in the past two and one-half years will not be buttressed by significant public sector investment.