CLOSURE ON THE WEST BANK AND GAZA
AUGUST-SEPTEMBER 1997

Following the suicide bombings in Jerusalem on July 30 and September 4, a comprehensive closure was imposed on the West Bank and Gaza (WBG), including external and internal closure.

This fact sheet provides an outline of the stare of the closure and its effects on the Palestinian economy.

THE CLOSURE

a. Implementation

Comprehensive closure prevents Palestinian resident in the WBG from traveling into or through Israel, and prevents the movement of a significant number of Palestinians within the West Bank. Commodity shipments and persons are also prevented from crossing out of or into the WBG through Rafah or Allenby Bridge, even if they would not have to pass through Israeli (this measure was lifted on 11 August and reimposed on September 5).

The full closure is maintained by through checking of vehicles, passengers and persons on foot at Israeli controlled areas, and into Israel. Those Palestinians who do not hold Israeli Citizenship or Jerusalem identify cards are refused passage into Israel.

Internal closure (which was lifted fully on 27 August and reimposed on 5 September) denies Palestinians passage through checkpoints, usually from Palestinian areas into Israeli controlled areas, but wider application of this restriction also occurs, including to residents of those towns). This effectively isolates cities and towns from one another.

To implement the internal closure, checking of vehicles and persons is also being carried our at exits from population centers throughout the West Bank, between villages outside area A and within areas B and C. Alternative access routes are regularly blocked. Residents of the major towns are regularly turned back at the entrance points to those towns by Israeli soldiers or police.

b. Days of closure

As of September 7 1997 (250th day of the year,), the following provides details on days of closure this year.

1. Comprehensive closure days since 31 July 1997 39
2. Effective closure days since 31 July 1997 30
3. Comprehensive closure days since 1 January 1997 63
4. Effective closure days since 1 January 1997 47
5. Potential working and trading days since 1 January 1997 191
6. Effective working and trading days since 1 January 1997 144
7. Proportion of potential working and trading days

Lost since 1 January 1997 24.6%

"Effective closure days" refers to the actual working week. Sunday to Thursday are counted as full working days, and Friday as half a working days, based on numbers of truckloads and workers passing through checkpoints.

On 17 August, a number of workers were permitted to work in settlements and the Erez Industrial Zone. This ceased on 5 September. Permits for 4,000 workers, teachers and medical staff, were issued from 1 September until 5 September, when the full closure (including internal closure) was reimposed following the second bombing.

EFFECTS OF THE CLOSURE

It is difficult to estimate with certainly the costs of closure, as many effects are indirect and lagged. Economic costs also vary with the duration and intensity of the closure, and are subject to seasonally. Internal closures increase significantly the overall cost of closure.

a. Direct effects

Employment

The direct loss each working day can be estimated as a number of persons employed prior to closure, multiplied by the average wage. At end July 1997, approximately 51,000 (daily average)permitted workers from WBG were employed in Israel, and day of average take-home daily wage was about NIS 92.5 for such workers. Each day of comprehensive closure which prevents these workers from reaching their jobs results in a loss of NIS 4,717,500 or about USD 1.35 million in direct household income in the WBG. From 31 July to 7 September (30 effective closure days), there has been a direct loss of USD 40.5 million in income -earning opportunities for these workers.

Trade Income Losses

Direct losses are also accrued through losses of trade income. The IMF has projected that total exports for 1997 would be USD 366 million which, when divided by the 277 potential workdays in the year, yields average 1997 daily WBG export revenue of USD 1.3 million . Assuming effective daily losses of USD 1.3 million, to 7 September (30 effective closure days) losses are estimated at USD 39 million of course, to some extent the export revenue losses bay be recouped at a later date when closure ends, but in the meantime adverse repercussions will have worked through the Palestinian economy, the more so the longer the period of closure.

Towards the end of August, a limited amount of goods were permitted access to Israeli markets.

b. Indirect effects, short and long term

There are additional second round effects that reduced has on the sales and income of WBG businesses from whom workers purchase goods and services. These losses can amount to as much as, or more than. the direct income losses, although they are typically lagged.

The restrictions on merchandise import and export flows into and from WBG generate economic losses. Economic activity in many sectors is disrupted by interruptions in intermediate import supplies. Export revenue losses can also be significant particularly for perishable products, and export market opportunities on the activity of fisheries entail further losses. Lack of access to markets for agricultural produce results in wastes crops(eg. cucumbers and tomatoes in Gaza and northern West Bank, and grapes in Hebron during August). Where farmers and labourers are barred from accessing agricultural lands, crops requiring harvesting rot.

In addition closure results in lost business sales and unfulfilled contracts, both of which further reduce income earnings. The lower income will subsequently inhibit private investment in the WBG, which had already declined considerably during 1996. The Palestinian economy's longer term growth potential is likely to be hampered by the disincentive to private investors as a result of the uncertain business environment.

The fiscal impact of the closure includes a reduction in the collection of customs duties, VAT and excises by the PA and reductions in income tax revenue. The reduction will be both from revenue clearances and domestic revenue collections. A reduction of profits will also have a negative fiscal impact on business tax collections.

The length of the closure dictates to some extent the amount of average daily losses.

A comprehensive closure lasting several weeks has a proportionately higher dampening effect on trade.

In summary, actual and potential losses in the Palestinian economy as a result of closure occur in the following areas:

Short term:

* Reduction in income from external employment;

* reduction in income from internal employment in West Bank;

* secondary loss in potential income for workers in Israel, who are unable to access alternative work internally in the WBG;

* loss of sales as a result of reduction in expenditure;

* loss of export and other contracts;

* reduction of inputs for production;

* fiscal impact of reduction in income tax, customs duties and excises.

Long term

* contraction of business;

* fiscal impact of contraction of business;

* contracting effect of cumulated political/logistical uncertainly on private investment.

It should be noted that many other elements of economic and cocial cost must be added to the direct and indirect effects of loss of income from employment.

Overall, once these various effects are aggregated, it is possible that losses under severe closure could total 40% -60% of income and output, around USD 4-6 million per day. This figure does not take into consideration the costs of the internal closure in the West Bank, which are difficult to estimate.

The closure threatens what has been a promising improvement in economic conditions beginning in mid-1996. Based on good fourth quarter performance, the Ministry of Finance and the IMF projected real GNP growth rates of about 8 per cent for 1997 on the assumption that there would be an average of 35,000 WBG workers in Israel on a daily basis, expanded trade flows and a successful 1997 Palestinian Public Investment P.

For the first six months of 1997 there has been an estimated daily average of 39,000 workers on Israeli -controlled areas and based on preliminary estimates of merchandise exports during the first six months of 1997, the average number of truckloads leaving Gaza was 32 per cent higher on a monthly on a basis than the monthly average in 1996, as reported by the PA.

c. Revenue Transfers from Israel

In reaction to the bombing on July 30, the Israeli Cabinet decided to cease payment of revenue "clearances" to the PA. These clearances are mainly VAT, excise taxes and customs duties, and to a lesser extent income tax, collected by the Government of Israel on behalf of the PA, and remitted to the PA, according to the provisions of the Economic Protocol of the Interim Agreement. There was NIS 134 million owing to the PA at the end of July. One third of this sum was transferred in the week commencing 18 August. Further revenues have accrued during August. The total sum now owing is approximately USD 65 million.

Article III (import taxes and import policy)paragraph 15 of the Protocol states, with respect to import taxes, that "…This revenue clearance will be effected within six working days from the day of collection of the said taxes and levies." Article VI paragraph 8 requires clearances of VAT between Israel and the PA to be settled within 6 days from the 25th of each month. Article V Paragraph 4 requires Israel to transfer 75% of the axes collected from Palestinian working in Israel and full amount from those working in settlements. Israel is also obliged to transfer clearances on petroleum and health stamp tax (see attached schedule from the Israel Ministry of Finance).

In 1995 and 1996, these clearances accounted for over 60% of the PA's total revenue (63%in 1995 and 61% in 1996). The 1997 budget projects 63% of revenue coming from clearances.

Non-transferal of revenue to the PA has severely compromised its ability to meet recurrent expenses- particularly the monthly payroll of the Authority's employees.

The Authority increased its exposure to the domestics banking system to pay the July wages bill - after some delay - and also borrowed from the Palestinian Monetrary Authority. The Palestinian Authority has also severely curtailed non-wage expenditures. It is currently working on sourcing finance for the next wages bill of USD 40 million, which was due an Egyptian grant of USD10 million.

Utilizing overdraft facilities or borrowing to cover the resulting has negative downstream effects, e.g. crowding out the private sector from the domestic credit market.

d. Effect on Donor Activities

Closure can have a substantial adverse impact on the implementation of projects funded by donors in WGB. This includes;

* shortages of materials;

* escalating material prices;

* restricted mobility of project personnel and vehicles.

As a result of the economic and social hardship brought on by closure, donor attention and resources are also typically diverted to immediate relief measures at expense of the longer term development agenda for the Palestinian economy and community.

No further donor funding is currently available from the Holst Fund to counter the effects of closure through employment generation initiatives or support for the PA's budget. This fund has been vital during past closures to alleviate some of the immediate economic pressures caused by closure. The Holst Fund has made available almost USD 38 million for employment generation over the past 18 months. At its peak in June 1996, the fund was supporting over 15,000 full -time -equivalent jobs.

These activities are now winding down.

Prepared by the World Bank and UNSCO, using documentation from the Palestinian Authority, the Israeli Government, the IMF and other bodies.

5 September 1997