The implosion of the Palestinian economy
Once showing signs of recovery, the Palestinian economy has now plunged into turmoil, pushing the Palestinian Authority toward a potential breaking point.
In a nutshell
- Inflation is soaring, and poverty is rising sharply in the Palestinian territories
- Israel’s suspension of transfers has crippled the Palestinian Authority’s budget
- Lasting economic hardship could lead to increased violence and instability
The West Bank was already in a fragile condition before Hamas attacked Israel in October last year. Since then, the territory has been rocked by economic turmoil that has brought the governing Palestinian Authority (PA) to a crossroads, and may ultimately lead to its replacement with a new governance structure.
Though the Gaza Strip theoretically falls under the administrative jurisdiction of the PA, which is based in the West Bank capital of Ramallah, it has been de facto controlled by Hamas since 2007. Before the start of the conflict, the West Bank had been showing noticeable improvement in recent years. Encouraging signs such as rising tax revenues and strong exports to Israel suggested a promising future. Yet, after 10 months of war in Gaza, the PA is on the brink of collapse.
Ballooning budget deficit
Almost immediately following the Hamas attack on Israel on October 7, 2023, Israel barred some 140,000 West Bank workers from continuing their jobs on Israeli territory, a heavy blow to the Palestinian economy. Following this, transfers of the PA’s tax revenues, which are collected by Israel and handed over after deducting the costs of services (e.g. sewage and electricity) provided by the Jewish state, were partially suspended. This $175 million monthly revenue has been the PA’s main source of income in recent years. Its coffers are being emptied to pay its civil servants and provide public services (health, education), with little hope of replenishment. Israel has also put an end to a financing mechanism dating back to the 1993-1995 Oslo Accords, under which the Israeli government collects and passes on to the PA customs duties on goods imported into the Palestinian territories.
Per capita gross domestic product (GDP) is falling, and inflation is soaring. If current trends continue, the budget deficit will double by the end of the year. The owner of a small local grocery store, critical of the PA, says her sales have fallen by 70 percent. More than one-third of consumers use credit to buy food daily.
Although the PA was ousted from the Gaza Strip in 2007, many public sector workers remained in their positions and continued to be paid out of the transferred tax revenues. Israel now believes that this transfer of money into Gaza is tantamount to supporting Hamas, and therefore funding terrorism. Accordingly, every dollar the PA pays into Gaza is deducted from the amount Israel returns to the PA. This creates a deficit in the PA’s overall budget, leading to some 145,000 employees being paid only 60-80 percent of their full salaries. In March, for example, the shortfall was $45.9 million. Meanwhile, direct aid from Arab states has dried up.
Ramallah’s banks, which managed $22 billion in assets before the war, are in an extremely precarious situation. Israel is considering suspending the annually issued protection waiver, which permits its lenders to work with Palestinian financial institutions. It recently took an American intervention to prevent Israel from severing banking links with the PA: At the G7 summit in Italy, United States Treasury Secretary Janet Yellen warned Tel Aviv against a rupture that would leave the PA in an impossible situation.
Labor shortage
Palestinian workers contribute $4 million each month to the territories administered by the PA, and are the primary construction labor force working on the development of Israeli settlements in the West Bank.
Initially, the PA thought the suspension would be short-lived. Palestinians account for a significant proportions of the labor force in the construction, agriculture and hospitality sectors. The residential construction sector nearly collapsed when the war broke out, falling by 95 percent.
There was some hope of a return to normalcy when the Israelis began issuing special permits to bring back Palestinian workers. But what the PA did not expect was that Israel would turn eastward rather than inward for a new labor source, launching a mass recruitment of Asian workers. In December 2023 Israel and India signed an agreement for employment of Indian workers, similar to the deals New Delhi had already signed with Japan and Taiwan. One report suggested the government was looking to recruit as many as 80,000 workers from India, Sri Lanka and other Asian countries, despite the higher costs such as accommodation and translators. It would take an estimated three to four years to supply enough laborers to replace the Palestinian workforce.
Representatives of Israeli business are crisscrossing Asia, including Sri Lanka and Thailand. Israeli inter-ministerial delegations are making routine visits to Delhi, and opinion polls indicate that 71 percent of Israelis have a positive view of India. The projections are a source of concern for the PA: 42,000 Indians are expected in Israel, and 17,000 are already working as nurses, a profession where there is a serious shortage of workers.
For now, Israel remains vague about these measures, which are presented as temporary. On the Israeli side, a rupture would cost a few points of growth and initiate a drastic reform of the labor market. The workforce has already been thinned by call-ups of army reservists, but Israel’s economic fundamentals would not be threatened. Meanwhile, a complete and definitive break in economic relations would bankrupt the PA, because its economy is so inextricably linked with Israel’s.
Israel’s long-term plan
In June, Israeli Finance Minister Bezalel Smotrich’s decision to freeze all financial transfers to the PA was postponed. The Israeli right believes that there is nothing to be expected from the PA, no matter how the war ends. Mr. Smotrich stated that he would not “artificially revive the PA so that it can work against me.” Still, the security establishment believes the opposite. Israel needs a Palestinian counterpart, even if that counterpart is merely an anemic puppet authority. The army and intelligence services believe that completely severing relations is unrealistic.
To stabilize the Palestinian Authority’s financial situation, an agreement was reached in March between the PA, the Israeli government and Norway. The Norwegians were tasked with securing Palestinian assets and ensuring that they are used strictly in accordance with the territory’s needs, such as wages and utilities.
More by Pierre Boussel
- Iran works to spread its revolutionary message
- Jordan looking to weather new challenges
- The secret of Lebanon’s resilience
What then, is Israel’s strategy? Is the goal to completely cripple the economy of the PA? This would increase the danger of violent actors taking over the territory, and eventually coming to power through the ballot box. The Israelis may be hoping that the Palestinian Authority, originally meant to be a transitional body, has fulfilled its intended purpose and will now be replaced by a new government, more technocratic than political in nature. However, the Palestinian population is unlikely to give up the fight for full independence.
Scenarios
Less likely: Power transition in the Palestinian Authority
PA Chairman Mahmoud Abbas is embittered. His decision to install a new prime minister in February has gone nowhere. He reluctantly agrees to do what everyone has been urging him to do for years: step down. He passes the torch to one of three possible successors: Fatah Hussein al-Sheikh, Fatah Central Committee member Mahmoud al-Aloul or Security Chief Jibril Rajoub. At the urging of the U.S. and the EU, the Israelis agree to work with this new PA. Ramallah joins peace negotiations after the Gaza war. With peace restored, reconstruction begins.
Most likely: The Netanyahu government settles the West Bank
The West Bank gradually comes under the control not of the Israeli army but of armed settlers, who complete their takeover of the Palestinian territories. The demoralized Palestinian population drifts toward extremism. Violence continues, both in the Palestinian territories in the form of bombings and assassinations, and abroad (Lebanon, Iraq, Yemen), where armed groups operate. Factions of militants who take up arms and claim leadership of the Palestinian cause also fight each other.
For industry-specific scenarios and bespoke geopolitical intelligence, contact us and we will provide you with more information about our advisory services.
Sign up for our newsletter
Receive insights from our experts every week in your inbox.
