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Palestinian Economy: Impact of Political Instability

The Palestine economy remains vulnerable due to socio-political instability, which has a significant impact on economic growth and living standards. The World Bank’s Palestinian Economic Monitoring Report to the Ad Hoc Liaison Committee (AHLC) indicates that Palestinian economic growth is expected to soften in 2023, with growth projected to hover around 3 percent, negatively impacting living standards. The report highlights that the Palestinian financing gap closed the year at US $351 million, or the equivalent of 1.8% of the GDP, down from 7% in 2021. The exposure of the banking sector to the public sector remains high, posing risks to long-term macroeconomic stability. The Palestinian territories have been in a de facto customs union with Israel for thirty years, but the divergence between both economies has continued to widen, with income per capita in Israel almost 14-15 times higher than in the Palestinian territories. Poverty rates are stubbornly high, with roughly 1 out of 4 Palestinians living below the poverty line.

The economy’s vulnerability is further exacerbated by socio-political instability, restrictions in the West Bank, and the near-blockade imposed on Gaza. The exposure of the banking sector to the public sector remains high, and the large and growing stock of arrears to the private sector, the pension fund, and public employees poses risks to long-term macroeconomic stability. The overall economic outlook remains bleak, with the Palestinian economy expected to continue operating well below its potential if restrictions in the West Bank and the near-blockade imposed on Gaza are not eased or lifted.

The Palestinian economy’s forced dependency on Israel, excessive production and transaction costs, and barriers to trade with the rest of the world have led to a lopsided dependence on Israel. The Palestinian territories have been in a de facto customs union with Israel for thirty years, but the divergence between both economies has continued to widen, with income per capita in Israel almost 14-15 times higher than in the Palestinian territories. Poverty rates are stubbornly high, with roughly 1 out of 4 Palestinians living below the poverty line. The impact of the fiscal crisis is aggravated by the fact that the Palestinian government does not have a full-fledged Central Bank, does not issue a national currency, has little access to international financial markets, and has exhausted safe domestic borrowing.

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