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Policy space for Palestinian economic revival

UNCTAD's latest report argues that reviving the Palestinian war-torn economy requires empowering the Palestinian Authority with increased policy options and strengthened institutional capacities to formulate and implement economic policies.

Lifting the Israeli closure policy and movement restrictions imposed on the occupied Palestinian territory, dismantling the Israeli separation barrier, intensifying donor support and institutional reform, while necessary, are not sufficient for achieving economic recovery and sustained growth. Palestinian policymakers must have the full range of economic policy instruments, a new UNCTAD report argues.

UNCTAD's projection of the Palestinian economy "baseline scenario" - which assumes a return to the pre-2000 relatively less-restrictive Israeli closure policy and continuation of the existing economic policy framework - predicts modest economic improvement by 2015. By contrast, empowering the Palestinian Authority with more substantial fiscal, monetary (national currency), trade, and labour policy tools could bring about substantially higher growth rates. The proposed integrated policy package would increase gross domestic product (GDP) by 24 per cent above the "baseline" level in 2015 and lead to full employment by 2012.

Israeli mobility restrictions have effectively isolated and fragmented the occupied Palestinian territory. GDP per capita continued its downward trend to 60 per cent of the 1999 level. Unemployment increased to 29 per cent in 2007 from 21 per cent in 1999. The percentage of those living below the poverty line increased to 57 per cent in 2006 from 52 per cent in 2005, while the percentage of those living in absolute poverty increased from 40 per cent to 44 per cent. The situation in the virtually isolated Gaza Strip is much worse. Excluded from resumed foreign aid in 2007, 66 per cent of Gazans suffered from absolute poverty in 2006, 30 per cent higher than in the West Bank.

The Palestinian trade deficit with Israel increased by 20 per cent from 1999 to 2007, to reach an estimated $2.1 billion, or 40 per cent of GDP and 90 per cent of total net current transfers (mainly donor support). Moreover, Israeli withholding of Palestinian tax and customs revenue, collected on behalf of the Palestinian Authority, has aggravated the Palestinian Authority fiscal crisis. Despite austerity measures, the public deficit jumped from 17 per cent of GDP in 2005 to 27 per cent in 2007.

Along with the need to end the isolation of the Palestinian economy and expand the Palestinian Authority's policy space, the report emphasizes that achieving economic recovery requires greater consistency and predictability in foreign aid, as well as public investment programmes to rebuild and revitalize the economy's eroded productive capacity. Special emphasis should also be given to developing the Palestinian Authority's capacities to design and implement a wider range of economic policies.

With the launching of a new project to promote regional growth-oriented economic and trade policies, UNCTAD's programme of assistance to the Palestinian people achieved significant progress in the areas of customs modernization, establishment of the Palestinian Shippers' Council and trade policy. To intensify the secretariat's efforts, donor funds are needed for projects in the areas of small and medium-sized enterprise development, debt management and investment retention.