43620 WEST BANK IIIJLLIaI LVIILl ',,Cat.IvII AND GAZA by the International and Office of th UPDATE The World BankGroup A QuarterlyPublicationof theWest Bank andGazaOffice ~uly-deptember 2003 The World Bank & the Private Sector - I Stock-taking since the Second Intifada I Background A Ten Year Involvement - remains economically viable and is currently preparing a bond issue. Since the early days of the Oslo Process, the World Bank has been providing technical support to the economic The World Bank typically intei~enesin post-conflict or development of the West Bank & Gaza. Inaddition, it has in-conflict situations by performing an assessment of the deployed financial resources to sustain the Palestinian development needs of the country concerned. For this society and institutionsand to upgrade infrastructure.The reason, way back in 1993, the Bank was requested by the Bank has also played a leveraging role, drawing resources parties to the multilateral Working Group on Economic from the donor community at large and fosteringdialogue Development and Regional Cooperation to perform a among public and private stakeholders. needs assessment and analyze the economic prospects of the West Bank & Gaza Strip. The overall exercise focused The World Bank's efforts at supporting a better working on five sectors which included a full-scale private sector environment for the private sector also span ten years. review (*)This report contained contextual information,a Although not a large proportion of its overall portfolio, sectoral assessment and a set of prerequisites for private private sector development (PSD) operations have been sector development as the engine of socio-economic carried out in the past largely in the form of capital recovery. The starting point looked promising in spite financing in the context of projects that have provided of the volatile political situation. For example, in 1991, capacity-building and/or technical assistance to privale the private sector accounted for 85% of GDP, with the sector stakeholders. Examples include the Palestinian vast majority of productive assets in private hands an Hoz sing Project,designedto develop a secondarymortgage - unusual setup, in other economies public institutions market the Gaza Industrial Estate Project, established to tend to play a larger role. The private sector had a long spearhead PSD in Gaza and to foster Palestinian/Israeli history of entrepreneurship under difficult conditions and business links, as well as the Micro-Enterprise Project had proven remarkably resilient. It could rely on a good (currently closed), which aimed at creating incentives stock of human capital of high qublity relative to the for commercial banks to devise lending programmes for region and which was largely underutilized Moreover, SMEs. All three projects were co-financed by IFC (See substantial financial resources in the Palestinian Diaspora Box- end of article). In addition, MIGA, the Multi-Lateral could potentially be tapped for investment. The report Guarantee Agency initiated its Palestinian Investment concluded that given the right political, regulatory and Guarantee Fund, a multi-donor instrument which has market conditions, the private sector would be able to worked well in Bosnia-Herzegovina, and more recently flourish and play its expected role in the economy i.e. in Afghanistan, but which had LObe folded away due to - act as an engine for socio-economic growth. the current crisis. compromised by the current c;isis. The prevailing business Flscal and Budgetary Developments in 2003 3 climate has prevented project objectives from being met, notably in terms of stimulating new investments and UNSCO 'pdate, October 2, 6 job creation. Despite these difficulties, the Housing and R,,,,~ Economic Developments 7 hzdustrial Estate projects have succeeded in fostering an appreciable degree of institutional development. and Gaza Porrfollo 16 For the Mortgage and Recent Mlddle East and Nodl Afr~caPublications 17 Corporation, established under the Palestinian Housing P?flojectsand owned in majority by private investors, Doing Buslnes~In 2004: ~ndersstandln~~ e ~ u l a t l o n 19 Ten years down the line, a number of key structural the new cabinet led by Prime Minister Ahmed Qureia changes to the Palestinian private sector have been The Ministry of Planning is leadinga PA effort to draw up a implemented, e.g. the creation of a financial sector, Socio-EcorzomicStabilisation Plan. The Plan is due to be regulatory institutions and the development of capacity finalized in early December and will fulfill two functions both in the public and private sector. However, these ten - first, a PA legal requirement to present to the Palestinian years have known alternating periods of crisis and calm, Legislative Council a budget and spending plan for 2004, ultimately culminating in an aggravation of the political and second, as the PA's submission to the international context. Since September 2000, severe closures and community for financial support for 2004 to be tabled at curfews have been among the aggravating factors leading donors' meeting in December 2003. The Plan will present to a rolling-back of progress achieved in the late 90s in the PA's views on the appropriate mix of donor financing termsof economic recoveryand growth. In addition, key needed for 2004,for budget support,emergencyassistance infrastructureinvestments have been curtailedor damaged, and more conventionaldevelopment investment/technical sometimes even destroyed and businesses are once again assistance. It will also discuss pressing policy issues such operating in a high-risk environment. as the need to preserve and revitalize the private sector One look back into the past will reveal that in many and the need to create a sustainable public social safety respects, some of the challenges highlighted in the 1993 net system. assessment are still the same: market access remains a The World Bank and other international organizations problem; trade impediments prevail; the human resource (includingthe IMF, UNSCO and the EC)are supporting the base continues to be underutilized (also because of an PA to develop this Plan.The Bank has been involved most employment crisis); the legal and regulatory framework closely on the private sector and social safety net inputs, needs to be further streamlined and properly enforced; as well as the economic outlook. The premise for a policy credit facilities are hard to come by. Some of these focus on privatesector regeneration is that throughout the challenges need to be addressed irrespective of the three-year Intifada, external assistance to the Palestinians outcome of the current political impasse and work has was mainly targeted at budgetary support and emergency already started in this direction. operations. Very little direct assistancewas made available While criticalfor bolsteringa privatesector whose range of td the private sector in relative terms,althoughan effort was coping mechanisms is by now well tested,these efforts will made to stimulate the demand for Palestinian goods and not alone supplant the positive spill-over effect resulting services.In spite of the private sector's resiliencethus far, when businessconfidenceand normal operatingconditions coping strategiesare startingto erode. The time has come are once again restored. The philosophy behind current to suggest a process whereby the short-term needs of the effortsto support privatesector needs is that medium-term privatesector could be addressed as a first priority and an concerns need to be blended into short-term responses. effort made at stabilizing the situation and laying a sound basis for recovery in future. There is an understanding The PA1sSocio-Economic Stabilisation Plan among key donors of the need to build on existing support projects (credit to SMEs, repair & rehabilitation of private for 2004 Sustaining the Private Sector - infrastructure, firm-level assistance) and to expand into other areas (e.g. loan guarantees, business association The founding of the Palestinian Authority marks the most capacity-building). fundamental differencebetween the context ten years ago and today.Since its creation,the PNA has been responsible Work on the Plan, in particular on the PSD assessment, for delivering public services, developing national relied on inputs from the Ministry of National Economy strategies and policies and representing the interests of and the Coordination Councilof Palestinian PrivateSector the Palestinian people on the international scene. The Institutions.The final version of the Plan will availableon current PA has been through different configurations. As the Ministry of Planning-s web-site: www.mop.gov.ps. a result of a cabinet reshuffle in April 2003, the Ministry of Planning was created as a separate ministry in its own (*) DevelopingtheOccupiedTerritories-An Investmentin Peace; right with overall responsibilityfor management of foreign \701~~mePrivateSectorDevelopment,World Bank, Washington 3, assistance.This setup has been recently reconfirmed under D.C., September 1993 The International Finance Corporation - World Bank Group's private sector arm Since 1995 IFC has committed $51 million in debt and equity investments to fourteen private sector companies in the West Bank and Gaza (WB&G). Furthermore, IFC actively supported technical assistance work mainly focusing on the private and financial sectors. For the past three years, IFC has been concentrating on its portfolio supervision, where it is assisting its client companies weather the current political crisis, which adversely affected their operations and financial performance . Due to the political situation and non-conducive investment environment, IFC was unable to conduct any new investments in the private sector through its traditional investment instruments. Iiowever, IFC is currently looking into ways to provide private sector technical assistance and advisory services in the WB&G to (i) improve the business enabling environment, (ii) strengthening the financial markets, and (iii) stimulate the growth of small and medium-sized enterprises. ~z~()~-Sep~e/iz her 2003 2 Fiscal and Budgetaw Developments in 2003 by the International Manetaw Fund A. Performance during the first three quarters (excluding donor financed capital expenditures and net lending) were broadly as envisaged in the budget. The fiscal situation in the West Bank and Gaza This overall neutral expenditurestance was not uniform continues to be difficultand fragile despite some very over the first nine months or across expenditure positive developments that have taken place since the categories. Reflecting a progressive increase in public beginning of the year. While budgetary revenues were employment, the appreciation of the shekel against significantly higher than expected, a large shortfall in the dollar, and a salary increase for security personnel budget support by donors led to lower repayments of (of 8 percentlo% effective June 2003), the wage bill PA arrears than envisaged in the budget. Repayments increased from US$55 million in January to US$66 of tax revenue withheld by the GO1 were also much million in September,exceeding the monthly wage bill lower (011 a net basis) than emisaged in the budget. of IJS$58million envisaged in the budget. Indeed, civil The PA was nevertheless able to repay sizable arrears serviceemploymentincreased between December 2002 to the private sector, therefore somewhat alleviating and September 2003 by 2,108 employees, 62 percent the liquidity squeeze the sector has experienced in the of which were in social sectors, sig~ificantlybelow the last three years. incre~sefor2003envisaged in the revisedbudget (2,771 employees).In addition,security employmentincreased Total budgetary revenue has been remarkably strong by 3,057 during the same period, an increase which since the beginning of the year, and became even might result in exceedingthe 2003 budget appropriation stronger in the last few months. First, since their of IJS$248million for the security wage bill. resumption in December 2002, the regular monthly flows of clearance revenues from Israel have been On the other hand, non-wage expenditures were steady and exceeded budget assumptions by about $6 squeezed by a monthly average of US$10 million million at $36 million on average (on a net basis).' In below budget. This cut in non-wage expenditure was addition, domesticrevenue directly collectedby the PA more pronounced in the first quarter when less than of $21 million on average per month were above the one half of the budget appropriation was spent in budget expectations of $19 million as they benefited anticipation of a shortfall in revenues and financing, from a one-time transfer to the budget from the PA's but then began to ease after April to progressively commercial activities (PIF) of $16 million in April. reach the full budget appropriation and even exceed The collection of both tax and nontax revenues was it in July onward. This cautious easing was necessary stronger than expected, despite the difficult situation in order to ensure a continued smootll functioning of on the ground, as a result of in~provementsin tax the public administration and services. In addition to administration and a major collection effort. these budgeted expenditures, the PA was obliged to repay bills on behalf of municipalities owed to Israeli Overall, total revenue of $59 million per month on companies. These payments, which municipalities average was higher than expected, which is actually agreed to reimburse in the f ~ t u r eaveraged US$17 , ~ consistent withsignsthat economicactivity has stabilized million a month, and were deducted from the gross or even slightly improved since the beginning of the transfers by Israel out of the stock of tax revenues year. The remarkable strength in total revenue, given withheldin 2001-02, as well as from monthly clearance the circumstances, became even more pronounced in revenues for the water bill (Mekorot). July-September 2003, when it reached about $67-71 million per month, a level only 20 percent lower than The contraction in non-wage expeqditure early in the three years ago just before the beginning of the Intifada. year was required in view of the disappointingly low The takeover of the Petroleum Commission in June level of donors support.This mainlystemsfromshortfalls 2003,coupled with a changein managementand pricing of the assistance from Arab League donors that has been policy, resulted in sharp increasesin sales of petroleum much lower than the budget assumption(US$13million products by the commissionbeginninginJuly 2003and vs. US$30million per month) and a redefinition of EU's much stronger excise revenues. This is a structural shift assistance,which totaled only US$20million during the in revenue levels and composition. Clearance revenue first nine monthswhile the budget envisaged a monthly in August-September averaged $49 million per month support of US$10million. Out of the first disbursement as opposed to $34.5 million on average for the first of US$4i million from the EU to a special Treasury seven months. subaccount from a new financing facility agreed with the Palestinian Authority in June, US$6.3 million have Thestrongrevenueperformancedid nottrigger,however, an expansion in expenditure. Rather,total expenditures ' Budget data conveited dt the average late of exchange in Tanuary- Thesr payments not foreseen m the budgetare class~f~edas nrt lend~ng September 2003 of US$l=NIS4 57 in the table below Jzily-Septet17bcr 200.3 .? been released to the Treasuryand another US$30million than envisaged in the budget and may even further are expected to be disbursed before year-end. The increase if the upward trend in public employment 1JS$20 million disbursement from the United States3 continues. Second, the implementation of the civil in July could not fully offset these shortfallsjand, as a service law,(job regradingand salaryadjustment)starting result, total external budget support was only US22 with the Ministries of Education, will further increase million a month during Janualy-September,as opposed the wage bill, beginning in October. Concurrently, this to a budgeted US$45 million. trend has been compounded by an increase in the salaries of security personnel (as mentioned above). Because of the significant shortfall in external budget Third, prospects for external budget support are weak. support,which was expected in the budget to cover half The six-month extension of the Arab League budget of expenditures, and despite the strong performance support decided in March 2003 expired in September in revenue, the budget objective of a zero deficit could and there is not yet any renewal foreseen. In addition, not be achieved beyond the first quarter. The overall in view of the slow pace in the disbursement of the first fiscal balance (including budget support but excluding tranche out of the new EIJ financingfacility, it is unlikely net lending) which achieved a small surplus during the that the second tranche would be disbursed before the first quarter, deteriorated progressively thereafter and end of the year. Finally, as mentioned above, transfers reached an average monthly deficit of $11 million over of withheld tax revenues by Israel were stopped in January-September. September pending the resolution of cases brought to In spite of the unforeseen financing needs to cover the overallfiscal deficit,the Ministry of Finance (MOF) made On the positive side, the strong trend in total revenue good progress toward the objective of reducing the observed since the beginning of the year may be stock of budgetary arrears. As outlined in the budget, expected to continue, although the recent strikes by the MOF used the transfers from the accumulated stock Israeli customs and other tax official and the worsening of withheld tax revenue by Israel (net of the deductions in the security situation and the political environment made for the repayment by the PA on behalf of the may bear negatively on revenue developments. Palestinian municipalities)to repay arrears to the private Nevertheless, the recent increase in petroleum product sector of about $130 million, which helped the private salesfollowingthe price reduction should contribute to a sector recover somewhat from the liquidity squeeze continued strong revenue performance, and more than it experienced in the last three years. The transfers of offset the expected revenue shortfalls arising from the withheld tax revenue by Israel have been indeed steady cancellation inJune of the emergency tax of 6.5 percent as expected for the first seven months of the year but and the three days a month of salaries contribution for were then brought to an abrupt stop due to withholding job creation. of NIS 830 million by order of Israeli courts pending resolution of claims by private Israeli companies. These Overall, MoF will require at least US$30 million per transfers amounted to a net sum of NISlOO million month in external assistance for the October-December (about $20 million) monthly from January to May and period to cover non-wage expenditures. If external NISI50 million (about $30 million) in June and July. financing falls short of this amount, this will force Consequently, while the budget expected transfers the MOF to reduce nonwage expenditure, possibly of accumulated tax revenue to amount to $40 million incur new arrears, and increase the PA's indebtedness per month, the actual amount received averaged $19 toward the banking sector, instead of lowering it (by$65 million. million) as foreseen in the budget. As of end September, the MOF net indebtedness to the banking systemof $124 The MOF increased its indebtedness to the banking million is relatively high although it remains below its sector by $8 million by end-september, while it has peak in November 2002 at $179 million. repaid substantial arrears to the private sector, and accumulated a small amount of new arrears on the With respect to the integration of the capital budget into pension contributions to the GPIC, as well as other the overall PA budget, the MOF sent a questionnaire to public sector arrears, amounting to a total $59 million all PA ministries and agencies as well as to all donors during the first nine months of the year. inquiring about actual project disbursements in 2003 and 2004. Rased on the first six month data for 2003, indications tend to confirm that capital expenditures in 2003 would attain about $200 million.This information B. Prospects for the remainder of the year will also be used to underpin a much more detailed Prospects for the remainder of the year have worsened account of the 2004 capital budget than was the case on several counts. First, the wage bill will remain higher in 2003. -- - - 3About half of this disbursement was earmarked for reconstruction in Gaza which does not strictly quallfy as budget support Table Zp %JestBank and Gaza Fiscal Developmen%,Januaq-September2003 (bzmiilions qf US$) July August September Year to Date Total Monthly Average Total Revenue 60.7 61.5 60.5 480.4 53.4 DomesticRevenue 23.3 17.3 17.6 170.5 18.9 NetTax Revenue 15.4 10.7 12.5 104.7 11.6 Tax Revenues 15.6 12.6 15.2 114.2 12.7 Less: VATRefunds -0.2 -1.9 -2.7 -9.5 -1.1 Non-tax Revenue ClearanceRevenue Expendituresand Net Lending TotalExpenditures Wages and Salaries Non-wageExpenditures Capital Expenditures (PA-fmced) Withheld ClearanceRevenue Net DomesticBank Lending Net Change inArrears Source:MOF and ME: Closure in the West Bank and Gaza IJNSCO Update -October 2, 2003 Closure continues unabated. Although the number of Closure in many regards remains more ~ e v e r eThe so- . ~ permits for Palestinian workers in Israel has increased, called "Separation Barrier",which involves confiscation actual labor flows to Israel reveal almost no change of land and demolition of shops and homes, continues between 2002 and 2003,and the daily average number to be constructed with electrified fence, trenches, of Gazans working in Israel has increased only from barbed wire, watchtowers and military patrols. As of 3,000 to 4,000 persons per day.' Truckloads in and September 2003, the Wall had been constructed along out of Gaza remain highly restricted: between January 171knl running throughJenin,Tulkarm,Qalqiliya, Salfit, and August 2003, imported truckloads averaged 6,000 and Jerusalem Governorates. Recently, residents of the and outgoing truckloads 1,000 per month (compare Ramallah/Jerusalem/Bethlehem area have lost land for to 13,000 and 2,000, observed before the crisis in the further con~truction.~ year 2000). The Wall prevents an increasing number of Palestinians In the West Bank, approximately 4,300 permits for from accessing schools, medical services, workplaces work in Israel were issued monthly, and West Bank and markets. In addition to the Wall, a severe permit employment in Israel is actually lower in 2003 than in policy remains enforced with another series of trenches, 2002.' The only mentionable improvements in closure, fences, roadblocks and checkpoints, restricting therefore, were reductions of certain internal movement Palestinian travel in and out of Palestiniangovernorates, restrictionsand extended fishingdistance in Gaza;in the cities and towns. West Bank, a reported eight roadblocks were removed, only to be replaced by manned or roaming checkpoints on nearby roads or later reinstated,according to OCHA. As of August, OCHA counted 388 roadblocks in the northern West Bank alone, some of them new. Nablus, for example, has seen new closure restrictions,including the creation of a new checkpoint at Awarta for transit of goods. External closure continues to restrict travel of goods and persons through borders with neighboring countries. Curfew continues to impact approximately 200,000 Palestinians daily.3 Truckloads in and out of Gaza remain hlghly restricted:betweenJanuary and August 2003, imported truckloads averaged 6,000 and outgoing truckloads 1,000 per month (compare to 13,000 and 2,000, observed before the crisis in the year 2000),according to data received by UNSCO from Gaza crossing authorities. In the West Bank, approximately 4,300 permits for work in Israel were issued monthly. The only mentionable improvements, therefore, aside from limited employment in Israel were, in Gaza, reductions of certain internal movement restrictions,and extended Permit data is from the Palestinian Ministry of Labor, and shows an fishing distance; and in the West Bank, a reported eight roadblockswere increase between 2002 and 2003 from 3,000 to 4,000 permits in the removed, only to be replaced by manned or roaming checkpoints on West Bank and from approximately 6,000 to 14,000 permits in Gaza. nearby roads or later reinstated, according to OCHA.As of August, OCfU The estimated number of workers actually entering Israel (not including counted 388 roadblocks in the northern West Bank alone, some of them industrial zones) for work is substantially less, averaging approximately new. Nablus, for example, has seen new closure restrictions, including 6,500 persons betweenJanuary and August 2003,according to Palestinian the creation of a new checkpoint at Awarta for transit of goods. External National Security Force, Northern Command, Gaza. closure continues to restrict travel of goods and persons through borders with neighboring countries. PCBs data show that in 2002, an average of 47,000 West Bank Palestinian The PCBS reports that 165,000 dunums of land were confiscated in 76 were working in Israel; PCBs 2003 data show an average of 46,000 localities, displacing 2300 persons and leaving 42,100 between the wall persons were working in Israel in the first two quarters of 2003. and the green line. OCHA reports that while 3,000 acres of land have OCHA Website, estimate for January to August 2003; compare to been lost to the wall, an additional 40,000acres of high yield agricultural average of 520,000 persons impacted daily by curfew in 2002 (estimate land is also impacted. See also PENGO, and OCHA and Humanitarian for January to November). and Emergency Policy Group of the LACC for analysis of the Wall. Recent E c o n o ~Developments c The impact of closures following the outbreak of the Intqada and their progressive tightening through summer 2002 is clearly reflected in the reduction of Most recent economic data available (Palestinian Palestinian imports from Israel. Both first and second imports from Israel for the first half of the year; quarter 2003 again witnessed reduction from the levels Palestinian employment for the second quarter and in seen in the second half of 2002 (which represented a Israel for July; financial sector data for August) tends rebound from the depressed second quarter 2002, the to support a very modest economic recovery. The height of Israeli military operations in the West Bank). extent to which this recovery, already fragile, will be Second quarter imports were US$258million (NIS1,162 reversed by the increased violence and the re-imposition million). Expressed in dollars, this represents a 1.1% of curfews, travel and transit restrictionsand closures of increase over the first quarter of 2003 - expressed in the Israeli labor markets following the collapse of the shekels, however the value has fallen by 5.5%. (See unilateral Palestinian ceasefire (hudna) remains to be Figure1). seen. Indeed, a survey of Palestinian business owners and managers conducted in late August revealed that Figure 1. Merchandise Imports from Israel while in their view, the overall business climate had (million NI Shekel$) improved in August relative to July, their expectations regarding future employment, sales, and investment were pessimistic over both the coming month and coming year. ForeignTrade Trade traditionallyplayed an important role in the small and open Palestinian economy. Throughout the past five years, imports of final goods, services, equipment and intermediate inputs represented approximately 70 percent of GDP, while exports of goods and services ;epresented less than 20 percent of GDP. Unfortunately trade is badly registered, as most of it Source : Israeli Central Bureau of Statistics. takes place between the West Bank and Israel, where no custom stations exist (unlike trade between Gaza Second quarter (April-June) 2003 merchandise exports and Israel). The Israeli Central Bureau of Statistics (NIS 210 million,US$47million) declined by 7.0percent nevertheless estimates such flows, and we rely on when expressed in dollars, and 13.1 percent expressed their data to depict the evolution of trade since 1998. in shekels. They were 54 percent that of third quarter This only covers Palestinian trade with Israel, and (July-September) 2000 CUS$478 rrhllion), (see Figure not with the rest of the world. However, trade with 2). Israel represents the bulk of total Palestinian trade.' Furthermore, a significant share of imported goods from Israel are actually originating from third countries Figure 2. Merchandise Exports - "indirect imports". In addition, it does not appear to Israel that these relationships are considerably impacted by (million NIShekels) exchange rate movements, neither the depreciation of the New Israeli Shekel in the first half of 2002 or its subsequent appreciation during the first half of 2003are thought to have significantly altered the composition of Palestinian imports in terms of trading partners. (See Figure 9for shekel-dollar exchange rate movements). ' 1998, In imports from and via Israel represented 75 percent of total imports, while exports to Israel represented 96 percent of total exports (Astmp and Dessus, 2001, Trade Options for the Palestinian Economy: Some Orders of Magnitude, MENA Discussion Paper Series, 21, The World Bank). Source : Israeli Central Bureau of Statistics At least three factors explain the reduction in exports The negative impact on domestic employment of witnessed during the past two years: increased costs in job losses in Israel was aggravated by the difficulties transportation resultingfrom closure making Palestinian in conducting business within the West Bank and products less competitive; foreign purchasers switching Gaza: internal closures and curfews were and are to more reliable alternative sources of supply in the attended by significant transaction costs, disruption face of production and shipping interruptions; and in production cycles, losses of perishable output, and Palestinian producers switching to service domestic lower economies of scale. Only recently has domestic markets. employment recovered to the extent that the number of Palestinians employed within the West Bank and Gaza a Labor Markets reached levels last seen prior to the Intifad~z. In third quarter 2000, the number of West Bank As a result of external closures, nearly 100,000 Palestinians working in the West Bank was 352,000. Palestinian workers have lost their jobs in Israel since At its low point, in second and third quarter 2002, the September 2000. According to Palestinian Central number had reached 287,000and 288,000respectively. Bureau of Statistics (PCBS) data, 146,000 Palestinians Fourth quarter 2002 saw an increase in jobs in the (116,000from the West Bank, incl. EastJerusalem, and West Bank to 334,000,but this growth was short-lived, 30,000 from Gaza) were working in Israel and Israeli concentrated in agriculture (related to the olive harvest industrial estates and settlements during the thlrd quarter and reversed in the first quarter of 2003) and some 2000. By second quarter 2003, the number had fallen one-off infrastructure repair generating employment in to 54,000 (50,000 from the West Bank and 4,000 from construction. From a first quarter decline to 300,000, Gaza)-although this represented a slight increase from second quarter 2003 saw strong growth - to 371,000. the first quarter of the year, when PCBs reported 49,000 While much of this increase was again in agriculture workers so employed. (32,000) jobs and hence potentiallyseasonal, significant Fewer jobs in Israel translates directly into a decline in growth was also recorded in commerce (13,000), workers remittances (according to the Israeli Central construction (9,000),manufacturing (8,000),and services Bureau of Statistics, third quarter 2000 remittances (8,000) - which could herald more sustained growth totaled US$328 million; in second quarter 2003, only should political and security conditions permit. $40 million- a 90 percent decline, seeFigure3) is very In Gaza, 163,000 Gazans were domestically employed significant with direct consequence on the income of during third quarter 2000. By third quarter 2002, Palestinian households, as workers' remittances from a particularly poor period, this number had fallen Israel represented some 18 percent of their total to 111,000 (a 32 percent decline). Three quarters disposable incomes in 1999. In turn, lower incomes of continuous job growth now finds 175,000 Gazans inevitably affected the demand for Palestinian goods employed domestically. Again, roughly one-third of and services, and hence labor demand for Palestinian this growth since third quarter 2002 was in agriculture workers producing such goods and services within the (22,000 jobs were added before agricultural sector West Bank and Gaza. employment fell ten percent in second quarter 2002, emphasizing its seasonal nature); construction added 12,000 jobs since third quarter 2002 (also potentially Figure 3. Workers' Remittances seasonally related); job growth in services (13,000) from Israel and in commerce (10,000) since July-September 2002 (million US Dollars) points to potentially more permanent employment, 350 although likely contingent upon an improving political environment. 300 Despite the recent increases in employment, with 250 population growing at approximately 4.3 percent per 200 year, dependency ratios - the total population divided by the number of employed persons - increased 150 dramatically over the Intifada period. Whereas in the 100 third quarter of 2000 each job holder in the West Bank was supporting 4.3 persons, by the second quarter of 50 2003each employed person was supporting 5.4 persons. 0 In Gaza, the dependency ratio increased similarly,from Q1-00 Q3-00 Q1-01 Q3-01 Q1-02 Q3-02 5.9 to 7.4. Source Israeli Central Bureau of Statistics. : With population and labor force growing, declines in Palestinianemployment in Israel and Israeli settlements, When the definition of the labor force is broadened to and a lack of domestic job creation, unemployment and include "discouraged workers" - persons without jobs unemployment rates continued to grow dramatically who, because of their pessimism regarding the prospect , during the first two years of the Intifada. Even with of actually finding work, have stopped looking - the the job growth in recent quarters, the absolute number "relaxed definition" of unemployment shows similar of unemployed remains far in excess of pre-Intzfada trends. In this case, the unemployment rate in the levels. In the West Bank the unemployment rate in West Bank has increased from 16.9 percent (95,000 second quarter 2003 fell back to 22.3 percent from its individuals) in third quarter 2000 to 31.7 percent first quarter rate of 31.4 percent -the highest level since (195,000) in second quarter 2003; in Gaza, from 26.9 the beginning of the Intifada - with 121,000 persons percent (71,000 individuals) to 37.4 percent (107,000) looking for work. (During the third quarter of 2000,the over the same period (see Figure 6). number of West Bank unemployed was 38,000and the Monthly labor force data from the Israeli Central Bureau unemployment rate stood at 7.5 percent.); seeFigure 4. of Statistics showed an increase in ("legal") Palestinian In Gaza, second quarter 2003 unemployment stood at employment in Israel in July, the second monthly 28.4 percent (71,000 individuals); prior to the Intifada increase following after five months of continuous the rate 15.4 percent (35,000 persons). (Figure 9. decline. July's monthly average of 15,600 workers (Under International Labor Organization (ILO) standard compares with 17,000 in January 2003 (the highest definitions, a person must be actively seeking work in level during the Intifada) and 29,500 in September order to be considered "unemployed".) 2000. Of the 3,700 increase recorded in July, the bulk - 2,400-were in construction, similar toJune when 3,000 new construction jobs were noted. With the Figure 4. West Bank Unemployment collapse of the hudna and subsequent re-imposition (thousands of persons) of closure, reductions in these numbers are expected 200 in coming months. 180 160 140 Figure 6. Unemployment Rates 120 100 (solid line = ILO Standard; 80 bar = Relaxed Definition) 60 60% 40 20 0 Q3 Q1 Q3 Q1 Q3 Q1 2000 2001 2001 2002 2002 2003 Unemployed DiscouragedWorkers Source: PCBS. Data for West Bank includes East Jerusalem. 0% Q3 Q1 Q3 Q1 Q3 Q1 2000 2001 2001 2002 2002 2003 I.--= West Bank I 1 Gaza Strip Figure 5. Gaza Strip Unemployment (thousands of persons) Source: PCBS. Data for West Bank includes EastJerusalem. 120 Monthly labor force data from the Israeli Central Bureau of Statistics showed an increase in ("legal") Palestinian employment in Israel in July, the second monthly increase following after five months of continuous decline. July's monthly average,of 15,600 workers compares with 17,000 in Januaq 2003 (the highest level during the Intifada) and 29,500 in September 2000. Of the 3,700 increase recorded in July, the bulk - 2,400 - were in construction, similar to June when 3,000 new construction jobs were noted. With the Unemployed DiscouragedWorkers collapse of the hudna and subsequent re-imposition of closure, reductions in these numbers are expected Source: PCBs in coming months. Tbzble 1 Nzrmber.of Palestinians Enzplo-yed (tholunlzdsl Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 4-2 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 Workers in West Bank 352 316 292 314 314 316 304 287 288 334 300 371 Workers in Gaza 163 120 126 127 129 134 138 131 111 150 169 175 Workers from 116 40 69 72 60 66 56 30 50 49 43 50 1 West Bank in Israel Workers from 30 3 3 2 3 2 2 2 2 7 6 4 Gaza in Israel Total Employed 662 479 490 515 506 518 501 451 452 540 518 600 of which, Unpaid 65 62 46 47 46 48 48 51 40 61 52 76 Source: PCBs. Note. Israel includes employment m Israeli settlements and industnal estates. West Bank includes East Jerusalem PCBs Quarterly Labor Surveys consistentlyreport higher work for less than the prevailing wage - that cannot levels of Palestinian employment in Israel than does reach potential jobs remain jobless; at the same time, ICBS, which is likely the result of two factors: PCBs firms that face a shortage of labor are, therefore, not data includes Palestinianswho hold Israeliidentitycards inclined to reduce workers' compensation. (or foreign passports) as well as persons who hold Such behavior helps explain why the decline in labor Palestinianidentity- presumably ICBSconsiders foreign demand witnessed during the Intifada has resulted passport holders as foreigners and Israeli identity card primarily in higher unemployment and only to a lesser holders as Israelis; PCBs data includes "illegal" (non- extent in lower real wages. (In the West Bank, real permit holding) workers,whereas these undocumented wages have declined 10.8 percent since third quarter workers are likely to be under-counted by ICBS, as 2000; in Gaza, the decline is 2.7 percent. See Figure ICBS reports foreigners' employment on the basis of n. Indeed the decline in real wages has mostly employer reporting to the National Insurance Institute). been the result of increase consumer prices and not It should be noted that while Palestinian employment in decreased nominal wages. Even so, the decline in real Israel has grown since its low point during the second wages during the Intifada period is much less than quarter of last year, it remains significantly below pre- experienced in the 1995-96 period of external closure, Intifada levels. According to ICBS data, in September when real wages declined more than 20 percent in 2000 29,500 Palestinianswere legallyemployed in Israel response to a reduction in the number of Palestinians -5,000inagriculture;15,200inconstruction;and9,300 working in Israel - a reduction much smaller than that in other sectors. of the current Intifada. For wage earners continuing to be employed,the impact of the increase in dependency ratios during the course of the Intifada (and the implied obligation of working Figure 7. Real Wage Indices Palestinians to support greater numbers of extended (Third Quarter 2000 = 100) family member) is exacerbated by the decline in real 115 wages over the period, fairly consistently in the West 110 Bank, and more recently in the Gaza Strip. Nominal wages have actually increased slightly (2.6 percent in 105 both the West Bank and Gaza) over the 33 months since 100 third quarter 2000 - the average monthly wage in the West Bank stood at NIS 72.1 in second quarter 2003,and 95 NIS 51.7 in Gaza. (These compare with average monthly wages of NIS 121.0 received by Palestinians working 90 in Israel and Israeli settlements.) One explanation for 85 - - the stickiness of nominal wages may be the physical ai-oo a3-00 ai-01 a3-01 aiu2 a302 ai-03 partitioning of the labor market, the result of travel West Bank Gaza Strip restrictions associated with internal closure, which has resulted in increased mis-matches between supply and Source. PCBs average wage data; World Bank staff calculations. Data are demand for various types of labor in the local labor deflated by consumer price indices for West Bank and Gaza, re-based market. Unemployed workers - even those willing to to Third Quarter 2000 = 100. Prices Excluding food, the consumer price index in the West Bank has risen by 3.4 percent since December Consumer prices increased in both the West Bank and 2002 (4.5 percent annualized); in Gaza, the non-food Gaza in the nine month periodJanuary-September2003, CPI has risen 0.6 percent since December 2002 (0.8 by 2.5 percent in each of the West Bank and Gaza percent annualized) - rates below what were witnessed (annual rates of 3.3 percent). (See Figure 8). Such in previous years. In 2001, non-food prices rose 4.6 inflation is below the annual inflation rate recorded in percent in the West Bank and fell 0.6 percent in Gaza; 2002 for the West Bank (6.1 percent); but above the in 2002, non-food prices rose 8.7 percent in the West 2.2 percent for Gaza last year. Expected inflation for Bank and 3.0 percent in Gaza. the remainder of the year is expected to be low for several reasons. When transportation costs are also excluded -transportation pricesbeingmostaffectedbychanges Figure 8. Consumer Price Indices in the closure regime - the impact of exchange rate (July-September2000 = 100) movements on prices is clearly seen. Non-food, non- 120 transportation prices in the West Bank have increased 1.8 percent (2.4 percent annualized in the period 115 January-September 2003, and are unchanged in Gaza. During 2002, non-food, non-transportation prices rose 110 4.6 percent in the West Bank and 2.9 percent in Gaza. 105 In 2001, these prices rose 2.0 percent in the West Bank and fell 1.8 percent in Gaza (see Figure 10). 100 95 Dec Jun Dec Jun Dec Jun Dec Jun Price Indices, excl. Transportation -- 1999 2000 2000 2001 2001 2002 2002 2003 - (July-September2000 =100) e F West Bank Gaza Strip Source: World Bank calculations based on PCBS data. Figure shows three-month moving averages, re-based to ThirdQuarter Ouly-September) 2000 = 100. Much of the increase witnessed during the first six months of 2003 was in food prices, which exhibits strong seasonality and generally peaks during the second quarter (seeFigure9). As expected, food prices have begun to decline during the first two months of the third quarter and are likely to continue doing so before picking up again in the fourth. Source: World Bank calculations based on PCBs data. Figure shows three-month moving avenges, re-based to Third Quarter (July-September) Figure 9. Food Price lndices 2000 = 100. (July-September2000 = 100) 115 The strong depreciation of the Israeli shekel in the first half of 2002 (represented as an upward movement in 110 Figure11) and its subsequent appreciation (downward movement in the figure), particularlyin the period since 105 January 2003 explains to a large extent the acceleration of inflation: during the same period in 2002 and its 100 subsequent slowing down. Between the period December 2001 and May 2002 the 95 Shekel lost 15.8 percent of its value with respect to Dec Jun Dec Jun Dec Jun Dec Jun 1999 2000 2000 2001 2001 2002 2002 2003 - the US dollar. As a result, prices of goods imported into Israel from overseas - and by extension, into the '---- West Bank Gaza Strip West Bank and Gaza - mechanicallyincreased and the overall consumer price index, measured in shekels, Source: World Bank calculations based on PCBs data. Figure shows three-month moving averages, re-based to ThirdQuarter (Tuly-September) also increased to the extent that the CPI market basket 2000 = 100. consists of imported goods or services priced in dollars 1 Figure 12. TransportationPrice Indices, (July- (such as rents). With an appreciatingshekel- through September 2000 = 100) September, the shekel has risen 10.1 percent against 160 the dollar since May 2002 - imports become cheaper, 150 and inflation measured in shekels lessens (so long as importers pass on these reductions to consunlers). 140 130 Figure 11. NIS-US Dollar Exchange Rate 120 5.00 110 100 4.80 90 Dec Jun Dec Jun Dec Jun Dw; Jun 1999 2000 2000 2001 2001 2002 2002 2003 4.60 " s m West Bank -" Gaza Strip 4.40 Source: World Bank calc~~lationsbased on PCBs data. Figure shows three-month movingaverages, re-based to Third Quarter (July-September) 4.20 2000 = 100. : I 4.00 Dw: Jun Dee Jun Dec Jun Dec Jun n Financial Sector 1999 2000 2000 2001 2001 2002 2002 2003 The decline in overall economic activity in the West Source: Central Bank of Israel. Bank and Gaza since the beginning of the Intifada is clearly evident in the total value of checks cleared While exchange rate movements explain the basic by banks operating in the West Bank and Gaza Strip, trends in tradeable consumer prices (particularly in particularly in the periods of increased Israeli military non-food prices, less affected by seasonality)tightened operations. During the first nine months of 2000, i.e., closure during the period also impacted consumer prior to the Intifada, the value of checks presented for prices overall. This effect comes through both direct clearing averaged US$449million (US$301million in the and indirect channels: changes in the transportation West Bank, $148 million in Gaza) per month. During component of the consumer price index (which the twelve months of 2002, monthly values averaged measures transportation prices that increased directly less than half the pre-Intifada levels: US$148 million as a resultof heightened closure,but also through reflect in the West Bank; $67 million in Gaza; total, US$216 changes in world petroleum prices and,since petroleum million. is a dollar-priced import,changes in the exchange rate) August 2003 saw US$216 million cleared in the West and indirectly through increased costs of shipping for Bank and IJS$81 million in Gaza. For the first eight producers and distributors, which are in turn passed months of 2003, the total value of checks cleared on as increases in the final price of all goods faced by has increased 13.2 percent (15.2 percent in the West consumers in the market place. Bank, while increasing 8.8 percent in Gaza) relative Thus the tightening of closure associated with the to the January-August 2002 period. (See Figure 23). outbreak of the Intifada in fall 2000 affected both Gaza Similarly,the number of checks has also risen, but not and the West Bank,while Israeli military interventionsin as dramatically: 1.1 percent overall (5.2 percent, West the West Bank in autumn 2001 and spring 2002 explain Bank; minus 0.2 percent, Gaza). the difference in movement in the transportation price index in the West Bank and Gaza. In effect, these are negativeshocks that raise the level of the transportation price index. In 2003, transportation prices increased in the West Bank 7.8 percent through September (6.7 percent throughJune, before declining slightly inJuly); in Gaza,transportation costs have increased 3.3percent for the first nine months of the year (Figure 22). continued to decline, reflecting both lower demand on Figure 13. Total Value of Checks Cleared the part of borrowers and greater risk aversion on the (million US Dollars) part of bankers during a period of economic downturn 400 and political uncertainty. In such a climate, the granting 350 of new credits is scaled back and existing lending and 300 overdraft facilities are rolled-over less automatically. 250 200 During the Intifada credit to the resident private sector 150 has fallen (in the iirst month -October 2000- byUS$91 100 million, 7.2 percent). By August 2003, private sector 50 credit extended had reached US$794 million, a total 0 decline of US270 million (25.3 pkrcent decline) from Sep Mar Sep Mar Sep Mar September 2000's level. (Figure 15). 2000 2001 2001 2002 2002 2003 - --- West Bank Gaza Strip Figure 15. Credit to Private Sector (million US Dollalrs) Source Palestmwn Monetary Authority (PMA). 1,100 1,050 The Palestinian banking sector continues to try to 1,000 manage the current economic crisis by maintaining the 950 conservative investment positions taken over the years. Banks remain very liquid, with placements in the West 900 Bank and Gaza and, more significantly, overseas, and 850 have continued to increase their liquidity ratios since 800 September 2000- by end-August 2003, 22.7 percent of 750 the combined assets of commercial banks operating in the West Bank and Gaza were held in cash or deposits 700 Mar with other Banks; a further 49.1 percent of assets were Sep Mar Sep Mar Sep 2000 2001 2001 2002 2002 2003 held as deposits in foreign banks. These represent significant increases in asset allocation compared to Source: Palestinian Monetary Authority (PMA) September 2000 when 14.3 percent of total assets were maintained in cash and local bank deposits and a 47.6 Expressed as a share of total bank assets, private sector percent were in deposits with foreign banks. (Figure credit has declined from 22.1 p6rcent in September 24). 2000 percent to 17.0 percent end-August. (See Figure 14). Although the quality of bank's loan portfolios Figure 14. Composition of Bank Assets has suffered (non-performing loans have increased (percentage of Total Assets) and some collateral destroyed as the result of military 100% operations), the low percentage of loans to total assets 90% mitigates solvency concerns thus far for most banks. 80% 70% Just as lending has taken a dramatic downturn, the 60% 50% stock of resident private sector deposits witnessed a 40% considerable decline in the first &nth of the Intifada 30% (falling 10 percent in October 2000) followeh by 20% 10% continued decreases through the first quarter of 2002 - 0% reaching their lowest level in March 2002: LJS$3.3billion S ~ P Mar SeP Mar S ~ P Mar 2000 2001 2001 2002 2002 2003 ($420 millionbelow September 2000). After an increase in the second quarter and general stability through E4 L~qu~dAssets Abroad I3 L~quidAssets ~nWBG November 2002, deposits fell agaih in the final month Credit to PrlvateSector of the year. Since the beginning of 2003 a recovery in residents' deposits has been witnessed. Total deposits Source Palest~nranMonetary Authority (PMA) at end-August stood at US$3.67 billion (US$L.8 billion, West Bank; US$0.87 billion, Gaza). Since December Along with this increase in liquid assets is the decline 2002, residents' deposits have increased 4.5 percent in in Bank's lending activity. Throughout the Intifada, the West Bank; in Gaza, by 15.6 percent. Compared to the volume of credit extended to the private sector has pre-Intifada September 2000, West Bank deposits are up 7.9 percent. In Gaza, however, total deposits have Business respondents were asked their expectations declined, by 22.8 percent over the 35 month period of future employment, sales, and investment over (Figure 10. two time frames - "next month" and '.next year" - compared to "this month". Five answers were Figure 16. Total Deposits possible: "much higher"; "somewhat higher"; "about (million US Dollars) the same"; "somewhat lower"; and "much lower" than 3,000 current levels. 2.500 In general, both Gazan and West Bank businessmen were pessimistic over prospective improvements in 2,000 business operations over the short term ("next month"), but less pessimistic over the medium term ("next year"). 1,500 West Bank business managers and owners were more 1,000 optimistic than their Gazan counterparts in each category. (See Table 2). 500 The survey also asked businessmen whether their S ~ P Mar S ~ P Mar S ~ P Mar 2000 2001 2001 2002 2002 2003 - businesses have "suffered" during the past month and ---= past year. Whereas 63.6 percent of West Bank business West Bank Gaza Strip managers/owners responded "yes" in the past month (and 82.7 percent over the past year), in Gaza only Source: Palestinian Monetary Authority (PMA). 33.6 percent said their business suffered in the past month, while 67.8 percent said they had suffered over IB BusinessConfidence. the past year. The World Bank, with financial support from the Both the lower percentage reporting business "suffering" Government of Norway, has commissioned PCBs to in the past month and the considerable improvement conduct a series of surveys on the attitudes of both relative to the past year in Gaza can be seen as evidence Palestinian households and Palestinian business that the easing of movement restrictionswithin the Gaza owners and managers concerning their current Strip during July and August preceding the collapse of economic situation and their expectations concerning the hudna had had a positive impact - and that the short- and medium-term changes. Similar to consumer smaller improvement in the West Bank reflected the confidence, investor confidence, and business attitude less significant easing of restrictions witnessed there. surveys conduced around the world, the businesssurvey Additionally, the reinstatement of restrictions in Gaza measures current perceptions and future expectations; might be one reason for the greater pessimism noted of particular interest are questions related to future among Gazan business managers and owners looking employment levels, expected sales volumes, and future forward. investment plans, as they reveal information concerning overall optimism/pessimism and, over time, could indicate expectations of economic recovery. July-Septcr17ber 2003 Table 2. Expectations of Palestinian Busi~zessOz~vle?~sand n/lnna,oeil-s: "Next Month" and 'iVe~tYenil-.' Compared tcith C Z L ~Levels I Z ~ ~ ~ Employment Sales Investment NextMonth NextYear --- West Bank Much Higher 0.2% 0.0% 0.6% 0.4% 1.1% 0.8% Somewhat Higher 14.0% 32.6% 17.9% 60.1% 14.1% 29.6% No Change 61.3% 43.8% 52.4% 29.6% 64.6% 49.2% 1 Somewhat Lower 10.6% 12.4% 20.5% 6.5% 10.5% 16.8% Much Lower 13.9% 11.2% 8.7% 3.3% 9.7% 3.5% Gaza Strip I I I Much Higher 1.O% 1.8% 0.5% 1.O% 3.3% 3.3% Somewhat Higher 10.0% 26.0% 17.1% 34.2% 2.7% 3.2% No Change 36.2% 33.1% 39.9% 17.5% 76.9% 67.1% Somewhat Lower 49.0% 20.8% 31.9% 24.4% 7.3% 15.2% Much Lower 3.8% 18.3% 10.6% 22.9% 9.8% 11.3% Source: World Barik staff calculations based on PCBS survey data. Survey conducted August 24-September 9 Current Projects AllocatedAmounts Disbursed Total TFGW JOINT TFGWB JOINT Disbursed 197 Palestinian Housing Project 17.40 6.31 6.31 97 Legal Development Program 2.79 15.00 2.49 1 2.49 97 Palestinian Expatriate Professional Program 3.00 0.32 1.81 10.32 2.14 198 Gaza Industrial Estate 110.00 ( 14.75 1 14.75 1 I I I I I 99 Bethlehem 2000 125.00 13.61 / 24.39 13.41 127.80 1 99 Southern Area Water and Sanitation Project )21.00 1 I 15.62 1 115.62 1 100 Electricity Sector Management Project 00 Health System Development Project ---- 7.90 6.18 6.18 01 Municipal Infrastructure and Development Project I1 7.50 5.00 3.42 3.42 101 Solid Waste and Environmental Management Project /9.50 1 12.80 1 12.80 1 101 Education Action Project 1 01 Palestinian NGO I1 Project 18.00 111.62 1 2.88 1 I 1 02 Emergency Services Support Project 20.00 131.49 20.00 125.22 1 45.22 02 Integrated Community Development Project 10.00 1.12 1.12 --- 03 Emergency Services Support Project I1 25.00 28.54 16.07 16.07 03 Emergency Municipal Services Rehabilitation Project 20.00 2.29 2.29 Total 209.09 95.58 123.04 , 29.66 152.70 COMPLETEDPROJECTS 1 96 Municipal Infrastructure and Development Project 140.00 15.41 1 40.00 1 5.44 ( 45.44 95 Emergency Rehabilitation Project 30.00 63.50 30.00 1 63.48 93.48 97 MIGA Fund 10.00 10.00 ( 10.00 196 Emergency Rehabilitation Project I1 20.00 3.50 20.00 3.70 23.70 1 97 Community Development Project 10.00 2.81 10.00 2.73 12.73 97 Microenterprise Project 2.19 2.19 2.19 01 Emergency Response Program* 12.00 99 Community Development Project I1 8.00 8.00 8.00 95 Education and Health and Rehabilitation Project 20.00 29.10 20.00 19.05 39.05 1 97 Gaza Water and Sanitation Project 131.00 1 1 31.00 1 1 31.00 1 I I I I I 98 Palestinian NGO Proiect 110.00 14.60 1 10.00 1 4.96 114.96 1 TOTAL (Current andCompleted) 1402.28 204.50 1 304.23 1 129.03 433.25 1 1 I DonorFundedTrustFundPortfolio I AmountsAllocated I TotalDisbursed I I The Holst Fund (closed) I 285.72 I 285.72 I Technical Assistance Trust Fund (closed) PEACE Facilitv 24.99 15.99 *The Bank's $12 million grant was channeled through the Holst Fund Recent Middle East and N o ~Africa BubBications h The World Bank has released four economic reports on data on issues that relate to governance. Activities of critical topics in the Middle East and North Africa region the ~nediaare carefully monitored and controlled in (MENA):Trade,Governance, Gender and employment. most countries, stifling public debate. Accountability These reports, while conveying difficult messages and mechanisms in the region consistently continue to be reco~nmendations,were well received at the Bank weak because of excessive concentration of power Annual Meetingin Dubai and by MENA audiences more in the executive authority and limited channels for broadly. The topics were the subject of a number of citizen participation. Contestability for most public seminars and covered widely in the press. The reports officials through regular,fair and competitive processes will serve the Bank in the coming months (and years) remains rare. The report reveals that the failure of when following up in individual countries with policy MENA countries to ensure these has weakened their advice and support for reform.. economic growth and human development. And, as men and women in MENA are living today at a time of rising expectations and growing economic challenges, 13et:er ,:'. . A L L _L., Lir,hs- A Governance in the Middle East and North Africa affects m Iracle, Investment. :and 3e1~eli:pmentin 1 growth and development in the region. Econornic the @Iidc%le East .~:lci Ncsrt:h Africa: Engaging growth in the region would have been higher by as with the World. much as one percent a year had governance been as good as in similar but better performing countries in Thegreatesteconomicchallengeis to create enough jobs other regions.This book calls on countries in the region for its rapidlygrowinglaborforce,which is increasingly to commit to formulating and implementing national young and educated, to ward off threats to social and programs to enhance governance, including actional politicalstability inherent in high unemployment rates. measures to expand inclusiveness, to widen external This effort requires higher, and more sustainable, accountability, and to deepen internal accountability economic growth than has been achieved in the past mechanisms. two decades. Expanding trade and private investment offers the best hope. The potential is enormous given Inclusivenessdraws on the notion of equality,which is the region's human resources, skills, location, history, enshrined in virtually every constitution in the region. and opportunities. Inclusive governance maintains mechanisms to define and protect the basic rights of everyone, and it provides Oil, aid, and workers' remittances are unlikely to be remedies and recourse guaranteed by a rule of law. able to support enough employment and income in the Good governance is based on equal rights before the coming years. Rising competition in world markets is law without discrimination and equal opportunities to creating more pressure. Already, in employment rates, access the public services. are among the highest in the world. At the same time, the public sector cannot providk anymore the jobs Accountabilitydraws on the notion of representation,of needed by the scale of new entra* to the labor force. holding public figures answerable to their constituents The best and most sustainable wdy for all countries in - a value that most NIENA constitutions also recognize the region to address this challeng$is to acceleratetheir by vesting sovereignty in the people. Accountability trade and investment integration. depends on public transparency, which requires knowledge and readily available information on what The book analyzes whythe region bas yet to tapfullyinto government does. It also rests on mechanisms such the rich streamof globalcommercd and investment--and as contestability and a strong ethic of service to the the measures needed to do so, including i~nprovements public, which encourage government officials to act in the domestic investment climate and refor~nsin the in the public's interest-or be removed fro~noffice for policies of the region's trading partners.Its findingswill poor perfor~nance. appeal to policymakers in the region, the private sector and civil society,trade specialists,donors and partners, In general, MENA countries exhbit a pattern of limited and anyone with an interest in the historyand prospects and reluctant transparency. It has the least empirical of the Middle East and North Africa. Gender arrd Dt.\reloplnent in the Mic'ldle effective in reducing poverty,government employmen, East and North Africa: Wc;~-nenan the Public is an inefficient safety net since. Sphere. MENA needs a new development model based on a This World Bank report urges countries in MENA to reinvigorated private sector,greater integration into the translate notable investments in healthand educationinto world economy,and better management of oil resources. increased employmentopportunities for women. Doing These drivers of future growth and job creation require so would significantlyenhance the growth prospectsand a foundation of better governance. Moreover, this economic productivity of countries in the region.This is transformation necessitates a new "social contract" the first economic analyses on the subject. Women,the between the governments and their citizens. The "old" report says, remain a largely untapped resource in the social contract, helped spur economic growth while region despite generous public spending over the last keeping income inequality low. Mortality dramatically few decades on health and education. Although, the declined, life expectancy increased, school enrollment average literacy rate for women in MENA rose from 16.6 surged, and literacy levels rose. But over time, gaps percent in 1970 to 52.5 percent in 2000,and 63 percent widened between institutional arrangements and of university students are female in some countries. expectationson one side and the diminished capacity of MENA women are also healthier: their life expectancy governmentsto deliver welfare on the other side. By the has increased and maternal mortality has fallen. Yet early 1980s the inabilityof the social contract to sustain gains in health and education have not translated into the economic gains of previous decades became clear, commensurate gains in employment. Women's portion and by the late 1980s,the strains had grown into a major of the labor force in MENA has increased rapidly during economic crisis. Causing the economic difficulties were the last three decades but it still ranks among the lowest declining oil prices,shrinkingdemand for migrant labor, in the world. reduced remittance flows, and declining productivity.In response, governmentslaunched reforms,which helped The report also suggests that as countries progress to reduce debt levels and curb inflation. higher levels of per capita income, increased female labor force participationcan result in significantlyfaster Though the main responsibility for reforms lay with growth in incomes. Calculations for a subset of MENA MENA, external partners can help by opening their countries show that if female participation rates had markets to products from the region, encouraging more reached their potential, per capita GDP growth could intra-regional trade, boosting aid, and helping resolve have been 0.7 percent higher on average than the 1.9 the conflicts that continue to blight the region. percent during the last decade for these countries. The report lays out a plan of action for improving women's access to opportunity and economic security in the region. The four broad areas of the policy recommendations are a review of the legislative environment, the provisionof supportive infrastructure, continued attention to education, and reform of labor laws and regulations. Ln?ockir?gthe Emp!o~~rnentPotectial In the Middle East and %osth Africh: Towaicl a New Social Contract. This report argues that meeting this employment challenge will require the transformation on MENA's societies and economic structures. Creating work for today's unemployed workers and future, first-time job- seekers will require nearly100 million new jobs over the next two decades. This is much more than the number of jobs created in the region during the past fifty years. Labor market reforms are clearly needed. Private-sector jobs are few and far between, and the government continues to dominate labor markets. Although fairly 33ing Business in 2004: Underst~ndingRegleIatiom New World Bank Group Publication In Australia you can register a business in 2 days;in Haiti you need 203. In Denmark, you do not pay anything to start a business, while in Cambodia you pay 5 times income per capita. In Tunisia, you can enforce a contract in 7 days; in Guatemala this takes more than 4 years. Credit information systems have credit histories on almost every adult in New Zealand, Norway, and the United States, but cover less than 1 percent of the population in China, Nigeria, and Pakistan. Resolving bankruptcy takes six months in Ireland but more than 11 years in India. Doing Business collects and analyzes data on over 130 countries, including OECD countries. The analysis is based on assessments of each country's laws and regulations, with input from and verification by local experts who assist entrepreneurs in starting a business, hiring and firing workers, enforcing contracts, getting credit, and closing a business. Doing Business ifz2004 covers the fundamental aspects of a business life cycle, from starting a business to bankruptcy. Topics include access to credit, bankruptcy, entry regulations, contract enforcement, and labor regulations. Answers are offered to the following critical questions: Which is the most expensive country for starting a new business? Which countries have the most rigid regulations on hiring and firing? Which countries have the most extensive business entry procedures? Why does heavy regulation lead to inefficiency and corruption? What countries are most efficient in the area of contract enforcement? How do clearly-defined property rights enhance prosperity? What are the most successful regulatory models?Why? Over the next two years, Doing Business will address additional topics, indicator sets will be updated and the collection of case-studies will be expanded. The publication is a comprehensive resoulrce for investors, economic advisers, business developers and policymakers. *For more information please contact Mary Koussa at our Public Information Center in Al-Ram (mkoussa@worldbank.org) Indicators and analysis, and information on ordering the report, are available on the Doing Business website: httpvrnl.w-d Contact Numbers Mjest Sank Office I"4umbers: Task Force on Project Switchboard 02 - 2366500 lmplementations Fax 02 - 2366543 Stefano Mocci 02 - 2366535 Country Director Projects Disbursments Nigel Roberts Adel Odeh 02 - 2366506 02 2366515 - Samira Hillis Debuty Head of Office /NGOs 08-2823422 Sima Kanaan 02 - 2366536 External Affairs Elena Peresso Economics 02 2366509 - John Weffer 02 2366522 - Public lnformation Mary Koussa Portfolio/ 02 - 2366529 Private Sector Kazuki ltaya Gaaa Officer 02 - 2366501 Coordinator Husam Abu Dagga InfrastructureDevelopment Tel. 08-2823422,08-2824746 lbrahim Dajani Fax. 08-2824296 02 - 2366553 lnformation Technology Investment Officer Abdallah Nasr Youssef Habesch 02 2366527 - 02-2366517 Fax.02-2366521 Human Development Anne Johansen 02 2366514 - West Bank and Gaza Update editorial team Mary Koussa John Wetter Elena Peresso Kazuki Itaya For further information contact: Mary Koussa Tel. 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