In This Issue 1. New World Bank Paper ­ Disengagement, the Palestinian Economy and the Settlements /3 2. Averting a Human Crisis ­ the Effluent Lake at Beit Lahia /14 3. Recent Economic Developments /17 4. Fiscal and Monetary Developments, January-April 2004 /21 5. Leveraging Budgetary Support to the Palestinian Authority - the Public Financial Management Reform Trust Fun /32 6. West Bank & Gaza Country Team earns President's Award for Excellence /36 A Quarterly Publication of the West Bank and Gaza Office August 2004 Special contribution by the International Monetary Fund (IMF) Gaza Office West Bank Office 36 West Bank & Gaza Country Team earns President's Award for Excellence The year 2004 marks two milestone events in the Coming from six years of experience with conflict- history of the World Bank's program in the West Bank affected countries in the Balkans, Mr. Poortman praised & Gaza--ten years of dedicated support to Palestinian the standards and innovative approaches to post-conflict institutional and socio-economic development, and work set by the West Bank & Gaza program ten years a public recognition of these endeavors through the ago, starting early on with the first post-conflict trust President's Award for Excellence. fund through which the World Bank's assistance to the Palestinians is still managed today and the first post- The President's Awards for Excellence program conflict multi-donor trust fund (the Holst Fund). Over was instituted in 1996 as a means to celebrate the the past ten years, the team has achieved sustained outstanding service that World Bank teams provide to performance in the face of enormous challenges and clients throughout the world in terms of cooperation, the has demonstrated exemplary dedication, motivation, quality of the support, and the facilitation of equitable, and technical and diplomatic skills. stable and sustainable growth. Since then, over 20 teams representing more than 500 staff in core teams have Accepting the award on behalf of 104 team members, received official recognition for their work. Nigel Roberts, the current Country Director, pointed out that this is the first time the award has been granted to The 2004 award ceremony singled out the achievements a Country Team (as opposed to a Project Team). He of four teams: (1) IDA Credit Buydown; (2) China thanked all those who dedicated their time and efforts Tubercolosis Control Program; (3) China-Loess Plateau to the program, in particular during the last four years Rehabilitation Project and (4) West Bank & Gaza of intensified challenges. He described the Team's work Country Program Team. In all, 57 nominations were as a "collective act of professional devotion" and singled received and criteria for selection focused on results, out a few members who prefer to work behind the client responsiveness and cost-effectiveness. scenes to provide key support to the team in terms of "I think you've done a phenomenal job," World Bank security, transportation, cleanliness, analytical standards President James Wolfensohn told the award winners. "I and information management. also want to recognize that none of these awards would A big Thank You and Well Done are due to one and have been possible without partnership with people in all! places outside our institution." Partnership was also one of the achievements of the West Bank & Gaza program highlighted by Middle East and North Africa Vice-President, Christiaan Poortman. 35 Disbursements to-date Donor contributions have started flowing through the RTF and are being disbursed at a fast pace. As of June 15th 2004, US$31 million have been received from Canada, Norway and the United Kingdom. Japan has committed US$10 million. The EC, Belgium and France have expressed strong support for the Reform Fund. The Bank's own parallel contribution (US$20 million) in support of the PA's reform program accompanying the RTF was approved on June 3rd, 2004. To date, US$45 million have been disbursed to the PA through donor and Bank funds. Other potential donors include Germany, Belgium, the Netherlands and Sweden. The Fund will terminate on December 31st, 2005. July 2004 34 Leveraging Budgetary Support to the Palestinian Authority - the Public Financial Management Reform Trust Fun Background At the Ad Hoc Liaison Committee meeting in Rome December 10th, 2003, donors were alerted to the PA's widening budget financing gap. In spite of generous donor support to the PA budget throughout the Intifada years (approximately US$1.25 billion), clear evidence of donor fatigue suggested that an alternative mechanism was required to help leverage new budgetary assistance ­ one that also responded to donors' concerns about reform and public financial management and accountability. Given the Bank's past experience in managing multi-donor trust funds for budget support in the West Bank & Gaza, Afghanistan and other countries, the PA requested that such an instrument be set up and administered by the World Bank in the beginning of 2004. The Bank's Board of Directors approved the Public Financial Management Reform Trust Fund (RTF) on April 22nd, 2004. The main focus of this multi-donor instrument is to support improved PA financial management within a broader national reform agenda. In parallel, the PA has developed a Public Financial Management Reform Program (RP) as a basis for donors to channel budgetary assistance through the RTF. benchmarks and making disbursement decisions RTF Structure & Governance accordingly. It is advised in these decisions by a Guidance Committee comprising the Bank, as chair, the Mechanisms IMF and a limited number of other key Reform Fund donors (actual or potential contributors and partners of The RTF is aimed at leveraging donor budgetary support significant posture). through a single channel against a number of clearly defined financial accountability benchmarks that are In discussions earlier this year with the World Bank, consistent with the RP. budget support instruments the IMF and potential contributing donors, the PA has which helped push forward key PA reforms including, specified two sets of benchmarks consistent with the the creation of a single treasury account, reinforced Reform Program for 2004, each covering a period of transparency in PA public finances and auditing, full six months, and a timetable for their implementation. MoF responsibility for managing the PA payroll, and the Further benchmarks will be developed to cover each adoption of a Judiciary and Basic Law. subsequent six-month period. As the fund administrator, the Bank is responsible for monitoring and certifying compliance with the 33 Table2. West Bank and Gaza: Consolidated Banking System 1998 1999 2000 2001 2002 2003 2004 Dec Dec Dec Dec Mar Jun Sept Dec Jan Feb Mar April Net foreign assets 1,669 1,972 2,313 2,329 2,568 2,678 2,813 2,880 2,795 2,787 2,812 2,775 2,803 Palestinian Monetary Authority 182 184 275 259 274 286 378 380 374 383 403 410 418 Commercial banks 1,487 1,788 2,037 2,070 2,294 2,392 2,435 2,500 2,421 2,404 2,409 2,365 2,386 Net domestic assets 568 690 1,025 890 490 454 477 436 485 491 468 515 498 Net claims on the PA -41 -49 223 196 -40 -27 -11 -54 32 82 -18 50 20 Net claims on local government -17 -13 -12 -6 -22 -28 -32 -29 -66 -58 -73 -53 -62 Credit to the economy 740 919 1,015 923 866 829 869 878 884 882 926 894 920 Private sector loans and overdrafts 736 913 927 865 865 805 853 862 867 864 909 894 920 Loans to the private sector 299 402 416 378 353 346 333 364 367 370 372 372 395 Overdraft 381 453 429 421 424 371 424 409 409 405 446 413 416 Other 60 63 169 124 89 111 111 105 108 107 108 108 110 Nonfinancial public sector loans 4 6 88 58 1 24 16 16 17 17 17 and overdrafts Other items (net) -114 -167 -200 -224 -315 -320 -348 -358 -365 -414 -367 -377 -381 Deposits with banks 2,237 2,663 3,338 3,218 3,058 3,132 3,291 3,316 3,280 3,278 3,281 3,289 3,301 Private sector Deposits 2,216 2,615 3,274 3,161 2,980 3,051 3,205 3,236 3,209 3,214 3,219 3,228 3,238 Private sector demand deposits 605 673 808 757 752 815 929 974 1,007 1,010 1,027 1,023 1,053 Private sector time and savings 1,611 1,942 2,466 2,404 2,229 2,236 2,276 2,261 2,202 2,204 2,192 2,205 2,185 deposits Nonfinancial public enterprises 21 48 64 57 78 81 86 80 70 64 61 61 63 Memorandum items Currency composition of depos- 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 its 1/ U.S. dollars 60.7 63.1 62.1 60.5 62.4 61.8 61.3 60.4 59.7 59.2 58.4 Jordan dinars 24.2 22.2 20.7 22.1 22.3 21.9 22.0 22.6 23.5 23.1 23.4 New Israeli shequels 14.3 13.6 15.3 15.4 12.8 13.4 14.2 14.6 14.3 14.2 14.6 Other 0.8 1.1 1.9 1.9 2.5 3.0 2.5 2.4 2.5 3.5 3.6 Currency composition of credit 1/ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 U.S. dollars 49.1 57.0 60.1 66.6 67.6 68.2 67.6 67.4 62.6 63.5 66.0 Jordan dinars 25.3 21.0 16.2 14.2 14.3 14.3 13.3 14.4 13.6 12.5 12.8 New Israeli shequels 24.2 20.5 23.0 18.7 17.4 16.7 18.3 17.5 22.9 22.8 20.4 Other 1.4 1.5 0.8 0.5 0.7 0.8 0.8 0.8 0.8 1.2 0.8 Credit to the private sector as a share of private sector de- 33.1 34.5 30.4 28.7 28.3 26.5 26.4 26.5 27.0 26.9 28.2 posits in percent of GDP 17.4 20.3 23.2 25.0 28.0 ... ... ... 24.7 22.9 24.1 Deposits to GDP ratio(in percent) 52.5 58.9 76.3 87.3 99.0 ... ... ... 91.7 85.3 85.4 Source: Palestinian Monetary Authority 1/Residents only both public nonfinancial and private sectors. July 2004 32 Credit to the private sector grew at a slightly faster rate PA Employment than the growth in total domestic deposits. After being stagnant through 2001-03, credit witnessed a 4 percent As of end March, the PA had hired a net 2,702 government growth in the period compared with a 3 percent fall employees (additional to the end 2003 level). This is over the same period last year. This led to a 6 percent a seasonal peak because of the Ministry of Education improvement in the credit/deposit ratio as against an 8 recruitment for additional teachers. The budget allows percent fall in the same period last year. Both loans and for a net 3,500 additional positions by December 2004. overdrafts witnessed higher growth rates of 7 percent In comparison to the first quarter of 2003, the growth in and 2 percent respectively, consistent with the observed government employment in first quarter of 2004 was 5.6 rebound in economic activity in 2003 and the carryover percent. This was comprised of a 7.8 percent increase in 2004. Lending to the private sector of about US$ 850 in security employment and a 4.0 percent increase in million amounts to about one quarter of private sector civilian employment. Within civilian employment, social deposits. sector employment2 increased 37 percent compared to There was increased use of the banking sector by the that of the first quarter in 2003. Palestinian Authority (PA). Loans and overdrafts to the PA reached US$311 by April 2004, whereas they were (see Table 1 for fiscal update) $239 in December 2003. However the net credit position of the government improved by $US 8 million as PA deposits grew by 41percent compared with a 13 percent Recent Monetary Developments fall in the same period last year. The currency composition of deposits remained fairly Overall, the banking sector remained strong with no stable. There was continued dominance of the dollar perceptible negative impact of the Israeli raid on banks with 58 percent of private sector deposits. On the credit in West Bank and Gaza. While the seizure of US$ 8.5 side, the dollar gained more importance with 66 percent million dollars from banks' vaults in the West Bank of credit denominated in dollars compared to 63 percent and Gaza on February 25, 2004 by the Israeli Defense in December 2003. 15 percent of the deposits and 20 Forces unsettled the Palestinian Monetary Authority percent of credit were denominated in NIS, while the (PMA), and the banking sector, there was no detectable rest is worthy in Jordanian dinars. negative impact as of end April. Deposits did not decline implying that the public confidence in the banking (See Table 2 for monetary update) sector was maintained. However, the seizure of funds appears to have reduced the growth in deposits by the private sector and May and June data would be required to make a reliable assessment of the raid's impact. Total deposits increased by only 1 percent between December 2003 and April 2004, compared with 5 percent in the same period last year. This can be attributed to the decline in time deposits and a lower growth of demand deposits. Although savings deposits grew faster than last year, their impact on total private sector deposits was minimal because they are the smallest component of private sector deposits. 31 Table 1. West Bank and Gaza: Central Government Fiscal Developments, 2003-04 (in millions of U.S. dollars, unless otherwise stated) 2003 2004 Budget Actual Preliminary Actuals Budget Jan-April Monthly Avr. Annual Jan-April (at actual exchange rate) Jan Feb March April Avr. Total Avr. (at actual exchange rate) Revenue 585 747 66 73 73 66 70 278 67 70 845 282 Domestic 228 275 18 21 21 25 21 85 25 26 312 104 Net tax revenues ... 151 9 15 14 9 12 47 13 13 157 52 Tax revenues ... 165 13 15 18 19 16 64 14 14 172 57 VAT refunds ... -14 -4 0 -4 -10 -4 -18 -1 -1 -15 -5 Non-tax revenues ... 123 10 6 6 16 9 38 12 13 155 52 Gross monthly clearance 1/ 357 471 48 53 52 41 48 193 42 44 532 177 Expenditure 1,174 1,129 89 91 108 105 98 393 110 116 1,387 462 Gross wages 700 743 72 71 72 72 72 287 69 72 868 289 Civilian ... 455 46 44 45 45 45 180 69 46 550 183 Security ... 287 27 27 27 27 27 107 69 27 319 106 Non-wage expenditure 449 350 17 19 35 32 25 102 40 42 501 167 PA financed capital spending 24 36 0 1 1 2 1 4 2 2 19 6 Net lending 2/ 0 178 16 5 11 2 9 34 10 10 126 42 Balance -589 -561 -39 -23 -46 -41 -37 -149 -53 -56 -668 -223 External budget support 3/ 589 229 11 26 55 6 24 97 54 57 681 227 Balance including budget support 0 -332 -28 3 9 -35 -13 -52 1 1 13 4 Total other financing 0 332 28 -3 -9 35 13 52 -1 -1 -13 -4 Gross withheld clearance revenues 4/ 528 294 0 0 0 0 0 0 15 16 189 63 Net change in arrears (- = repayment) and -457 -46 -75 73 -57 52 -2 -8 -15 -16 -189 -63 residual Net domestic bank financing -72 85 104 -76 49 -17 15 60 -1 -1 -13 -4 Memorandum items Exchange rate NIS/$ 4.54 4.54 4.42 4.46 4.50 4.55 4.49 4.49 4.70 4.49 4.49 4.49 2-Social sector employment is defined as the employees of the following ministries: education, health, social affairs and justice, and the High Judicial Council. July 2004 30 it should stimulate private sector activity and bolster The Fiscal Deficit and Financing confidence in the VAT system, both of which would The projected 2004 budget gap of US$650 million--may contribute to a stronger VAT collection in the future. turn out to be slightly larger due to the NIS stronger Hence for the full year of 2004, the expectation is for a than expected position against the US dollar. The gap net repayment of NIS200 million (US$46 million) on top was planned to be covered entirely by donor budget of that projected in the budget. support. Should other sources of finance materialize, Expenditures and Net Lending such as the release of the remaining withheld clearance revenues of 2001-02, this would be spent on reducing Budgeted growth of expenditures is expected to surpass the stock of outstanding arrears and the PA's exposure that of revenues during 2004. The rationale was to to the domestic banking system. reverse the sharp squeeze in non-wage expenditure As of end April, the deficit was 33 percent smaller than which occurred throughout most of 2003 and carry envisaged due to a shortfall in external financing and an through the implementation of the civil service law expenditure squeeze. Despite impressive management of last year. Thus the Budget envisages a 23 percent of the budget, lower donor budget support could not increase above 2003's actual total outlays. The recovery cover the smaller than expected recurrent budget deficit, in non-wage expenditure is set for a growth of 43 leading to additional borrowing from domestic banks. percent during 2004, while the wage bill will increase by 17 percent. Net lending to municipalities (primarily Donor support amounted to $97 million in the first in order to cover their outstanding utility payments to four months of 2004, 57 percent lower than expected. Israeli providers) is expected to be 30 percent lower This comprised assistance from Saudi Arabia of US$31 than the outturn of 2003, when a back-log of bills owed million, Libya of US$5 million and joint donor funds from 2002 was cleared. However, this expectation will under the Emergency Services Support Program (ESSP) depend on greater efforts by municipalities in utility bill of US$22 million. The latter is designed to safeguard collection. non-wage expenditure on education, health, and social welfare. Finally, the EC's US$32 million held up from last The expected growth in expenditure outlays during year were cleared for spending in March; in addition, January-April did not materialize. Expenditures were the US$50 million which were disbursed by the EC US$393 million, 15 percent lower than budgeted, due to in April will only be released pending the vetting of a continued sharp squeeze (by 39 percent) in nonwage supplier's bills. expenditure, PA financed development spending (only US$4 million) and much lower PA net lending to The only other source of finance to cover the recurrent municipalities (totaling US$34 million) some 19 percent deficit has been domestic bank borrowing. The MOF lower than budgeted. The wage bill was US$287 is still unable to fulfill its obligations on social security million, within 1 percent of the budget expectation. payments (including pensions) and thus accumulating This was comprised of a slightly higher security wage some arrears. Nevertheless, by the end of April a net bill (1 percent) and a slightly lower civilian wage bill (2 repayment of US$58 million was registered for the percent). However, due to the increase in the wage bill January-April period, reducing the stock of arrears to and the squeeze in other types of expenditures, the wage US$312 million (8.7 percent of GDP), while the stock of bill now represents 73 percent of total expenditures-- the PA's debt to banks increased to US$253 million (7.1 much higher than the share of total wage outlays last per cent of GDP). year (66 percent). 29 Fiscal and Monetary Developments, January-April 2004 By the International Monetary Fund Fiscal Performance Revenue The rebound in budgetary revenues in 2003 is set to continue in 2004. Following the collapse of 2000-02, the 2004 Budget envisages a stronger revenue collection by 13 per cent above 2003's actual receipts in US dollar terms.1 This is driven mainly by growth in non-tax revenues collected domestically and indirect taxes collected by Israel (clearance revenues). The former Overall, this points to better than expected revenue are expected to grow 26 percent above 2003's actual performance. receipts, while the latter by 13 percent. VAT refunds surpassed the full year appropriation. Gross revenue performance during January-April at Refunds are paid out from gross domestic receipts and US$296 million, exceeded budgeting projection by 3.1 amounted to an estimated US$18 million at end April, of percent. Gross domestic tax receipts were higher than which US$8 million were paid during the first quarter, budgeted by some 12 percent but this was not the resulting in a slightly weaker than expected net domestic case for non-tax revenue which underperformed by 27 revenue position. The (annual) budget appropriation of percent, despite a transfer from the Palestine Investment US$15 million was for regular refunds accrued within Fund's profits to the budget of US$11 million in April. 2004. However, in addition to this amount, the ministry On the other hand, net clearance revenue was US$193 of finance (MOF) did not budget for a refund of arrears million, 9 percent higher than expected. This was driven from last year. Last year refunds amounted to only by much stronger excise tax performance, particularly US$16 million and an accumulated arrear position of petroleum excises, following the takeover of the about NIS240 million (US$53 million). Following the petroleum agency by the Ministry of Finance since last passage of the budget, the objective has been to clear July (chart 1). as much as possible in 2004, since almost 60 percent of these arrears are due to private sector contractors implementing donor projects. Although the immediate Or growth of 15.5 percent above 2003 receipts in NIS terms. effect of this measure has been lower net revenues, July 2004 28 worsened somewhat, and 8.5 percent considerably over In general, both Gazan and West Bank businessmen were the preceding month. on balance negative over prospective improvements in specific aspects of business operations over the short- Looking forward one month, more West Bank term ("next month"), turning slightly more optimistic businessmen are evenly divided between those expected over the medium-term ("next six months") in both an improvement relative to the current situation, those prospective employment and sales levels. Regarding foreseeing no change, and those expecting a decline. future investment plans, large majorities in both In Gaza, however, businessmen remained pessimistic Gaza and the West Bank saw little change in planned on balance. investment levels over the coming year relative to their In addition, business respondents were also asked their current spending (See Table 3). expectations of future employment and sales over two time frames ­ "next month" and "next six months" ­ as compared to the current situation. Expected investment levels over the coming year were also surveyed. Again, five answers were possible: "much higher"; "somewhat higher"; "about the same"; "somewhat lower"; and "much lower" than current levels. Table 3. Expectations of Palestinian Business Owners and Managers: "Next Month" and "Next Six Months" Compared with Current Levels Employment Sales Investment Next Month Next Six Months Next Month Next Six Months Next Year West Bank Much Higher 0.6% 0.6% 0.5% 0.6% 0.4% Somewhat Higher 11.1% 12.9% 21.5% 12.7% 7.6% No Change 65.9% 64.3% 50.8% 44.4% 68.8% Somewhat Lower 13.8% 15.5% 18.7% 14.7% 12.0% Much Lower 8.6% 6.7% 8.5% 5.1% 11.2% Gaza Strip Much Higher 0.0% 1.4% 0.0% 1.7% 0.2% Somewhat Higher 13.3% 45.1% 13.8% 45.1% 13.9% No Change 62.9% 31.2% 57.3% 26.2% 83.8% Somewhat Lower 22.7% 19.4% 23.1% 20.5% 0.6% Much Lower 1.1% 2.5% 5.8% 6.5% 1.5% Source: World Bank staff calculations based on PCBS survey data. Survey conducted May 2-15.. 27 Business Confidence. The World Bank, with financial support from the Government of Norway, has commissioned PCBS to conduct a series of surveys on the attitudes of both Palestinian households and Palestinian business owners and managers concerning their current economic situation and their expectations concerning short- and medium-term changes. Similar to consumer confidence, investor confidence, and business attitude surveys conduced around the world, the business survey Source: Palestinian Monetary Authority (PMA). measures current perceptions and future expectations; of particular interest are questions related to future In Gaza, deposits stood at $1.13 billion prior to the employment levels, expected sales volumes, and future Intifada, declining to $1.0 billion at end-2000. In 2001, investment plans, as they reveal information concerning they fell an additional 18.5 percent to end the year at overall optimism/pessimism and, over time, could $814 million; 2002 saw additional decline in the first indicate expectations of economic recovery. quarter followed by relative stability, ending the year at $752 million. 2003 witnessed a return to deposit Business establishment owners/managers were growth, continuing into the first quarter of 2004; April asked to evaluate the current business situation ­ the 2004's level of $855 million has brought deposits back overall business operating environment ­ compared to the level of May-July 2001 (Figure 19) to the situation one month ago and their expectations concerning the overall business climate one month in the future ­ would it be "much better", "somewhat better", "unchanged", "somewhat worse", or "much worse". In the most recent survey (conducted May 2-15, 2004) business managers in both the West Bank and Gaza were, on balance, negative in their assessment of the current situation compared to one month ago ­ with businessmen in both areas noting deterioration relative to the previous month. In the West Bank slightly more than one-third (37.4 Source: Palestinian Monetary Authority (PMA). percent) saw the current situation as unchanged; 24.0 percent saw somewhat of an improvement (and 0.8 The difference in deposit behavior between Gaza percent considerable improvement); one-fourth (24.9 and the West Bank likely reflects the higher rates of percent) saw somewhat of a worsening; and 12.9 unemployment and poverty, and hence lower savings, percent believed the situation to be much worse than in Gaza as well as the fact that West Bank residents one month ago. In Gaza, only 3.9 percent witnessed have greater family ties (and access to relatives) abroad, an improvement (0.3 percent saying "much better"; 3.6 primarily Jordan ­ a source of financial transfers and percent, "somewhat better"); one-half (51.6 percent) support. saw no change; 36.1 percent believing the situation had July 2004 26 The Palestinian banking sector continues to try to to US$825 million. Nevertheless this still represents a weather the current economic crisis by maintaining the 22.4 percent decline from pre-Intifada September 2000, very conservative investment positions taken over the when US$1.06 billion in credit was outstanding (Figure years. Banks remain very liquid, with placements in the 17). West Bank and Gaza and, more significantly, overseas and have continued to increase their liquidity ratios since September 2000 ­ by end-April 2004, 18.2 percent of the combined assets of commercial banks operating in the West Bank and Gaza were held in cash or deposits with other Banks; a further 48.1 percent of assets were held as deposits in foreign banks. These represent significant increases in asset allocation compared to September 2000 when 14.3 percent of total assets were maintained in cash and local bank deposits and a 47.6 percent were in deposits with foreign banks (Figure 16). Source: Palestinian Monetary Authority (PMA). Expressed as a share of total bank assets, private sector credit has declined from 22.1 percent in September 2000 percent to 17.9 percent end-April 2004 (see Figure 16). Although it is quite probable that the quality of bank's loan portfolios has suffered (non-performing loans have increased and some collateral destroyed as the result of military operations) as well, the low percentage of loans to total assets mitigates solvency concerns thus far for most banks. Source: Palestinian Monetary Authority (PMA). Resident private sector deposits witnessed a considerable decline in the first two months of the Intifada in both the Along with this increase in liquid assets is the decline West Bank and Gaza; however in subsequent months in Bank's lending activity. Throughout the first two different patterns emerged. years of the Intifada, the volume of credit extended to the private sector declined steadily, reflecting both In the West Bank, deposits levels recovered; from May lower demand on the part of borrowers and greater 2001 to April 2002 their level was essentially as in risk aversion on the part of bankers during a period of September 2000. Further growth in the second quarter economic downturn and political uncertainty. In such of 2002 was followed by another period of stability until a climate, the granting of new credits is scaled back and April 2003; over the next twelve months deposits again existing lending and overdraft facilities are rolled-over increased, reaching $2.88 billion end-April 2004, 11.1% less automatically. Over the past twelve months some above September 2000 (Figure 18). increase in lending to the resident private sector has been noted. From its low point in March 2003, when the stock of credit outstanding was US$737 million, lending has increased; at end-April 2004, amounting 25 on as increases in the final price of all goods faced by consumers in the market place. Banking Sector Thus the tightening of closure associated with the The decline in overall economic activity in the West outbreak of the Intifada in fall 2000 affected both Gaza Bank and Gaza since the beginning of the Intifada and the West Bank, while Israeli military interventions in is clearly evident in the total value of checks cleared the West Bank in autumn 2001 and spring 2002 explain by banks operating in the West Bank and Gaza Strip, the difference in movement in the transportation price particularly in the periods of increased Israeli military index in the West Bank and Gaza. In effect, these are operations. During the first nine months of 2000, i.e., negative shocks that raise the level of the transportation prior to the Intifada, the value of checks presented for price index (seen as upward steps in Figure 14). clearing averaged US$449 million (US$301 million in the West Bank, $148 million in Gaza) per month. During the twelve months of 2002, monthly values averaged less than half the pre-Intifada levels: US$148 million in the West Bank; $67 million in Gaza; total, US$216 million. April 2004 saw US$207 million cleared in the West Bank and US$79 million in Gaza. Compared to the first four months of 2003, the total value of checks cleared has increased 33.9 percent (43.8 percent in the West Bank and 7.3 percent in Gaza). However, this apparently strong increase in the West Bank is deceptive, reflecting the depressed volume in the January-April 2003 period. Source: World Bank calculations based on PCBS data. Figure shows three-month moving averages, re-based to Third Quarter Indeed, the average monthly value cleared in the West (July-September) 2000 = 100. Bank during the first four months of 2004 ($207 million) is below the monthly average for the July-December In 2003, transportation prices increased in the West 2003 period ($214 million). Likewise, the monthly Bank 7.9 percent; in Gaza, transportation costs have average thus far in 2004 for Gaza ($76 million) is below increased 3.1 percent. January-May 2004 has again seen the average recorded during the second half of 2003 increases in the transportation index ­ since December, ($80 million). it has risen 2.9 percent (7.0 percent annualized) in the West Bank, and by 3.8 percent (9.4 percent annualized) in Gaza. Source: Palestinian Monetary Authority (PMA). July 2004 24 emerges. Non-food, non-transportation prices in the overseas ­ and by extension, into the West Bank and West Bank increased 4.1 percent in 2003, and by 1.5 Gaza ­ mechanically increased and the overall consumer percent in Gaza (Figure 12). price index, also measured in shekels, increased ­ not by the same amount, but to the extent that the CPI market basket consists of imported goods and of services priced in dollars (such as rents). With an appreciating shekel ­ from February 2003 through December 2003 the shekel has strengthened 9.7 percent against the dollar (11.7 percent since the shekel's weakest point in May 2002) ­ imports become cheaper, and inflation measured in shekels lessens (to the extent that importers actually pass on these reductions to consumers). In the five months through May 2004, the shekel has again weakened against the dollar, depreciating by 4.6 percent. Consequently, inflation tendencies might Source: World Bank calculations based on PCBS data. Figure be expected to pick up during the course of this year, shows three-month moving averages, re-based to Third Quarter particularly if such depreciation continues. (July-September) 2000 = 100. (During 2002, non-food, non-transportation prices rose 4.6 percent in the West Bank and 2.6 percent in Gaza. In 2001, these prices rose 2.0 percent in the West Bank and fell 1.6 percent in Gaza.) Over the first five months of 2004, this measure of "core inflation" increased 1.2 percent in the West Bank (2.8 percent annualized) and 0.3 percent in Gaza (0.7 percent annualized). There is also a relationship between price movements in the West Bank and Gaza and changes in the shekel- dollar exchange rate. The depreciation of the Israeli shekel in 2001 and early 2002 (particularly strong in the period November 2001-April 2002; depreciation is Source: Central Bank of Israel.. represented as an upward movement in Figure 13) and While exchange rate movements help explain basic its subsequent appreciation, especially in the period trends in tradeable consumer goods prices (particularly in February-July 2003 (downward movement in the figure) non-food prices, which are less affected by seasonality) explains to a large extent the acceleration of inflation: tightened closure during the Intifada period also during the 2002 and its subsequent slowing down in impacted consumer prices overall. This effect comes 2003. through both direct and indirect channels: changes in From December 2000 to December 2001 the Shekel the transportation component of the consumer price lost 4.9 percent of its value with respect to the US index (which measures transportation prices that have dollar; from December 2001 until May 2002 the Shekel increased directly as a result of heightened closure) weakened a further 15.9 percent. As a result, prices of and indirectly through increased costs of shipping for goods, expressed in shekels, imported into Israel from producers and distributors, which are in turn passed 23 As Figure 10 indicates, much of 2003's increase in overall consumer prices occurred during the first six months of 2003, with price declines in the third quarter offset by price increases in the fourth. The price increases during the first two quarters was driven by increases in food prices. Food prices generally exhibit strong seasonality effects, peaking during the second quarter (see Figure 11). Source: World Bank calculations based on PCBS data. Figure shows three-month moving averages, re-based to Third Quarter (July-September) 2000 = 100. Leading the increase in 2003 in the West Bank was the Transport and Communications price index, up 7.9% last year (compared to 21.7 percent in 2002) and, somewhat surprisingly, Medical Care, up 8.0 percent. (In 2002, the West Bank Medical Care index fell 1.0 percent; in the period from the beginning of the Intifada Source: World Bank calculations based on PCBS data. Figure shows three-month moving averages, re-based to Third Quarter through December 2002, medical care prices rose only (July-September) 2000 = 100. 0.5 percent.) For the January-May 2004 period Textiles, As is customary, food prices then declined in the third Clothing, and Footwear have led the increase, rising 4.0 quarter before rising modestly in the fourth quarter percent since December. of the year and continued to increase during the first Cost of medical care in Gaza represented the second quarter of 2004. Over the course of 2003, the Food price largest increase in the components of the consumer index increased 4.7 percent in the West Bank and 3.5 price index in 2003, rising 4.9 percent (compared to percent in Gaza ­ in both areas above the increase in a 1.2 percent fall in 2002 in the Medical Care index the overall price index. for Gaza.) Medical care costs continued to increase in Excluding food, the consumer price index in the West 2004, with May's level 2.8 percent above December's Bank has risen by 4.1 in 2003; in Gaza, the non-food CPI index. The component with the largest increase in Gaza increased 1.8 percent last year ­ rates below what were last year, the Education price index, rose 7.3 percent. witnessed in previous years. (In 2001, non-food prices A significant change from 2002, when education prices rose 4.6 percent in the West Bank and fell 0.3 percent in rose 2.1 percent. (Education in the West Bank rose 5.8 Gaza; in 2002, non-food prices rose 8.7 percent in the percent in 2003, a rate less than in Gaza, but above the West Bank and by 2.8 percent in Gaza.) overall West Bank Consumer Price Index increase for the year.) Since December, education costs have stabilized, When the Transportation and Communication price declining 0.5 percent through May. Leading the overall index is also excluded ­ transportation prices being change in prices since December was Transportation most affected by changes in the closure regime, but and Communications, up 3.8 percent (see also Figure also by changes in world energy prices, which can be 14). quite erratic ­ a clearer portrait of general price changes July 2004 22 Monthly labor force data from the Israeli Central Bureau of Statistics showed an decrease in ("legal") Palestinian employment in Israel in March, the second monthly decrease following four months of growth. March's monthly average of 9,500 workers compares with 15,200 in January 2004 and 16,900 in January 2003 (the highest level during the Intifada).2 Of the 5,700 decrease recorded since January, the majority ­ 4,000 ­ were in construction, and make reflect seasonal considerations as well as security concerns. Currently 29 percent (2,800) are employed Source: PCBS. West Bank includes East Jerusalem. in agriculture; 55 percent (5,200) in construction; 16 percent (1,500) in other sectors. It is in these "other The average daily wage in the West Bank stood at NIS sectors" ­ primarily manufacturing and commerce 72.5 in first quarter 2004, and NIS 55.6 in Gaza; these ­ where the falloff since pre-Intifada employment levels compare with an average daily wage of NIS 127.5 has been greatest. According to ICBS data in September received by Palestinians working in Israel and Israeli 2000 29,500 Palestinians were legally employed in Israel settlements. ­ 5,000 in agriculture; 15,200 in construction; and 9,300 One explanation for the stickiness of nominal wages in other sectors. may be the physical partitioning of the labor market ­ the result of travel restrictions associated with internal closure ­ which has resulted in increased mis-matches Prices between supply and demand for various types of labor in the local labor market. Unemployed workers Consumer prices, measured in NI shekels, increased ­ even those willing to work for less than the prevailing in both the West Bank and Gaza in the twelve month wage ­ who cannot reach potential jobs remain period January-December 2003, by 4.3 percent in the jobless; at the same time, firms that face a shortage of West Bank and 2.5 percent in Gaza. For the West Bank, labor are, therefore, not inclined to reduce workers' this represents a reduction from 2002's inflation rate of compensation. 6.1 percent, and a slight increase over the 2.2 percent recorded last year in Gaza. During the first five months Such behavior helps explain why the decline in labor of 2004, inflation in the West Bank has slowed, to 2.9 demand witnessed during the Intifada has resulted percent (compared to the January-May 2003 level), while primarily in higher unemployment and only to a lesser in Gaza it has accelerated, to 3.7 percent (Figure 10). extent in lower real wages. Indeed the decline in real wages has mostly been the result of increase consumer prices and not decreased nominal wages. Even so, the PCBS Quarterly Labor Surveys consistently report higher levels decline in real wages during the Intifada period is much of Palestinian employment in Israel than does ICBS, the result less than experienced in the 1995-96 period of external of two factors: first, PCBS data includes Palestinians who hold Israeli identity cards (primarily East Jerusalem residents) or closure, when real wages declined more than 20 percent foreign passports as well as persons who hold Palestinian identity in response to a reduction in the number of Palestinians ­ presumably ICBS considers foreign passport holders as foreigners working in Israel ­ a reduction much smaller than that and Israeli identity card holders as Israelis; second, PCBS data includes "illegal" (non-permit holding) workers, whereas these of the current Intifada undocumented workers are likely to be under-counted by ICBS, as ICBS reports foreigners' employment on the basis of employers reporting to the National Insurance Institute. 21 Source: PCBS. Source: PCBS. When the definition of the labor force is broadened For wage earners continuing to be employed, the impact to include "discouraged workers" ­ persons without of the increase in dependency ratios during the course jobs who, because of their pessimism regarding the of the Intifada (and the implied obligation of working prospect of actually finding work, have stopped looking Palestinians to support greater numbers of extended ­ the "relaxed definition" of unemployment shows family member) is exacerbated by the decline in real similar trends. In this case, the relaxed definition wages over much of the period of the Intifada, fairly unemployment rate in the West Bank has increased from consistently in both the West Bank and in Gaza. In the 16.9 percent (95,000 individuals) in third quarter 2000 West Bank, real wages have declined 9.6 percent since to 30.9 percent (187,000) in first quarter 2004; in Gaza, fourth quarter 2000; in Gaza, they have decreased 9.4 from 26.9 percent (71,000 individuals) to 35.1 percent percent (see Figure 8). (99,000) over the same period (see Figures 6 and 7). Source: PCBS average wage data; World Bank staff calculations. West Bank includes East Jerusalem. Data are deflated by consumer Source: PCBS. Data for West Bank includes East Jerusalem. price indices for West Bank and Gaza, re-based to Fourth Quarter 2000 = 100. Nominal wages have actually increased (3.2 percent in the West Bank and 10.3 percent in Gaza) over the 42 months since third quarter 2000 (Figure 9). July 2004 20 Table 2. Number of Palestinians Employed (thousands) Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 Q-2 Q-3 Q-4 Q-1 2000 2000 2001 2001 2001 2001 2002 2002 2002 2002 2003 2003 2003 2003 2004 Working in West Bank 352 316 292 314 314 316 304 287 288 334 300 371 377 386 368 Working in Gaza 163 120 126 127 129 134 138 131 111 150 169 175 180 173 177 Working in Israel ­ from West Bank 116 40 69 72 60 66 56 30 50 49 43 50 59 54 49 Working in Israel 30 3 3 2 3 2 2 2 2 7 6 4 8 4 6 ­ from Gaza Strip Total Employed 662 479 490 515 506 518 501 451 452 540 518 600 624 617 602 of which, Unpaid 65 62 46 47 46 48 48 51 40 61 52 76 71 70 60 Family Member Source: PCBS. Data for West Bank includes East Jerusalem. Despite the recent increases in employment, with population growing at approximately 4.3 percent per year, dependency ratios ­ the total population divided by the number of employed persons ­ have increased significantly over the Intifada period. Whereas in the third quarter of 2000 each job holder in the West Bank was supporting 4.3 persons, by the first quarter of 2004 each employed person was supporting 5.7 persons. In Gaza the dependency ratio increased equally dramatically, from 5.9 to 7.5. Growing population and labor force, declining levels of Palestinian employment in Israel and Israeli settlements, Source: PCBS. Data for West Bank includes East Jerusalem and a lack of domestic job creation during the first . two years of the Intifada, led to dramatic increases (By contrast, during the third quarter of 2000 the in unemployment and unemployment rates. Despite number of West Bank unemployed was 38,000 and the the job growth in recent quarters, the number of unemployment rate stood at 7.5 percent. unemployed remains far in excess of pre-Intifada levels. (Under International Labor Organization (ILO) standard In Gaza, fourth quarter 2003 unemployment stood at definitions, a person must be actively seeking work in 31.9 percent (83,000 individuals); first quarter 2004 order to be considered "unemployed".) saw some improvement, with the rate declining to 29.8 percent (78,000 persons). Prior to the Intifada the Following a decline in the unemployment rate in the unemployment rate in Gaza was 15.4 percent (35,000 West Bank in the fourth quarter of 2003 to 20.7 percent persons). (Figure 5.) (down from its Intifada peak of 31.4 percent in first quarter 2003) first quarter 2004 again saw an increase, to 24.6 percent; 136,000 persons remain unemployed (see Figure 4). 19 At its low point during the second quarter of 2002 the transaction costs, disruptions in production cycles, losses number had fallen to 33,000 before rebounding in the of perishable output, and lower economies of scale. following quarter to 53,000; since then, the number By second quarter 2002 domestic employment had of Palestinian workers in Israel and settlements has recovered to the extent that the number of Palestinians been roughly stable, fluctuating in accordance with the employed within the West Bank and Gaza surpassed extent of closure imposed in the wake of specific terror the levels prior to the Intifada (see Table 2). At the incidents. In first quarter 2004, the number of workers same time, however, the number of unemployed has stood at 55,000 (49,000 from the West Bank and 6,000 continued to grow, from 73,000 in the pre-Intifada third from Gaza) quarter 2000 to 214,000 currently. Fewer jobs in Israel translates directly into a decline in In first quarter 2004 the number of West Bank workers remittances. According to the Israeli Central Palestinians working in the West Bank was 368,000 Bureau of Statistics, third quarter 2000 remittances totaled compared to 352,000 just before the Intifada. At its low US$328 million; in first quarter 2004, only $90 million ­ a point in second and third quarter 2002, their number 72.6 percent decline (Figure 3) ­ was remitted. had fallen to 287,000 and 288,000 respectively. Fourth quarter 2002 saw an increase in jobs in the West Bank to 334,000, but this growth was short-lived, concentrated in agriculture (related to the olive harvest and reversed in the first quarter of 2003) and some one-off infrastructure repair generating employment in construction. From a first quarter 2003 decline to 300,000, second quarter 2003 saw strong growth ­ to 371,000 ­ with continued expansion in the third (to 377,000) and fourth quarter (to 386,000) last year, followed by a decline (to 368,000) in the first quarter 2004. The most recent decline represents season factors in agriculture and construction, sectors responsible for the growth Source : Israeli Central Bureau of Statistics. witnessed in the latter half of 2003. This decrease has had direct consequence on the income In the Gaza Strip, 163,000 Gazans were domestically of Palestinian households, as workers' remittances employed during third quarter 2000. By third quarter from Israel represented some 18 percent of their total 2002, the low point during the Intifada, this number had disposable incomes in 1999. In turn, lower incomes fallen to 111,000 (a 32 percent decline). Four quarters of inevitably affected the demand for Palestinian goods continuous job growth found 180,000 Gazans employed and services and hence, labor demand for Palestinian inside the Gaza Strip, before the decline registered workers producing such goods and services within the during the fourth quarter of 2003 reduced the number West Bank and Gaza. of employed to 173,000. First quarter 2004 again witnessed domestic job growth in Gaza, to 177,000. It The negative impact that job losses in Israel has had on is likely that the increase in tension and deteriorating domestic employment was aggravated by the difficulties security environment in Gaza during spring 2004 will be in conducting business within the West Bank and Gaza reflected in the worsening employment numbers during as a result of internal closures and curfews, particularly the coming quarter. in 2002, which resulted in significant increases in July 2004 18 and Israel). The Israeli Central Bureau of Statistics Trends in merchandise exports to Israel have followed nevertheless estimates such flows, and we rely on a similar pattern: decline through summer 2002; some their data to depict the evolution of trade since 1998. rebound in the second half of that year; two consecutive This only covers Palestinian trade with Israel, and quarters of decline in 2003, followed by an uptick in not with the rest of the world. However, trade with the third quarter. Unlike imports, fourth quarter 2003 Israel represents the bulk of total Palestinian trade.1 saw a decline, while first quarter 2004 (NIS 263 million, Furthermore, a significant share of imported goods US$59 million equivalent) demonstrated strength. This from Israel are actually originating from third countries represents a 16.0 percent decline from third quarter 2000 ­ "indirect imports". In addition, it does not appear (Figure 2). that these relationships are considerably impacted by exchange rate movements; neither the depreciation of the New Israeli Shekel in the first half of 2002 nor its subsequent appreciation during 2003 is thought to have significantly altered the composition of Palestinian imports in terms of trading partners. (See Figure 13 for shekel-dollar exchange rate movements.) The impact of closures following the outbreak of the Intifada and their progressive tightening through summer 2002 were clearly reflected in the reduction of Palestinian imports from Israel. While both first and second quarter 2003 again witnessed reduction from Source : Israeli Central Bureau of Statistics. the levels seen in the second half of 2002 (which, in turn, represented a rebound from the depressed second At least three factors explain the reduction in exports quarter 2002, the height of Israeli military operations in witnessed during the past three years: increased costs in the West Bank), third and fourth quarter 2003 imports transportation resulting from closure making Palestinian were at levels not seen since the outbreak of the products less competitive; foreign purchasers switching Intifada. First quarter 2004 (NIS 1553 million; USD 349 to more reliable alternative sources of supply in the face million equivalent) declined slightly from fourth quarter of production and shipping interruptions; and Palestinian 2003; compared to the third quarter of 2000, the decline producers switching to service domestic markets. in imports is 20.0 percent (Figure 1). Labor Markets As a result of external closures nearly 100,000 Palestinian workers have lost their jobs in Israel since September 2000. According to Palestinian Central Bureau of Statistics (PCBS) data, 146,000 Palestinians (116,000 from the West Bank, incl. East Jerusalem, and 30,000 from Gaza) were working in Israel and Israeli industrial estates and settlements during the third quarter 2000. In 2000, imports from and via Israel represented 73 percent of total imports, while exports to Israel represented 92 percent of total Source : Israeli Central Bureau of Statistics. exports. 17 Recent Economic Developments of Palestinian business owners and managers conducted Economic Output. through May 2004 revealed that, in their view, the overall business climate had deteriorated; their expectations Most recent economic data available (Palestinian imports regarding future employment, sales, and investment are from Israel for the first three months of 2004; Palestinian at best neutral over the short-term and, on balance, only employment data through the first quarter of 2004 and modestly optimistic over a medium-term horizon (See in Israel through March; banking sector data through "Business Confidence" and Table 3, below). end-April) continue to provide evidence of a modest economic recovery throughout 2003 and extending into Table 1. Macroe conomic Projections 2003-2006 this year, but at a reduced rate of growth. 2003 2004 2005 2006 GDP (US$ million) 3,144 3,262 3,351 3,401 Underlying the economic stabilization of 2003 were real growth rate 6.1% 1.6% 0.4% -0.8% diminished levels of violence, fewer curfews, and GDP per capita (US$) 925 913 894 866 real growth rate 0.6% 1.6% 0.4% -0.8% more predictable (albeit intense) closures, as well as GDI per capita (US$) $1,467 $1,382 $1,299 $1,221 adaptation by Palestinian businesses to the contours of real growth rate 5.7% -7.7% -15.2% -22.0% a constrained West Bank economy. Looking forward, Unemployment Rate 26% 28% 31% 35% the extent to which this admittedly fragile growth path Poverty Rate 47% 50% 52% 56% can be sustained depends greatly upon the political/ World Bank staff projections, June 2004, "Status Quo" scenario. security situation and the extent to which travel and transit restrictions within the West Bank and Gaza, and whether closures of Israeli labor markets to Palestinian Foreign Trade workers are eased or tightened (as recent Government of Israel policy statements suggest). Trade traditionally played an important role in the small and open Palestinian economy. Throughout the past Under a political "status quo" scenario, economic five years, imports of final goods, services, equipment performance in the West Bank and Gaza will continue and intermediate inputs represented approximately 70 to be considerably below its previous levels, with the percent of GDP, while exports of goods and services domestic economic unable to generate employment represented less than 20 percent of GDP. necessary to absorb the increasing number of new entrants to the labor force. Private investment will Unfortunately trade is badly registered, as most of it continue to be depressed and increased foreign takes place between the West Bank and Israel, where investment unlikely (Table 1). Indeed, monthly surveys no custom stations exist (unlike trade between Gaza July 2004 16 1. Pumps and a transfer line to drain part of the lake to infiltration basins to be built at the site of the new wastewater treatment plant of which they will subsequently become a part of. However, before the plant is built, this infrastructure will pump effluent from the lake to eliminate the immediate threat of flooding from the effluent lake into local communities. 2. Technical assistance to supervise the works outlined above, and to carry out an environmental assessment, monitor the implementation of the environmental monitoring plan and to carry out detailed studies for remedial works. Phase II will ensure that a long-term solution the treatment of wastewater is implemented in north Gaza, and will consist of the following: Construction of the north Gaza wastewater treatment plant to secondary treatment and nitrogen removal with a design capacity of 35,000 m3/day. Implementation of remedial works, and operation and maintenance costs for the first 2 years of operation (excluding spare parts). The estimated cost of these activities is US$29.5 million. It is anticipated that the works for this component would take up to two years to be completed. Technical assistance to monitor and supervise the execution, as well as to monitor the implementation of the environmental monitoring plan during the construction period of item 2 above. The project will be implemented by PWA and should take about 42 months to complete. Upon completion the infrastructure component will be handed over to the Coastal Municipal Water Utility. 15 Today the effluent lake provides a natural breeding ground for mosquitoes and parasites. This environment is also conducive to the transmission of water-borne diseases. A large and growing number of children are already showing signs of digestive and respiratory health problems. An assessment of the health risks posed to the neighboring communities was conducted in June 2003. The worst affected population is that of Um An Nasir, a village situated at the very edge of the treatment plant and its overflow. The village clinic identified three principal health problems: (i) over 50% of children have problems with their digestive system; (ii) the population is also suffering from skin infections and allergies caused by the high prevalence of mosquitoes leading to ulcers, itching and rashes; and (iii) respiratory diseases are also widespread caused by gases from the sewage basins and the high levels of humidity in the summer. Health professionals are seriously concerned about the long-term effects of this hazardous environment, in particular the high level of nitrates in the groundwater, on the local population. These could lead to stunted growth, mental disorders and cancer. Rationale for Donor Involvement. The Bank has had considerable global experience in designing and implementing operations in response to Recognizing the immediate and serious threat to public natural disasters and emergencies arising in conflict- health and the environment by increased exposure affected settings. For this particular project, the Bank to sewage-borne disease from the effluent lake, PWA is working in partnership with other donors whose with support from several donors and humanitarian long involvement in water treatment operations is well coordination agencies formulated a phased action plan known and respected. These include the European to deal with the impeding threats and the longer-term Commission, SIDA, AFD and the EIB. The total project needs of proper wastewater treatment and disposal. cost is estimated at US$41.3 million. As an immediate step, PWA is continuing to take Objectives of the Bank Project temporary measures to prevent catastrophic over flowing of the effluent from the lake into the The objective of Phase I of the project is to mitigate surrounding communities. These short-term measures the immediate and gathering health and environmental therefore need to be complemented by further robust safety threats to the communities surrounding the effluent actions to eliminate the risk of flooding. Such actions lake at Beit Lahia through implementing a scheme to are included under the two next phases of the action transfer the effluent in the lake to the newly constructed plan ­ the first, to drain the lake and thus alleviate the infiltration basins east of Jabalya. The objective of Phase environmental and health threats associated with the II is to provide a satisfactory long-term solution to the existing wastewater treatment plant and the effluent treatment of wastewater for the Northern Governorate lake; the second, to provide a long-term solution to in Gaza through implementing the proposed North the wastewater treatment issue in northern Gaza by Gaza Wastewater Treatment Plant east of Jabalya. increasing the capacity for processing wastewater with Project Description improved effluent quality standards. The immediate steps, as well as the two phases should be considered Phase I will ensure that the immediate threat of flooding an integral part of the overall solution, thus allowing for posed to the communities that are neighboring the Beit higher flexibility with respect to arranging the necessary Lahia wastewater treatment plant is eliminated, and will financing and implementation as they could be run in finance the following: parallel. July 2004 14 Averting a Human Crisis ­ the Effluent Lake at Beit Lahia Background There are three wastewater treatment facilities in the Gaza Strip and all of these are designed for aerated lagoon process. The southern facility, serving part of Rafah City is essentially a collection pond with very minor treatment facilities. The poorly treated wastewater is disposed into the sea. The second plant serves Gaza City. It is about 50% overloaded but the effluent quality is still acceptable and the total effluent (about 40,000 m3/day) is mostly disposed to the sea. The third plant is in the north (at Beit Lahia) and is heavily overloaded, poorly functioning and not equipped with any disposal facilities. This has led to the current unfavorable situation of sewage overflows into the surrounding area putting human lives at risk. The Beit Lahia wastewater treatment plant (BLWTP) serves a population of 190,000 from the municipalities of Jabalya (including the refugee camp), Beit Lahya, Beit Hanoun and Um An Nasir. It was built in 1976 with a design load capacity of 5,000 cubic meters per day (CMD) of wastewater to secondary treatment levels. The original design, however, did not incorporate any effective effluent disposal and the treated effluent has been left to infiltrate into the sand dunes surrounding the plant. In the past this did not pose any risks since the effluent quality was good and the sandy soil was able to handle the volume of effluent through natural infiltration. During the past few years, many communities were provided with sewerage networks, which were subsequently connected to the BLWTP. Consequently, the volume of sewage inflows to the plant, currently estimated at 12,000 CMD, has substantially exceeded the plant's capacity. The combination of increasing volume of sewage inflows and insufficient capacity to handle this inflow properly has led to poorly treated effluent overflowing from the treatment plant into the surrounding sand dunes, creating a lake of nearly 1.5 million cubic meters of foul water, which now covers over 30 hectares (300 donums) and continues to rise, threatening to overflow and flood the neighboring communities. Without a concerted response to the persistent rise in the level of the effluent, such flooding is regarded as inevitable. Flooding has already occurred on two occasions in 1989 and 1992, when sand barriers collapsed under the pressure of the foul water. These floodings caused several fatalities, health problems and resulted in substantial damage to residential buildings in Beit Lahia. According to the Palestinian Water Authority (PWA), tens of thousands of people would be affected if the lake were to overflow into these communities again. PWA and other local agencies have intervened to strengthen and raise the height of the sand barriers around the lake to try to prevent such flooding from happening again, but these are only band-aid solutions to a serious threat to the residents of that area. 13 The best form of protection of the settlements is an open the efforts of the Ministry of Planning as part process of public consultation resulting in clear plans of, or as a supplement to, ongoing work on and procedures. The PA should seize the opportunity to a Palestinian Medium-Term Plan. This could then lead to a donor funding conference, re-assert leadership, show sensitivity to public concerns at which it would be important to define a and demonstrate technical competence. Civil society, "quick-hitting" program of investments. municipal governments, and the PLC all have essential Neither a general assessment nor a high-profile donor roles to play. It will also be important to disabuse the meeting have much added value in today's stagnant public of some of the more fanciful expectations that economic environment, however. Donors are already evacuation of the settlements may give rise to. providing high levels of emergency, humanitarian and reconstruction assistance and appear disinclined to do much more without a quantum shift in Palestinian economic prospects. Next steps The paper recommends that, without prejudice to the critical need for Palestinian security reform, the Quartet focus on a dialogue on what can be done to address closure and kick-start the Palestinian economy. A number of discrete tasks feeding into this dialogue may usefully be launched at once. These tasks include: · An in-depth review of ways to facilitate border cargo management; · A rapid review of the feasibility of industrial estates/export processing zones; · A study of Palestinian export possibilities; · A detailed review of the settlement assets and their potential uses; · Design work on the structure, functions, staffing and support needs of a special PA agency to be charged with managing the transfer and disposal of settlement assets. These preparatory studies should be accompanied by a joint PA-donor effort to define a time-bound, monitorable agenda of top-priority Palestinian reforms. This merits a higher level of energy by both the PA and the donors to this important topic. If commitment by the GoI, the PA and the Quartet to creating a proper enabling environment for economic development is forthcoming, a full reconstruction assessment of the type mentioned in the May 4 Quartet Action Plan would be very useful. One way to proceed would be for the donors to support July 2004 12 the process, e.g. a temporary special agency created clear economic and social goals and on rational physical by and reporting to the Palestinian Legislative Council; plans will do much to avoid such an embarrassment. determining the legal status of the lands and organizing In deciding the best use of settlement assets, the PA a transparent claims procedure; agreeing on the use may wish to take five factors into account: first, private of the settlement areas and assets; arranging for any claims on the relinquished land; second, the trade-off interim use pending disposal; and conducting a public between productive and social uses of space; third, information campaign. This preparatory period would environmental constraints; fourth, the usefulness of take at least six months. the infrastructure left behind for Palestinian needs; and Muncipalities should be carefully involved in the finally, planning for the longer-term (with particular process. Those areas which the PA does not decide attention to environmental considerations). to retain as `public land' would in time come under Assets can usefully be broken into three categories: municipal jurisdiction. In the Katif Block, in particular, public infrastructure, productive assets and houses. this gives rise to a need for technical and fiscal support Public infrastructure (roads, electricity and water to the municipalities concerned ­ to ensure that installations) is in principle best handed over to the settlement infrastructure (roads, electricity grids and responsible PA/municipal authorities. Productive assets sewage systems) is well-integrated, and that the aquifer (land, industrial infrastructure and equipment) can be is properly protected. sold to investors using transparent auction methods, Claims on land unless the land is needed for public projects or for green areas/tourism. Houses are a more difficult proposition. The special agency should receive and adjudicate If the houses are left standing, their disposal needs property claims. Accordingly, the law establishing the careful thought. Possibilities range as follows: giving agency should detail the procedures to be used, and houses away, renting houses at full economic cost, should define the rights of former owners. renting houses at subsidized cost, selling the houses at The status of settlement lands is complicated. According full or subsidized cost, to specific groups or on the open to the Palestinian Land Authority, about 90-95% of the market, and "densifying" the housing blocks with low- land on which the settlements are built in the Gaza Strip cost units. was declared `public land' during the Ottoman period. Allowing temporary occupation of vacated houses In the West Bank, land registration has been restricted, and land is a tempting option, but should be avoided. and the GoI has declared a considerable quantity of International experience, from the Balkans in particular, land privately held (but unregistered) to be `public' shows that temporary occupation may be impossible to ­ subsequently using it to create Israeli settlements. reverse peacefully. Instead of this, a maximum effort A significant number of individual land claims should should be made to dispose of the assets quickly. be anticipated against evacuated properties in the West Bank. Securing the settlements Disposing of the settlement assets Whether the settlement assets can be protected after their evacuation depends on the general security There is serious concern among Palestinians, situation. If the overall security environment is positive, international observers and the GoI that settlement assets the integrity of the settlements is likely to be respected, may find their way to those with power or connections. and problems would hopefully be limited to isolated This would seriously damage the PA's reputation. incidents of theft or squatting. A well-prepared and well-publicized policy based on 11 reluctance to invest in major new infrastructure assets as Handover and the role of the long as they perceive a risk of damage or destruction, international community and this continues to inhibit productive investment. The GoI believes that the PA may be unwilling or unable to secure the settlements, leading to looting and destruction, or to seizure of houses and other assets by The settlements ­ transferring militants. The GoI has indicated that it will not negotiate the assets the withdrawal process with the PA, but has signaled a willingness to coordinate the process at a technical level, The settlements and their either directly or through a third party. productive potential Third-party custodianship of settlement assets raises many questions. First, it is unclear that a third party has A total of 21 settlements are at issue in the Disengagement the legal authority to receive, administer and dispose of Plan ­ 17 in Gaza and 4 in the West Bank. The 17 these assets. A more pressing question is how a custodian settlements in Gaza occupy 15-20% of the land and by could in reality secure the assets against destruction, December 31, 2003, contained a population of 7,254 in looting or squatting in the event of a breakdown of approximately 1,500 to 2,000 houses. Some 32 square Palestinian authority. Third, a custodian would have kilometers have been allocated to agriculture, and to accept a significant reputational risk ­ even a token 160,000 square meters are occupied by buildings. There pass-through role would not absolve the custodian of is a small industrial zone inside the Katif Settlement blame for any subsequent misuse of the assets. Block ­ Neveh Dekalim, where 18 enterprises provide employment for 90 Israelis and 120 Palestinians. A more practical alternative to custodianship is for a third party to act as a "technical partner" in close support of Although situated on some of the best-watered and the PA. This would be more compatible with the views richest arable land in Gaza, the settlements use little of the PA, which sees itself as the rightful custodian of it and produce at well below the area's potential. of the relinquished assets, and would have the added Data on the economic output of the settlements needs benefit of strengthening, not displacing the PA. The further analysis. By one account, though, the 17 Gaza donors, through the Ad Hoc Liaison Committee (AHLC), settlements produce c. US$33 million in gross output should provide the advice and assistance needed to per annum, equivalent to only 3% of the 2003 GDP of ensure that the asset transfer process goes well and is the rest of the Gaza Strip. Most of this (US$25 million) is acceptable to all parties. derived from agriculture ­ with only 3.3 of the 32 square kilometers of agricultural land in use. Expansion of the Preparing for handover area under irrigation seems attractive, but the scarcity of water in Gaza and today's border management regime The GoI should make relevant information available mean that careful planning will be needed. to the PA or the third party well in advance of the first evacuations so that their transfer and disposal may be The Disengagement Plan also calls for the evacuation properly planned. It should also ensure that departing of four small settlements in the northern West Bank. settlers preserve any assets intended for handover to the These settlements house around 550 people, and are Palestinians. "dormitory communities". They do not contain any agricultural or industrial enterprises, and their productive The PA, in its turn, needs to mobilize without delay. potential is negligible ­ particularly if the houses were to Adequate preparation will involve a considerable be dismantled by the GoI. number of steps ­ creating a mechanism to oversee July 2004 10 forward with early local elections is therefore a welcome Unless donors perceive a fundamental change in step. In this respect, missing elements of the relevant Palestinian economic prospects, though, there is unlikely legislative framework and completion of the voter to be much "additional money". The rationale for a registration process are two immediate priorities. For major additional donor effort is a scenario promising its part, Israel will need to facilitate campaigning and true economic revival. Under such a scenario, the main voting so that a valid democratic process is feasible. constraints to public investment would be the availability of donor finance, and PA implementation capacity. Maintaining PA fiscal stability is essential and a vigorous financial effort by donors will help contain the current The World Bank has estimated that a "major new fiscal stress. For its part, though, the PA must take decisive effort" might bring in another US$1.5 billion over the steps to contain the escalating wage bill. Critical areas 2004-6 period (for a total of US$4.3 billion). If such are civil service reform and a comprehensive reform of a target could be achieved, only part of these funds the pension system. Legal, judicial and regulatory reform could be made available for infrastructure. Even with a also needs to progress. recovering economy, up to US$1 billion per year would need to be devoted to a combination of budget support, PA transparency has improved considerably during the humanitarian assistance and the transition to a new last two years; nonetheless, further measures are needed public pensions system. This would leave about US$500 to create confidence among investors, the public and million each year for the rehabilitation and development donors. This relates in particular to the establishment of infrastructure, and for the creation of public and of an independent audit function. In the interest of private capacity. minimizing anti-competitive bias, the PA should also move ahead with liquidating equity holdings and Any detailed assessment of Palestinian reconstruction privatizing most public enterprises. and development needs will require careful prioritization in view of other needs for budgetary and humanitarian Developing the infrastructure of assistance. It is appropriate, therefore, that any further Gaza and the West Bank reconstruction planning related to the Disengagement Plan should mesh with work being done by Ministry of A well-functioning infrastructure is important to improve Planning on the PA Medium-Term Plan (2005-7). the quality of life and popular confidence in the future, and to build a stable platform for private economic GoI facilitation of development and activity. An added benefit is the short-term impact humanitarian assistance of public works programs on the local construction industry and on employment. Donor frustration with operational policy of the Israeli Defense Force (IDF) is considerable and has not met If violence in Gaza and the northern West Bank abates, with an adequate response, despite GoI assurances from donor-financedrehabilitationanddevelopmentworkwill the highest levels that donor activity and humanitarian accelerate somewhat ­ as it did during the comparative aid will be fully facilitated. The destruction of donor- calm in mid-2003. A cease-fire in Gaza would encourage financed infrastructure assets is a serious issue for donors to repair key components of the infrastructure donors. While the scale of this is now significantly less network as well as press ahead with basic needs than in 2001-2, during May 2004 appreciable damage was projects delayed by insecurity. The restoration of freer done to economic infrastructure in Gaza (road surfaces, movement in the northern West Bank would encourage electricity transformers, water mains, the environs of rehabilitation of degraded local roads as well as delayed the Gaza Industrial Estate). Much of this had been built school and health infrastructure projects. or repaired with donor funds. Donors have expressed 9 transaction costs and make it impossible to fulfill export Developing Palestinian exports orders on time. In recent times, over 90% of Palestinian exports have gone to or through Israel. At the same Given that Israel will remain the primary Palestinian time, over 75% of imports have come from or through trading partner for some time to come, Palestinian Israel. economic recovery will depend on re-building commercial cooperation with Israel. Primary attention should therefore be given to regularizing cross-border trade with Israel. For exports, The best way to access third countries appears to lie extensive use can be made of advanced electronic in partnerships with Israeli companies. The business equipment at checkpoints, with large, truck-size scanners model that carries the most logic today, and which at border crossings such as Karni and Erez in Gaza and benefits both Palestinian and Israeli economies, is one in along the Green Line in the West Bank. In addition, which Israeli companies secure market access for high- simple but meaningful facilitation measures can be end products wholly or partly produced by Palestinian introduced ­ such as extending border operating hours enterprises. and ensuring perishable cargoes are given priority. A future Palestinian state should aspire to build its own For imports from certain countries, pre-shipment export base, but it will take time before such exports inspections by third parties and transport in specially make an appreciable contribution to living standards. sealed containers should allow some relaxation of the Palestinian products today have little independent current requirement that all cargoes destined for Gaza penetration in international markets. Cost structures and the West Bank must be inspected upon entry at ­ both labor and other inputs ­ are high compared Israeli ports. Bonded warehouses or logistic facilities with those of Jordan and Egypt, while productivity is for cargo moving to and from Gaza and the West Bank still poor. New business opportunities will need to be could also be introduced at Haifa and Ashdod. developed to maximize comparative advantage, for example in tourism, crafts, agriculture and in the apparel International gateways for the Palestinian economy, industry. Significant retooling and adjustment is needed, and a link between Gaza and the West Bank, should though, and donors should intensify programs aimed also be developed. The export routes running through at building competitiveness at the firm and the industry Israel (to the seaports of Ashdod and Haifa and to Ben levels. Gurion airport) have been unreliable and costly, due to inconsistent security procedures and the need to use Creating a growth-oriented Israeli logistic service providers. Similar issues arise in economic environment relation to cargo moved through Jordan and Egypt. If a satisfactory security protocol can be established, a sea If donor funds are to be put to effective use, the PA port in Gaza, provided it is accessible to West Bank needs to build an environment attractive to investors. businessmen and efficiently run by a private operator, Although the impact of PA efforts will remain limited is likely to be competitive ­ particularly if initiated unless GOI addresses the restrictions on internal as a `Roll-On, Roll-Off' facility, which could be built movement and external trade, this is no reason to delay in a relatively short time and for as little as US$15-20 important reform measuresboth in terms of establishing million. better control of domestic security and improving public accountability and governance structures. The holding of national and local elections would re- legitimize the PA and renew investor confidence in Palestinian governance. The recent PA decision to press July 2004 8 Table 3. Selected Macroeconomic Indicators Under "Complete Withdrawal Plus Trade Facilitation" Scenario with Different Aid Assumptions Over 2004-2006 and Impact in 2006 of Increasing Donor Support $2.8 billion in $4.3 billion in Impact in Total Donor Assistance Total Donor Assistance 2006 of Over 2004-2006 Over 2004-2006 Increasing Amount of Donor Support: Amount of Donor Support: Donor Support over period $1.0 $0.9 $0.9 $1.3 $1.5 $1.5 2004-2006 billion billion billion billion billion billion 2003 2004 2005 2006 2004 2005 2006 Gross Domestic Product (GDP), US$ million 3,144 3,338 3,740 4,196 3,703 4,468 4,909 + 713 West Bank 2,172 2,322 2,620 2,959 2,575 3,130 3,463 + 503 Gaza Strip 973 1,016 1,120 1,236 1,127 1,338 1,446 + 210 GDP per capita, US$ 925 935 998 1,068 1,037 1,192 1,250 + 182 West Bank 1,052 1,072 1,156 1,249 1,190 1,381 1,461 + 212 Gaza Strip 729 723 756 793 802 904 928 + 135 Real GDP growth rate (West Bank and Gaza) 6.1% 4.1% 9.4% 9.2% 15.4% 17.9% 7.2% Real GDP per capita growth rate (West Bank 0.6% -1.0% 4.3% 4.2% 9.8% 12.3% 2.2% and Gaza) Cumulative Real GDP per capita change since -1.0% 3.2% 7.6% 9.8% 23.3% 26.1% +18.5 pts. 2003 GDI per capita, US$ 1,467 1,403 1,403 1,424 1,590 1,757 1,758 + 334 West Bank 1,621 1,570 1,583 1,621 1,772 1,969 1,987 + 365 Gaza Strip 1,227 1,147 1,126 1,124 1,310 1,433 1,411 + 287 Real GDI growth rate (West Bank and Gaza) 11.5% -1.4% 2.4% 3.6% 11.6% 13.3% 2.3% Real GDI per capita growth rate (West Bank 5.7% -6.2% -2.4% -1.2% 6.2% 8.0% -2.4% and Gaza) Cumulative Real GDI per capita change since + 21.4 -6.2% -8.5% -9.5% 6.2% 14.7% 11.9% 2003 pts. Poverty Rate 47% 48% 48% 46% 42% 37% 37% - 10 pts. West Bank 37% 38% 38% 36% 32% 27% 27% - 9 pts. Gaza Strip 64% 66% 64% 64% 61% 53% 53% - 11 pts. Unemployment Rate 26% 27% 25% 23% 22% 16% 14% - 9 pts. West Bank 24% 25% 23% 21% 20% 13% 12% - 9 pts. Gaza Strip 29% 31% 29% 28% 26% 20% 20% - 8 pts. 7 A reasonable economic future is Changing today's economic possible reality A reduction in violence, a major easing of internal closures and the revival of trade across borders could Summary hold today's stabilization in place, depending on the number of Palestinian workers allowed into Israel. Israel The key to restoring Palestinian economic vitality is for should, at least, maintain the current level of Palestinian Israel to dramatically ease internal closures and restore workers entering Israel for several years to come. the predictable flow of goods across borders. Easing internal closures throughout the West Bank must be It is important to understand that additional donor accompanied by a credible Palestinian security effort. money alone can not solve today's economic problems. As long as Palestinian violence persists, the case for Donor disbursements of c. US$1 billion per annum (or dismantling closures will always be contestable. US$310 per person) are already very high. Additional aid in today's economy would help alleviate day-to-day Even today, though, it should be possible to re-establish hardship, but would have little lasting impact. As long a regular, predictable import/ export regime without as the web of Palestinian economic transactions remains compromising Israeli security. Removing restrictions shredded by closures, investors will stay away, and on the movement of cargo across borders is relatively short-term gains will not be sustainable. simpler ­ technologies and administrative methods exist that permit the orderly flow of cargo and the With a freeing-up of the constraints on economic maintenance of security. Introducing a new, efficient activity and committed Palestinian reform, an additional border cargo regime would make a major difference to major donor effort would make a difference ­ it would Palestinian welfare and commercial prospects. enable the Palestinian economy to turn the corner. An additional US$500 million per annum, on top of existing A maximum PA effort to fulfill its security obligations disbursements, could by 2006 spur a growth in real under the Road Map is needed if the donor community personal incomes of about 12% (and 20% in nominal is to argue for a major easing of today's closure terms), and could reduce unemployment to levels only regime. An easing of closures alone, though, will not slightly higher than prior to the intifada. (See Table 3) attract investors back to the Palestinian economy. A reinvigorated program of Palestinian reform, designed The alternative to this is stark. At the wrong end of the around measures that will create an investor-friendly spectrum of possible outcomes is a Palestinian economy business environment, is essential. There is no reason with unemployment levels of over 35% by 2006, and for the PA to delay implementation of such a program. with poverty afflicting upwards of 55%, and 70% in Gaza. With the PA weakened as it is, the time to get things right is running out. Borders and trade Creating an export-based economy depends above 4 Use of this word in the paper does not imply any judgment by the World Bank on the appropriate location of any political borders. all on efficient, unimpeded access to Israeli and third- The term is used to denote boundaries between areas of economic country markets. The current security-oriented border jurisdiction, and the movement of people and goods across them. Unless otherwise indicated, though, the location of these economic regime ­ and access through the West Bank or Gaza boundaries is assumed to be the security fence that surrounds the to the borders ­ involves unpredictable delays, and Gaza Strip, and the 1949 Armistice Line (the `Green Line') in the West Bank. uses inefficient methods which add considerably to July 2004 6 An additional US$1.5 billion in donor assistance over work in Israel, real per capita GDI would be unchanged three years under these conditions would increase per from 2003. Poverty and unemployment would remain capita GDP, but would no more than offset otherwise stuck at levels similar to those of today. This outcome declining personal incomes. The World Bank modeled makes it difficult to justify such extra outlays, other than the impact of disbursement increases of c. US$500 on humanitarian grounds. If the Erez Industrial Estate million per annum in 2004-6. This would boost real GDP closes, this will represent a further serious setback for per capita by 7% by 2006, but as a result of the decline in the Gaza economy. Table 2. Macroeconomic Indicators Under Various Scenarios "Disengagement Plus "Status Quo" "Disengagement" Lifting Internal Closures throughout the West Bank" 2003 2004 2005 2006 2004 2005 2006 2004 2005 2006 Gross Domestic Product 3,144 3,262 3,351 3,401 3,266 3,360 3,422 3,276 3,472 3,637 (GDP), US$ million West Bank 2,172 2,269 2,347 2,399 2,272 2,354 2,414 2,279 2,432 2,566 Gaza Strip 973 993 1,004 1,002 994 1,007 1,008 998 1,040 1,072 GDP per capita, US$ 925 913 894 866 915 897 871 917 926 926 West Bank 1,052 1,048 1,035 1,012 1,049 1,038 1,018 1,053 1,073 1,082 Gaza Strip 729 706 678 643 707 680 647 709 702 688 Real GDP growth rate 6.1% 1.6% 0.4% -0.8% 1.8% 0.6% -0.5% 2.2% 3.6% 2.3% (West Bank and Gaza) Real GDP per capita growth 0.6% -3.3% -4.3% -5.4% -3.1% -4.1% -5.0% -2.8% -1.3% -2.4% rate (West Bank and Gaza) Cumulative Real GDP per -3.3% -7.4% -12.4% -3.1% -7.1% -11.7% -2.8% -4.0% -6.3% capita change since 2003 Gross Disposable Income 1,467 1,382 1,299 1,221 1,383 1,301 1,227 1,386 1,331 1,282 (GDI) per capita, US$ West Bank 1,621 1,546 1,463 1,385 1,547 1,466 1,391 1,550 1,501 1,455 Gaza Strip 1,227 1,130 1,047 973 1,131 1,049 977 1,134 1,072 1,018 Real GDI growth rate (West 11.5% -3.0% -3.6% -3.6% -2.8% -3.4% -3.4% -2.6% -1.5% -1.4% Bank and Gaza) Real GDI per capita growth 5.7% -7.7% -8.1% -8.1% -7.5% -8.0% -7.8% -7.3% -6.1% -6.0% rate (West Bank and Gaza) Cumulative Real GDI per -7.7% -15.2% -22.0% -7.5% -14.9% -21.6% -7.3% -13.0% -18.2% capita change since 2003 Poverty Rate 47% 50% 52% 56% 49% 52% 56% 49% 50% 51% West Bank 37% 40% 43% 47% 40% 43% 47% 39% 40% 42% Gaza Strip 64% 68% 69% 72% 66% 69% 72% 66% 66% 68% Unemployment Rate 26% 28% 31% 35% 28% 31% 34% 28% 29% 31% West Bank 24% 26% 29% 33% 26% 29% 32% 26% 27% 29% Gaza Strip 29% 32% 35% 39% 32% 35% 38% 32% 33% 35% Population (million) 3.40 3.57 3.75 3.93 3.57 3.75 3.93 3.57 3.75 3.93 o/w Gaza Strip 1.33 1.41 1.48 1.56 1.41 1.48 1.56 1.41 1.48 1.56 5 The performance of the security services is less commendable, with instances of lawlessness in some The economic benefits of areas of the West Bank and Gaza (for instance, Jenin, disengagement ­ of itself, Nablus, and Rafah). The PA's Reform Program, launched in mid-2002, lost much of its early momentum during very limited the summer of 2003. It has registered relatively few achievements in the past year, most of them clustered in The Plan and closure the public financial accountability sphere. The GoI's Modified Disengagement Plan provides for the evacuation of settlements in Gaza and redeployment of the army along the Philadelphi Route and outside Excessive Dependence on Donor the Gaza "envelope", as well as the evacuation of four Assistance settlements in the northern West Bank. A disengagement of this type would benefit the Palestinian economy in The PA, the Palestinian economy and Palestinian two ways ­ reduced internal closures, and the transfer personal incomes have come to depend on high of settlement land and assets. But the Plan does not levels of donor financial support. Donors have more than doubled their pre-intifada disbursement provide for any change in border trade regimes, with levels, providing an average of US$950 million Israel retaining control of the Gaza Strip's external per annum between 2001-3, and in so doing perimeter, its airspace and coastline. adding 30% to GDP and over 20% to Palestinians' disposable incomes. In the short-run, little economic benefit Without donor help, living standards would be far worse; of the estimated US$713 million spent in 2002-3 on Table 2 shows that the differences between "status quo" welfare instruments (food, cash support, job creation), and disengagement as envisaged under the current Plan some 97% was donor-financed. This insinuation of are negligible; indeed, the Palestinian economy would donor funding into the core of the economy will be hard experience similar levels of decline. A step-by-step to unravel without a general economic recovery. disengagement would further reduce the aggregates due Although there was little sign of "donor fatigue" through to uncertainties and potential delays during each phase 2003 (with the exception of budget support from Arab of implementation. donors), these levels of assistance cannot be counted Were disengagement accompanied by the sealing of upon indefinitely. At the last major conference on Gaza's borders3 to labor and trade or by terminating the Palestinian economy in Rome in December 2003, supplies of water and electricity to Gaza, disengagement delegates stressed that the lack of a clear political horizon would create worse hardship than is seen today. This made it increasingly difficult to argue for sustained high could forfeit the international goodwill that Israel's levels of donor assistance to the West Bank and Gaza. initiative has created. Under such circumstances, the Plan's assertion that Israel is no longer responsible for the population of Gaza will not resonate. Nor would donors appreciate the implication that they must 2 In view of the current GoI policy inclinations, the Bank bear the humanitarian consequences of this style of has projected, for illustrative purposes only, a decline in Palestinian employment levels in Israel. This should not be disengagement. taken as a World Bank recommendation, however. 3 Public Opinion Pulse Poll, Jerusalem Media & Communications Center, December 2003. July 2004 4 point to further decline under the political `status quo'2 A weakened Palestinian Authority scenario (See Table 1). Assuming that the closure regime remains essentially unchanged, no appreciable revival The effectiveness of the Palestinian Authority (PA) has in private investment can be expected. Without new declined over the past year. Persistent restrictions on sources of capital, the trend towards informalization movement and a sustained fiscal crisis have taken their will continue, and new entrants to the labor market will toll on the PA. To its credit, the civilian apparatus still outstrip the economy's ability to provide work. By 2006 functions quite well, and PA core services ­ education, real GDP per capita (domestic output) would drop by health, water and electricity, sewerage and solid waste about 12% from 2003 levels, while real GDI per capita ­ continue to be delivered on a regular basis. Inevitably, (overall incomes including aid transfers) would decline however, service standards are in decline. by 22%. Unemployment would increase to 35% by 2006 The performance of the security services is less and poverty levels would reach 56%. commendable, with instances of lawlessness in some areas of the West Bank and Gaza (for Table 1 ­ Economic Scenarios, West Bank and Gaza Nominal GDP per Nominal GDI per Unemployment Rate Poverty Gaza Poverty cap. US$ cap. US$ (percent) Rate (percent) Rate (percent) As at end 2003 925 1,467 26 47 64 Projected Outcomes by 2006 1. Status Quo 866 1,221 35 56 72 2. Disengagement 871 1,227 34 56 72 3. Disengagement + lifting internal closures in West Bank and opening 1,068 1,424 23 46 64 borders 4. Disengagement + lifting internal closures in WB and opening borders 1,250 1,758 14 37 53 + extra US$1.5 billion from donors over 2004-2006 Note: Scenarios all assume labor flows to Israel are in gradual decline. Scenarios 1, 2, and 3 assume donor contributions of US$1 billion (2004), US$900 million (2005), and US$900 million (2006) = US$2.8 billion over three years. Scenario 4 assumes donor contributions of US$1.3 billion (2004), US$1.5 billion (2005), and US$1.5 billion (2006), a total of US$4.3 billion over three years. instance, Jenin, Nablus, and Rafah). The PA's Reform Sixteen percent of the total population, and one quarter Program, launched in mid-2002, lost much of its early of all Gazans, live in deep or "absolute" poverty, and momentum during the summer of 2003. It has registered are unable to feed themselves adequately, even with relatively few achievements in the past year, most of food aid. The population as a whole has reduced its them clustered in the public financial accountability per capita food consumption by 30-35% since 1999, sphere. and were it not for donor assistance (food aid having increased five-fold since 2000), malnutrition would be at Poverty and social stress levels associated with much poorer countries. Palestinian social resilience is notable despite donor still functions quite well, and PA core services ­ education, and PA predictions that Palestinian coping mechanisms health, water and electricity, sewerage and solid waste would be exhausted. However, the number of families ­ continue to be delivered on a regular basis. Inevitably, unable to cope is poised to increase quite sharply. however, service standards are in decline. 3 New World Bank Paper ­ Disengagement, the Palestinian Economy and the Settlements1 On June 6, 2004 the Israeli Cabinet approved a Modified Disengagement Plan for withdrawal from the Gaza Strip and from four settlements in the northern West Bank. In a recent paper on the Plan, the World Bank argues that if implemented with wisdom and foresight, disengagement could make a real difference to the Palestinian economy. Critical conditions for success include the radical easing of closure by Israel, which can be achieved without compromising Israel's security; a reinvigorated program of Palestinian reform designed around measures that will create an investor-friendly business environment, accompanied by a credible Palestinian security effort; and an additional US$1.5 billion in donor assistance over three years. Fragile stability The Palestinian economy The Palestinian economy stabilized in 2003. This today ­ few prospects reflected diminished levels of violence, fewer curfews and more predictable (albeit intense) closures ­ and Economic decline adaptation by Palestinian businesses to the contours of a cantonized West Bank economy. It also reflects the fiscal The Palestinian recession between September 2000 stimulus from Israel's resumption of revenue transfers in and late 2002 is among the worst in modern history. late 2002. Unemployment increased from 10% of the workforce to an average of 41% during 2002, and the number of the This stabilization, however, possesses little vitality. poor rose from 20% to over 50% of the population. In The economy continues to function at well below Gaza, unemployment exceeded 46% of the workforce, its previous capacity, and under today's movement and the poverty level rose to 68%. Private investment restrictions cannot generate the employment needed and trade fell dramatically through 2001 and 2002. to absorb a rapidly expanding workforce ­ let alone mount a sustained attack on unemployment. Sustaining The precipitator of this economic crisis has been `closure' this recovery will prove difficult as stabilization in 2003 ­ a multi-faceted system of restrictions on the movement resulted from factors which will either not be repeated, of goods and people designed to protect Israelis in Israel or may not last. itself and in the settlements. Closures have cut through The World Bank drew up a series of macro-economic the web of Palestinian economic transactions, raising the projections based on the Government of Israel's (GoI) costs of doing business and disrupting the predictability Modified Disengagement Plan of. These projections needed for orderly economic life. 1 The full paper can be found at: www.worldbank.org\we July 2004 2 Contact Numbers West Bank Office Numbers: Switchboard 02-2366500 Health, Education, Social Projects Disbursments Fax: 02-2366543 Protection Adel Odeh Anne Johansen Tel. 02-2366515 Country Director Tel. 02-2366514 Samira Hillis Nigel Roberts Tel. 08-2823422 Tel. 02-2366506 Task Force on Project Implementation/ External Affairs Deputy Head of Office/Civil Society LACC Secretariat(Head) Elena Peresso Sima Kanaan Stefano Mocci Tel. 02-2366509 Tel. 02-2366541 Tel. 02-2366535 Public Information Economics Infrastructure Development Mary Koussa John Wetter Ibrahim Dajani Tel. 02-2366529 Tel. 02-2366549 Tel. 02-2366553 Portfolio Husam Abu Dagga Tel. 08-2823422 Gaza Office: International Finance Corporation Coordinator Investment Officer Husam Abu Dagga Youssef Habesch Tel. 08-2823422/2824746 Tel. 02-2366517 Fax: 08­2824296 Fax: 02-2366521 West Bank and Gaza Update editorial team Elena Peresso Mary Koussa John Wetter Email for free subscription: mkoussa@worldbank.org Newsletter at Internet: http://www.worldbank.org/we Special thanks to Karim Nashashibi (IMF), Elena Peresso, Suhail Jme'an and Jhon Wetter for their contributions to this issue of the Update.