ReliefWeb

Executive Summary

Three years after the 2014 hostilities (08 July – 26 August), Gaza is yet to recover from the extensive destruction caused by the conflict. A crippling Israeli economic blockade (land, air and sea), now entering its eleventh year, continues to take a debilitating toll on all aspects of life in the occupied Palestinian territory, with a loss in potential GDP of over 50%.1 One-third of Gaza’s arable land, and more than half of its Oslo-agreed fishing waters – both unilaterally declared by Israel as high risk / no-go zones –remain off-limits to Gazan economic use. Isolated and under severe restrictions on movement of people and trade, Gaza’s economic troubles are further compounded by continued chronic shortages in electricity, water2 , and fuel supplies, and by an unconventional institutional and regulatory environment caused by ten years of Palestinian internal political split.

Despite reported progress in housing and infrastructure repairs3 , three years after the latest hostilities Gaza’s reconstruction is proceeding slower than expected and falling behind schedule. As of 31 December 2016, the latest update from the World Bank indicates that only 51% (US$1.796 billion) of the US$3.5 billion pledged for Gaza reconstruction at the October 2014 Cairo Conference has been disbursed.4 Of the disbursed funds, only US$670 million, or 17% of the estimated US$3.875 billion estimated recovery and reconstruction plan of the Palestinian government – titled “Detailed Needs Assessment (DNA) and Recovery Framework for Gaza Reconstruction”– were allocated to finance priority needs in five identified sectors affected by the 2014 war.5 Critically, only US$16 million of the disbursed money was allocated to meet the productive sector’s recovery needs estimated by the DNA at US$602 million.

Without any real change in the status quo, and with the government’s DNA programme currently underfunded, Gaza’s economic recovery remains a distant goal. However, given the scale of Gaza’s ongoing economic predicament, inaction will have serious and widespread consequences, including higher rates of unemployment, poverty and food insecurity, worsening infrastructure, the dwindling of even basic public services, including education and healthcare; continued environmental degradation and deepening institutional decay.

Gaza’s population (43% of which is under the age of 15) is growing at a rate of 3.3% per year (2016),7 recently surpassing the 2 million mark. Its young labour force is increasing by 4.5% per year, with the majority of new entrants to the labour market – estimated at 35,000 annually – becoming unemployed. Currently, the unemployment rate for youth (aged 15-29) of 56.0% is the highest in the world and is only likely to increase.8 Gaza’s economy, however, has stagnated for the past ten years, with average annual real GDP growth rate over the last decade (2006-2016) not exceeding 1.44% (and only 0.17% for the period 2006-2014), while Gaza population grew by 38.4% over the same period. Based on the findings of an IMF report, output growth of at least 4.5% per year is needed just to absorb the new entrants to the job market.9 Thus, GDP growth that surpasses population growth will be required in order to reduce both chronic unemployment, currently at 40.6%,10 and to improve ongoing sub-standard living conditions.

Gaza’s private sector, the engine of future economic growth potential, is presently incapacitated due to the blockade, restrictions on movement and access to natural resources and markets, the strict application of “dual-use” items list system, and recurrent destructive wars. A 2016 UNDP survey of Gaza’s private sector two years after the war (Chapter three, Section C, and the Annex) reveals the sector’s continued decline (in terms of capital assets, production and sales, employment, and exports; all at 50%-60% of their pre-2014 war levels). This has been exacerbated by grossly inadequate international financial support to address the extensive damage and losses caused by the war and to help initiate recovery. Further analysis of Gaza’s current business environment (Chapter four) reveals a very small, micro enterprise-based private sector that has been operating for years, but mainly since 2006, under considerable internal and external pressure. The emerging picture also reveals a very poor business climate that touches on all aspects of business activities, from investment decisions, to production operations, to the delivery of final output. In such a constrained business climate, the degree of risk and uncertainty for investors is extremely high, the cost of doing business is frequently prohibitive, and the level of confidence among private sector agents is correspondingly low.

For years, the international community has been providing financial and technical support, in addition to the badly needed humanitarian aid, in an attempt to alleviate the adverse impact of the stringent conditions under which Gaza businesses are operating, in order to ensure their continued survival. Currently, donors’ incremental, project by project, ad hoc approach to providing assistance has provided only limited success in bolstering Gaza’s private sector.

It is clear that a fresh approach is needed to create a sustainable private sector that can boost Gaza’s resilience. Gaza’s economy requires a fundamental long-term strategic policy shift from the international development community, under which short-term measures are complemented by programmes that focus on long-term sustainability. In this alternative approach, Gaza needs to be looked at for its strategic development potential rather than as a humanitarian burden.

This study proposes an alternative approach to be implemented within the context of the Palestinian government’s DNA recovery and reconstruction programme. The proposed approach consists of three inseparable core components: (1) Accelerated short-term financial support to address the urgent needs of Gaza’s private sector, as identified by the DNA framework and by Gazan business owners. To be effective however, these short-term measures should be linked to a longer term plan, as an integral part of a strategic view to Gaza’s economic future. (2) The design of a comprehensive plan for the medium- and long-term development of Gaza’s private-sector-led economy. The plan, which is currently missing from the DNA framework, should be based on an in-depth analysis of Gaza’s business climate, and on sector strategies, and be utilised afterward as a core guide of where future international and domestic investment should be allocated. (3) A persistent effort by the international community to resolve the political conditions that are the root cause of Gaza’s humanitarian crisis. For short-term interventions to be effective, and for a long-term strategic plan to have a real chance of successful implementation, a mechanism to ensure short- and long-term stability of political and security conditions must be in place.

This last component is the most challenging of all, and yet, there is no other way out. If the root causes of Gaza’s economic crisis are political, then that is where the first step of a sustainable solution must be found.

Under unchanging political conditions, the future of Gaza and its inhabitants is bleak. When the UN is already predicting Gaza to be unliveable by 2020, then those with high stakes in the future of a fragmented State of Palestine should take a moment for serious pause.