With Israel's withdrawal from the Gaza Strip, the embattled Palestinian economy comes under scrutiny. Sherine El-Madany reports Palestinian policy-makers should pursue trade and tax reform policies as well as expand market transactions in order to restore economic stability, reduce public debt, and boost growth, advised guest speakers at a seminar held Monday by the Economic Research Forum (ERF). The seminar aimed to present the economic findings of the "Palestine Country Profile" to officials, researchers and the business community. The profile covered all aspects of the country's economy including macro- economic and financial performance, in addition to trade relations and trends. It comes as a part of the Country Profiles project, an extensive four-year research venture, which is coordinated by the ERF for the Arab countries, Iran and Turkey, as well as the Institut de La Mediterrannee and funded by the European Commission and the Arab Fund for Economic and Social Development. "The Palestine Country Profile reflects a national in- depth study of the country's economy and gives both researchers and policy-makers the chance to map the road to growth and prosperity," said Samir Radwan, ERF managing director. A picture drawn out of the Palestinian economy by Nidal Sabri, professor and dean of economics at Birzeit University, was not exactly rosy. He said that taxes, customs, and international assistance, the main sources of revenue for the PNA budget, are not enough to meet expenditures. This said, he pointed out that the majority of tax revenues are collected by Israel as stated by the Paris Protocol agreement, except for the income tax which is collected by the Palestinian National Authority (PNA) under a new Palestinian law. The government budget, said Sabri, finances public, social, justice, and security services. Security and social services tend to receive the largest share of the total budget, followed by public debt service and retirement expenditures, which form about one quarter of the total expenditures. Cultural services, foreign affairs, and transportation receive only one to three per cent of the total budget. Sabri pointed out that international assistance is used to rebuild the infrastructure of the country. Annual international assistance has ranged between $650 million to $250 million during the last 11 years. Major donors include the European Commission, USAID, the World Bank, the United Kingdom, and Saudi Arabia, respectively. The United Nations Relief and Works Agency (UNRWA) is the number one beneficiary, as it received about $1.674 billion to finance its operational budget, infrastructure projects, institutional buildings, water and sanitation, energy, education, and health. Sabri warned that with public debt increasing from $17 million in 1993 to $1 billion in 2005, "this necessitates an exclusive debt management department to enable the government to pay its payment obligations at the lowest possible cost." On a more positive note, Sabri did speak more optimistically of monetary and financial policies including banking and the stock exchange market. "Although the political situation in the country has remained tense, the financial sector has witnessed positive growth in the last ten years," Sabri said. "However, agricultural and industrial sectors have greatly suffered as a result of Israeli measures implemented in 2001 and 2002," he added. He listed different aspects of such financial development such as the banking sector which has grown significantly as expressed by owners' equity and total assets. The number of deposits has also increased to constitute 90 per cent of Palestine's GDP. "However, there are some problems within the banking sector that need to be addressed carefully," Sabri stated. Some of these problems include bounced checks, which increased significantly to reach about 20 per cent with the start of the second Intifada. The second problem is the percentage of uncollected loans in banks which increased to $144 million in 2003, thus forming about 13 per cent of the total granted credit. Another problem is the high margin between interest paid on deposits and interest earned on credit facilities. Sabri also described the difficult role of the central bank, represented by the Palestinian Monetary Authority (PMA). "The PMA does not have its own national currency, instead, it has a system of three currencies: Jordanian Dinar, Israeli Shekel, and US Dollar," Sabri said. "Therefore, the PMA has little control regarding currency exchange rates and interest rates," he added. Interest rates are determined by other banks and the market, which results in a big interest spread between rates paid on deposits and those collected on credits. This means that the services carried out by the PMA consist of conducting clearance of checks as well as monitoring and controlling the operations of Palestinian, Arab, and international banks inside Palestine. As for the stock exchange market, known as the Palestine Securities Exchange (PSE), it was incorporated as a private share holding company in 1995 and consists of 26 listed corporations. Sabri complained that the stock exchange trades only with the secondary market and not with the primary market, and that neither corporate nor government bonds are being dealt with in the Palestinian market. Some of the negative aspects suffered by the financial system is that it only finances commercial services and ignores agriculture, industrial, and housing services. "In addition, the majority of its assets are not invested internally and are located outside of Palestine," Sabri noted. To tackle such financial issues, Sabri suggested providing insurance coverage of investments and export credits against political and commercial risks such as nationalisation, war, currency, and civil disturbances. Another problem with the Palestinian economy is its trade with the outside world. "Non-tariff Trade Barriers imposed by Israel have led to significant constraints on production; and therefore the degree of Palestinian economic dependency on Israel has been accumulating overtime," said Mahmoud El-Jafari, head of the communications department at Birzeit University. Some of these barriers include transportation costs which have increased due to the practices and measures applied by Israel on the borders such as back-to-back convoying trucks inspections. Israel has also prevented Palestine from building infrastructure (electricity, water, and telecommunications) independent from Israel. To overcome such obstacles, El-Jafari suggested liberalising trade and allowing Palestinians to engage in trade with other regional and international markets. "That will reduce Israel's monopoly of the Palestinian market," he suggested.
