Global Investment House- Economic & Strategic Outlook – Gross Domestic Product – Palestinian Monetary Authority (PMA) was established as an independent entity in 1994. According to the protocol on economic relations that specifies the PMA responsibilities, the Shekel (New Israeli Shekel-NIS) would be one of the circulating currencies and that required reserves on shekel should be in-line with those in Israel. However, there has been no Palestinian currency for over fifty years and three foreign currencies circulate freely: The Israeli Shekel, the Jordanian Dinar, and the U.S. dollar. Generally, the largest share of currency denomination in both deposits and lending is in U.S. dollar.
Data on Deposits is almost the only available indicator regarding money supply. According to the latest data from Ministry of Finance, deposits went through an increasing trend during 1999 and 2000 increasing by 18% and 25% respectively. However, starting 2001, deposits declined by 3.4% followed by another 5.6% decline in 2002 as a direct consequence of Intifada. Going forward, 2003 showed some recovery where deposits grew by 7.8% to US$3.21bn. Similarly, claims to the private sector followed the same trend as deposits although it picked up marginally by 0.2% in 2003 to reach US$861mn.
PMA’s responsibilities mainly include licensing, regulating, and supervising the operating banking system ensuring that the capital adequacy ratios are respected this is in addition to protecting depositors. Thus, although PMA has some of the powers and functions of a central bank, it does not issue its own currency. Looking forward, the PMA should become the central bank, charged with monetary and exchange rate policy.
On the positive side inflation is still expected to stay at acceptable levels as there has been no recent history of high inflation to counter against. PMA’s data for the last five years reflected a decline in inflation levels measured by the growth in Consumer Price Index (CPI). Price levels declined over the period 2000-2005 to stay below 6%. It is important to note that changes in price levels in Palestine are more or less a kind of mirroring inflationary pressures in Israel to which the Palestinian economy is still tightly linked. Thus the major factor that affect price levels in addition to the unrest caused by Israeli practices is the NIS exchange rate against the US$. Moreover, the fact that almost all-Palestinian imports are routed through Israel led to a sort of imported inflation.
During the period 1999-2005, inflation increased at a moderate CAGR of 3.36% as CPI increased from 119.9 points in 1999 to 146.23 points at the end of 2005. During 2002, inflation has reached a peak of 5.71% because of the Intifada and unrest mirroring the sharp inflationary pressures in Israel where the NIS weakened markedly against the US$ during the year. Moreover, prices rose as the closures and curfews have led to a sharp increase in transport and communication costs. Going forward, prices went through a declining trend to stabilize at the range of 3% in 2004.
In 2005 inflation picked up slightly by 3.08% where CPI stood at 146.2 points up from 141.9 points reported in the previous year. According to PMA data, the rise in inflation was primarily driven by an increase in the cost of food by 2.98% in addition to a sharper hike in the price of beverages and tobacco by 5.11%. The two items are the most heavily weighted categories in the index.
On the geographical level, there have been great differences regarding inflation levels among governorates. Jerusalem continued to witness the highest inflation level since 2003. The governorate price index increased by 5.5% to reach 149.1 points by the end of 2005 up from 141.3 points in 2004. Following ahead, Northern governorates’ inflation picked up moderately by 2.42%, while Southern governorates had the lowest inflation rates of 0.32%.
Gross Domestic Product
Palestine GDP is estimated to have grown at slower rate in 2004 as compared to 2003 to reach US$4.46bn recording 5.7% growth. The same upward trend is expected to continue in 2005 and 2006, however at lower growth rates. Looking forward, nominal GDP is expected to grow at 4.73% and 3.42% to stand at new highs of US$4.67bn and US$4.83bn in 2005 and 2006 respectively. This is to reflect the expected impact of the implementation of the Gaza disengagement towards the end of 2005. However, the macroeconomic outlook will depend strongly on the political situation.
The economy of Palestine grew at a remarkable Compound Annual Growth rate (CAGR) of 6.45% for the period 1995-1999. Nominal GDP stood at US$4.52bn in 1999. However, with the onset of the Intifada in September 2000, the Palestinian economy went into a major decline but did not collapse. The escalation of Israeli military operations against Palestinian towns and villages led to extensive physical damage. Moreover, the imposition of a curfew on the main towns in the West Bank meant that economic activity practically has ground to halt. This was reflected by the declining growth rates till 2002 where nominal GDP encountered a sharp decline of 8.62% to reach at US$3.78bn, its minimum level since 1997. The decline in economic activity was large by any standards, but given the extraordinary circumstances, the Palestinian economy proved surprisingly resilient. By early 2003, the downward trend reversed and the economy began to stabilize. Nominal GDP hiked up 11.69% to reach US$4.22bn but still below its maximum level scored just before the Intifada in 1999.
In real terms, Palestinian GDP witnessed the same trend as its average growth rate for the period 1995-1999 stood at 8.3%. Afterwards, it declined significantly until 2002 where it reached US$3.84bn recording a 3.75% decline over the previous year. Entering 2004, real GDP declined marginally as it reached US$4.13bn as compared with US$4.16bn reported in 2003. This was a result of continued violence and closures in the West Bank and Gaza in addition to further extension of the separation wall. For 2005, we expect real GDP to reach US$4.25bn showing 2.99% annual growth rate.
GDP per-capita witnessed a sharp declining trend until 2002. Backing such trend for the period 2000-2002 were both the GDP declining by (5.72%) on average and the population growing by 3.98% on average. As a result, GDP per-capita declined sharply to US$1,114 in 2002 (its minimum level since 1995) as compared with US$1,263 in 2001. Similarly, as GDP witnessed a rebound in 2003, GDP per-capita reversed its declining trend to increase to reach US$1,201 in 2003 recording a 7.85% growth. Going forward GDP per-capita is estimated to continue its upward trend however at slower rates (2.13%) to reach US$1,242 in 2005.
The PCBS data reveals that total domestic expenditure surpassed domestic production by a large margin throughout the period 2000-03, ranging between 152%-157% of GDP, to reach US$6.58bn in 2003. Out of total domestic expenditure, private consumption was the major expenditure component and contributed US$4.46bn or 105.71% of GDP in 2003. Worker’s remittances and transfers from abroad mainly fueled the growth. Government consumption stood at US$1.12bn (26.43% of GDP) followed by Gross fixed capital formation that contributed US$998.5mn (23.65% of GDP) in 2003. Net exports contributed negatively to GDP by US$2.36bn due to the sheer size of imports US$2.87bn (68.06% of GDP) as compared to US$518.3mn of exports (12.28% of GDP) reported in 2003.
Palestinian economy is mainly an economy of services. Consumption value of services sector in GDP proves this fact. Services sectors (social and productive services) proportion in the GDP during 2000-04 was in the range of 68.9% to 71.5%. Looking forward for 2005, Social services are expected to contribute US$2.17bn (50.92% of GDP) with 8.22% growth rate. This is mainly due to the sheer size of public administration and defense services projected at 17.85% of GDP.
Wholesale and retail trade will stand at US$419.8mn in 2005 followed by transport, storage and communication services at US$339.3mn. Due to restrictions imposed on industry during the occupation that have made manufacturing sector of the least productive sectors of the economy. Agriculture, the mainstay of the economy, was dashed by the implementation of non-tariff barriers and by the Israeli policy of destroying arable land on the ground of security. Thus, agriculture contribution to GDP is estimated to decline from US$470.7mn (10.43% of GDP) just before the Intifada to US$408.4mn (9.6% of GDP) in 2005.
