After having experienced a modest recovery in 2003-05, the Palestinian economy suffered another decline in 2006, as a result of the domestic and international political difficulties. Although hard data are scarce, real GDP is estimated to have fallen within a range of 5 to 10 percent in 2006, less than initially had been feared, but still leaving average real per capita GDP at almost 40 percent below its 1999 level. Stronger-than-expected official and private inflows have helped prevent a much sharper decline in incomes and consumption in 2006, thus cushioning the overall contraction. But with a larger decline in investment, from an already low level, this also signals a further hollowing out of the Palestinian economy and an increase in its dependency on foreign aid.
This note focuses on developments in economic activity and incomes in West Bank and Gaza (WBG) in 2006. It is obvious that 2006 has been a difficult year for the Palestinian economy and the population. The political difficulties, which often resulted in violence, have caused much hardship on the Palestinian people, as has been extensively reported by various UN agencies and NGOs. This note aims to offer a first assessment of how the overall economy fared under these difficult circumstances. It should be noted at the outset that economic data for WBG are limited, and some of those that are available are of poor quality, or the quality may have worsened as a result of last year’s difficulties. Consequently, this note only presents a broad picture of overall trends, rather than exact outcomes.
Economic developments in WBG in 2006 were heavily influenced by political events. The Hamas-led Palestinian Authority (PA) government that was formed in March, following Hamas’ victory in the January 2006 parliamentary elections, was confronted with a diplomatic and financial isolation by the international community. Internally, tensions repeatedly flared up between various Palestinian factions, as did tensions with Israel, culminating in June with the re-entry of the Israeli military into Gaza in response to the kidnapping of an Israeli soldier by Palestinian militants. Restrictions on movement and access imposed by Israel were intensified significantly during 2006, particularly in Gaza, severely limiting the flow of goods and people. Israel also detained several Hamas ministers and members of parliament, complicating the government’s ability to function, and since March 2006 has withheld most of the indirect taxes—so-called clearance revenues—it collects on behalf of the PA, thus contributing to a severe fiscal crisis.
The worsening political and security situation has clearly been detrimental to economic growth. Production has been lost due to outright destruction of physical infrastructure and assets, or dampened by the numerous closures and checkpoints, the shortage of funds to finance government spending, as well as by the increased uncertainty about the Palestinian territories’ prospects.
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