Palestine economy 'will take years' to bounce back from devastation caused by Gaza war

The outlook was grim even before the conflict broke out as it continued to operate 'below potential in 2022', Unctad says

Israel is continuing its bombardment campaign that has devastated buildings and infrastructure in Gaza. Bloomberg
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The devastation wrought by the Israel-Gaza war and the continued destruction of infrastructure in the narrow enclave means it will take years for Gaza and the broader Palestinian economy to recover.

The outlook was grim even before the war broke out and it continued to operate “below potential in 2022 as persistent challenges intensified”, the UN Conference on Trade and Development said in its latest report on the Palestinian economy on Wednesday.

“These include loss of land and natural resources to Israeli settlements, endemic poverty, a shrinking fiscal space, declining foreign aid and the build-up of public and private debt,” the UN agency said.

The latest conflict, although mainly limited to Gaza so far, will have a drastic impact on the broader economy as unemployment will rise further and more people will fall below the poverty line in the territory of 2.4 million people, according to analysts.

The continued bombardment of Gaza has turned into a humanitarian crisis and the economic fallout of the siege and devastation is the worst the territory has ever experienced.

“Israeli air strikes have caused extensive and severe damage to Gaza’s infrastructure that pales in comparison to previous rounds of conflict, while its blockade has severely reduced the availability of food, fuel, electricity, water and medication,” said Pat Thaker, editorial director for the Middle East and Africa at the Economist Intelligence Unit.

“Gaza’s economy will take years to recover from the damage already – and that has yet to be – done.”

Israel imposed a land, sea and air blockade on the Gaza Strip in 2007 that has severely hampered the movement of people and goods and hit the enclave's economy hard.

Even though Palestinian gross domestic product grew by 3.9 per cent in 2022, per capita real GDP was still 8.6 per cent below its 2019 pre-coronavirus level.

In Gaza, real GDP per capita was 11.7 per cent below the 2019 level and close to its lowest level since 1994, according to Unctad data.

Unemployment remained high last year, at 24 per cent, across the occupied Palestinian territory, 13 per cent in the West Bank and 45 per cent in Gaza – with women and youths hit hardest.

“Poverty increased, rendering 40 per cent of the population in need of humanitarian assistance,” Unctad said.

“Three decades after the Oslo Accords, the hoped-for convergence between the Palestinian economy and Israel’s remains obstructed by occupation policies. Instead, the two economies have diverged, with the Palestinian per capita GDP currently standing at just 8 per cent of Israel’s.”

The Palestinian economy is expected to continue operating well below its potential and growth is projected to hover at about 3 per cent, according to a World Bank report published last month, before the start of the war.

Given population growth trends, income per capita is also expected to stagnate, dragging down living standards, the Washington-based lender said at the time.

The EIU expects Palestine's economic expansion to be about 3 per cent this year, continuing the downward trend since the post-pandemic rebound in 2021, which was halved in 2022 to 3.9 per cent.

The International Monetary Fund earlier this year projected real GDP growth of 3.9 per cent for Gaza in 2023, 2.2 per cent in 2024 and 1.9 per cent in 2025.

“Now, the economic outlook for Gaza is worse. The damage caused to Gaza’s economy by the war … only exacerbates these negative trends, with repercussions for the West Bank economy, as well,” Mr Thaker said.

Currently, Palestinian GDP losses are estimated to exceed $500 million, or 3 per cent of the 2022 GDP, he said.

“Daily loss of production in Gaza is estimated at $16 million and Gaza’s level of trade will plummet below the 12 per cent of the total Palestinian trade size in 2023,” he said.

The Unctad report said the Palestinian economy’s “forced dependency on Israel” in terms of excessive production and transaction costs, as well as barriers to trade with the rest of the world, had resulted in a chronic trade deficit and a “pervasive, lopsided dependence”, which accounted for 72 per cent of total Palestinian trade in 2022.

“A lack of a national currency and reliance on the Israeli shekel leave little space for monetary policy while the strong shekel exchange rate undermines the already impaired competitiveness of Palestinian producers in domestic and foreign markets.”

With waning donor support, the capacity of the Palestinian economy to bounce back from shocks has also suffered.

“Foreign aid had helped the territory to manage the impact of occupation in the past. However, in 2022, the Palestinian government received just $250 million in donor budget support and $300 million for development projects,” Unctad said.

“This is a steep decline from a total $2 billion, or 27 per cent of GDP in 2008, to less than 3 per cent of GDP in 2022.”

Israel last week warned people to evacuate the northern part of Gaza and move towards the south as it prepares for a ground invasion of the territory.

More than 5,700 Palestinians, mainly civilians, have been killed so far in Gaza during Israeli bombardments in retaliation for the Hamas attacks on October 7.

Israeli Prime Minister Benjamin Netanyahu has already spoken of a long war as his troops gather at the border with Gaza.

The EIU expects the Israeli military campaign to last several months and said continued fighting would further damage the enclave’s infrastructure and harm its economy.

“It is too early to think about rebuilding Gaza, which will require massive international investment and long-term commitment not previously secured,” Mr Thaker said.

“Israel, for its part, is determined to sever itself from the strip and establish a new security arrangement. After the war, Israel will no longer provide Gaza with electricity and water, Gazan workers will likely not be allowed to work in Israel and a new agreement on trade entering and exiting the shared borders with Israel will be reassessed.”

Updated: October 25, 2023, 2:28 PM