Two years on: What will Israel's continuing control mean for the Palestinian economy?

Occupied West Bank also bearing brunt of Gaza war, with economy contracting most in more than 50 years, recent report says

Palestinian sellers display their goods near the rubble after the Israeli army demolished 16 shops at the produce market in Beita village south of Nablus in the occupied West Bank. AFP

Israel is expected to continue to control Palestine’s economy even if peace returns to the territory and the Gaza war ends amid current negotiations, while Palestine needs statehood to make its own decisions, experts have said.

“I don't think that what's going on in Gaza or negotiations around the world will bring a lot of effect on Palestinian economy,” Naser Mufrej, professor of finance and economics at the Arab American University in Ramallah told The National.

“Israel will continue to employ adverse measures against the economy … continue to follow the same policy, so the economy will not recover, at least in the coming two, three months.”

However, the establishment of a sovereign state will usher in a new phase of economic growth for the territory, with more investments flowing in.

“If ceasefire in Gaza opens the path for a just and peaceful solution to the whole struggle, and ends with establishing a sovereign, viable Palestinian state, then this will bring, automatically, what we call appetite for economic, investment, consumption, and that will create optimism, even among donors,” Prof Mufrej said.

Raja Khalidi, director general of the Palestine Economic Policy Research Institute, said "a free Palestine would be a very strong player in the region".

“We have models of industrial growth and agricultural development in the West Bank and services, and banking, which regionally are competitive," he added.

“This idea of the State of Palestine is now where the discussion should naturally move. The State of Palestine should have been established in 2003. There was a constitution drafted under the previous president, [Yasser] Arafat, by a proper committee."

Currently, Israel controls Palestine's economy through restrictions on the movement of goods, labour, and the disbursal of tax revenue. It also sets Palestine’s monetary policy, with Israeli shekel being the main currency in use in the territory.

Israel has been withholding Palestine’s clearance revenue, including tax and customs fees, to restrict the Palestinian Authority’s sources of income since the beginning of the Gaza war.

“The status quo in [the occupied] West Bank will continue until a new arrangement takes place,” Firas Melhem, former governor of Palestine Monetary Authority told The National.

“This means restrictions will continue and Israel will continue to put pressure on Palestine's economy by withholding Palestine revenue and their ability to pay salaries of public sector employees.”

The comments come as Hamas and Israel hold talks to end the two-year long Gaza war after US President Donald Trump unveiled a detailed plan to redevelop the enclave and set the region on the path for what he promised could be “eternal peace”.

The plan includes a “Trump economic development plan” to rebuild Gaza that will be convened by experts “who have helped birth some of the thriving modern miracle cities in the Middle East”.

The plan would also establish a special economic zone that would give Gaza preferential tariff and access rates that it can negotiate with other countries.

Gaza’s economy was devastated due to the war that began on October 7, 2023 following Hamas attacks in southern Israel that resulted in about 1,200 deaths, according to Israeli sources. In retaliation, Israel has bombed Gaza relentlessly, killing more than 67,000 civilians and destroying its vital infrastructure.

As of early this year, economic activity in Gaza was effectively at a standstill, World Bank said in a recent report.

After an 83 per cent year on year contraction last year, Gaza’s GDP fell an additional 12 per cent in the first quarter.

West Bank impact

The West Bank’s economy also bore the brunt of the war as Israel intensified its movement restrictions and imposed widespread closures and launched new military operations in the occupied territory.

Trump says 'everybody will be treated fairly' in Gaza deal

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Palestinian workers were also barred from their workplaces in Israel, denying a vital source of revenue for its people, according to a recent report from the UN Conference on Trade and Development (Unctad).

As of February, 849 movement restrictions – including checkpoints, road gates, earth mounds and trenches – continued to restrict the movement of 3.3 million Palestinians across the West Bank, it found.

The most significant of these remains the 712km wall constructed by Israel in the Occupied Palestinian Territory.

“The impact of additional Israeli restrictions drove the occupied West Bank’s economy into its most severe contraction in over fifty years,” the Unctad said.

“In 2024, the economy shrank by 17 per cent, equivalent to 18.8 per cent decline in gross domestic product per capita, erasing 17 years of development progress, pushing the overall economy back to 2014 levels and GDP per capita back to its 2008 level.”

By January last year, an International Labour Organisation survey revealed that 99 per cent of West Bank businesses had been adversely impacted because of Israeli measures. Over 97 per cent of small and medium-sized enterprises reported declining sales, resulting in permanent job cuts at business establishments.

The report also assessed economic costs incurred by the West Bank due to tightened restrictions imposed by Israel in the aftermath of the 2,000 confrontations (Second Intifada) and post-October 2023, combined with the additional constraints in Area C, which is fully controlled by Israel.

Smoke rises after explosions during the Israeli army offensive in Gaza city, as seen from the central Gaza Strip. Reuters

Without these constraints, the economy could have generated an additional $170.8 billion in cumulative GDP between 2000 and last year – equivalent to 17 times the West Bank’s GDP last year, according to Unctad analysis.

'Largely symbolic'

World powers including the UK, France, Australia, Portugal and a number of other countries recently announced the formal recognition of Palestine, lifting hopes of an independent state with full powers to control its economy.

Experts, however, said the recognition is “largely symbolic” and is not expected to benefit Palestine economically as “sovereignty over land remains the primary missing component of a Palestinian state”, Anas Iqtait, a senior lecturer at the Australian National University, said.

The Palestine Authority’s fiscal autonomy is also limited, putting pressure on its finances, with domestic tax collection accounting for only “about 30 per cent of spending, while the majority of revenue are import taxes collected and transferred by Israel, leaving the PA highly dependent and vulnerable”, Mr Iqtait added.