An economy strangled by its neighbour

The Bank of Israel's cut with Gaza highlights the degree to which Israel has engineered the Gaza Strip's absolute financial dependency on its larger neighbour.

NAZARETH // The accelerated pace of Gaza's economic asphyxiation since January, when the Bank of Israel cut ties with the tiny enclave, has highlighted the degree to which Israel has engineered the Gaza Strip's absolute financial dependency on its larger neighbour. The Harvard political economist, Sara Roy, has characterised Israel's long-term policy towards Gaza as one of "de-development", or "the systematic and progressive dismemberment of an indigenous economy by a dominant one".

That trend increased, according to Ms Roy, during the Oslo period of the 1990s, despite the widespread assumption that, with the Palestinian leadership allowed to return from exile, Gaza and the West Bank were moving nearer to self-rule. An official policy of separation - the Labor leader Yitzhak Rabin successfully campaigned in the 1992 general election under the slogan "Get Gaza out of Tel Aviv" - resulted in the Strip's being sealed off by an electronic fence.

Rather than increasing Gaza's independence, however, the enclave became ever more reliant on Israel for economic favours, with workers forced to apply for individual permits to enter Israel. Regular closing of borders, thus forbidding exit from Gaza, raised levels of unemployment and poverty. The Paris Economic Protocol of 1994, a key element of the Oslo process, further deepened Gaza and the West Bank's dependence on Israel: first, by requiring that all Palestinian imports and exports pass through Israeli sea and air ports and border crossings: and then by making Israel responsible for collecting taxes on the trade and transferring the money to the new Palestinian Authority (PA).

During the second intifada in particular, Israel repeatedly delayed or threatened to withhold tax transfers as a way to punish the PA and more recently to weaken the Hamas regime in Gaza and strengthen its rival, Fatah, in the West Bank. One of Israel's earliest acts during the intifada was to destroy Gaza's air and sea ports, further isolating it. Closures grew in frequency and duration until almost all work permits were cancelled in 2004, in the run-up to disengagement.

With Hamas's election to head the PA in early 2006, Israel imposed an economic blockade that not only prevented Gaza's workers from leaving the Strip but also ensured little crossed in, including international aid and tax receipts. Israel stepped up the pressure a year later when it declared Gaza an "enemy entity" and began restricting fuel and power supplies and regularly shut the border crossings to imports of basic items.

Reports from international bodies last year revealed that 98 per cent of Gaza's 3,900 factories had been forced to close; general unemployment had reached 45 per cent, the highest in the world, while in the private sector it stood at 70 per cent; and more than four-fifths of the population were dependent on food aid. The economic situation deteriorated yet further during the Israeli army's attack on Gaza in December and January when more than 24,000 homes were either damaged or razed and large tracts of agricultural land destroyed.

According to a report by the UN Conference on Trade and Development this week, US$4 billion (Dh14.7bn) in damage was caused - "three times the size of the Gaza economy". Israel continues to refuse imports of cement and others items vital to the enclave's reconstruction. Since January, Israel's Hapoalim and Discount banks, backed by the central bank, have also joined the blockade by refusing to handle monetary transfers to Gaza, including benefits to disabled workers. The banks say they faced legal action from right-wing groups threatening to use recent Israeli legislation banning the financing of terrorist groups.

Most financial transactions with Gaza, including from abroad, are supposed to pass through Israeli banks first. Whether Israel can uphold the absolute severing of financial relations remains to be seen. Gaza's banking system requires regular injections of Israeli currency, the shekel, both to replace worn-out notes and to replenish those spent on what little trade into Gaza continues, mainly through smuggling tunnels with Egypt. The PA has been warning for some time that Gaza suffers from a cash shortage that is pushing local banks to the point of collapse.

In the longer term, Israel faces a choice between supplying shekels through its state-run Postal Bank and allowing Gaza to drop the shekel and switch to the Egyptian pound. Mamoun Abu Shala, of the Bank of Palestine, said several sources of income were keeping the system afloat, if barely: banknotes being shipped in by armoured car from Ramallah in the West Bank, when Israel allows, to pay 77,000 PA workers in Gaza; funds being brought in by international charities and aid agencies, especially the United Nations to help the refugees, and receipts from Palestinian workers in the Gulf, often smuggled in via the tunnels from Egypt.

In early December, the World Bank warned that "the liquidity crisis could lead to the collapse of the commercial banking system in Gaza" with "serious humanitarian implications". [e-mail]