By Jafar Sadaqa
RAMALLAH, December 30, 2017 (WAFA) - The growth forecast in the Palestinian economy fell by half a percentage point between the beginning of 2017 and the year’s third quarter. The final data with the close of the year will most likely show a larger gap between the forecast and what was actually achieved on the ground, taking into consideration the security and political developments during the fourth quarter of this year.
Forecasts by official circles and international institutions pointed to a slowdown in economic growth to reach around 3% in 2017, down from 3.3% in 2016. However, the forecast ceiling has actually declined to reach 2.5% at the end of the third quarter due to the political and security conditions in Palestine and the region. As a result, unemployment rate rose from 27.6% in the beginning of the year to 29.2 in the third quarter.
Three scenarios for planning
Palestinian planning and forecasting were based on three scenarios according to expectations resulting from the political and security situation: an optimistic scenario that assumes a push for a solution to the conflict with Israel; the second is pessimistic and assumes the situation will deteriorate toward further instability; and the third scenario assumes the situation will continue as it is, which is the baseline scenario on which planning and forecasts are based.
The Palestinian Monetary Authority (PMA), in its periodic reports on macroeconomic forecasts, attributed the slowdown in growth in the Palestinian economy to a number of factors, notably the continuing uncertainty, political stagnation and division, Israeli restrictions and impediments, the weakness of the public sector and the inability of the private sector to advance, ongoing settlement activities and restricting Palestinian activity in 62% of the area of the West Bank, in addition to the continuous siege on the Gaza Strip.
Based on the baseline scenario, the PMA and the Palestinian Central Bureau of Statistics (PCBS) expected the slowdown in the Palestinian economy in 2018, which will grow at a rate by between 2.2% and 2.6%, and a decline in per capita GDP of between 0.1% and 2% as well as a high unemployment rate of between 28.7% and 29.3%.
Strategic projects
A power generating plant, a cement plant and visible activity in the development of industrial zones are the most prominent developments in the Palestinian economy during 2017. In addition to their strategic importance, their operation means a crucial reduction in the bill of Palestinian imports, particularly from Israel.
In Jenin in the north of the West Bank, investors led by the Palestinian Investment Fund (PIF), the investment arm of the Palestinian Authority, started the construction of the first conventional power plant with a capacity of 450 MW with investments exceeding $600 million. The plant is expected to become operational in 2019. Its construction coincides with the rise of many solar power generation projects, which the Palestinians hope will reduce import of electric power from Israel, whose annual bill exceeds $2 billion, as well as to reduce the cost of energy, which is one of the main obstacles to the manufacturing sector.
Electricity projects, from conventional and renewable energy, reflect the Palestinian government‘s tendency to diversify energy sources that started in September of last year with the signing of the first agreement with Israel to supply electricity on a commercial basis. This will help in the reduction in costs, cancelling interest on late payments and doing away with price differentials that were added by the Israeli supplier company without consulting the Palestinian side, in addition to rescheduling the debts owed by the distribution companies, which Israel usually deducted from Palestinian tax revenues in violation of the Paris Economic Protocol.
In the south, specifically in the city of Bethlehem, the PIF also began, in partnership with the Jordanian Manaseer Group, to build a cement factory at a cost of more than $300 million. Its production is expected to cover all the needs of the Palestinian market from this strategic product in a country with a building boom after five decades of deprivation.
The Palestinian market consumes around 3 million tons per year, 90% of which is imported from Israel while the rest comes from Egypt, Jordan, Turkey and Greece. The Palestinian import bill of this product is about $300 million annually.
The year 2017 has also witnessed a breakthrough in the development of industrial zones that for years remained projects on paper: one in the northern West Bank with Turkish investments, another in Bethlehem in the south of the West Bank with a Palestinian-French partnership and a third in the east near the Jordanian border with Japanese funding. The three zones were so far able to attract 40 factories while negotiations are underway with outside investors to establish a fourth industrial zone in Hebron where about 40% of Palestinian industrial facilities are located.
New economic laws
A new step by the Palestinian government in its efforts to improve the investment environment came by issuing a series of economic laws and amending others during 2017.
Earlier this year, the Social Security Law was passed allowing for the first time the establishment of a Palestinian social security institution covering all workers outside the civil service, numbering about one million workers and employees, including Palestinian workers in Israel, whose number is nearly 200,000.
The Palestinians rely on the role of the social security institution as a cornerstone for investing in the local economy based on the huge revenues expected from the premiums of the participants, in addition to the pension rights of Palestinian workers in Israel, which were accumulated over five decades to reach, according to the estimates of the Palestinian Ministry of Labor, about $8 billion. Israel is expected to transfer this amount to the Palestinian social security institution as required in Paris Economic Protocol.
Another law that is no less important for the Palestinians was issued a few weeks ago and that is the law on transferrable funds, which for years has faced technical obstacles in preparing a record of this money. Observers expect a qualitative shift in bank financing for the manufacturing sectors in terms of size and target groups since this will create new tools for loan guarantees.
Despite the passage of 24 years since the establishment of the Palestinian Authority and the issuance of dozens of laws, the economic laws are still incomplete. Some of the laws in force in the West Bank are mostly Jordanian, which are different from those in the Gaza Strip, which is still functioning on laws from the Egyptian administration and before it the British and Ottoman rule, The most prominent of these economic laws is the Companies Law, which has been in the draft stage for 15 years, in addition to the duality of issuing laws between the West Bank and the Gaza Strip since the start of the division 10 years ago.
Financial performance
The fiscal year 2017 did not come out of the overall framework of the 2016 budget. It achieved its goal of increasing revenues, but the Ministry of Finance‘s latest data at the end of October showed a larger deficit than estimated at the beginning of the year due to a drop beyond expectation in foreign aid.
The overall deficit in the budget reached $870 million by the end of October, up by half a percentage point, while the direct foreign financial support for the Palestinian treasury fell by nearly 35% to only $367 million from $494 million in the first 10 months of 2016.
On the income side, net revenues rose by nearly 2% to $2.9 billion due to rise from the two main sources: domestic by 4.3% to reach $1.4 billion, and tax revenues from clearing with Israel by 1.5% to over $2 billion. Economists attributed this to an improvement in the local tax collection and the activation of new mechanisms for clearing with Israel, and not to improvement in the Palestinian economy.
On the other hand, the government continued with the policy of rationalizing spending, causing a rise in public expenditures by less than 2.5% due mainly to pay rises for employees whose salaries account for half of the budget despite the reduction in the payroll bill under pressure from international organizations. The recent cuts in the salaries of Gaza Strip employees was not yet clear how it would influenced the budget.
With the rise in the deficit and the decline in foreign aid, the Palestinian public debt rose by more than 4.5% to reach $2.525 billion. This was mainly due to a 9.7% rise in domestic debt to about $1.5 billion, despite the decline of external debt by more than 2% due to reliefs from some Arab funds and postponing the interest on loans by international institutions.
Two weeks ago, the government began to discuss the budget for 2018 in its first reading. Statements by Finance Minister Shukri Bishara indicate a trend towards further belt tightening to meet the financial cost of reconciliation, whose success depends on including about 40,000 employees appointed by Hamas in the Gaza Strip over the last 10 years to the civil service payroll, as well as to face US threats to stop aid to the Palestinian government, which could be followed by cessation of aid from other countries.
The stock market
Just a few days before the end of 2017, the main index on the Palestine Stock Exchange maintained its position in the green zone, recording a gain of 43 points since the beginning of the year, accompanied by an improvement in liquidity.
Al-Quds Index closed Wednesday trading up by 8% compared to the close of trading in 2016, along with gains in eight out of 16 Arab stock markets.
The index was supported by the rise in the indices of four sectors, led by the industrial sector index, which rose by 25%, followed by the investment sector index, which rose by 14.5%, then the banking sector by 12%, and finally the insurance sector index increased by 6%. The services sector index was the only loser by 2%.
On the sector level, shares of a number of listed companies rose sharply since the beginning of the year. In the industrial sector, the share of Jerusalem Pharmaceuticals Company increased by 78% since the beginning of the year, the share of Vegetable Oils Company increased by more than 31% and Birzeit Pharmaceutical Company share was up by 12.5%.
In the banking sector, a rise was recorded in most of the banks listed on the stock exchange. Al-Quds Bank was the leader and its share rose by 73%, followed by Palestine Islamic Bank by 25%, Palestine Investment Bank by 14% and the Arab Islamic Bank by 11%. Share price of Bank of Palestine, the largest of the Palestinian banks, remained the same by market value, while The National Bank was the only loser going down 7.5%.
Leading stocks in the investment sector recorded strong gains since the beginning of the year. PADICO Holding, the largest in this sector by market value, rose nearly 27%, followed by its sister company, Palestine Industrial Investment Company, by almost 23% and then APIC by 2.6%.
On the other hand, the services sector index dropped as a result of a decline in the share of Palestine Telecommunications, the largest listed company in the Palestine Exchange by market value and the strongest index in the Al-Quds Index, which recorded a decline of 7.6% since the beginning of the year affected by the agreement to renew its license with the Palestinian government for the next 20 years at a cost of almost $300 million. The share of Wataniya Mobile, the second mobile operator in Palestine, posted gains of more than 24%, supported by the launch of its services in the Gaza Strip.
The stock market witnessed this year a series of major deals, most notably the Palestine Investment Fund in large-scale profit making financial investments in favor of buying stakes in strategic sectors such as tourism and repositioning its investments in the financial sector.
A remarkable growth in the performance of the banking sector
As with the Palestine Stock Exchange, the banking sector has changed the trends of the decline in the Palestinian economy, showing a remarkable growth in all its indicators during 2017, which led it to the forefront of the best performing sectors in the Palestine Stock Exchange with remarkable gains in the shares of listed banks.
Fourteen banks operate in the Palestinian territory, including seven Palestinian banks, six Jordanian banks and one Egyptian bank.
The latest data from the PMA on the consolidated balance sheet of banks showed a remarkable increase in all indicators of the banking system. The total assets of the 14 banks rose to $15.5 billion dollars in the first 10 months of 2017, an increase of 11.5% over the same period last year. This was mainly due to a similar increase in total customer deposits to reach at the end of October $12 billion. Along that, a remarkable growth in direct credit facilities by almost 20% to about $7.8 billion.
The impressive performance of the banking sector has placed it at the forefront of investors‘ attention and has become the most attractive sector for external domestic investments as well as the focus of many mergers and acquisitions.
The year 2017 witnessed one of the largest transactions in the history of this sector since the return of banks to operate in the Palestinian territories with the arrival of the Palestinian Authority in 1994. This happened when Bank of Palestine bought the entire shares of Palestine Commercial Bank and 52% of the shares of the Arab Islamic Bank, which resulted in the creation of a financial group with assets approaching $5 billion.
By completing this deal, Bank of Palestine’s financial group accounted for 31% of the total assets of the banking sector, 29% of total deposits and 32% of total facilities. Its net profits for the first nine months of 2017 amounted to $38.5 million, an increase of 1% from the corresponding period last year.
M.K.
