MIDDLE EAST DOSSIER: Israeli Policy Bleeding Palestinian Economy

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By Jaya RamachandranPicture: Bank Of Palestine, Ramallah, handling New Israeli Shekel (NIS) alongside American Dollar (USD) and Jordanian Dinar (JOD) | Credit: Wikimedia Commons

GENEVA (IDN) - Though at pains not to transgress political correctness, a new UN report unveils the highhandedness characterising Israeli economic policies towards the occupied Palestinian territory (OPT), which are denting the authority of the Palestinian government.


Israel is not only depriving the OPT of about US$300 million every year but also buttressing Palestinian dependence on Israel, and gravely undermining its competitiveness by refusing to transfer to the Palestinian treasury revenues from taxes on direct and indirect imports and on smuggled goods into the OPT from or via Israel, says a new report by UNCTAD.

According to the Protocol on Economic Relations, also known as Paris Protocol, signed in 1994 by Israel and the Palestine Liberation Organization, leaked revenue from taxes on direct and indirect imports is supposed to be transferred to the Palestinian Authority (PA).

The report says that unpaid taxes on smuggled goods arriving from Israel represented some 17 per cent of total Palestinian tax revenues, or about $305 million in 2012. These would have gone a long way to cover 18 per cent of the PA wage bill.

"If this 'leakage' could be curtailed, and the money transferred from the Israeli treasury to the Palestinian treasury, the resulting increase in revenue would give the PA greater fiscal policy space and help to expand economic growth and employment. The gross domestic product of the OPT would increase by 4 per cent, and employment would increase by 10,000 jobs per year," the report contends.

Multiple revenue leakage sources

The report stresses, however, that this fiscal loss is from one source only and does not include the revenue leakages from many other sources. These include taxes levied by Israel on incomes of Palestinians working in Israel and settlements. Also the use of the Israeli currency (shekel) in the OPT harms revenues.

Israel is also making the PA suffer the revenue loss by under-pricing imported goods in invoices, taking advantage of the fact that there is lack of Palestinian control over borders and obstacles in accessing proper trade data. Also because of lack of control over land and natural resources, the Palestinian Authority is losing revenues. Then there is the financial resources loss related to goods and services imported through the Palestinian public sector (petroleum, energy, and water), and fiscal loss as a result of the smaller tax base caused by the decimation of the productive base and loss of natural resources to occupation.

The UNCTAD report estimates that 39 per cent of Palestinian imports from Israel originate in third countries, cleared as Israeli imports before being sold in the OPT as if they had been produced in Israel. Customs revenue from these "indirect imports" is collected by the Israeli authorities but not transferred to the PA.

Smuggling is another source of significant fiscal revenue loss. Where the smuggled goods are produced in Israel, the PA loses value-added tax (VAT) and purchase tax revenue. However, where goods are produced in a third country, tariff revenue is also leaked along with VAT and purchase tax revenue. "The value of goods smuggled from Israel into the OPT is hard to estimate, but may make up from 25 to 35 per cent of the OPT's total imports," says the report.

Remedies

The UNCTAD report suggests ways to reduce fiscal resource leakage. These include changes to the Paris Protocol, so that it is a more balanced framework "consistent with Palestinian sovereignty needs for economic, fiscal and policy independence."

The report also pleads for the PA being given full access to all data related to imports from or via Israel when the final destination of goods is the OPT. Also existing time restrictions, which currently prevent the PA from claiming due revenue, should be abolished, and Palestinian dependency on Israel ended by removing barriers to trade with countries other than Israel.

Palestinian custom brokers should be allowed access to Israeli ports and crossing points so that they can monitor customs procedures and the PA should be provided with financial and human resources needed to strengthen its customs administration capacity, says the report.

Constraints

The UNCTAD report points out that economic growth in the occupied territory came to 6 per cent in 2012, down from double digits the previous two years. While the restrictions on both the supply and demand sides of the economy continue to accumulate, aggregate demand is inhibited by the fiscal crisis, lower aid flows, and the private sector's inability to invest and generate employment.

At the same time, the supply side is depressed by the blockade on Gaza, mobility restrictions, the construction of the separation barrier in the West Bank, and by the isolation of the entire economy from regional and international markets. The resulting high production costs cripple competitiveness, says the report.

In previous years, donor support concealed the impact of the measures imposed by the occupation. However, with the decline of such support and the subsequent fiscal crisis, the severe impact of the occupation on the Palestinian people and their economy are becoming clearer, the study says.

The economic impact was most pronounced in Gaza, where growth fell from 21 per cent in 2011 to 6.6 percent in 2012. The decline is concentrated in Gaza's agricultural and fishing sector, which has been directly affected by the Israeli military operation in Gaza in November 2012.

Unemployment in the OPT increased by 1 per cent to reach 27 per cent in 2012, the report says. Among youth, the jobless rate is roughly 50 per cent. Real wages, labour productivity, and labour participation rates all declined in 2012.

The poverty rate in the OPT in 2011 was 26 per cent – 18 per cent in the West Bank and 30 per cent in Gaza. Social assistance from the PA kept the rate from being 18 per cent higher, the study contends, but a fall in donor support in 2012 undercut the PA's ability to apply fiscal stimulus measures.

The PA increasingly has accumulated arrears to domestic banks, and loans owed to such institutions now represent 68 per cent of the Authority's revenues. The territory's human resources are severely impacted by Israeli closures, which hinder workers' abilities to find jobs, reduce school attendance, and create pressures that lead to child labour, the report contends.

The report notes that since 1967, Israel has established about 150 settlements in the OPT, including East Jerusalem. In addition, an estimated 540 internal checkpoints, roadblocks, and other physical obstacles continue to impede Palestinian movement in the OPT, separating Palestinian communities from international and local markets.

As a result, Palestinian products lose competitiveness in local and international markets, and economic growth in the OPT leans more and more towards the services sector, with a decline in agriculture and manufacturing.

Israeli restrictions on the movement of people and goods in and around the OPT make Palestinian trade heavily dependent on the Israeli economy. This reinforces Palestinian dependence on Israel and is the major factor behind the chronic Palestinian trade deficit, which grew in 2012 from 44 per cent to 47 per cent of gross domestic product, the report says. [IDN-InDepthNews – September 13, 2013]

Picture: Bank Of Palestine, Ramallah, handling New Israeli Shekel (NIS) alongside American Dollar (USD) and Jordanian Dinar (JOD) | Credit: Wikimedia Commons

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