Washington Report on Middle East Affairs, May 2002, pages 17-18

Trade and Finance

 

Palestinian and Israeli Economies Buffeted By War’s Destruction, Lost Revenue

By Colin MacKinnon

If war is hell, it is expensive hell. The economies of both Israel and Palestine have been buffeted severely by what began as the al-Aqsa intifada but which now has become out and out war.

The Israeli economy, 20 times the size of the Palestinian, is modern, sophisticated and resilient. Nevertheless, it has suffered significant losses. According to a report presented this spring by the Prime Minister’s Office, between September 2000, when the intifada exploded, and December 2001 the government had to spend an unplanned $1.2 billion to fund the war and suffered about $1 billion in lost revenues directly because of the war. The $2.2 billion total hit the government took because of the war during that period was the equivalent of about 2 percent of Gross Domestic Product—no small change.

Most of the extra expenditure, some $500 million, went, as one would expect, to the Ministry of Defense—for ammunition expended, emergency pay for reservists called up, transportation for troops and materiel, unplanned construction, and, naturally, the more than usual costs for protecting Israeli settlements in the West Bank and Gaza.

There is no way to conduct military operations on the cheap. Running a Merkava tank a mere one hour sets the IDF back $2,000 or so. An Apache helicopter costs $4,500 an hour to fly. The F-16, much in use these days, costs $12,000 every hour it’s in the air.

Nor is the Ministry of Defense the only spender. Israeli police needed an extra $271 million during this period for unplanned operating expenses, new equipment, and additional personnel.

Added social services—medical expenses, compensation for property damage, social workers—consumed an additional $70 million. Psychological services for Jewish settlers in the West Bank and Gaza alone ran to $7 million.

Apart from incurring expenses considerably larger than expected, the government lost revenue as well. According to the Prime Minister’s Office, El Al, Israel’s state-owned airline, lost $133.5 million as a direct result of the war. The Airport Authority lost $96.1 million. Other state-owned transportation facilities—the Port Authority, Egged and Dan Bus Cooperatives, Zim (the shipping line) and the Railroad Authority—lost significant sums as well.

Then there are the unpaid bills from the other side of the Green Line: by the beginning of March 2002 the Israel Electric Company was claiming that Palestinian subscribers owed it $26.7 million. Needless to say, there are many such debts.

And because business is down, tax revenues also will be down for some time to come.

And those are just Israeli governmental losses.

Private Sector Losses

For Israel’s general civilian economy, quantifying losses caused by the war is difficult, particularly in 2000-2001, when the world economy, including the U.S.’s, was in recession.

Still, according to the same PMO report, Israel lost 4 percent of its GDP over the period Sept. 2000-Dec. 31, 2001. GDP growth in 2000 as a whole was 6.4 percent. The war had to have caused much of this dramatic reversal.

The Israeli tourism sector, a huge money-maker for the country, is particularly sensitive to the security situation, and recent figures demonstrate that: according to a Bank of Israel report, in the period October 2000 to December 2001 the number of tourists dropped 52 percent, with tourism revenues falling $2.1 billion.

Other civilian indicators:

•Stocks are down: the TA 25 Index, which tracks 25 prominent firms listed on the Tel Aviv Stock Exchange and which had climbed 7.3 percent in 2000, fell 17 percent in 2001 and had fallen another 11.3 percent by the end of February 2002.

•Foreign investment is seriously off: in the last quarter of 2001 investment inflows totaled $199 million, down from $1.8 billion in the second quarter and $1.9 in the first.

•Defaults on mortgage payments were up 28 percent in 2001.

•Though banks are still in the black, their profits are down: United Mizrahi’s were off 30.3 percent in 2001 compared with the year before. Bank Leumi’s profits were down 45 percent, Bank Hapaolim’s down 46 percent, and United Bank of Israel’s down 48 percent. Much of this loss is due to increased bad debt, a sign of a deteriorating economy in which people and businesses have trouble paying their bills. Mizrahi’s portfolio of problem debts, for example, grew 23 percent in 2001, to $4.8 billion.

There is no sign of improvement to this picture anywhere. The year 2002 looks like a bad one for Israel, politically and economically, and for one main reason: the war.

And Palestine?

Palestine’s Plight

Every time it appears things can’t get worse in the West Bank and Gaza, they do. The World Bank, in a report just out in March, Fifteen Months—Intifada, Closures and Palestinian Economic Crisis—An Assessment, [available from the World Bank at <http://www.worldbank.org>, under “Countries and Regions, West Bank and Gaza”] gives a bleak picture of one of the world’s least healthy economies now reeling under unprecedented pressure.

The PNA is essentially bankrupt. As business has fallen and curbs on movement within the Palestinian areas have prevented tax collection, monthly revenues have plunged from $91 million to $22 million.

The PNA is spending money it does not have—living off donor emergency support, not paying suppliers, borrowing from local banks. Most of its spending goes not for planned development, but for wages of workers who never get to the office or work site and for emergencies of one sort or another.

The Palestinians have had their national income cut almost in two.

Israel is not remitting to the PNA value added (VAT), import and excise taxes on fuel, tobacco and other commodities which it is supposed to collect on the PNA’s behalf. By the end of May, 2002 total tax revenues withheld by the Israelis will reach something like $650 million.

The World Bank says that Palestinian GDP declined by 6 to 7 percent in 2000, mostly because of poor performance in the last quarter of that year, when the intifada broke out. In 2001 GDP fell another 12 percent—this in an economy where annual per capita GDP was $1,600 at best.

Economic opportunities have been lost in investment ($1.2 billion in foregone investment) and in the tourism and export sectors. Total Gross National Income losses were $2.4 billion for the first 15 months of the intifada (Gross National Income is GDP plus revenue from abroad such as the wages that overseas workers send home).

GNI in 1999 was $5.4 billion. A loss of $2.4 billion means the Palestinians have had their national income cut almost in two.

Unemployment at the beginning of 2002 was 35 percent, compared with 20 percent the year before (the Bank’s figure, as it admits, doesn’t even address the problem of increased underemployment). The war was the main cause of the drop: in the last quarter of 2000 “some 100,000 jobs of a total of 125-130,000 evaporated.” They did so because Israeli authorities drastically cut the number of job permits and tightened controls on routes into Israel and the Jewish settlements.

Lost jobs in Israel and the settlements led to lower demand for labor in the West Bank and Gaza (less money coming in, less demand for goods produced internally).

And, of course, local investment fell. The Bank estimates total investment in the West Bank and Gaza decreased as much as 19 percent in 2000 and another 30 percent in 2001.

Add to this the cost of destruction of property and infrastructure, which the Bank puts at $305 million at the end of 2001. Agriculture was hit hardest, with losses of $176.6 million (fields plowed up, trees cut down, nurseries, greenhouses and the like destroyed). And, of course, the war-induced destruction and its total cost, like the war’s casualty figures, are constantly rising.

The Bank attributed the main cause of economic disaster in the West Bank and Gaza to Israel’s closure policies. Because of the closures, fewer people and goods move from point to point and it takes them much longer to get where they’re going.

“Even on days of partial closure,” the report says, “these checkpoints have created a life of roundabout routes, interminable delays and frequent harassment.” Average journey times have tripled because of new internal checkpoints and delays on the borders with Egypt, Jordan and Israel. “Removing or significantly easing closure is the most important prerequisite if further decline is to be arrested and economic pressure removed from the Palestinian population,” the report said.

Even if Israel is inclined to ease the closures, the report noted, it will take the West Bank and Gaza at least two years to get back to the level of economic activity they had before the crisis. And, remember, pre-crisis levels were terrible.

It will take even longer to get back to previous income levels, which are now some 30 percent below the levels of the Gaza-Jericho Agreement of 1994.

“Conversely,” continued the report, “a sustained further tightening of closure will impoverish Palestinians and will lead to economic implosion and a scale of hardship so far only hinted at.”

Even worse would be complete economic and political melt-down, which, says the Bank, is “not beyond the realms of possibility…The PA [Palestinian Authority] might cease to govern. Should this occur, the donors would lose their main conduit for support—the budget channel through the Ministry of Finance. The consequences of a simultaneous collapse of the administration, incomes and demand would set the peace process back many years and would undo almost all of the post-Oslo economic and institutional gains.”

Colin MacKinnon is a country analyst with the Syracuse, New York-based PRS Group.

< Prev		Next >