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State of Israel Measures Taken by Israel in Support of Developing the Palestinian Economy and Socio-Economic Structure Report of the Government of Israel to the Ad Hoc Liaison Committee (AHLC) New-York, September 21, 2010 1 2 Chapter One Economic Growth in the West Bank and Israeli Measures ECONOMIC SITUATION IN THE WEST BANK General 1. During the first half of 2010, the West Bank continued to undergo significant economic recovery. The macroeconomic situation continued to improve in the West Bank and Gaza, with solid economic growth registered so far in 2010. Real GDP growth in the first half of 2010 (compared to the first half of 2009) is estimated by the IMF at 9 percent for the West Bank and 16 percent for Gaza.1 The continuation of the positive trends reported in 2009 and 2008 is also due to measures taken by Israel to support economic activity, improvements in the security situation in the West Bank, the continued financial support of the international community to the Palestinian Authority and increased foreign investment. 2. The following indicators reflect the growth in economic activity: o There was persistent growth in manufacturing, trade, and financial services, as reflected in Table 1 below. o There has been a continued decline in unemployment. In the first quarter of 2010, unemployment decreased by 3% 1 Source: IMF Given the uncertain prospect for further easing of trade controls in the remainder of the year, the IMF's conservative projection for real GDP growth for the WBG in 2010 stands at 8 percent. 3 in comparison to the first quarter of 2009.2 o Growth was recorded in the tourism sector in the West Bank. For example, between June 2009 and March 2010, the number of guests staying in hotels rose by 13.7%, the average number of nights spent in hotels rose by 11.8%, and occupancy rates rose by 10.6%, to 32.7%. During the second quarter of 2010, the total number of guests was recorded at 140,009.3 In particular, a significant increase in tourism was recorded in Bethlehem and Jericho. For example, in the first half of 2010, external tourism in these two cities amounted to 824,000, in comparison to 441,000 in the first half of 2009.4 o In the first half of 2010, Israel transferred to the Palestinian Authority 2,299 million NIS, compared to 2,029 million NIS in the parallel period of 2009 and 1,865 million NIS in the parallel period in 2008. An additional 350 million NIS was transferred at the beginning of September 2010. The estimated amount to be transferred for the whole of 2010 is 4,598 million NIS, compared with 4,372 million NIS5 in 2009, and 3,918 million NIS in 2008. o Growth in the field of construction reached more than 20% in the first 2 Source: COGAT 3 As reported in a PCBS study of 94 hotels operating at the end of the second quarter of 2010. 4 Source: COGAT 5 After the aforementioned deduction of payments. 4 quarter of 2010 (in comparison to the parallel quarter in 2009).6 o The numbers of vehicles imported to the Palestinian Authority increased dramatically in the months January to August 2010 compared to the corresponding period in 2009, from 854 vehicles in the corresponding period in 2009 to 2093 vehicles in 2010 (a 145.08% increase).7 Table 1: Palestinian GDP by Industry Agriculture Mining, manufacturing etc. Construction Transport, Storage and Comm. Services GDP (Right scale) 400 1,400 350 1,300 1,200 300 1,100 250 1,000 200 900 150 800 700 100 MillionsUSD (GDP) 600 50 500 0 400 USD Millions (Value added by Industry) by added (Value USDMillions Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2007 2008 2009 2010 Employment 3. General Figures on employment in the West Bank demonstrate a positive trend. There has been a continued decline in unemployment. In the first quarter of 2010, unemployment decreased by 3% in comparison to the first quarter of 2009.8 Palestinian estimates regarding the labor market in the West Bank point to a continued improvement in the economy of the area––the unemployment rate declined to 6 Source: Palestinian Central Bureau of Statistics 7 Source: Israel Airports Authority 8 Source: COGAT 5 15.2 % in the second quarter of 2010, its lowest level in three years. In comparison, it should be noted for example that in the first quarter of 2008, the unemployment rate in the West Bank was 19%.9 4. Palestinian Employment in the Israeli Economy In the first half of 2010, the increase in Palestinian employment in Israel and the Israeli settlements in the West Bank continued.10 The most notable feature of the increase was the constant rise in the number of Palestinian identity card holders with work permits employed, while employment of Palestinians without permits was at a standstill and even declined slightly. The average daily nominal wage also increased steadily in 2009 and the first quarter of 2010, with a slight drop in the second quarter of 2010 (See table 2 below).11 The increase in the employment of permit holders derives from the increase in permits to work in Israel and may also be partly due to increased use of the permits to work in the Israeli settlements in the West Bank. Nevertheless, the change in the composition of permit holders and non-permit-holders working in the Israeli economy may well explain the increase in the average daily nominal wage that occurred despite the 8% percent drop in the number of hours worked per week between 2008 and the first half of 2009.12 9 Source: Palestinian Central Bureau of Statistics 10 Source: Palestinian Labor Force Surveys 11 Source: Bank of Israel 12 Another plausible explanation for the increase in the wage is the increase in the wage of residents of East Jerusalem who are included in the average daily wage published by the Palestinian CBS. 6 Table 2: Palestinian Employment in the Israeli Economy (2007-2010)13 Without Permit With Permit Average Daily Wage (Right Scale) 40 170 35 150 30 130 25 110 20 90 NIS (current prices) NIS (current 1000s of employees 1000s 15 70 10 50 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2007 2008 2009 2010 Banking 5. In the first half of 2010, deposits of Palestinian banks in Israeli banks continued to increase rapidly, reaching more than NIS 1.6 billion. This increase was an extension of the upward trend evident in 2007–09. The growth in deposits may be due to the higher level of liquidity in the Palestinian economy and the high interest rate on the Shekel compared with that on other currencies, or it may be due to the increased volume of business between the two economies.14,15 13 Estimates of workers with permits and those without include Palestinians with Palestinian I.Ds, and do not include Palestinians with Israeli I.Ds or foreign passports, the great majority of which live in East Jerusalem. The average daily wage published by the Palestinian CBS includes holders of Israeli I.Ds and foreign passports, including residents of East Jerusalem who are not included in this review. Source: Palestinian CBS, Labor Force Surveys. 14 Source: Bank of Israel 15 The amount of deposits declined in the past, in the first years of the Intifada (2002–03) and in 2005–06, following the third-party claim against the Israeli banks because of intervention in the transfer of terrorist funds. At the same time, foreign currency deposits of the Palestinian banks continued to follow a downward trend, reaching less than NIS 100 million. This low level reflects the switch, in the 1990s, of foreign currency activity by the Palestinian banks from the Israeli banks to direct dealing with foreign banks. 7 6. The Bank of Israel (BoI) has been working with the Palestine Monetary Authority (PMA) to establish smooth banking relations between the respective economies subject to security concerns and international standards prohibiting the financing of terrorism. These international standards––the implication of which was seen in legal action taken against an Israeli bank abroad for an alleged indirect breach of anti-terrorism-financing regulations– –combined with the low profitability of business relations with Palestinian banks, induce Israeli commercial banks to limit their relations with Palestinian banks. Specifically, they do not conduct business with branches located in the territory controlled by Hamas–– the Gaza Strip- in line with other financial institutions that comply with the international regulations prohibiting the financing of terrorism. This situation resulted in large NIS cash surpluses accumulated by West Bank banks, which the BoI and the PMA cooperated in absorbing. Specifically, since August 2009, the BoI in coordination with the GoI has arranged transfers totaling about NIS 1 billion in cash from the West Bank to Israel as an extraordinary measure. These transfers are evident in the increase in the NIS deposits of Palestinian banks in Israeli banks (Table 3). In addition, the BoI and the PMA are negotiating an agreement whereby certain amounts of excess NIS cash are regularly deposited in Israeli banks. The BoI and the GoI were also involved in finding solutions for other problems that have arisen from time to time in Palestinian banks, such as exchanging worn banknotes.16 16 Source: Bank of Israel 8 Table 3: Deposits of Palestinian Banks in Israeli Banks (1996-2010)17 1,800 Deposits in NIS 1,600 Deposits in USD /EURO 1,400 1,200 1,000 800 NIS MillionsNIS 600 400 200 - Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Trade with Israel 7.