BICOM Strategic Assessment

Israeli-Palestinian economic relations

June 2016

Key Points the Palestinian Authority (PA) and Hamas; ◊ The resistance of Egypt to any steps which • The Palestinian economy is stuttering in the might help Hamas; West Bank, and is in a dire condition in the ◊ International concerns not to grant Gaza Strip. In both cases, whilst the causes are legitimacy to Hamas and thereby inseparable from the political conflict with , undermine the PA; they also relate to internal Palestinian political ◊ Tensions between Israel and the PA challenges and the role of third parties. exacerbated by recent Palestinian violence and the PA’s policy of confronting Israel in • Many Israeli officials recognise that improving the international fora; Gaza Strip and West Bank economies will reduce ◊ Political resistance on the Israeli right; the chances of violence. Israel has recently taken ◊ The deal to re-establish ties between Israel steps to improve the situation, and there is support and Turkey, linked to Turkish demands to from the IDF for major infrastructure projects to open up Gaza; transform the Gaza Strip. ◊ Shortfalls in donor aid.

• However, cooperation and development are • Improving the Palestinian economy is a shared hampered by complex factors including: Israeli-Palestinian interest, and much can be done even in the absence of a broader shared ◊ The security threat posed to Israel by political horizon. However, major changes require Hamas; international support, which must come with a ◊ The political division and rivalry between recognition of the complex factors involved. What is the current state of the Palestinian The unresolved territorial dispute limits economy? development. The complex subdivision of the West Bank into PA control (Areas A and B, the 40 per cent Distinct yet interrelated factors are shaping the of the West Bank where most Palestinian live) and very different economic situations in the Gaza Israeli control (Area C, including the settlements) Strip, under the de facto rule of Hamas, and in limits Palestinian development. The situation, the West Bank, under the rule of the PA led by meant to be a temporary arrangement under the Mahmoud Abbas. Oslo Accords, has remained fixed in the absence of a final status agreement. The Palestinians are unable West Bank to exploit economic, resource and infrastructure opportunities in Area C, which could add as much The economy in the West Bank is stuttering after as 35 per cent to Palestinian GDP, according to a period of growth. After the the World Bank. Reports also highlight the failure ended in 2005, the West Bank economy grew at of the PA to exploit land resources even in Areas close to 10 per cent, fuelled by increased donor A and B, due to problems such as lack of formal aid – especially after the 2007 split with the land registration. Whilst Israel is routinely criticised Hamas regime in Gaza – and helped by reduced for building new homes for settlers in contested restrictions on movement and PA reforms under Area C, Israel objects to unauthorised Palestinian former Prime Minister Salam Fayyad. However, construction there, including construction

the PA’s fiscal position has been hit by a sharp conducted with assistance from international decline in international donor aid from US$1.2bn donors including the EU. in 2012 to US$750m in 2015, coupled with a decision by Israel to withhold clearance revenues Mismanagement and corruption in the PA. Some following the PA signing the Rome Statute in 79 per cent of Palestinians regard the PA as corrupt, 2015. West Bank growth slowed in 2015 to less according to a March 2016 survey, and international than 3 per cent, with unemployment estimated confidence, already low, suffered further with the at 18 per cent (Q1, 2016). International priorities resignation of Salam Fayyad in 2013. Palestinian have shifted with competing demands such as the civil society organisations such as ‘Transparency Syrian refugee crisis. The US, the single largest Palestine’ and ‘Al Shabaka’ highlight endemic donor, reduced economic support to the PA from corruption issues including the politicisation of US$370m to US$290m in 2015, partly in response public appointments and misuse of public funds to PA decisions to accede to international and contracts by both Fatah and Hamas. Documents institutions. Donor confidence is undermined by leaked to Associated Press (AP) in August 2015 uncertainty fuelled by periodic threats by Abbas highlighted how PA officials direct international to resign or dismantle the PA. These recent issues aid to serve their personal interests and misdirect compound underlying issues. PA budgets to assist themselves and their families. The non-functioning of the Palestine Legislative that the Gaza Strip could be ‘unliveable’ by 2020. Council (The PA’s legislature, which has not sat Gaza has a soaring population of 1.85m (43 per since 2007), means there is no accountability for cent younger than 15) combined with shattered Abbas’ executive authority. infrastructure, especially water, electricity and housing. The crisis is a function primarily of Mismanagement and waste also contributed to the conflict between the Hamas government the PA’s large fiscal deficit. A particular concern and Gaza’s neighbours, Israel and Egypt, and its highlighted by an EU report in 2013 is the PA conflict with the PA. Hamas remains committed to paying tens of thousands of civil servants in the destruction of Israel. Hamas’s infrastructure the Gaza Strip who have not worked since the has been severely damaged by rounds of conflict Hamas takeover in 2007. Furthermore, according with Israel. Border access is tightly restricted by to an April 2016 World Bank report, “The internal Egypt and Israel with no functioning seaport or divide between the West Bank and Gaza, which airport. Unemployment in the Gaza Strip is 41.2 has created a dual regulatory framework, has per cent (Q1, 2016). also negatively impacted economic activity and the tax base.” The PA has also clashed with Gaza’s electricity sources – a small power plant international donors over the money it spends supplemented with power from Israel and a small on large monthly salaries for convicted terrorists amount from Egypt – provides less than half of serving sentences in Israeli prisoners and the demand, with rolling power cuts of 12 hours a family members of suicide bombers, amounting day. The problems are exacerbated by increased to more than £100m in 2012 according to a report fuel costs due to the closing of smuggling tunnels from the Israeli Foreign Ministry. from Egypt; fuel shortages due to Hamas’s non- payment of fuel taxes to the PA; and damage to Israeli security measures impede movement. the power plant caused by Israel during the 2014 Israeli checkpoints and barriers intended to conflict. An equally acute crisis is water. Pollution prevent attacks on Israelis impede Palestinian of aquifers, inadequate infrastructure, and energy movement both within the West Bank and shortages mean supply is intermittent and largely between the West Bank, Israel and Jordan. These undrinkable, and large quantities of sewage are barriers, along with political uncertainties, deter pumped into the sea. both investors, and tourists, and contributes to the Palestinians lacking access to adequate Gaza has faced severe restrictions since Hamas sources of finance. took over in 2006-7. When Israel left Gaza in 2005 it signed an Agreement on Movement and Access Gaza Strip with the PA. But following Hamas’s violent ejection of PA forces in 2007, Israel declared the Gaza’s economic and infrastructure situation is Gaza Strip an enemy entity and imposed severe dire. A widely quoted 2015 UN report asserted restrictions on movement and access. It aimed to avoid an acute humanitarian crisis, but prevent What is the latest in Israel-PA economic and Hamas acquiring the means to rule effectively development cooperation? and expand its military threat to Israel. Egypt also regarded Hamas as a threat, and tightened There is wide recognition in Israel, especially the Gaza-Egypt border. Hamas sustained its in the security establishment, that improving rule with international assistance (especially economic prospects for Palestinians in both from Iran) and a smuggling economy through the Gaza Strip and West Bank means reduced hundreds of tunnels under the Gaza-Egypt border. potential for violence. Senior IDF officers have Nonetheless, Gazan exports stopped almost warned political leaders that a failure to ease completely and unemployment soared. After the conditions inside the Gaza Strip will likely lead to Mavi Marmara incident in 2010, Israel relaxed renewed conflict, and there is also a concern that many import restrictions. Hamas’s collapse could lead to chaos and greater freedom of action for other Jihadist groups. Recent Egypt’s clampdown accentuated Gaza’s problems. steps announced by Israel with the potential to After President Sisi came to power in Egypt in ease the economic situation, include: 2013, he accused Hamas of aiding the Muslim Brotherhood and the Islamist insurgency in the In the West Bank: Sinai and set about destroying smuggling tunnels. Egypt has kept the Rafah crossing largely closed, • Approval by the Israeli Security Cabinet in and says it will only open it under PA supervision. February 2016 for an additional 30,000 permits The clampdown, coupled with declining support for Palestinians to work in Israel bringing the from Iran, and the unwillingness of the PA to step potential number to 85,000 (in addition to an in and pay salaries for 40,000 Hamas employees, estimated 40,000 working without permits and exacerbated Gaza’s crisis. This was one of the 22,000 working in settlements). factors which motivated Hamas during the conflict in 2014. • A decision by Finance Minister Moshe Kahlon in February 2016 to release NIS500m (£92m) in Gaza’s reconstruction has also been hampered withheld Palestinian tax revenues. by shortfalls in donor aid. Reconstruction and development have been limited by problems • A series of measures spearheaded by Finance raising pledged money and disbursing it, with Minister Moshe Kahlon in coordination with only US$1.4bn of US$3.5bn pledged at an October Palestinian counterpart Shukri Bishara including 2014 international donor conference delivered. proposals to open up areas of the Israeli economy to Palestinian contractors and workers including Since 2014 Israel has tried to relieve the pressure. construction, hi-tech and medicine. Bishara wrote After the 2014 conflict Israel gradually relaxed to Kahlon in February 2016 that, “owing to your some restrictions. In September 2014 Israel agreed leadership and understanding, we have reached the Gaza Reconstruction Mechanism (GRM) a positive turning point and set the stage for with the UN and the PA to import construction new beginnings in the commercial relationship materials, including dual use materials, into the between Israel and ourselves”. Gaza Strip and assure they were not diverted • An agreement to install scanners at the King for Hamas’ military purposes. An electronic Hussein/Allenby crossing between the West database, run by the PA’s Ministry of Civil Affairs, Bank and Jordan in the near future, with US and matches the supply and demand for goods, and as Dutch funding. This has the potential to decrease of May 2016 more than 1.25m tonnes of material Palestinian transaction costs due to Israeli has been dispatched to more than 130,000 security checks and increase West Bank-Jordan beneficiaries. However, the PA is not present in trade flows by 30 per cent. the Gaza Strip to monitor the materials and UN has not prevented Hamas syphoning supplies for • An agreement in November 2015 between the military purposes. The PA has no control inside Palestinian Minister of Civil Affairs Hussein Al- the Gaza Strip and Abbas refuses to take control Sheikh and Israel’s Coordinator of Government of the borders, believing he will be simply used Activities in the “Territories” (COGAT) Maj. Gen. as a front for Hamas’s continued rule. Israel Yoav Mordechai to allow Palestinian telecoms has agreed to give Turkey a greater role in aid companies to deliver 3G in the West Bank. and development in the Gaza Strip as part of the Israel-Turkey reconciliation deal. • The resolution of years of disputes allowing the new Palestinian city of Rawabi to be connected to the water grid, announced by Israel in February 2015. agencies on the ‘Gaza Reconstruction Mechanism’, with around 130,000 residents receiving materials • An announcement by Finance Minister Moshe to rebuild homes. Kahlon and former Defence Minister Moshe Yaalon in May 2016 to spend NIS300m (£53m) • Announcement from then-Defence Minister in upgrading crossings between Israel and the Yaalon in May 2016 of intent to reopen the Erez West Bank, increasing flows of goods and people, crossing to goods for the first time since 2000. reducing waiting times and improving conditions for workers. • Announcement in June 2016 that the EU will fund the second stage of the Deir al-Balah • The IDF has backed a PA plan to build a power desalination plant with Israeli coordination, with plant for the West Bank near Jenin, which will the first phase set to become operational later this run on Israeli supplied natural gas. year.

• Talks are also being held between the IDF and • Support from the IDF for other major projects to the PA on reducing Israeli military incursions into provide Gaza with new power and water sources. Area A (mainly Palestinian cities and population centres). • Israel has also expanded humanitarian crossings, doubling the numbers of Gazans entering Israel In the Gaza Strip: via the Erez crossing from around 7,000/month in 2014 to more than 15,000/month in 2015 and 2016. • Expanding truckloads of goods entering Gaza These are mostly medical patients, traders and aid from Israel from 4,307/month in 2014, to 7,898/ workers, but Israel has recently also allowed 300/ month in 2015 and around 10,000/month in 2016. month to visit the Al Aqsa mosque in .

• Increased exports from Gaza (agricultural, However, these measures remain sensitive to clothing, furniture, scrap metal), mostly to the fluctuations in the security situation. Deliveries of West Bank from around 20/month in 2010-2014 to cement to private individuals was suspended for 113/month in 2015 and around 185/month in the a month in April 2016 following the discovery of first four months of 2016. (Compared to more than Hamas tunnels built with cement syphoned from 1200/month in 1999.) A second container scanner supplies intended for reconstruction of homes. is being installed to facilitate exports at the Kerem Shalom crossing. Palestinian private sector:

• The expansion in April 2016 of the fishing zone Israeli-Palestinian business cooperation is a daily south of Wadi Gaza to nine nautical miles. reality. The Palestinian economy is inextricably tied to Israel, which is the source of 65 per cent of • Close cooperation with the PA and international its imports and the destination for 81 per cent of its exports. In addition, 114,000 Palestinians were cooperation with improved infrastructure to employed in the Israeli economy in the 1st quarter access export markets. Labour Member of 2016, accounting for 14 per cent of the West and former venture capitalist Erel Margalit is Bank’s workforce. In Israel they earn on average among those promoting joint economic zones 113 per cent more than workers in the Palestinian for business and trade at locations straddling the economy. Some 22,000 Palestinians have permits Israel-West Bank border. to work in settlements, many of them employed in Israeli businesses in industrial zones located in Area C represents a further opportunity. There the West Bank. is considerable diplomatic pressure on Israel to allow the PA greater access and more scope to develop civil infrastructure and economic projects What are the opportunities for more substantial in Area C including agriculture and resource development? extraction. Israel proposed during peace talks in 2013-4 that the Palestinians be able to manage West Bank planning for zoning and construction in parts of Area C adjacent to Palestinian cities, a step that There is considerable potential for Palestinian would create considerable economic potential, economic development in the West Bank. The West and which remains under consideration by Israel. Bank’s potential lies in opportunities including Israel already allows Palestinian police to operate relatively high levels of education, and access to in Palestinian population areas of Area C. the Israeli market. Reports by the Office of the Quartet, which coordinates international efforts Gaza Strip to promote Palestinian development, identified growth potential in sectors including agriculture, A number of major development projects have manufacturing, tourism, ICT, and infrastructure. been proposed to address the crisis in the Gaza Strip. Seizing these opportunities depends on better cooperation with Israel. Such cooperation is vital Access via sea: Israeli security officials and to improve movement and access, border flows, several ministers advocate establishing a and addressing restrictions relating to dual use seaport to serve Gaza, which will not be in Gaza materials. Improved cooperation with Israel on itself. They believe that this will alleviate the technical issues such as management of the humanitarian situation, reduce the chance of customs regime, would also improve the PA’s renewed violence, create employment for Gazans, finances. reduce international pressure on Israel and reduce Israel’s responsibility for Gaza. Several proposals NGOs such as the Peres Center for Peace, private have been aired, with the most ambitious, publicly individuals, and the Israeli Ministry for Regional backed by Israeli Transport Minister Israel Katz, Cooperation are working to further promote Israeli- being an offshore island port with the potential Palestinian business cooperation, in the belief for an airport, power and water production on that this will not only help develop the Palestinian the same site. Other proposals include a seaport economy but build peace. There are many areas of for Gaza in Egyptian territory in the Sinai, or a potential complementary work. The hi-tech sector special quay for Gaza within Israel’s Ashdod port. has been widely identified as a shared opportunity It was widely reported in 2015 that Hamas was for Israel’s booming industry to outsource work indirectly negotiating with Israel over such an to Palestinian programmers and to access Arab initiative in return for a long term ceasefire. Israel’s markets via Palestinian intermediaries. There hesitations relate to both security and political is considerable growth potential in tourism for considerations. On security, there is reluctance visitors that want to access cities and sites in Israel to reduce Israel’s control over what enters Gaza, and the West Bank at the same time. In agriculture given the determination of Hamas to rearm. The there is potential for Palestinian farmers to benefit political concerns relate to the objections of the from technological developments in Israel dealing PA and Egypt to anything which may assist with identical conditions. Hamas, and the domestic political concern for Netanyahu of making an accommodation with a Industrial free zones represent another source terror organisation. of opportunity. A new industrial free zone is due to be opened in Jenin in 2016 with Turkish Power: The IDF has proposed plans to address funding, promoting Israeli-Palestinian business Gaza’s power shortages including adding more power lines from Israel, help establish solar decision makers, including Prime Minister energy, and convert the Gaza power plant to run Netanyahu, are constantly concerned about being on gas from Israel’s offshore gas fields. Qatar outflanked by politicians on the right calling for is willing to finance the gas line. The Dutch a hard-line approach in the face of escalating government is funding a feasibility study nearing Palestinian violence. completion, though construction is not expected before the end of 2017 at the very earliest. The Israel’s dilemma over dealing with Hamas: In the Quartet has said it hopes for an agreement to wake of the Gaza conflict in 2014 many Israeli be signed on the solar power development by analysts and politicians called for a proposal in September 2016. Qatar is also willing to fund which Israel would facilitate reconstruction in new power lines from Israel, though it was the Gaza Strip in exchange for Hamas’s gradual reported in March that Abbas had blocked the demilitarization and transfer of powers to the plan. Plans for a new power station are now part PA. However, since 2014 Palestinian attempts to of an Israel-Turkey reconciliation deal. Long term, reunify have remained moribund and Hamas’s gas deposits off Gaza’s coast present a potential military wing has proven fully committed to economic opportunity for the Palestinians as well rearming for future conflict. Abbas has been as a solution to their power needs. unwilling for the PA to assume any direct responsibility for Gaza’s borders, not wanting Water: A newly constructed waste water plant to do anything to assist Hamas – which he sees on the northern Gaza Strip is due to go online as a direct threat to his own rule – and believing but is delayed due to problems ensuring energy Hamas will not allow him real control. Nor has supply. With respect to water supply, expanding the PA been willing to transfer salaries to Hamas desalination would alleviate the situation, and officials. Israel does not want to legitimise Hamas the World Bank, European Commission and with a long-term ceasefire agreement, and which Islamic Development Bank supporting technical could give a green light for third parties to also preparations, with the backing of Turkey among engage with Hamas. others. Palestinian anti-normalisation: Meanwhile, the However, long-term development projects are Palestinian political mood opposes ‘normalisation’ hampered by lack of donor confidence due to of relations, and political cooperation with Israel, the instability of Gaza and the risk of conflict, as even where it potentially benefits Palestinians. well as by complex political challenges affecting The notion of ‘economic peace’ is dismissed by Israel, the Palestinians and third parties. Palestinians as a way of deferring the political issues. The PA leadership both reflects and Political Challenges reinforces the anti-normalisation mood by avoiding open political negotiations with the The capacity to exploit opportunities to develop Netanyahu government, by confronting Israel the Palestinian economy in both the Gaza Strip in international forums, and by Abbas’ repeated and West Bank is hampered by the poor political threats to end security cooperation with Israel. relations between Israelis and Palestinians, A specific example in the economic field is the domestic political factors on both sides, and the Traklin business centre opened by Israel’s interests of third parties. Ministry of Regional Cooperation at the Efraim Gate crossing near Tulkarem to facilitate Israeli- Israeli domestic political challenges: Even those Palestinian business cooperation. According to Israelis who are hawkish on the question of a the Israeli ministry it shut in late 2015 due to the political agreement are generally supportive in PA stopping Palestinians visiting. The facility principle of measures to improve the Palestinian was intended to enable Israeli and Palestinian economy; sometimes referred to as ‘economic business people to meet without the Palestinians peace’. The security establishment is broadly of requiring any permit to reach it. This climate of the view that greater economic opportunity will mutual mistrust also prevents the outdated 1994 reduce the chance of violence. Objections come Paris Agreement governing economic relations when measures to improve the economy are also between the parties from being updated. seen to have security and political implications. In periods of escalating Palestinian violence and Regional interests of Egypt, Turkey and others: incitement, the weight of Israeli public mood in Regional politics also complicates efforts to Israel shifts against ‘concessions’, especially address Palestinian challenges. So long as where there appears to be no reciprocity. Key Egypt sees Hamas as a partner to the Muslim Brotherhood and Islamic State-inspired violence in Egypt, it opposes opening up Gaza and in particular building a seaport. Egypt is wary of the political and economic support provided by Qatar and Turkey to Hamas, and accuses Turkey of hosting Muslim Brotherhood and Hamas figures involved in terrorism inside Egypt. Egypt also does not want to shift the burden of humanitarian responsibility for Gaza to itself by opening its border. While Turkey has conditioned restoring diplomatic ties with Israel on demands relating to the development of infrastructure in Gaza, Israel needs to take into account the opposition of Egypt to allowing Turkey and other sympathisers of the Muslim Brotherhood a leading role in Gaza. Meanwhile, Hamas’s association with the Muslim Brotherhood and its supporters in Qatar and Turkey, as well as its ongoing military relationship with Iran, also limits its ability to acquire support and assistance from the Saudis and other Arab states in the Gulf.

Conclusion

Improving Palestinian economy and living standards is a shared Israeli-Palestinian interest, and much can be done even in the absence of a broader shared political horizon. The causes for economic and associated humanitarian challenges in the Palestinian areas are complex and multi-faceted, with the positions of Israel, the PA, Hamas, and other parties including Egypt and Turkey playing a role. Whilst many Israeli officials recognise the Israeli interests in improving economic conditions for Palestinians, Israel faces constraints due to internal Palestinian splits, regional political factors, and Israeli domestic politics. Major changes require international support, which must come with a recognition that the barriers to development need to be addressed comprehensively, especially in relieving the acute crisis in the Gaza Strip. This strategic assessment was produced by *** BICOM’s Research Team.

Copyright © Britain Israel Communications and Research Centre 2016

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