Economics
The Palestinian Ministry of Finance (MOF) and the International Monetary Fund (IMF) initially projected 1998 real Gross Domestic Product (GDP) and Gross National Product (GNP) growth rates of 2.1 and 3.5 percent respectively, higher than 1997 growth rates. Better than expected trends in the first half of 1998 - especially with regard to Palestinian labor flows to Israel, donor reimbursements and imports - led to an upward revision of real GDP and GNP growth estimates to 3.0 and 5.5 percent respectively. These growth estimates were reaffirmed at the end of the third quarter, despite the imposition of 22 comprehensive closure days during September and October. If accurate, the estimated growth rates would be sufficient to marginally raise per capita income levels in the West Bank and Gaza (WBG) for the first year since the beginning of the interim period in 1994.

Employment, Trade, Investment, Closure

Growth in the number of permits issued and fewer comprehensive closures resulted in a 16.9 percent increase in the number of WBG workers employed in Israel in 1998. Permit-holding worker flows were estimated at an average of 44,400 per day during the year. Average labor flows were sharply reduced during comprehensive closures imposed in September and October, but rebounded in November and December. In addition, unofficial labor flows are estimated at an average of more than 55,000 on a daily basis in 1998 (excluding periods of closure).
Trade flows also improved in 1998. Monitored truckload movements exiting and entering the WBG grew an estimated 12.4 percent in 1998 relative to 1997. Imported truckloads grew 14.7 percent while the number of exported ones grew only 1.9 percent. In nominal NIS (New Israeli Shekels) value terms, WBG total trade with Israel - the WBG's main trading partner - grew about 9.3 percent, with WBG exports rising 17.3 percent (to about $492 million) and WBG imports growing 7.2 percent (to about $1,714 million) as between 1997 and 1998. Direct registered WBG imports from countries other than Israel grew about 24.3 percent (to about $143 million).
There were mixed results in private investment activity. Construction activity - the main component of private investment - grew modestly, with the new surface area licensed by Palestinian local authorities for private construction rising 4.6 percent in 1998. The area licensed for residential construction rose to only 0.1 percent while that for business construction increased by 36.2 percent. Slower growth in overall construction licensing, despite the relative improvement in economic conditions, may be due to increased uncertainty regarding the peace process and/or a relative surplus of housing after several years of rapid expansion.
The number of newly registered companies in the WBG increased 12.6 percent, but all of this increase was in Gaza. Total registrations declined 12 percent in the West Bank. About 90 percent of new registrations were private unlimited-liability companies - generally smaller businesses - while the number of newly registered private limited-liability companies, public limited companies and foreign companies all declined. The values of approved investment projects qualifying for customs and tax exemptions under the Palestinian Law for the Encouragement of Investment declined 18.1 percent to $161 million in 1998. The decline was accounted for by projects in the West Bank; approved projects in Gaza rose 94.3 percent to $58.3 million. The growth in Gaza may be related to the completion of the first phase of the Gaza Industrial Estate.
The total value of bank credit extended to private businesses grew to $467.3 million at the end of 1998 - an increase of 9.3 percent in nominal terms relative to the end of 1997. The rate of growth in bank credit to businesses was well below that in 1997, when it grew by more that 40 percent. This suggests a deceleration in bank lending after several years of rapid growth. Bank credit for transportation, tourism, hotel and restaurant activities, construction, manufacturing and mining all grew, while that for commerce and agriculture declined. Thus banks were generally lending more for productive activities and less for commerce, which nonetheless remains the single largest area of bank business lending. The loan-to-deposit ratio of the Palestinian banking system - a measure of the relative bank and borrower confidence - grew to 34.5 percent at the end of 1998, but remains one of the lowest in the region. Moreover, there was a retrogression in the average repayment period for bank loans in 1998 as overall bank credit shifted toward shorter-term consumer loans and away from longer-term business loans. The total value of loans disbursed to small and medium-sized businesses by NGOs and UNRWA rose 20 percent in nominal terms to $28.2 million in 1998.
Donor disbursements declined from $550.6 million in 1997 to a reported level of $399.8 million in 1998 - a 27.4 percent reduction. Nonetheless, total public investment spending is estimated to have risen 11 percent to approximately $215 million. Public investment absorbed about 53.8 percent of total disbursements in 1998, a substantial proportional increase as compared to 1997 when only 43.7 percent of disbursements were dedicated to public investment. The higher proportions of funds spent for public investment are due in part to the achievement of a balanced recurrent budget by the Palestinian Authority in 1998 - the first year this has occurred during the interim period, allowing more donor resources for investment.
There was no reduction in the severity of the general closure and separation policy applied in the WBG by the Israeli authorities in 1998. The mobility of Palestinians between the West Bank and East Jerusalem, and between the West Bank and the Gaza Strip remained severely restricted. Palestinian public and private institutions, as well as international agencies, continued to experience high transaction costs, time delays and lost productivity due to Israeli movement restrictions on personnel and goods at border crossings. However, there were significantly fewer comprehensive and internal closure days imposed by the Israeli authorities on the WBG during the year. Comprehensive closures were imposed on 26 days during 1998, 2 days in the first half of the year and 24 days in the second half, mainly in September and October. Excluding weekends and holidays, there were 14.5 effective closure days, a loss of 5.2 percent of the total potential work days, as compared to 20.5 percent loss in 1997.

Population, Labor Force and Wages

The working-age population grew to an estimated 1.38 million persons in 1998 - a 6.5 percent increase. Despite a small decline in the labor force participation rate, the labor force increased by 5.9 percent to about 585,000 persons in 1998. The full-employment rate grew to 77.8 percent in 1998 from 69.4 percent in 1997, while the absolute number of fully employed persons increased 18.9 percent to about 456,240 persons. The improvement in labor market conditions in 1998 was due in large part to a reduction in the standard unemployment rate - defined as the proportion of the labor force actively seeking, but unable to find work - which fell from 20.9 percent in 1997 to 15.6 percent in 1998, the lowest rate recorded since 1995. In absolute terms, the number of unemployed persons decreased by about 21.5 percent to about 91,000 persons. Average core unemployment rates in the West Bank in 1998 were 12.3 percent and 23.5 percent in the Gaza Strip.
Broader measures of unemployment - which include discouraged workers - averaged 25.1 percent in 1998, compared to 30.3 percent in 1997. Using the broader definition, the estimated number of unemployed persons in 1998 was about 165,700, a decline of about 12.8 percent relative to 1997. The broader unemployment rates for the West Bank and Gaza Strip in 1998 were 23.2 and 31.4 percent respectively.
There were an estimated 58,450 new jobs for WBG workers in 1998 - a 13.4 percent increase over 1997 - with employment growth in every economic branch. The absolute increases in employment by branch were as follows: construction, 37.1 percent; the public sector, 11.4 percent; manufacturing, commerce and transportation, 7.5-9 percent; and services, 5.4 percent. The specific branch contributions to overall employment growth in 1998 were as follows: construction, 50.4 percent; the public sector, 15.7 percent; manufacturing, 11.9 percent; commerce, 11.3 percent; services, 3.8 percent; agriculture, 3.5 percent; and transportation, 3.1 percent.
Of all new jobs created in 1998, about 56 percent - approximately 32,900 - were located in Israeli-controlled areas (ICA). Overall Palestinian employment in ICA - permitted and unofficial - increased by about 44.2 percent relative to 1997, to over 100,000 persons. Construction remained the dominant source of employment, accounting for 65.3 percent of total Palestinian job growth in ICA. Agriculture accounted for about 10.3 percent of overall employment growth; services for 9 percent; commerce, hotels and restaurants for about 9 percent; and manufacturing for 5.5 percent of overall job growth. About 75 percent of new Palestinian employment in ICA was in construction and agriculture, relatively labor-intensive activities.
By contrast, domestic employment in the WBG rose by about 7 percent, to an estimated 386,875 persons. In absolute terms, there were about 25,500 new jobs located in the WBG - 44 percent of total employment growth in 1998. The public sector employment accounted for 36 percent of total new employment in the WBG in 1998, a decline in its share of job creation as compared to 1997. Construction contributed 31.1 percent of new employment; manufacturing, 20.2 percent; commerce, hotels and restaurants, 14.4 percent; and transport and communications, 6.3 percent. Absolute employment levels in agriculture and services declined. The domestic share of total job creation for WBG workers was lower in 1998 relative to 1997 - 44 percent versus 52.6 percent respectively. However, the private sector accounted for a larger share of total domestic employment growth in 1998 relative to 1997 - 64 percent versus 51.2 percent, respectively. This suggests growth in the WBG's private economy in 1998.

Women's Participation

Despite generally rising employment opportunities, women's labor force participation continued to decline in 1998, falling to 11.7 percent from 12.3 percent in 1997. The portion of fully employed women increased by about 8 percent in relative terms in 1998 to 80.1 percent. The full-employment rate for women grew faster and remained higher than that for men, but the absolute number of fully employed women increased by only 9.4 percent, compared to a 21.2-percent increase for men, reflecting the decline in overall women's participation. The underemployment rate of women declined by about 29.2 percent in relative terms between the two periods to just 3 percent, significantly lower than that for men. In absolute terms, the number of underemployed women declined by 27.8 percent. Higher full-employment and lower underemployment rates for women - in the context of declining participation rates - suggests a tendency for women to leave the formal labor market if full-time work is available. This may be due to both structural and cultural constraints on women's employment.
Reflecting the general trend, women's unemployment rate declined to 16.9 percent in 1998, remaining above that for men which fell to 15.5 percent. This reversed the trend witnessed in 1996, when numerous and severe border closures drove men's unemployment rates to historically high levels. The regeneration of significant labor flows to Israel in 1997-1998 was a main factor behind the restitution of the historic pattern of generally higher unemployment rates among women.
The average employed Palestinian worked 1.3 percent more days in 1998 than in 1997. More job opportunities and fewer closure days in 1998 led to an increase in real daily and monthly wages. The average real NIS daily wage rate for a fully employed WBG worker increased by about 8.5 percent to NIS 59.5 (about $15.61), while the monthly wage increased by about 10.1 percent to NIS 1,347 (about $353.54).

Household Expenditures and the Level of Living

Despite the relative economic recovery in 1997 and, especially 1998, the decline in average real household expenditures persisted in 1998. Expenditures for a 7-person household fell from a monthly average of NIS 2,634 in 1997 to NIS 2,579 in 1998 (about $676.90) - a decline of 2.1 percent in inflation-adjusted terms. There was no change in basic expenditures (housing, food, clothing, medical care, transport, education and taxes), but a 6.2 percent decline in secondary expenditures (household operations, furniture, personal care, recreation, tobacco and other cash expenditures). "Other cash expenditures," the second-largest category in overall expenditures, declined 9.8 percent, accounting for about 70 percent of the decline in secondary expenditures and more than 50 percent of the drop in total expenditures.
Closer examination of "other cash expenditures" indicates that, while it includes interest on loans, it does not include repayments of loan principal. As the level of household indebtedness has risen over the past several years, repayment of loans in 1998 - under generally improved conditions - has probably contributed to the decline in current expenditures. Higher levels of savings in 1998 - as suggested by continued growth in commercial bank deposits - has also contributed to the decline in current household expenditures.
Consumer prices in 1998, after several years of deceleration, reversed course in 1998. Under the impact of relative economic improvements and the sharp depreciation of the NIS/US$ exchange rate in the autumn, the rate of inflation in the consumer price index (CPI) in the WBG rose to 9.7 percent for the year. The CPI rose by 10.3 percent in East Jerusalem, 9.7 percent in the rest of the West Bank and by 9.3 percent in the Gaza Strip. Food prices increased by about 5 percentage points faster than the general price level, placing an added burden on household budgets. Food purchases accounted for 38.7 percent of total expenditures in 1997 and increased to 40.1 percent in 1998.
WBG's official labor flows to Israeli-controlled areas in the first quarter of 1999 averaged about 47,100 workers on a daily basis, 3.5 percent higher than during the same period in 1998 and slightly more than the 1998 average as a whole. The slower growth in labor flows may be the result of a recessionary trend in Israel. Commercial truck movements through monitored crossings during first-quarter 1999 were 1.3 percent below their first-quarter 1998 level. Exported truckloads were 10 percent below the first-quarter 1998 level, while the number of imported truckloads was 1 percent higher on a monthly basis. There were no comprehensive closures imposed during first-quarter 1999 [...] Continued cooperation among the parties to the social and economic development process in the WBG - the Palestinian Authority, the Government of Israel, donors, multilateral institutions and NGOs - will be crucial in instilling confidence in the private sector in the coming months and years.