Economy of Palestine

Author: Nino Orto
Edited by: Erik Prins

Palestine’s economy has historically been heavily influenced by external forces, with limited control by Palestinian authorities. The West Bank’s economic survival has long depended on financial support from Western and Arab states, while Gaza has relied on backing from Gulf state donors and NGOs.

Trapped in a low-income, low-growth cycle, the Palestinian economy is characterised by stagnant GDP per capita and persistent high unemployment, Moreover, the economy is driven more by donor aid than by sustainable development.

As the war on Gaza continues to rage on, the destruction of the agricultural sector has dealt a devastating blow to the Palestinian economy and the lives of millions of Palestinians. Israeli forces continue to systematically target Gaza’s agricultural areas, bulldozing fields, orchards, and livestock farms, resulting in a level of destruction not seen in over a century.

According to the Institute for Palestinian Studies, more than 75% of Gaza’s agricultural land has been destroyed so far.

Gaza’s agricultural sector is a crucial part of the local economy, contributing approximately 11% to the Palestinian GDP in 2022. That same year, agricultural exports accounted for 55% of Gaza’s total exports, valued at $32.8 million.

Key products such as tomatoes and cucumbers made up a substantial portion of these exports, collectively worth $16.1 million. Specifically, tomatoes were the most exported product, making up 33.1% of total agricultural exports in 2022, followed closely by cucumbers, which also accounted for 33%.

Longstanding Israeli-imposed restrictions on trade, movement, and access on both the West Bank and Gaza have played a major role in stifling economic growth.

These constraints have left the Palestinian economy heavily reliant on external aid and under significant control of the Israeli government. Key sectors, such as manufacturing and agriculture, have seen a troubling decline in recent years. The share of manufacturing and agriculture in Palestine’s GDP has dropped while investment rates remain low.

Foreign Direct Investment (FDI) is minimal compared to other economies in the region. Additionally, private savings rates have been largely negative over the last decade, a direct reflection of the uncertainty caused by the Israeli occupation and the ongoing instability and insecurity.

Recent studies have attempted to quantify the economic toll of these restrictions. According to the World Bank, restrictions on movement and access to Area C alone are estimated to have reduced GDP by around 35 percent.

The ARIJ (Applied Research Institute Jerusalem), quoted by the World Bank, reported an even more staggering figure, estimating a 74 percent reduction in GDP due to Israeli restrictions, excluding important inter-sectoral linkages (such as agriculture, services and construction, sectors where the Israeli and Palestinian economies are interconnected).

The International Monetary Fund (IMF) projected that, without these political and security constraints, GDP per capita could have been 37-130 percent higher.

Since the outbreak of the war on Gaza on October 7, 2023, economic indicators have further worsened in the West Bank, while in Gaza the economy collapsed. While prior to October 7, a growth of 3 per cent had been estimated, the GDP of the combined territories declined by 6.2% percent in 2023, driven by heightened movement restrictions, diminished trade, loss of income from jobs in Israel, and substantial infrastructure destruction, particularly in Gaza.

The revocation of work permits for over 170,000 Palestinians employed in Israel and a steep reduction in clearance revenue transfers from the Israeli government have exacerbated fiscal pressures.

Israel has also intensified land-use restrictions and limited water access, while allowing increased settler violence and settlement expansion. This has further fragmented the West Bank, stifling any hope for growth. Meanwhile, Gaza’s economy has come to a complete halt, leaving the region in a state of economic paralysis.

The Palestinian Authority (PA), which (in theory) has authority over parts of the West Bank, is grappling with a deepening financial crisis as donor aid dwindles and its reliance on Israeli-controlled revenues becomes more precarious.

The PA relies heavily on clearance revenues—customs duties collected by Israel—which make up 68 per cent of its budget. However, since November 2023, Israel has increased its deductions from these revenues, cutting an additional $75 million each month, further squeezing the PA’s already strained finances.

In 2022, the Palestinian Authority (PA) faced a $682 million budget deficit, despite receiving $243 million in international donor support. By 2024, aid had decreased even further, potentially widening the PA’s financing gap to as much as $1.2 billion.

To stay afloat, the PA has turned to bank loans, now totalling $2.5 billion, and delayed payments to private sector suppliers and pension funds. Public sector workers have only received 80% of their salaries since late 2021, adding $800 million in unpaid wages.

The West Bank is grappling with severe economic challenges exacerbated by Israeli-imposed restrictions, particularly in Area C. These developments have limited land access for Palestinian use and reduced any chance to recover an already dire economic situation.

Since Israel launched its war against Gaza in October 2023, the West Bank has seen a surge in violence, while Israel significantly intensified its raids, demolitions, and settlement expansion, leading to a sharp decline in economic activity.

The repeated raids by the Israeli army in the West Bank have created severe movement restrictions, making it difficult for employees to reach their workplaces and increasing transportation costs and investment risks. A 2024 survey by the International Labour Organization (ILO) and the Palestinian Central Bureau of Statistics (PCBS) found that 99% of West Bank businesses have been negatively impacted since October 7 2023, with 97% reporting a sharp decline in sales, leading many to reduce their workforce.

One in four private sector employees in the West Bank—about 144,000 jobs—have been laid off, causing unemployment to skyrocket from 13% in the third quarter of 2023 to 32% by the fourth quarter. These figures, provided by ILO, illustrate the severe economic fallout in the West Bank, compounding the already fragile situation and adding further pressure on Palestinian livelihoods.

The closure of the Israeli labour market to Palestinians, which previously employed 150,000-200,000 workers, has been particularly impactful. As many Palestinians relied on their work in Israel, it was a critical pillar of the West Bank economy. Over 80% of Palestinian workers lost their jobs, contributing to a 32% decline in Palestinian GDP so far.

By employing Palestinian workers in Israel and its settlements, Israel not only exploits local labour, but also uses it as a tool for control and surveillance. Palestinians from the West Bank must pass rigorous security checks by the Israeli military administration to secure a work permit, requiring them and their families to avoid any political or union activities considered antagonistic to the occupation.

This economic reliance on Israel deepens their political vulnerability, as the Israeli occupation authorities often use the closure of crossing points and movement restrictions as punitive measures, driving communities to the brink of economic collapse.

Meanwhile, by expanding settlements and accelerating annexation of Palestinian land, Israel not only obstructs development of the Palestinian economy, it also severely impacts the possibility of a two-state solution. According to Peace Now, from October 2023 to July 2024, at least 25 new illegal settler outposts have been established, with over 24,000 dunams of land declared as “state land,” facilitating land grabs and the displacement of Palestinians.

These actions have been accompanied by substantial government investment in settlements, including plans for over 8,700 housing units and the approval of five new settlements. Additionally, 70 outposts have been recognized for governmental funding and infrastructure support.

Violence against Palestinians has escalated, with over 1,100 settler attacks documented, leading to the expulsion of nearly 1,400 Palestinians from their communities. Attacks by settlers and the Israeli army inflicted significant damage to Palestinian property, including over 46,000 trees.

In parallel, Israeli authorities have demolished more than 1,200 Palestinian structures, displacing over 2,500 people. 963 people were displaced due to a lack of Israeli-issued building permits — permits that are notoriously difficult for Palestinians to obtain.

The Palestinian Authority (PA) has warned that inflationary pressures, soaring unemployment, and the deepening impoverishment of households are placing unprecedented strain on the West Bank economy. According to the UN, the PA is under “enormous pressure,” jeopardising its ability to function effectively, with the Palestinian economy described as being in “freefall,” according to UN Deputy Secretary-General Pedro Manuel Moreno.

Israel’s relentless assault on the Gaza Strip has not only left the entire Gaza Strip in ruins, it has also devastated the local economy.

According to a July 2024 report by the United Nations Trade & Development (UNCTAD) the staggering economic devastation in Gaza surpasses the combined damage of the previous assaults in 2008, 2012, 2014, and 2021.

The widespread destruction of infrastructure and the displacement of millions have nearly wiped out all economic production in the region. By early 2024, between 80% and 96% of Gaza’s agricultural assets—such as irrigation systems, livestock farms, orchards, and machinery—had been destroyed, according to data collected by IPSOS. This has crippled food production, worsening already severe levels of food insecurity.

Furthermore, the private sector has been gravely impacted, with 82% of businesses and 83% of retail facilities damaged or destroyed, including supermarkets, grocers, and bakeries. The ongoing conflict continues to erode Gaza’s economic foundation, leaving little hope for recovery in the near future.

Gaza’s GDP experienced an unprecedented collapse, plunging by 81% in the last quarter of 2023, from approximately US$670 million to roughly US$90 in less than four months. For 2023, this resulted in a 22% contraction. By mid-2024, Gaza’s economy had shrunk to less than one-sixth of its 2022 size, according to a World Bank report.

The World Bank estimates that the destruction of critical infrastructure, including electricity systems, would require nearly US$280 million in repairs or replacements. The Palestinian Electricity and Natural Resources Authority (PENRA) and Gaza Electricity Distribution Company (GEDCO) reported that targeted strikes have rendered much of Gaza’s electricity equipment irreparable, exacerbating the humanitarian crisis.

Gaza’s water and sanitation infrastructure is in a similar detrimental state. Israeli military attacks have severely damaged key sites, resulting in an 84% reduction in water production. In Gaza City, 88% of water wells and all desalination plants have been damaged or destroyed, leaving the population with almost no clean water access.In addition, external water supplies from Israel’s national water company, Mekorot, have dropped by 78%.

Sewage systems have also been decimated, with 70% of Gaza’s sewage pumps and all wastewater treatment plants destroyed. This has led to severe public health consequences, with 26% of Gaza’s population now suffering from preventable diseases due to the lack of clean water and sanitation.

Beyond the infrastructure, the human toll is immense. Approximately 1.2 million people have been left homeless, and 62% of residential buildings have sustained damage. Homes have been levelled, with 141,000 completely destroyed and 70,300 severely damaged. The UN Shelter Cluster estimates that 1.7 million internally displaced persons (IDPs) now reside in Gaza, making up nearly 75% of the population.

Public infrastructure, including roads, has been devastated, with 62% of all roads damaged or destroyed, significantly hampering transportation and relief efforts. Primary roads are the most affected, with 92% sustaining damage and nearly 60% completely unusable. This destruction of fixed assets and the lack of accessibility due to the ongoing assault has further paralyzed Gaza’s already fragile economy and worsened living conditions for its population.

Poverty and unemployment are rising at alarming rates, with multidimensional poverty now affecting the entire population of Gaza. Gaza’s IDPs face shortages of food, water, fuel, and access to essential services like healthcare and education. The poverty rate across the Palestinian territories, 32.8 per cent in mid-2023, could surge to 60.7% if the conflict persists.

The ongoing reliance on loans and foreign aid is now the only way to manage the deepening fiscal and humanitarian crisis in Gaza, as well as to maintain essential public services. Humanitarian aid, largely coordinated by UN agencies, will be vital for those impacted by the extensive destruction caused by the war.

However, the scale of the damage in Gaza presents enormous obstacles for recovery and reconstruction, highlighting the pressing need for international support, not only to address immediate needs, but also to plan for long-term rebuilding once a ceasefire is in place.

The recovery of the Palestinian economy is fraught with challenges, but several key steps could steer it toward revival. In Gaza, recovery efforts will need to be carefully coordinated, prioritising sectors that can quickly contribute to humanitarian relief.

Restoring Gaza’s electricity sector will be critical, involving the repair of infrastructure such as power plants, high-voltage connection points, and distribution systems. Immediate relief will focus on providing generators, fuel, and solar kits to restore basic energy services as quickly as possible.

It is imperative to open to foreign investments to totally rebuild the basic facilities such as water and wastewater plants, along with houses, roads, public buildings and all the key infrastructures needed for life.

Stopping the Israeli aggression and the siege would also create the environment to rebuild the agricultural sector, on which Gaza’s economy is based, and revive the import and export with nearby countries such as Egypt.

In the West Bank, lifting Israeli-imposed restrictions on movement and trade would improve market access, while restoring international aid and encouraging private sector growth, which is vital for long-term sustainability.

Investments in critical infrastructure—such as energy, water, and transport—could spur job creation and attract much-needed investment. Supporting agricultural and industrial development by improving land access, modernising techniques, and fostering industrial zones would further boost productivity.

In the West Bank, small and medium-sized enterprises (SMEs) will need financial support and technical assistance, as banks have become increasingly reluctant to lend due to the high risks. Tackling the fiscal challenges facing the Palestinian economy will be essential for moving toward recovery.

In the long term, reforms will need to address the high public wage bill, pension system, healthcare costs, and net lending to create a more sustainable fiscal environment. Safeguarding the independence of the Palestine Monetary Authority from Israel will be crucial to maintaining financial stability.

Crucially, these recovery efforts hinge on achieving political stability, ending Israeli occupation and appropriation of Palestinian land by settlers as well as bringing an end to the war in Gaza. Only then can Palestine fully unlock its economic potential.