The Economic Observer, Issue 59/2019

Palestinian Center for Policy Research and Studies (PCPSR / MAS) Palestine Central Bureau of Statistics (PCBS) Palestinian Monetary Authority (PMA) Palestine Capital Market Authority (PCMA) 57

The Economic Observer, Issue 59 / 2019 February, 2020

Editor: Dr. Naiman Kenafieh - PCPSR (MAS) Coordinators from participating institutions: Islam Rabee - General Coordinator (PCPSR) Amna Khasib - Palestine Central Bureau of Statistics Dr. Shaker Rasouar - Palestinian Monetary Authority Dr. Bashar Abu Zaerur - Palestine Capital Market Authority

No part of this Observer may be published, stored in a retrieval system, or transmitted in any form (electronic, mechanical, photocopying, recording, etc.) without prior written permission. © 2020 PCPSR (MAS). English version of the Observer is available at: http://www.ps.mas.php.category/4695Y18069y4695?id?type_c=2 [Contact details for PCPSR, PCBS, PMA, PCMA]

The views expressed in this publication are those of the authors and do not necessarily reflect the position or policies of the Italian Agency for Development Cooperation and the General Consulate of Italy in Jerusalem. The Italian Agency for Development Cooperation and the General Consulate of Italy in Jerusalem are not responsible for any inaccurate or misleading information, or misuse of the information provided. This publication is supported by the Italian Agency for Development Cooperation under grant No. 11279, as part of the "GEWE-SI" project supporting the mainstreaming of a gender perspective and empowering women in the National Action Plan 2017-2022.

Contents:

1. Gross Domestic Product (GDP) - Box 1: Adjustment of National Accounts Data in Palestine for the Period 2004-2018
2. Labor Market - Box 2: Interactive Poverty Atlas in Palestine
3. Public Finance
4. Regulated Financial Sector - Box 3: Bank Profits in Palestine Compared to Neighboring Countries
5. Unregulated Financial Sector - Box 4: The Minimum Price for Mandatory Insurance is Fair to Companies and the Insured
6. Economic Environment - Box 5: Impact Bonds: An Innovative Approach to Develop Skills and Employment in Palestine
7. Prices and Inflation - Box 6: Pilot Research Project to Document Europe's Commitment to Discrimination between Israel and the Occupied Territories
8. Foreign Trade
9. Economic Concepts and Definitions
10. Rent and the Rentier State (State Rentier and Rent)
11. Key Economic Indicators in Palestine, Q3 2019: 2014-2019

Q3 2019 in a Nutshell: Gross Domestic Product: GDP reached approximately $3.9 billion at constant prices, representing a moderate increase of 1% compared to the previous quarter and a slight decline of 0.6% compared to Q3 2018. Growth was driven by a moderate increase of 1.1% in the West Bank and about 0.5% in Gaza. This was reflected in an increase in per capita GDP by 0.2% in the Gaza Strip (to $348.1) and by about 0.5% in the West Bank (to $1,191), while it declined by 1.4 percentage points compared to the previous quarter. Employment and Unemployment: The revised unemployment rate in Palestine declined in Q3 2019 to 24.6% (13.3% in the West Bank and 45.1% in Gaza). The average daily wage reached 136.7 NIS, distributed as 127.8 NIS for workers in Israel and settlements, 55.9 NIS for workers in Gaza, and 261.1 NIS for workers in the West Bank. About 30% of wage earners in Gaza receive monthly wages below the minimum wage threshold. Public Finance: Q3 2019 witnessed a significant increase in government revenue and grants, reaching approximately 4.2 billion NIS, due to increased clearance revenues and a 19% rise in local tax revenue. External aid rose by 35%, while public expenditure increased by 33% to reach about 3 billion NIS (cash basis). Government arrears in Q3 reached 1.1 billion NIS. Public debt increased by 8% compared to the previous quarter to reach approximately 10.2 billion NIS. Banking Sector: Credit facilities in Q3 2019 stabilized at approximately $8.9 billion, while deposits increased by 3% to reach $13 billion. Bank profits in this quarter reached $39.4 million, which is about 7% higher than the previous quarter and about 14% lower compared to the corresponding quarter. Palestine Stock Exchange: The market capitalization of listed companies reached $3.7 billion at the end of Q3 2019, down by 0.2% and 0.4% compared to the previous and corresponding quarters, respectively. Inflation and Prices: The Palestinian economy witnessed moderate positive inflation of 0.33% compared to the previous quarter. Consequently, real purchasing power in NIS also declined by about 2.08% and 4.81% compared to the previous and corresponding quarters, respectively. For those receiving income in NIS and spending entirely in NIS, their purchasing power declined at the same rate. As for those receiving income in USD and JOD but spending entirely in NIS, their purchasing power declined correspondingly. Balance of Payments: The current account deficit in Q3 2019 reached $387 million (9.9% of GDP), due to a trade deficit ($1,696 million), offset by an income surplus ($770 million) and a current transfers surplus ($539 million). Note: Percentages in the Observer are generally rounded to the nearest whole number, except for GDP growth rate, inflation, and interest rates.

Section 1: Gross Domestic Product (GDP) - Page 2 At the end of 2019, the Palestine Central Bureau of Statistics issued a new adjusted series for National Accounts (see Box 1 in this issue of "The Observer"). We will adopt the figures from the new series starting with the current issue. Palestinian GDP, which represents the monetary value of all types of goods and services produced in the economy, increased by about 1% in Q3 2019 compared to the previous quarter, reaching $3,915.3 million (measured at 2015 constant prices). This rise resulted from a moderate increase of 1.1% in the West Bank and 0.5% in Gaza compared to the corresponding quarter of the previous year, while GDP declined by 0.6% compared to the previous quarter. The increase in GDP, along with a 0.3% population growth, led to an increase in per capita GDP by 0.2% in the Gaza Strip (compared to the previous quarter). Regarding the corresponding quarters, per capita GDP declined by about 3.1% (see Table 1-1). Table 1-1: Per Capita GDP (Constant prices, base year 2015) (USD) Q3 2018: Palestine 859.4, West Bank 1,225.7, Gaza Strip 359.9 Q2 2019: Palestine 830.1, West Bank 1,185.2, Gaza Strip 348.9 Q3 2019: Palestine 832.9, West Bank 1,191.0, Gaza Strip 348.1 *Data excludes the part of Jerusalem governorate annexed by Israel in 1967.

The gap between GDP in the West Bank and Gaza Strip: Figure 1-1 illustrates the widening gap between the contribution of the West Bank and the Gaza Strip to Palestine's GDP over the past decade. The share of the Gaza Strip is now less than one-fifth, about 18%. Regarding per capita GDP in the West Bank and Gaza Strip, it reached $842.9 in Q3 2019. Thus, the per capita GDP share of Gaza does not currently exceed one-third of the West Bank's per capita share.

Structure of GDP: The share of productive activities in GDP increased by 0.2 percentage points between Q3 2019 and Q2 2019, due to an increase in the agriculture sector's contribution. The share of trade, transport, information, and financial activities increased by 0.1 percentage points, while the share of public administration and defense increased by 0.3 percentage points. Meanwhile, the service sector's share decreased by 0.5 percentage points. Compared to Q3 of the previous year, the share of productive activities decreased by 0.6 percentage points due to declines in manufacturing/mining and construction sectors. The share of trade, transport, information, and financial activities decreased by 0.8 percentage points, and the service sector's share decreased by 0.2 percentage points. Conversely, public administration and defense increased by 1.6 percentage points (see Figure 2-1).

GDP Expenditure: The value of GDP declined between Q3 2019 and Q3 2018 by about $23.5 million. This was due to a decline in general consumption and investment expenditure by about $97 million, compared to an increase in private consumption (with a slight increase in exports) by about $70 million. This was accompanied by a decline in imports of about $3.2 million, as shown in Table 2-1. General consumption and investment expenditure contributed to GDP decline by about 2.5%, while private consumption expansion and import decline contributed 1.9% to growth. The average of these rates is 0.6%, which represents the GDP decline between the corresponding quarters, as previously mentioned (see Table 2-1). *Note: Figures and percentages in parentheses are negative values.

Box 1: Adjustment of National Accounts Data in Palestine for the Period 2004-2018 National Accounts are of great importance to economists and policymakers, as they provide a comprehensive picture of the economy's state and available resources that can be used initially to increase population welfare. Growth in GDP (or National Income) is the most widely used economic indicator at all levels to evaluate the success or failure of economic policies adopted by governments in different countries. Despite the multiple shortcomings of the GDP indicator, it remains the best available indicator to provide a comprehensive picture of the economy's state and resource availability in each country or compared with others. Statistical agencies worldwide strive to continuously develop and review GDP values, either by expanding the scope of activities covered or through continuous adjustments and improvements in measurement methods, consistent with guidelines and methodologies adopted by the UN Statistics Division. Similarly, the National Accounts Department at PCBS conducted a re-estimation of GDP value and structure in Palestine during the period 2004-2018, following the previous adjustment made in 2014. We will attempt in this box to present the reasons for the new adjustment to National Accounts figures, along with changes in GDP values and structure.

Adjustment of GDP Values for 1994-2012: PCBS issued a new adjusted series of GDP figures at constant and current prices for 1994-2012 in 2014. The new values, at both current and constant prices, were higher than the old ones in all years by 1-8%. The increase rate rose with advancing years from 1994 to 2012. Changes also occurred in the contribution rates of different sectors to GDP. For example, the estimated share of manufacturing industries increased from 8% to 12% in 2012 at constant prices, while the construction sector's share decreased by two percentage points (to 10%) and services by one point (to 19%).

Reasons for the Current GDP Adjustment in Palestine for 2004-2018: There are four direct reasons behind adjusting GDP data in Palestine for 2004-2018: First: The statistical agency recently developed Supply and Use Tables based on information from the General Population, Housing, and Establishments Census (2017) and the Household Income and Expenditure Survey (2017). Preparing Supply and Use Tables requires examining sectoral linkages in the economy and adjusting transactions appearing on both supply and use sides, achieving economic balance, including estimates for informal activities (unregulated sector). This naturally reflected the need to adjust production or GDP values. Second: PCBS implemented the 2017 General Population, Housing, and Establishments Census following the 2012 establishments census. This requires adjusting data between the two censuses to reach a consistent, more accurate time series reflecting the economic reality of key indicators (number of establishments, number of workers, worker compensation, production, intermediate consumption, value added, and total fixed capital formation) across different economic sectors. Third: PCBS has been developing work on a series of economic surveys and gradually transitioning to obtaining private sector data from company financial statements in administrative records. Comparing financial statement data with those obtained from completed field economic surveys showed a noticeable improvement in coverage levels for registered companies and establishments, requiring re-evaluation of production figures. Fourth: The availability of a database on agricultural production quantities from administrative records of the Ministry of Agriculture, and matching these quantities with other sources through Supply and Use Tables, led to important adjustments in production values and intermediate consumption for the agricultural activity, thereby increasing value added for agriculture and increasing its contribution to GDP.

Changes in Value, Distribution, and Structure of GDP: The effects of the last adjustment to Palestine's GDP time series reflected in three key indicators:

1. Increase in estimated GDP: Table 1 shows that GDP values increased in the adjusted estimates compared to old estimates in all 14 years (2004-2018), whether at current or constant prices. The average increase rate compared to old estimates ranged between 6% and 15% per year. While the average annual GDP growth rate between 2004 and 2018 at current prices was 9.3% in old estimates, it reached 10.1% after adjustment. The adjustment increased GDP values at current prices in 2018 by $1,661 million, equivalent to an 11% increase over old estimates.
2. Decrease in Gaza Strip's share of Palestine GDP: Re-estimating GDP led to a decrease in Gaza's share/contribution across all years (2004-2018), reaching 3.7 percentage points in 2013 at constant prices (compared to a similar increase at current prices). In Q3 2019 compared to the previous quarter, GDP increased by about $38.7 million. This resulted from increases in private and general consumption and investment, offset by a decline in exports of about $51 million. About 29% of this increase was offset by rising imports (which increased by $14.8 million). Private and general consumption contributed to growth equivalent to 1.4%, while declining exports and rising imports led to a GDP decline of about 0.5%, meaning the growth average reached about 1% between consecutive quarters, as previously mentioned (see Table 2-1).
3. Change in GDP structure: Re-estimating GDP resulted in a noticeable change in Palestine's GDP structure. This is evident, as shown in Table 2, in the increased share of the agricultural sector, for example, in 2018, from 3% to 7%, compared to a decline in public administration by 2.2 percentage points, and the service sector by 1.5 percentage points between adjusted and old estimates. We will adopt using the new adjusted series of GDP figures in The Quarterly Economic Observer, replacing old figures starting with the current issue.

Section 2: Labor Market - Page 5 The labor force, according to PCBS definition, is the number of persons aged 15 years and over. It reached about 3,075 thousand persons in Q3 2019. The working force, which is the number of employed and unemployed persons (but only those actively seeking work), reached 1,359 thousand. Thus, the difference between the working force and the number of employed measures the number of unemployed. Figure 1-2 illustrates the relationship between these variables and total population in Q3 2019. As observed from Figure (1-2), the ratio of working force to labor force (known as "participation rate") is about 44% in Palestine. This ratio indicates the extent of population integration aged 15 and over into the labor market. The participation rate in Palestine is close to the general average in the Middle East region, where it reached about 48% in Turkey. However, it is lower than global levels, reaching 63% and 61% in Latin American countries and South Korea, respectively. This is primarily due to the lower participation of women in Palestine's labor market (as discussed in detail in Box 2, Issue 51 of The Quarterly Economic Observer). Source: PCBS, Labor Force Survey, Ramallah-Palestine, 2019. World Bank database.