Palestinian Center for Policy and Survey Research (MAS)

Palestinian Central Bureau of Statistics (PCBS)

Palestinian Monetary Authority (PMA)

Editor: Dr. Naiman Kenfane MAS (General Coordinator): Salem Saleh PCBS (Coordinator): Amna Khasib PMA (Coordinator): Dr. Shaker Rasour

Copyright

All rights reserved. No part of this Monitor or its materials may be reproduced, stored, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission from the Palestinian Center for Policy and Survey Research (MAS), the Palestinian Central Bureau of Statistics (PCBS), and the Palestinian Monetary Authority (PMA).

© 2016 Palestinian Center for Policy and Survey Research (MAS) P.O. Box 19111, Jerusalem & P.O. Box 2426, Ramallah Tel: +972-2-2987053/4 Fax: +972-2-2987055 Email: ps.mas@info Website: www.ps.mas

© 2016 Palestinian Central Bureau of Statistics (PCBS) P.O. Box 1647, Ramallah Tel: +972-2-2982700 Fax: +972-2-2982710 Email: ps.gov.pcbs@diwan Website: www.ps.gov.pcbs

© 2016 Palestinian Monetary Authority (PMA) P.O. Box 452, Ramallah Tel: +972-2-2409920 Fax: +972-2-2409922 Email: ps.pma@info Website: www.ps.pma

To obtain copies: Contact the administration of any of the institutions at the addresses listed above.

This issue was prepared with partial support from: Issue 46 / 2016 September 2016

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Palestinian Center for Policy and Survey Research (MAS)

Palestinian Central Bureau of Statistics (PCBS)

Palestinian Monetary Authority (PMA)

The Economic Monitor, Issue 46/2016

Contents:

1. Gross Domestic Product ... 1
2. Labor Market ... 4 Box 1: From Education to Employment ... 7
3. Public Finance ... 9 Box 2: American Aid to Israel ... 10
4. The Regulated Financial Sector ... 11 Box 3: Geographic Distribution of Deposits and Credit ... 13
5. The Unregulated Financial Sector ... 14 Box 4: Capital Market Authority: Supervision of Capital Market Sectors ... 15
6. Investment Indicators ... 17 Box 5: "Arab Smoke": Smuggling Costs and Reform Complexities ... 17
7. Prices and Inflation ... 18 Box 6: Expected Inflation ... 20
8. Foreign Trade ... 21 Box 7: Economic Concepts and Definitions: Gravity Models in International Trade ... 22 Key Economic Indicators in Palestine 2010-2016 ... 24

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Palestinian Center for Policy and Survey Research (MAS)

Palestinian Central Bureau of Statistics (PCBS)

Palestinian Monetary Authority (PMA)

The Economic Monitor, Issue 2016/46

1. Gross Domestic Product

Gross Domestic Product is the monetary value of all types of goods and services produced within a specific economy over a defined period. This variable considers the value of final goods. It is called "domestic" because it records production value within a specific geographic region, regardless of whether the producer is a national or foreigner, thereby avoiding double counting. (A "national" variable considers the production of a country's citizens, whether they reside inside or outside the country). GDP is evaluated at current prices or constant prices in a base year. The latter reflects the real increase in production, excluding price increases (inflation) since the base year.

GDP is a measure of flow, not stock (i.e., not the value of accumulated capital in a country). GDP is measured from two sides: the production side (value produced by each economic sector, such as agriculture and industry) and the expenditure side (value of different uses of produced goods, such as private consumption and investment). It is important to note that part of private consumption comes from imports, and part of domestic production goes to exports. Therefore, calculating GDP from the expenditure side requires adding exports and subtracting imports.

Palestinian GDP (at constant 2004 prices) rose by approximately 1.7% during Q2 2016 compared to the previous quarter, reaching $2,035 million. This growth resulted from a 4% increase in the West Bank against a 4.8% decline in the Gaza Strip. This contrasts with Q1, where growth was higher in the West Bank. Annual GDP growth between Q2 2015 and Q2 2016 in Palestine reached 3.9%. On a per capita basis, GDP rose by approximately one percentage point in Q2 2016 compared to the previous quarter, matching the same value compared to the corresponding quarter of the previous year.

The Gap in GDP between the West Bank and the Strip Despite the narrowing gap between the West Bank and the Strip's contributions to GDP in Q1 2016, it widened again in Q2 of the same year, as the West Bank's share of total GDP increased by 1.5 percentage points. The per capita income gap between the West Bank and the Strip reached $324. Per capita income in the Gaza Strip accounts for only 44% of the average per capita income in the West Bank, representing a decline of approximately four percentage points from the previous quarter.

Table 1-1: Per Capita GDP in Palestine by Region (Constant Prices, Base Year 2004) ($)*

	Q2 2015	Q1 2016	Q2 2016
Palestine*	444.7	444.3	448.7
West Bank*	578.9	564.0	582.6
*Data excludes the Jerusalem district annexed by Israel in 1967.

Structure of GDP No major changes occurred in the GDP structure between consecutive quarters (Q1 and Q2 2016) or between corresponding quarters (Q2 2015 and Q2 2016), except for an increase in the share of General Administration and Defense and others by approximately 1.8 percentage points at the expense of productive sectors (agriculture, industry, mining, electricity, water, and construction), which fell to approximately 24%. This continues the trend of service sector expansion at the expense of basic productive sectors.

Expenditure on GDP The absolute increase in total GDP value between Q2 2015 and Q2 2016 was approximately $76 million (representing a 3.9% increase as noted). Looking at how this increase was distributed, final consumption expenditure increased by $149 million during the period, exceeding the total GDP increase. This gap between the increase in usage and production was closed by a decline in investment (by 2.7%) and an increase in the trade deficit from abroad (by decreasing the surplus of exports, i.e., exports minus imports). The trade deficit increased by $67 million, resulting from a $40 million rise in imports and a $27 million decline in exports.

Table 1-2: Expenditure on GDP in the Palestinian Territories (Constant Prices, Base Year 2004) ($ million)*

	Q2 2015	Q2 2016
Private Consumption	1,734.0	1,881.0
Investment (Capital Formation)	457.6	445.3
Government Consumption	535.6	537.4
Exports	456.7	430.1
Imports (-)	1,206.8	1,247.0
*Data excludes the Jerusalem district annexed by Israel in 1967.

Figure 1-1: GDP in Palestine by Region (Constant Prices, Base Year 2004) ($ million)* (Data excludes the Jerusalem district annexed by Israel in 1967) [Chart Data: Gaza Strip, West Bank, Palestine across Q2 2015, Q1 2016, Q2 2016]

Figure 1-2: GDP in the West Bank and Gaza Strip (Constant Prices, Base Year 2004) ($ million)* (Data excludes the Jerusalem district annexed by Israel in 1967) [Chart Data: Palestine, West Bank, Gaza Strip across Q2 2006 to Q2 2016]

Figure 1-3: Per Capita GDP in Palestine by Region (Constant Prices, Base Year 2004) ($)* (Data excludes the Jerusalem district annexed by Israel in 1967) [Chart Data: Palestine, West Bank, Gaza Strip across Q2 2006 to Q2 2016]

Figure 1-4: Average Per Capita Income in Gaza Strip compared to the West Bank (Constant Prices, Base Year 2004) (%)* (Data excludes the Jerusalem district annexed by Israel in 1967) [Chart Data: 43.7%, 44.4%, 48.6% across Q2 2015, Q1 2016, Q2 2016]

Figure 1-5: Percentage Distribution of Activities in GDP (Constant Prices, Base Year 2004) (%) [Chart Data: General Admin & Defense, Services, Transport/Info/Finance, Productive Sectors across Q2 2012 to Q2 2016]

Figure 1-6: Expenditure Ratios on GDP in the Palestinian Territories (Constant Prices, Base Year 2004) (%)* (Data excludes the Jerusalem district annexed by Israel in 1967) [Chart Data: Investment, Gov Consumption, Private Consumption, Net Exports across Q2 2012 to Q2 2016]

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Palestinian Center for Policy and Survey Research (MAS)

Palestinian Central Bureau of Statistics (PCBS)

Palestinian Monetary Authority (PMA)

The Economic Monitor, Issue 46/2016

2. Labor Market

Labor statistics are calculated between the total population and the working-age population. Statistics are also calculated between the working-age population and the labor force. The working-age population, according to the PCBS definition, is the number of people aged 15 and above, while the labor force includes only qualified and ready individuals. Finally, there are actual workers. The difference between the labor force and actual workers measures the unemployment rate. Figure 2-1 illustrates the relationship between these variables. The population of the West Bank and Gaza Strip in Q2 2016 reached approximately 4.8 million, the working-age population reached 2.918 million, and the labor force reached 1.334 million.

Participation Rate Data indicates that the labor force to working-age population ratio in Palestine (which is approximately 46%) has remained stable in recent years. This ratio is close to regional averages (42% in Jordan in 2014 according to World Bank data), but differs significantly from developed countries where participation reaches 60% or higher (e.g., Albania and Norway).

There is a large difference in participation rates between males and females in Palestine, with the rate reaching 71% among males and dropping to only 20% among females. No significant difference is mentioned between the West Bank and Gaza Strip in this disparity. It is clear that the low participation rate among females in Palestine is the main reason for the decline in the overall participation rate.

Employment Distribution The number of workers in Palestine increased slightly by 0.1% between Q1 2016 and Q2 2016, reaching 975,000 workers. Workers in Q2 2016 were distributed as 59% in the West Bank, 29% in the Gaza Strip, and 12% (or approximately 114,000) in Israel and settlements. Regarding distribution by economic activity, more than half work in the public sector, with this rate rising to approximately 37% in the Gaza Strip. The employment rate in service sectors in Palestine in Q2 2016 was approximately 35%, rising to 56% in the Gaza Strip. Trade ranked second in Palestine at 22% of workers. Construction and building employed 20% of workers in the West Bank but less than 5% in the Gaza Strip. Meanwhile, the employment rate in trade, restaurants, and hotels is similar between the West Bank and Gaza Strip, reaching approximately 22%.

Unemployment The unemployment rate in Palestine rose to 26.9% in Q2 2016, which is two percentage points higher than the corresponding quarter of 2015 and half a percentage point higher than the previous quarter. This increase resulted from a rise in the unemployment rate in the West Bank (by three percentage points), while the rate in the Gaza Strip remained stable at its previous level, which sources state is the highest among workers. Among the most prominent characteristics of unemployment in the Palestinian territories are:

1. Unemployment is high among youth: The unemployment rate among youth aged 15-24 reached 41% (67.9% for females, 34.9% for males). This indicates that a large proportion of the unemployed are new entrants to the labor market (see Box on youth transition from education to employment in this issue).
2. Unemployment increases with lack of education for males, but the opposite is true for females (see Figure 2-5): The unemployment rate in Q2 2016 was approximately 31.2% for males with no education, compared to 19.3% for those with 13+ years of education. For females, unemployment among those with 13+ years of education was 50.9%, while it was only 5.0% for those with no education.

Growth Curve and Unemployment Change Figure 2-6 displays two curves: one for the GDP growth rate (constant prices) between Q2 2012 and Q2 2016, and the other showing unemployment rates each quarter. The first notable feature is the sharp fluctuation in the GDP growth curve. This fluctuation can be explained by the seasonal nature of GDP, as different seasons impose constraints on economic activity. However, political factors and restrictions play a more important role in explaining the sharp and cyclical fluctuations in economic growth. The second observation is the clear co-movement of the curves: whenever GDP growth rate increased, unemployment decreased, and vice versa.

If we perform a simple regression between the variables over the period Q2 2012 to Q2 2016, we find that every 1% increase in the growth rate was accompanied by a 0.26% decrease in the unemployment rate. This simple and approximate relationship gives a rough idea of the acceleration rate required to achieve a noticeable reduction in high unemployment rates in Palestine and the Gaza Strip in particular, highlighting the need for a long time frame.

Figure 2-7 and Table 2-2 illustrate weekly and monthly work hours. The average number of weekly work hours in the West Bank is 18% higher than in the Gaza Strip, but the average monthly work hours are similar. This does not reflect higher productivity or preference for leisure in developed countries.

Wages The average daily wage for workers in Palestine reached 110.4 NIS in Q2 2016. However, this average hides a large disparity between the average wage of those working in the West Bank and Gaza, and those working in Israel and settlements (see Table 2-3). Data shows that the average wage of workers in Israel and settlements is approximately three times that of workers in the Gaza Strip. The gap widens further when considering the median wage. The median wage is more meaningful and preferable to the average, as it indicates the level at which half of workers earn more and half earn less (see Figure 2-8 in the appendix for the difference between average and median). Note that the median wage in the Gaza Strip is less than half the median wage in the West Bank. The average daily wage for all workers increased by 1.8 NIS between Q1 and Q2 2016 (due to a basic rise in the average wage of workers in Israel), but the median wage for all workers decreased by 2.3 NIS between the two quarters (due to a decline for workers in the West Bank).

It is important to note when comparing the average wage of West Bank workers in Israel with those in the West Bank that it does not account for the additional costs these Palestinian workers in Israel often have to pay to intermediaries for permits and work (estimated at approximately 1,500 NIS monthly), as well as transportation costs (approximately 500 NIS). They also endure long waits at checkpoints that extend the workday to 16 hours instead of 8. It is also important to emphasize the existence of differences between the wages of West Bank workers within the Green Line and those working in settlements, as confirmed by the Israeli Finance Minister in a statement in mid-August.

In addition to the rise in nominal wages for workers in Israel and settlements, and the disparity between average and median wages between workers in the West Bank and Gaza, the following wage observations can be added:

• The average wage of workers in the private sector is lower than that of public sector workers, at 15% in the West Bank and 60% in Gaza.
• There is a gender wage gap: The daily wage for females in the private sector in the West Bank reached 75% of the daily wage for males, but the opposite is true in the public sector, where the daily wage for males in the West Bank reached 98% of the daily wage for females.
• Approximately 47% of workers in the Gaza Strip's private sector (and 9% in the West Bank) earn a daily wage below the minimum wage (65 NIS). For more information on this topic, see Box 2 regarding the implementation of the minimum wage decision in Issue 45 of the Economic Monitor.

Figure 2-1: Individuals 15+ and Workers in Palestine (Thousands) [Chart Data: Population, Working Age, Labor Force, Workers across Q2 2010 to Q2 2016]

Figure 2-2: Relative Distribution of Workers by Region and Sector for Q2 2016 [Chart Data: Public Sector, West Bank, Private Sector, Gaza, Other Sectors, Israel & Settlements]

Figure 2-3: Relative Distribution of Workers in Palestine by Economic Activity, Q2 2016 (%) [Chart Data: Agriculture/Fishing/Forestry, Quarries/Manufacturing, Construction, Trade/Restaurants/Hotels, Transport/Storage/Comms, Services/Other]

Table 2-1: Unemployment Rate among Labor Force Participants in Palestine by Region and Gender, Q2 2016 (%)

	Male	Female	Total
West Bank	15.3	30.5	18.3
Gaza Strip	34.4	65.3	41.7
Palestine	22.1	44.7	26.9

Figure 2-4: Number of Workers and Unemployed in Palestine by Age Group (Q2 2016) [Chart Data: Workers vs Unemployed across age groups 15-24, 25-34, 35-44, 45-54, 55+]

Figure 2-5: Number of Workers and Unemployed in Palestine by Education Level and Gender (Q2 2016) [Chart Data: Workers vs Unemployed across education levels (Less than Secondary, Secondary, University) for Males and Females]

Figure 2-6: GDP Growth Rate and Unemployment Rate in Palestine [Chart Data: GDP Growth vs Unemployment Rate across Q2 2012 to Q2 2016]

Figure 2-7: Weekly Work Hours and Monthly Work Days in Palestine [Chart Data: Avg Weekly Hours across Q2 2014 to Q2 2016]

Figure 2-8: Average and Median Daily Wage in NIS for Employers with Known Wages in Palestine [Chart Data: Median Wage vs Average Wage across Q2 2014 to Q2 2016]

Table 2-2: Weekly Work Hours and Monthly Work Days by Region (Q2 2016)

Work Location	Avg Weekly Hours	Avg Monthly Work Days
West Bank	44.5	23.1
Gaza Strip	37.8	23.0
Israel & Settlements	40.7	20.1
Total	41.9	22.5

Table 2-3: Average and Median Daily Wage in NIS for Employers with Known Wages in Palestine (Q2 2016) (NIS)

Work Location	Avg Daily Wage	Median Daily Wage
West Bank	98.3	88.5
Gaza Strip	61.6	46.0
Israel & Settlements	221.9	200.0
Total	110.4	90.0

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Palestinian Center for Policy and Survey Research (MAS)

Palestinian Central Bureau of Statistics (PCBS)

Palestinian Monetary Authority (PMA)

The Economic Monitor, Issue 2016/46

Box 1: From Education to Employment

The issue of youth qualification and employment in the labor market receives great attention from...