This information is derived from the State Department's Investment Climate Statement.
The U.S. Department of State Investment Climate Statements provide information on the business climates of more than 170 economies and are prepared by economic officers stationed in embassies and posts around the world. They analyze a variety of economies that are or could be markets for U.S. businesses.
Topics include Openness to Investment, Legal and Regulatory systems, Dispute Resolution, Intellectual Property Rights, Transparency, Performance Requirements, State-Owned Enterprises, Responsible Business Conduct, and Corruption.
These statements highlight persistent barriers to further U.S. investment. Addressing these barriers would expand high-quality, private sector-led investment in infrastructure, further women’s economic empowerment, and facilitate a healthy business environment for the digital economy. To access the ICS, visit the U.S. Department of State 2021 Investment Climate Statement, West Bank and Gaza website.
The Palestinian economy is small and relatively open. While 95 percent of firms in the West Bank and Gaza (there are 142,000 business establishments in the West Bank and Gaza) are family owned small- and medium-sized enterprises employing less than 20 people, large holding companies dominate certain sectors. Palestinian businesses have a reputation for professionalism and quality products. The private sector is mostly firms with moderate productivity, low investment, and limited competition, the majority of which are operating in retail and wholesale trade activities. Due to the small size of the local market (about 5 million consumers with relatively low purchasing power), access to foreign markets through trade is essential for private sector growth. Enterprises are highly dependent on Israel for either inputs or as a market, and 90 percent of Palestinian exports are sold to Israel.
Large Palestinian enterprises are connected internationally, with partnerships extending to Asia, Europe, the Gulf, and the Americas. However, Israeli government restrictions on the movement and access of goods and people between the West Bank, Gaza, and external markets reflect Israeli security concerns and continue to limit Palestinian private sector growth. Roughly 40 percent of the West Bank falls under the civil control of the Palestinian Authority (PA), referred to as Area A and Area B following the 1993 Oslo Accords and the 1994 economic agreement commonly known as the Paris Protocol. The Israeli government maintains full administrative and security control of Area C, which comprises roughly 60 percent of the West Bank. A recent USAID study found that high transaction costs stemming from limitations on movement, access, and trade are the most immediate impediment to Palestinian economic growth, followed by energy and water insecurity.
The Palestinian labor force is well educated, boasting a 98 percent literacy rate; the West Bank and Gaza enjoy high technology penetration. Nevertheless, already high unemployment persisted in 2019. According to the latest figures available from the PCBS (Q1 2021) the combined West Bank and Gaza (WBG) unemployment rate in the first quarter of 2021 was 27.8 percent. (17.1 percent in the West Bank and 47.9 percent in Gaza)., The rates were even higher for youth, especially educated youth. The public sector continues to be the largest Palestinian employer, providing 21.3 percent of all jobs.
In 2021, the World Bank estimates economic growth of Although lockdowns remained limited during the second half of 2020, Gross Domestic Product (GDP) for the entire year contracted by 11.5 percent. A modest recovery is expected in 2021 with growth returning to around 3.5 percent, reflecting in part the base year effect from a sharp contraction in 2020 and the uncertainty about the rollout of COVID-19 vaccinations. With population growth at roughly 3 percent per year, real per capita GDP is projected to decline as unemployment and poverty rates rise. Ongoing political, economic, and fiscal uncertainty has generally deterred large-scale internal and foreign direct investment. Foreign direct investment, representing 1 percent of GDP, is also very low in comparison with fast-growing economies.
According to the World Bank, in 2019 investment rates remained low, with the majority channeled into non-traded activities that generate low productivity employment and returns that are less affected by political risk, such as internal trade and real estate development. Private investment levels, averaging about 15-16 percent of GDP in recent years, have been low compared with rates of over 25 percent in fast-growing middle-income economies. The manufacturing and agricultural sectors’ contribution to GDP is also in decline. Manufacturing fell from 19 percent of GDP in 1994 to 11 percent in 2018 and agriculture fell from 12 percent of GDP in 1994 to less than 3 percent in 2018. To reverse these trends, the Palestinian Investment Promotion Agency (PIPA) included both sectors in its National Export Strategy. Target sectors include:
- Stone and marble
- Agriculture, including olive oil, fresh fruits, vegetables, and herbs
- Food and beverage, including agro-processed meat
- Textiles and garments
- Manufacturing, including furniture and pharmaceuticals
- Information and communication technology (ICT)
In 2021, the PA is projected to end up with a total fiscal deficit of nearly USD 1.2 billion, of which around USD 300-350 million is projected to be covered by direct budget support from foreign donors. The PA remains heavily dependent on Israeli transfers of PA clearance revenues – taxes and import duties collected by Israel on the PA’s behalf and transferred to the PA on a monthly basis – which comprised 70 percent of all PA revenues in 2020. The PA’s continued practice of making prisoner and “martyr” payments – paying families of Palestinian security prisoners in Israeli jails and Palestinians killed or seriously injured due to the Israeli-Palestinian conflict, including terrorists – jeopardized these transfers, as the United States and Israel each recently passed legislation imposing penalties to deter such payments, known as the Taylor Force Act and Anti-Terrorism Clarification Act (ATCA) in the United States.
In May 2021, following an escalation between Israel and the Gaza, Israel reinstituted significant limitations on Gaza’s commercial crossings that affected the flow of imports and industrial inputs into Gaza and exports coming out of Gaza through the primary Kerem Shalom crossing with Israel. As a result of these limitations, businesses operating in Gaza had significant difficulty producing and exporting goods and services, negatively impacting the Gazan economy. In the wake of the conflict, Palestinians living in Gaza continue to experience liquidity challenges and difficulty acquiring basic goods.
Future economic growth depends on a series of factors: further easing of Israeli movement and access restrictions, balanced with Israeli security concerns; expanded external trade and private sector growth; PA approval and implementation of long-pending commercial legislative reforms; political stability; increased water and energy supply to the productive sectors at lower cost; and PA fiscal stability. Economic sectors that are not dependent on traditional infrastructure and freedom of movement, such as information and communications technologies (ICT), are able to grow somewhat independently of these factors and therefore have enjoyed greater success in the Palestinian economy during the past decade. The 2018 introduction of Third Generation (3G) communications technology into the West Bank stimulated further development of businesses that benefitted from real-time GPS/location data.
Although the Palestinian economy is in a slow decline, investment opportunities continue to exist in information technology, stone and marble, real estate development, light manufacturing, agriculture, and agro-industry. Coronavirus pandemic response measures have had a significant negative impact on both the stone and marble industry and the tourism sector, previously considered growth areas. While the economy overall should start recovering after Coronavirus response measures are lifted, the tourism sector is projected to continue to be adversely impacted by the loss of inbound tourism throughout 2020, negatively affecting 37,800 tourism industry workers.
This report focuses on investment issues related to areas under the administrative jurisdiction of the PA, except where explicitly stated. Where applicable, this report addresses issues related to investment in the Gaza, although the de facto Hamas-led government’s implementation of PA legislation and regulations may differ significantly from the West Bank’s. For issues where PA law is not applicable, Gazan courts typically refer to Israeli and Egyptian law; however, Hamas does not consistently apply PA, Egyptian, or Israeli law. These inconsistencies in the legal environment, among a number of other, more challenging factors, are strong deterrents to private investment in Gaza.
Due to evolving circumstances, potential investors are encouraged to contact the PA Ministry of National Economy, Palestinian Investment Promotion Agency, the Palestine Trade Center, and the Palestinian-American Chamber of Commerce; as well