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. The Investment Climate Statements are also references for working with partner governments to create enabling business environments that are not only economically sound, but address issues of labor, human rights, responsible business conduct, and steps taken to combat corruption. The reports cover topics including Openness to Investment, Legal and Regulatory systems, Protection of Real and Intellectual Property Rights, Financial Sector, State-Owned Enterprises, Responsible Business Conduct, and Corruption. To access the ICS, visit the U.S. Department of State 2023 Investment Climate Statement website.
The Palestinian economy is small, just over $18 billion in nominal GDP in 2021, and while the internal economy in the West Bank is relatively open, there are significant constraints on movement and access of goods and persons both within the West Bank and Gaza. Due to the small size of the local market (currently 5.35 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 inputs and as a market, and around 90 percent of Palestinian exports are sold to Israel. Preliminary 2022 export statistics obtained from the Palestine Central Bureau of Statistics (PCBS) show total exports increased from $1.46 billion in 2021 to $1.6 billion in 2022. However, the trade deficit remained high at -$6.6 billion because of high levels of imports ($8.2 billion in 2022).
Palestinian businesses have a reputation for professionalism and quality products. Ninety-nine percent of firms in the West Bank and Gaza are family-owned small and medium-sized enterprises employing fewer than 20 people. Most private sector firms have moderate productivity, low investment, and limited competition, with the majority operating in retail and wholesale trading activities. Large Palestinian enterprises — only 1 percent of Palestinian companies — dominate certain sectors and 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 — which Israel states are necessary to address its security concerns — 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. Under those agreements, pending a final negotiated peace agreement defining borders and control of territory, the Israeli government maintains full administrative and security control of Area C, which comprises roughly 60 percent of the West Bank. A 2017 USAID “Inclusive Growth Diagnostic” 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, and the West Bank and Gaza enjoy high technology penetration, despite poor internet service and limited access to modern, high-speed mobile networks. Nevertheless, already high unemployment persisted and worsened in 2022. According to the PCBS 2022 Labor Force Survey, the unemployment rate among labor force participants in the West Bank and Gaza combined reached 24 percent in 2022. There is still a wide gap between the unemployment rates in the West Bank and Gaza, as this rate reached 45 percent in Gaza compared to 13 percent in the West Bank.
Breaking it down by gender, the unemployment rate for females reached 40 percent compared to 20 percent for males. The average daily wage in the West Bank is $37, and the equivalent is $15 in Gaza, compared to $79 in Israel. The public sector continues to be the largest Palestinian employer, providing around 22 percent of all jobs.
In 2021, the economy grew by 3.5 percent, according to World Bank preliminary estimates. With population growth roughly ranging between 2.5 percent and 3 percent per year, real per capita gross domestic product (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 (FDI). FDI, representing 1 percent of GDP, is also very low in comparison with other economies in the region.
According to the World Bank, in 2022 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 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 10 percent in 2021 and agriculture fell from 12 percent of GDP in 1994 to 6.6 percent in 2021. To reverse these trends, the Palestinian Investment Promotion and Industrial Estates Agency (IPIEA) 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)
- Renewable energy
To improve its foreign direct investment policies, the PA enacted a new Companies Law in December 2021 that became effective in April 2022. The new law updated the 1964 Jordanian law, to facilitate business incorporation online, and eliminate costly bureaucratic practices. The adoption of the companies’ law is a major milestone in improving the business climate. The law removed restrictions to foreign investors, such as foreign equity limits and local partner requirements. It improved rules for larger businesses with multiple shareholders. The new law also introduced new business types, including sole proprietorships and limited liability companies, and created a legal framework for mergers, divisions, and transformations that will allow businesses to adapt their business model as they grow.
In December 2021, the PA’s Ministry of Telecommunications and Information Technology (MTIT) facilitated the soft launch of a $3.5 million e-government initiative to ensure government services are more efficient and accessible to PA residents and the business community. The new e-services include online renewal of driver licenses, applications for government-provided health insurance, and registration for new companies. Wider deployment of e-services is waiting on launch of 4G mobile service, a long-awaited economic development turned White House deliverable after the visit of President Biden in July 2022. With the signing of a Technical MOU between Israel and the PA in December 2022, the first signed agreement between the parties since 2010, the parties are working toward the goal to deploy 4G in the near term.
In 2022, the PA ran a total fiscal deficit of nearly $526 million. International donors (largely the EU at 52 percent, Arab League members at 24 percent, and the World Bank at 18 percent) provided $243 million in direct recurrent budget support and $106 million for development financing, leaving the PA with a $177 million financing gap.
The PA covered its financing gap by taking additional bank loans (reaching $ 2.24 billion) and accumulating further arrears to private sector suppliers of goods and services (with the stock of arrears exceeding $1.05 billion), and the PA civil servants’ pension fund (arrears estimated at $2 billion). The Palestinian Monetary Authority and the banking sector have stated that banks can no longer provide further loans, as the PA has already exceeded established lending limits; further, lending to the PA and public sector employees now comprises roughly 40 percent of all banking loans.
The PA remains heavily dependent on clearance revenues (customs duties collected on imports by Israel on the PA’s behalf) which comprised 69 percent of all PA revenues in 2022. The PA’s continued practice of making prisoner and “martyr” payments – paying families of Palestinian security prisoners in Israeli jails and the families of Palestinians killed or seriously injured due to the Israeli-Palestinian conflict, including terrorists – jeopardized these transfers. Israel imposes penalties to deter such payments, a position shared by the United States and applied to U.S. assistance through the Taylor Force Act and the Promoting Security and Justice for Victims of Terrorism Act (PSJVTA).
Substantial economic growth in the West Bank and Gaza depends on several factors: further easing of Israeli movement and access restrictions balanced with Israeli security concerns; expanded external trade and private sector growth; continued 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, are able to grow somewhat independently of these factors and therefore have enjoyed greater success in the Palestinian economy during the past decade. However, communications technology is often outdated and is an impediment to further growth. The West Bank implemented Third Generation (3G) communications technology only in 2018, while Gaza is still limited to antiquated 2G communications technology. As noted above, Israel and the PA, with international pressure, have been negotiating the launch of 4G service in the West Bank and Gaza.
The Palestinian economy witnessed a modest slowdown in 2022 (3.5 percent growth after six percent growth in 2021). West Bank investment opportunities continue to exist in information technology, stone and marble, real estate development, light manufacturing, agriculture, and agro-industry. COVID-19 pandemic response measures led to setbacks in both the stone and marble industry and the especially hard-hit tourism sector, both previously considered growth areas; the loss of inbound tourism throughout 2022, negatively affected 37,800 tourism industry workers. The wind-down of the pandemic and constraints on travel and movement allowed for eased restrictions and it is anticipated that these sectors will flourish again. The increased cost of shipping and global disruptions in supply chains remain challenges despite the lifting of COVID-19 restrictions. The Gaza Strip effectively has been closed to traditional tourism since the 2007 Hamas takeover.
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 Gaza, although the de facto Hamas-led government’s implementation of PA legislation and regulations may differ significantly from PA’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, and businesses in Gaza have reported instances where Hamas courts and officials have employed coercion or have otherwise acted outside the legal system when engaging with private businesses. 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 (MONE), IPIEA, the Palestine Trade Center, and the Palestinian-American Chamber of Commerce, as well as the U.S. Office of Palestinian Affairs in Jerusalem and the U.S. Commercial Service for the latest information.