Growing services sector in a hidden gem: Palestine

This article is an abstract of the sector analysis published in the Outsourcing Destination Guide Palestine which is available for free download, written by Stephan Fricke, CEO & Head of Advisory Board at German Outsourcing Association and German Process Automation Association.

Location, History and International Relations

The State of Palestine is located in Western Asia situated between the Eastern Mediterranean and the Red Sea. Its territories are the West Bank which is ordering Israel and Jordan and the Gaza Strip which shares a common borders with Egypt and Israel.

The region of Palestine has a rich and complex history. It was among the first regions with settled agricultural communities partly due to its geographical vicinity to Mesopotamia, the area between the Euphrates and Tigris River (modern day Iraq), often referred to as the cradle of civilisation. However, the whole region is inextricably linked to the greater region, also encompassing the territories of todays states like Egypt, Syria, Jordan, Israel, Lebanon, the Gulf states, which the West commonly refers to as the Near or Middle East.

Todays Palestine, in terms of statehood, is however a relative young entity which emerged out of the tumultuous aftermath of the World Wars. It was proclaimed by PLO Chairman Yasser Arafat in 1988 and has been since recognised by 138 of 193 United Nations (UN) member states. The Palestinian National Authority (PNA), officially the State of Palestine is a semi-presidential multi-party republic with many different political parties.

Palestine is a member of the UN Asia Group and a UN (Observer), a member of the Non-Aligned Movement (NAM), the G-77, the UNESCO, the Organisation of Islamic Cooperation (OIC) as well as the Arab League.

Historically, the region always was reliant on trade with its neighbours as well as long-distance trading. Thus, Palestine intensified and diversified its trade relations with other nations like Turkey, the UK, and the Netherlands, who are its fastest growing export markets and Saudi Arabia, India and China in terms of imports.

In 1997 Palestine signed an Interim Association Agreement on Trade and Cooperation with the EU which provides for duty-free access.

In 1996, US President Clinton signed a proclamation granting duty-free import status to items produced in or imported from the West Bank and Gaza. The Palestinian Authority (PA) has more restrictive trade agreements with Jordan and Egypt and there are no tariffs on trade between Palestine and Israel.

Demographics, Language, and Religion

With a landmass of a little over 6,000 km2 Palestine is the 163rd largest country in the world and takes the 121st place in terms of population (around 5,319,000) which makes it a rather small state. https://worldpopulationreview.com/countries/palestine-population This makes Palestine a very densely populated country although 1.84 million of its people live neighbouring states.

In addition the State of Palestine has a staggering demographics with 61.9% of the total population being under the age of 30 and less than 2% are 65 years and older.

Islam is the dominant religion with 80-85% of the population being predominantly Sunni.

There are also other religious minorities like the small Arab Christian community which is mainly to EU markets for industrial goods and an agreement for further liberalisation of agricultural products which entered into force on January 2012.

Greek Orthodox (≈2%), the Palestinian Metawalis, Druze, Baha’is, and Samaritans. Thus, Arabic is the predominant language but Hebrew is also commonly known as well as English, as it is compulsory in all schools.

Economy

Palestine is a small lower middle income economy classified by the IMF as a developing country or emerging marked respectively and is driven by services, which accounted for 60% of GDP, and its exports have been on the rise over the past decade.

The nominal gross domestic product (GDP) for 2021 was $18.04 billion and 30.52 billion (PPP). It is slowly recovering from the depth of the 2020 recession and is estimated to reach its pre-pandemic level in 2023. Its current GDP per capita is $3,664.0 (IMF 2021/22).

The main currency is the Israeli new shekel because under the Protocol on Economic Relations (Paris Protocol 1994), the Palestinians are not allowed to introduce their own currency. Almost three decades later, the Protocol remains in place and still governs and constrains the Palestinian macroeconomic, fiscal and trade policies.

Key economic sectors

The Agriculture Sector is one of the most important and oldest in the Palestinian economy. Its GDP contribution declined from 37% in the mid-1970s to 7.1% in 2022. Yet, it still serves to achieve food security and economic growth, with olive oil and tropical fruits leading the export charts, despite a declining rural population that shrank to 23% of total population since the 1960s (≈55%) which makes Palestine comparable to Germany in terms of urbanization (World Bank 2021 / OEC 2022).

Industrial activities, including the extracting, processing, and handicraft branches, are contributing around ≈12% of the GDP with building stone, marble, scrap iron, and aluminium leading the list of the highest commodities exported from Palestine. Nevertheless, it is the handicrafts industry that makes up the largest part of the industrial sector. It is famously known for its embroidery and olive woodworks, following centuries old traditions while other newer branches innovate, tweak, and transform the old knowledge to produce modern crafts and increase its output even further (OEC 2022 / Heinrich B?ll Stiftung 2023).

The biggest GDP contributor by far however is the services sector which has grown substantially over the past decade, while the other sectors shrank, contributing ≈62% of GDP. The sector covers everything from real-estate, telecommunications, transportation, insurance, banking, hotel, restaurants, and distribution services.

Moreover, the Palestinian Authority’s and its Ministry of Telecommunication and Information Technology (MTIT) are trying for two decades now to build a Palestinian ICT industry by furthering productive growth in the sector and to regain sovereignty over this part of its economy.

During the pandemic Palestine took a big hit from the socioeconomic side effects, which resulted in the biggest recession on record, shrinking the economy by 11.3%, and although all sectors except the agricultural one grew and the overall growth rate reached 7.1% in 2021/22, it is still recovering. And an uneven recovery it is, as the barriers imposed under occupation and the lack of fiscal and monetary policy options have bereft the Palestinian government of the necessary tools to mitigate the ramifications in contrast to other countries.

In fact, all sectors are recovering but it is estimated that the economy will not reach its pre-pandemic levels before 2023. The different sectors also continue to suffer more or less from a variety of challenges.

The industries competitiveness is modest, if compared to other regional and international markets and the handicraft industry only truly prospers in synergy with tourism. With the recent global rise in food and energy prices, there is additionally a risk of inflationary pressure as the majority of wheat consumed is imported from Ukraine and Russia. Thus, GDP growth is expected to be in the range of 3% in the medium term, barely enough to keep up with the growing population and implying a weak labour market as well as possible per capita GDP stagnation (UNCTAD 2022 / IMF 2022 / World Bank 2022).

Read the entire article with graphs and numbers in the Outsourcing Destination Guide Palestine, which is available for free download at www.outsourcing-destinations.org.