An economy at the point of no return

Following Israel's withdrawal of its forces from the Gaza Strip in 2005, firms around the region discussed redeveloping land and homes on the territory's Mediterranean coastline, offering a bright spot on the economic horizon for Palestinians.

Fast forward three years, as the current crisis intensifies, and any thoughts of direct foreign investment seem unimaginable. Actions this week have laid to rest any hopes of a short-term recovery for Gazans and their beleaguered economy, according to leading Palestinian businessmen in the UAE.

Executives at leading banks and real estates firms told Emirates Business that Gazans face a bleak future as the fight for survival overshadows any prospect of financial security.

"Economically, it's a complete catastrophe," said Fouad Dajani, Vice-President for Middle East Equities Sales and Trading at Credit Suisse. "You're talking about the poorest stretch of land on Earth - with 50 per cent of people living in poverty. Add to this the fact that they are being bombed and you have a complete disaster.

"You can only imagine the horrors on the ground. The UN has said countless times over the past few months that this is a humanitarian disaster There is no light at the end of the tunnel economically, but perversely, from a political standpoint, this has brought Gaza back to the forefront of peoples' attention and maybe popular pressure will eventually force Israel to loosen its grip on the place."

Dajani said events this week made appetite for much-needed foreign investment to develop Gaza more precarious. "Who is going to want to put their money in a stretch of land which, at a moments notice, can be besieged and bombed? Israel has no regard for international law, we all know that, and that makes investment in Gaza almost financially nonsensical at the moment.

"In the short-term there are no prospects whatsoever for an economic recovery. The major need is to get food in – so we should forget economics for now."

The only possibility of a potential uplift was with the removal of Hamas, said Dajani. "Unfortunately, the only way I can see an economic revival is if Hamas is destroyed by Israel, because they will never let it go. Israel, along with a complicit international community, will persist in starving these people for the choice they made in their democratic elections – and unfortunately, that is the sad reality at the moment," he said.

The crisis dominated a two-day Gulf summit this week, overshadowing negotiations for a single currency pact. Gulf heads of state called for an end to Israel's "massacres" of Palestinians in Gaza.

Fahmi Alghussein, Head of Mena Equities at Morgan Stanley, said: "What's happening there is going to divide the Palestinians. The Israelis are sending a message to the Palestinians and to the regional governments that they have no will to negotiate peace. I'd imagine that the economic situation would continue to deteriorate."

One of the main aggravating factors of life in Gaza is a deteriorating employment rate – which is estimated to have reached around 60 per cent. "I can't imagine why anybody would trust foreign direct investment in that part of the world to help create employment as long as the political situation remains unstable," said Alghussein.

"The prospects for an economic recovery are extremely bleak. The crux of the problem is economics. If people have a stake in the system – jobs, mortgages, houses, car, a TV set – then they wouldn't have the situation we're in right now." The Palestinian economy has been in a steady decline in the past decade, a situation that has worsened during the past two years.

Economic growth has been negative every year since 2000, except for a short period between 2003 and 2005, when the economy was recovering, according to World Bank figures.

Of the 1.5 million population, it is estimated that around 267,000 Gazans are officially involved in their territory's labour force.

Ayman Badawi, Director of Human Capital at UAE construction firm NSCC, agreed with Dajani that the uncomfortable reality is that a future without Hamas could foster some hope of a turnaround for Gaza.

"If Hamas does something like Hezbollah did then Hamas will become a major player," he said. "But if it's the other way around then Hamas won't exist. This will expedite the peace process but the people might not get exactly what they expect.

"If Hamas disappears then Gaza will probably flourish. If Hamas stays then Israel is going to impose certain economic sanctions and that unfortunately is the truth that nobody's happy about."

Bawadi said foreign governments would continue to contribute aid to the cause regardless of whether Hamas was in power or not, but added: "If Hamas is not there and people feel the economy is booming then you might find even individuals contributing to the economy as they are business people.

"There is also a psychological impact for Gazans. Imagine the impact for a mother or father with a child that wakes up every minute to an explosion – and the impact on the child itself. Or if you lose a brother, father, relative or even a neighbour. For the international community, it's all a game, everybody does what Israel and the US wants – it's rehearsed so the outcome is going to be the same, so I'm not counting on anything there," said Bawadi.

In June, Hamas and Israel reached a ceasefire to halt the cross-border rocket attacks and end Israeli offensives in Gaza – a deal that expired last month.

Palestinians accuse Israel of never completely opening its border, while Israel accuses Hamas of continuing its rocket attacks.

Both sides accuse the other of timing the current escalation of violence with the exit of the US President George W Bush – a time when the US administration is at its weakest and without the political will to act.

Early last month, Middle East negotiator, Former British Prime Minister Tony Blair and the heads of the International Monetary Fund and World Bank urged Israel's prime minister to ease Israeli pressure on the ailing Palestinian banking system.

Blair and IMF Managing Director Dominique Strauss-Kahn and World Bank President Robert Zoellick in a letter to Israeli Prime Minister Ehud Olmert argued Israeli policies "undermine the viability of the Palestinian banking sector as a whole, greatly inhibit Palestinian-Israeli trade and divert resources away from the banking system toward unregulated informal channels".

Cash constraints in Gaza are "bound to seriously affect" the ability of Gazans "to cover basic needs," the letter said.

In recent months, Israel has blocked the shipment of shekel bills, the local currency, into Gaza, saying the money ends up in the hands of Hamas.

Israeli banks, cautious of being sued for abetting terrorist financing, are also looking to end their banking relationship with Palestinian banks.

If such a situation arises in the banking sector then Palestinian banks would have a tough time handling payments from abroad.


In crisis

Continued Israeli-imposed border closures in Gaza – which became more restrictive after Hamas took over the territory in June 2007 – have resulted in widespread private-sector layoffs and an acute shortage of most goods.

In the past few years the Palestinian economy has been in a steady decline that has worsened during the past two years.

According to the World Bank, Palestinian economic growth has been negative every year since 2000, except for a short period between 2003 and 2005, when the economy was recovering.

GDP contracted by nearly 8.8 per cent in 2006 and by 4.2 per cent in the first quarter of 2007. In 2007, the growth rate was near zero and it is projected to be only one per cent in 2008, a World Bank financial sector review of the area reported in its recent report.

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