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Palestine: Market Profile

Picture: Palestine factsheet
Picture: Palestine factsheet

1. Overview

The Palestinian internal polity remains divided with uncertainty about reconciliation. The lack of progress towards peace has contributed significantly to the unsustainable economic situation in the area. Donor support has significantly declined, and a financing gap persists despite the fact that fiscal performance improved in 2017.

Source: BMI Research

2. Major Economic/Political Events and Upcoming Elections

May 2015
The Vatican announced that it was to formally recognise Palestinian statehood.

October 2017
Hamas let the Ramallah-based unity government take over public institutions in Gaza as part of a reconciliation process between the two rival administrations.

December 2017
US President Donald Trump recognised Jerusalem as the capital of Israel, upsetting the Arab world and some Western allies.

March 2018
Prime Minister Rami Hamdallah visited Gaza, where his convoy survived a roadside bomb attack.

March-May 2018
Protests by Palestinian factions in Gaza on the border led to clashes with Israeli troops.

Source: BBC country profile – Timeline

3. Major Economic Indicators

Graph: Palestine real GDP and inflation
Graph: Palestine real GDP and inflation
Graph: Palestine GDP by sector (2015)
Graph: Palestine GDP by sector (2015)
Graph: Palestine unemployment rate
Graph: Palestine unemployment rate
Graph: Palestine current account balance
Graph: Palestine current account balance

Source: World Bank

4. External Trade

4.1 Merchandise Trade

Graph: Palestine merchandise trade
Graph: Palestine merchandise trade
Graph: Palestine major export commodities (2016)
Graph: Palestine major export commodities (2016)
Graph: Palestine major export markets (2016)
Graph: Palestine major export markets (2016)
Graph: Palestine major import commodities (2016)
Graph: Palestine major import commodities (2016)
Graph: Palestine major import markets (2016)
Graph: Palestine major import markets (2016)

Sources: Trade Map, BMI Research

4.2 Trade in Services

Graph: Palestine trade in services
Graph: Palestine trade in services

Source: WTO

5. Trade Policies

  • Palestine is not a member of the World Trade Organization (WTO), but is actively preparing for Permanent Observer status, and participated in the 2005, 2009, 2011, 2013, and 2015 WTO Ministerial meetings as an ad hoc observer.

  • Palestine is working on a draft Foreign Trade Law, but it is still in the review process.

  • Restrictions on the movement and access of goods and people between the West Bank, Gaza, and external markets imposed by the Israeli government continue to have a negative effect on the private sector and limit trade potential and growth.

  • Palestine is greatly dependent on Israeli ports for its trade, as it has limited or no access to regional port facilities in Egypt and Jordan. Israel, therefore, handles a significant amount of Palestinian imports, since Palestinian clearance agents have no access to Israeli port facilities either.

Sources: WTO – Trade Policy Review, BMI Research

6. Trade Agreement

6.1 Multinational Trade Agreements

Active

  • Palestinian Authority (PA) and European Free Trade Association (EFTA), consisting of Switzerland, Norway, Iceland and Liechtenstein – The main focus of the EFTA-PA Free Trade Agreement (FTA), which came into force in July 1999, is on the liberalisation of trade in goods.

  • EU and PA – The FTA between the EU and PA entered into force on July 1997, and it focusses on trade in goods.

  • Turkey and PA – The bilateral FTA between Turkey and PA entered into force on June 2005, and it focusses on trade in goods.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Palestine FDI stock
Graph: Palestine FDI stock
Graph: Palestine FDI flow
Graph: Palestine FDI flow

Source: UNCTAD

7.2 Foreign Direct Investment Policy

  1. The Palestinian Authority (PA)’s 2014 amendments to Promotion of Investment in Palestine Law shifted promotional incentives from a focus on those that benefit from industrial projects providing large capital investments to a focus on employment growth, development of human capital, increased exports, and local sourcing of machinery and raw materials.

  2. Under the Jordanian Company Law of 1966, the foreign investor should own no more than 49% of a company, with a local partner holding at least 51%. Foreign and domestic private entities may establish and own business enterprises in areas under PA civil control.

  3. Significant sectors highlighted by the Palestinian Investment Promotion Agency (PIPA) and in the National Export Strategy for 2014-2018 include the following:
    – Stone and marble
    – Tourism
    – 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)

  4. Under the Jordanian Company Law of 1966, the foreign investor should own no more than 49% of a company, with a local partner holding at least 51%. However, foreign investors can readily obtain exceptions to this policy by working with PIPA and the MONE, which issues exceptions promptly. Foreign and domestic private entities may establish and own business enterprises in areas under PA civil control.

Sources: WTO – Trade Policy Review, The International Trade Administration (ITA), US Department of Commerce

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available
There are no foreign trade zones or free ports in PalestineN/A
General incentives:
The 2014 amendment to Article 23 of the Promotion of Investment in Palestine Law granted incentives and exemptions for projects approved by PIPA (see right)
Income tax of 0% for producers of agricultural products whose income is directly generated from land cultivation or livestock.

Income tax of 5% for a period of five years commencing from the date of realizing profit but not exceeding four years, whichever is earlier.

Income tax of 10% for a period of three years commencing from the end of the first phase. It will thereafter be calculated based on the applicable and in-effect percentages and segments.

Sources: US Department of Commerce, BMI Research

8. Taxation – 2017

  • Value Added Tax: 16%
  • Corporate Income Tax: 15%

Sources: PwC, BMI Research

8.1 Business Taxes

Type of TaxTax Rate and Base
Corporate Income Tax
Specific rates: 5% with respect to life insurance companies' premiums; 20% on telecommuincations companies and other companies with specific privileges or monopolies. Companies falling outside these categories are taxed at 15%.
DividendsDividends transferred between resident companies are tax exempt. Dividends from a nonresident entity are taxed at normal rates (as per capital gains); 10% withholding tax also applies to dividends from either resident or nonresident sources (the rates have not been updated since 2017).
Capital Gains TaxGains from the sale of investments in equity securities are tax exempt. For the remainder of capital gains accrued, the standard corportate income tax rate applies.
Technical service feesPayments for services by nonresidents are subject to 10% withholding tax (exemptions notwithstanding).
Real Property Tax17% on the assessed value of rental income; 40% is deductable from the rental value as an expense in computing taxable income – the remaining 60% is available as a credit against the income tax liability.
InterestRequired to withhold a 5% tax on interest paid to residents, nonresidents, and entities which have been abolished.
Payroll TaxSalaries are taxed at the individual level.
Royalties10% withholding tax applicable to royalties paid to nonresident entities.

9. Foreign Worker Requirements

9.1 Work Permits

While the Palestinian Authority (PA) does not require foreign nationals working in the West Bank to seek work permits, the Israeli government does require foreigners to obtain Israeli visas in order to enter the West Bank and Gaza via Israel.

9.2 Visa Policy

Israel generally grants foreign passport holders from countries that have diplomatic relations with Israel three-month tourist visas upon arrival, but longer-term business visas may only be obtained by businesses or organisations with an Israeli presence.

Sources: Government websites, BMI Research

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
N/AN/A
Standard & Poor'sN/AN/A
Fitch RatingsN/AN/A

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
138/189140/190114/190
Ease of Paying Taxes Index
56/189101/190109/190
Logistics Performance Index
N/AN/AN/A
Corruption Perception Index
N/AN/AN/A
IMD World CompetitivenessN/AN/AN/A

Sources: World Bank, IMD, Transparency International

10.3 BMI Risk Indices


World ranking
201620172018
Economic Risk Index Rank183/202
Short-Term Economic Risk Score38.136.736.7
Long-Term Economic Risk Score36.53637.2
Political Risk Index Rank187/202
Short-Term Political Risk Score33.133.133.1
Long-Term Political Risk Score32.24040
Operational Risk Index Rank170/201
Operational Risk Score32.532.733.7

Source: BMI Research

10.4 BMI Risk Summary

ECONOMIC RISK

Both the PA and Hamas are reliant on external aid to support their budgets, and while the PA has made efforts to reduce its dependence on donors, this dynamic is not expected to fundamentally shift in the foreseeable future, as long as Israeli restrictions persist. The precarious finances of both factions mean that the reconstruction of the Gaza Strip – which saw extensive damage from conflict – will continue to face delays.

OPERATIONAL RISK

The territories' relatively small population and low purchasing power would only be attractive for foreign capital if the business environment was relatively open and export potential was high. However, given the obstacles to construction and strict borders controls, there is little scope for FDI to boost the Palestinian economy unless restrictions are eased. A negotiated settlement to resolve the Israeli-Palestinian dispute remains highly unlikely.

Graph: Palestine short term political risk index
Graph: Palestine short term political risk index
Graph: Palestine long term political risk index
Graph: Palestine long term political risk index
Graph: Palestine short term economic risk index
Graph: Palestine short term economic risk index
Graph: Palestine long term economic risk index
Graph: Palestine long term economic risk index

100 = Lowest risk, 0 = Highest risk
Source: BMI Research Economic and Political Risk Indices

10.5 BMI Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
West Bank and Gaza Score33.746.436.830.221.5
MENA Average47.449.348.148.443.9
MENA Position (out of 18)1410131414
MENA Average47.449.348.148.443.9
MENA Position (out of 18)1410131414
Global Average49.849.850.049.349.9
Global Position (out of 201)170123150167182

100 = Lowest risk, 0 = Highest risk
Source: BMI Operational Risk Index

Graph: Palestine vs global and regional averages
Graph: Palestine vs global and regional averages
Country
Operational Risk
Labour Market Risk
Trade and Investment Risk
Logistics RiskCrime and Secruity Risk
UAE73.867.879.672.575.1
Qatar66.363.963.167.870.5
Bahrain64.158.468.571.158.5
Oman63.251.059.866.475.4
Saudi Arabia61.863.061.863.259.2
Jordan58.054.959.159.758.3
Kuwait55.352.351.751.166.2
Morocco53.639.862.055.257.2
Tunisia47.142.352.446.946.7
Egypt45.846.046.453.537.4
Lebanon43.047.950.040.633.6
Iran42.948.738.351.233.3
Algeria39.944.031.739.844.2
West Bank and Gaza33.746.436.830.221.5
Libya28.344.426.029.313.5
Syria28.142.930.026.412.9
Iraq27.343.725.228.811.5
Yemen21.630.623.017.315.6
Regional Averages47.449.348.148.443.9
Emerging Markets Averages46.848.047.545.846.1
Global Markets Averages49.849.850.049.349.9

100 = Lowest risk, 0 = Highest risk
Source: BMI Research Operational Risk Index

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Palestine


2015
Growth rate (%)
Number of Palestinian residents visiting Hong KongN/AN/A
Number of Palestinians residing in Hong KongN/AN/A

Source: Hong Kong Tourism Board


2017Growth rate (%)
Number of Middle East residents visiting Hong Kong129,816-2.5

11.2 Commercial Presence in Hong Kong


2016
Growth rate (%)
Number of Palestinian companies in Hong KongN/AN/A
- Regional headquarters
- Regional offices
- Local offices

Source: Hong Kong Census & Statistics Department

Content provided by Picture: Fitch Solutions – BMI Research
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