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Palestine: Market Profile

Picture: Palestine factsheet
Picture: Palestine factsheet

1. Overview

The Palestinian economy is small and relatively open, with several large holding companies dominating certain sectors. Palestinian businesses have a reputation for their professionalism as well as the quality of their products. Large Palestinian enterprises are internationally connected, with partnerships extending to Asia, Europe, the Gulf and the Americas. Due to the small size of the local market, access to foreign markets through trade is essential for private sector growth. However, Israeli restrictions on cross-border movements will remain in place, hampering exports and capital goods imports. The lack of progress towards peace has contributed significantly to the economic pressures in the area. The reconciliation process between Hamas and the PA has stalled, and there is little to suggest that further progress will be made in negotiations between the two factions over the quarters ahead. Donor support has significantly declined, and a financing gap persists despite the fact that fiscal performance improved in 2017.

Source: Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

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.

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

July-August 2018
The UN and Egypt attempted to broker a long-term ceasefire between Israel and Hamas amid an upsurge in violence on the Gaza border from March.

September 2018
The US ordered the Palestinian mission to close its operations in the US.

Source: Fitch Solutions, 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 (2016)
Graph: Palestine GDP by sector (2016)
Graph: Palestine unemployment rate
Graph: Palestine unemployment rate
Graph: Palestine current account balance
Graph: Palestine current account balance

Source: World Bank
Date last reviewed: September 20, 2018

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)

Source: Trade Map, Fitch Solutions
Date last reviewed: September 20, 2018

4.2 Trade in Services

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

e = estimate
Source: Trade Map
Date last reviewed: September 20, 2018

5. Trade Policies

  • Palestine is not a member of the 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.

  • As per the Economic Agreement with Israel (Paris Economic Protocol), importing and exporting products to and from the Palestinian market and foreign markets is executed through Israeli ports where Israel is in full control of trade movement, in addition to the Israeli control of internal Palestinian trade. It should be noted that when the Paris Protocol was first envisaged, it was built on reciprocity between the Israelis and the Palestinians. It is obvious that this spirit of the Paris Protocol no longer exists, simply because it is not functioning as agreed. Thus there is a need to come up with a new formula that best serves the interests of the Israelis and the Palestinians, where reciprocity is the fundamental basis.

  • 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.

  • As the West Bank is landlocked and does not have its own international airport, goods must first pass through Israel and then to other countries. This significantly retards the flow of goods to external markets. The Palestinian Authority (PA) petitioned Israel to allow the construction of an international airport within its territory in October 2010, but there has been no major progress reported since.

  • Exports and imports are also dependent on Israeli policies. Restrictions on the movement and access of goods and people between the West Bank, Gaza and external markets imposed by the Israeli government continued to have a negative effect on the private sector and limit trade potential and growth in 2017 and 2018.

  • Imports will also be limited under current Israeli policy. As stated above, dual-use items are not allowed, which include many capital goods. Import restrictions are strongly tied to the underperformance in export and gross fixed capital formation growth, as they limit the range of goods and services that can contribute to the territories' economic activity.

  • Palestine is party to the Greater Arab Free Trade Area (GAFTA). Within GAFTA, Palestine is treated as a least developed country and began to apply the reductions of tariffs starting in 2005 by 16% for a period of five years and 20% in the final year. Recently, Palestinian customs started to refund the value of customs duties paid by Palestinian importers for goods subject to customs exemption under this Agreement, as an obligation of the membership of Palestine in the Arab Free Trade Area. Thus, Palestinian traders enjoy duty-free quota-free access for all goods to and from all Arab countries in GAFTA. GAFTA has many benefits for the involved countries, including the expansion of their market, increased investment opportunities, regulation of fair competition, and enhancement of research and development. It contributes to efforts to establish the Arab Common Market.

  • In May 2005, the European Union and Palestine agreed on a European Neighbourhood Policy (ENP) Action Plan setting out jointly agreed priorities for economic integration and political cooperation. This Action Plan was updated and adopted in March 2013.

  • A package of measures to facilitate the trade of Palestinian products with other Euro-Mediterranean partners on a bilateral and regional basis was adopted at the ninth Union for the Mediterranean Trade Ministerial Conference, in Brussels on November 11, 2010. Palestinian trade in the Euro-Mediterranean region shall be facilitated in a comprehensive way, through the removal of restrictions on access to markets and enhanced technical support.

  • The Agadir Agreement is open to Arab Mediterranean Countries that are in an association agreement with the EU and Members of the Arab League. Palestine decided to join the Agadir Agreement in 2009, and eventually the representatives of Palestine announced the PA’s induction to the agreement in 2011 to fulfil the potential of having free trade with the countries associated with the Agadir Agreement.

Source: WTO – Trade Policy Review, Fitch Solutions, Palestinian Trade centre

6. Trade Agreement

6.1 Multinational Trade Agreements

Active

  • Palestine-Israel Economic Agreement (Paris Economic Protocol): The Paris Protocol is an economic trade agreement concluded on April 9, 1994 in Paris between the Palestinian Liberation Organisation (PLO) and the government of the state of Israel, stating the basic principles of free trade between the two parties. This agreement resembles a joint customs arrangement built on three basic principles encompassing: tariff-free exchange of goods; adoption of a unified tariff by both parties (with the exception that Palestine has the right of customs determination on a limited list of strategic goods); and sharing revenues in customs clearance. The agreement also includes 11 separate articles on trade, including but not limited to those on labour, agriculture, tourism, industrial food, insurance and taxes. An additional advantage Paris Protocol provided is the possibility for the PA to sign free trade agreements (FTAs) and boost diversification of Palestinian trade.

  • Membership of the GAFTA: GAFTA is a multilateral trade agreement between 18 out of the 22 Arab League states aiming to fully liberate the trade of goods between Arab Nations. The agreement was signed in 1997 and brought into force in 1998. The trade agreement adopts the method of gradual reduction on taxes and customs (10% per annum) eliminating customs and non-tariff barriers on goods traded among the 18 Arab countries which are: Algeria, Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi Arabia, Sudan, Syria, Tunisia, United Arab Emirates and Yemen. As of January 1, 2005, the agreement reached full trade liberalisation of goods through the full exemption of customs duties and charges, having equivalent effect between all Arab countries that are members of GAFTA. Accordingly, since 2005 Palestinian exports enjoy duty-free quota-free treatment in all Arab countries that are members of GAFTA. It is important to note that Palestine is treated as a less developed country and began to apply the reductions of tariffs starting in 2005 by 16% for a period of five years and 20% in 2011. To further contribute to economic integration among Arab countries through liberalising trade in both goods and services, Arab countries are currently engaged in negotiations to liberalise services and investments among them. This free trade area is only a first step towards achieving a customs union by 2015 on the way to a common market by 2020.

  • Palestine-Russia Agreement on Commercial Cooperation: Russia and Palestine extend to each other the status of Most Favoured Nation regarding trade. Imports and exports between the two parties are duty free for the following goods: instruments and items specified for montage and repair, equipment and instruments specified for undertaking experiments and scientific research, articles for demonstration during fairs and exhibitions, and containers and similar packages used in international trade on a return basis.

  • Palestine-Jordan FTA: The Agreement between Jordan and the PLO was signed in July 1998. It provides preferential tariffs for certain goods traded between Palestine and Jordan. We do note that for some categories of goods, quotas apply. Products exported to Jordan must meet the Jordanian Rules of Origin (a product should be ‘wholly obtained’ (grown, produced or manufactured) in either Palestine or Jordan. If not wholly obtained, the product should at least have 35% of the value added produced locally, either in Palestine or Jordan).

  • Interim Agreement on Trade and Cooperation with the European Union (IAA): The Interim Association Agreement was signed on February 17, 1997 between the PLO and the European Commission. This agreement came on board as an outcome of the Barcelona Process that was launched by Euro-Mediterranean Conference of Foreign Ministers in November 1995 to strengthen the relations between Europe and other Mediterranean countries. The IAA started with an immediate duty-free treatment of bilateral industrial trade, and duty-free quotas for agricultural, agri-business and fishery products. In January, 2012, the agreement between the European Commission and Palestine came into effect, creating a duty-free, quota-free regime for the import of Palestinian agricultural, processed foods and fish products to European markets.

  • Palestine has an Interim Agreement with EFTA States: An agreement was signed between the EFTA States (Iceland, Liechtenstein, Norway and Switzerland) and the PLO for the benefit of Palestine on November 30, 1998 and entered into force on July 1, 1999. It gives duty-free treatment for industrial products, fish and marine products, with reduced tariffs on processed agricultural products. It is worth noting that the EFTA Rules of Origin are the same as the Rules of Origin applied by the European Union. Furthermore, Palestine has signed separate bilateral agreements on agricultural processed products with EFTA countries, because the four EFTA countries do not share the same agricultural policy.

Signed

  • The Agadir Agreement: This is a FTA aiming to establish free trade between Arab-Mediterranean counties, and it was signed in 2004 by Egypt, Jordan, Morocco and Tunisia. The agreement aims to develop economic activities and improve living standards within the member countries, and to create an opportunity for economic integration between them. Palestine benefits because Agadir is in harmony with GAFTA and the Barcelona Process (Euro-Mediterranean Free Trade Area).

  • Palestine has an Interim Agreement on Trade with Turkey: The trade agreement between Turkey and the PLO was signed in July 2004 in Istanbul to establish a free trading area between the two parties, eliminating tariff and non-tariff barriers in trade. This agreement regulates numerous subjects such as sanitary measures, payments and transfers, and safeguard measures. The agreement primarily aims to enhance the economic cooperation, gradually eliminate difficulties and restrictions on trade in goods (including also the agricultural products), contribute by removing barriers and create conditions for further encouragement of investments.

  • The Declaration of Free Trade between the US and West Bank and Gaza Strip: This declaration was signed in 1996 to potentially open the door for Palestinian exports to enter a larger market. It was intended to provide duty-free treatment to all Palestinian products entering the US and vice versa. However, the Israeli impediments on movement of goods and discrimination against Palestinian products in the Israeli ports, along with the lack of capacity of local producers, resulted in a minimal utilisation of this important agreement. Traded products must meet the US Rule of Origin. In many aspects, this declaration is merely an extension of the FTA between the US and Israel (1985) that allows the entrance of goods of both parties to their respective markets exempted from tariffs, which facilitates the entrance of Palestinian products to the US market.

  • The Palestine-Canada Framework on Economic Cooperation and Trade: This framework was signed in 1999 between Canada and the PLO to give Palestinian products the potential to enter a larger market. The arrangement states that Canada will support a programme of economic development in the Palestinian areas, and it focuses on reciprocity in liberalisation of markets for products of both sides, taking into consideration that Palestine needs to protect its newly established industries. The agreement aims to eliminate and reduce tariffs on industrial products, agricultural products and processed food pursuant to a quota system, as long as the products meet the Canadian Rule of Origin. This arrangement is considered an extension of the Canadian-Israeli trade agreement. Therefore, Canadian applied tariffs on imports from Palestine are the same as applied for Israel.

  • Palestine-MERCOSUR FTA: This FTA was signed in 2011 between Palestine and the Southern Common Market (MERCOSUR), whose members are Argentina, Brazil, Paraguay, Uruguay and Venezuela. To date, the agreement has not entered into force yet. This agreement is consistent with Article XXIV of The General Agreement on Tariffs and Trade (GATT 1994) and the Decision on Differential and More Favourable Treatment, Reciprocity and Fuller Participation of Developing Countries (1979).

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
Date last reviewed: September 13, 2018

7.2 Foreign Direct Investment Policy

  1. The 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. While the presidential decree enacted the amendments, the specific incentives provided are still being determined. The amendments add tourism projects and agricultural projects to qualifying industries, and removed real estate development projects from the industries promoted through the incentives.

  2. The amendments also gave additional authority to the Palestinian Investment Promotion Agency (PIPA) to create incentive packages targeted to individual business needs. PIPA expects the changes to create a streamlined investment and incentive processes to circumvent some PA bureaucratic red tape to obtain licenses for investment projects. For example, if any step in the business registration process takes longer than 30 days, PIPA can intervene and issue a business license or registration on its own authority.

  3. Foreign and domestic private entities may establish and own business enterprises in areas under PA civil control.

  4. The PA does not have a national currency. Major currencies used in Palestine include the Israeli shekel, Jordanian dinar and the US dollar.

  5. Significant sectors highlighted by the 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 beverages, including agro-processed meat
    – Textiles and garments
    – Manufacturing, including furniture and pharmaceuticals
    – Information and communication technology

Source: WTO – Trade Policy Review, the International Trade Administration (ITA), US Department of Commerce, Fitch Solutions

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 realising 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.

Source: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

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

Source: EY Worldwide Corporate Tax Guide, Fitch Solutions

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% witholding 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% witholding 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 withold a 5% tax on interest paid to residents, nonresidents, and entities that have been abolished.
Payroll TaxSalaries are taxed at the individual level.
Royalties10% witholding tax applicable to royalties paid to nonresident entities.

Source: EY Worldwide Corporate Tax Guide, Fitch Solutions
Date last reviewed: September 13, 2018

9. Foreign Worker Requirements

9.1 Work Permits

While the 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.

Source: Government websites, Fitch Solutions

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

Source: 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

Source: World Bank, IMD, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index Rank182/202
Short-Term Economic Risk Score38.136.735.8
Long-Term Economic Risk Score36.53637.2
Political Risk Index Rank185/202
Short-Term Political Risk Score33.133.133.1
Long-Term Political Risk Score32.24040
Operational Risk Index Rank169/201
Operational Risk Score32.532.733.7

Source: Fitch Solutions
Date last reviewed: September 13, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK

External aid inflows look set to decline as the US ends support for UNRWA and as other donors face pressing funding requirements from conflicts elsewhere in the region. Palestinian authorities' ability to support economic activity will thus weaken. 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. The IMF estimates that due to internal restrictions, the share of GDP produced by the tradable goods, manufacturing, and agriculture sectors has declined to under 20%. Consequently, these constraints have resulted in a disproportionate rise in non-tradable sectors. The construction and services industries, in particular, have been less hindered by the aforementioned barriers to physical movement and have thereby taken a greater share of GDP.

OPERATIONAL RISK

Economic conditions will remain particularly dire in Gaza, where deteriorating living standards and rising unemployment will keep risks of conflict and unrest elevated. As the peace process continues to stall, Israeli restrictions on cross-border movements will remain in place, hampering exports and capital goods imports. Furthermore, 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.

Source: Fitch Solutions, IMF
Date last reviewed: September 20, 2018

10.5 Fitch Solutions Political and Economic Risk Indices

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: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: September 13, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
West Bank and Gaza Score33.746.436.830.221.2
MENA Average47.549.348.148.444.1
MENA Position (out of 18)1410131414
MENA Average47.549.348.148.444.1
MENA Position (out of 18)1410131414
Global Average49.749.850.049.349.9
Global Position (out of 201)169123150167182

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

Graph: Palestine vs global and regional averages
Graph: Palestine vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Secruity Risk Index
UAE73.8
67.8
79.672.5
75.3
Qatar65.3
63.9
63.1
67.8
66.5
Bahrain64.5
 58.4 68.571.1
 60.1
Oman 63.3 51.0 59.8 66.4 76.0
Saudi Arabia 61.7 63.0 61.8 63.2 58.6
Jordan 58.4 54.9 59.1 59.7 60.0
Kuwait 54.8 52.3 51.7 51.1 64.1
Morocco
 52.9 39.8 62.0 55.2 54.6
Egypt
 47.8 46.0 46.4 53.5 45.3
Tunisia
 46.1 42.3 52.4 46.9 42.8
Iran
 43.3 48.7 38.3 51.2 35.1
Lebanon 42.7 47.9 50.0 40.6 32.4
Algeria
 40.9 44.0 31.7 39.8 47.9
West Bank and Gaza 33.7 46.4 36.8 30.221.2
Libya
 28.3 44.4 26.0 29.313.4
Syria 28.0 42.9 30.0 26.412.7
Iraq
 27.2 43.7 25.2 28.8 11.3
Yemen 21.7 30.6 23.017.3
16.1
Regional Averages
47.5
49.3
48.1
48.4
44.1
Emerging Markets Averages46.8
48.0
47.5
45.8
46.0
Global Markets Averages49.7
49.8
50.0
49.3
49.9

100 = Lowest risk, 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: September 13, 2018

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

 


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

Source: Hong Kong Tourism Board
Date last reviewed: September 13, 2018

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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