Banks in Palestine nowadays can be classified into Islamic banks and conventional banks. Conventional banks constitute about 82.7% of the banking system and more than 88.3% of total branches, while Islamic banks constitute about 17% of total banks and branches.
Economic activities in Palestine suffered during the lockdown in the second quarter of 2020 due to the coronavirus pandemic and are expected to only stabilize in the second half of the year if the current conditions prevail. The fiscal position has worsened not only due to the outbreak but also due to a political standoff that is disrupting the flow of revenues. The outlook remains precarious and subject to numerous political, security and health risks.
Review of 2020
Following three consecutive years of economic growth below 2%, 2020 is proving to be an exceptionally difficult year as the Palestinian economy faces three crises — i) resurgent COVID-19 outbreak, ii) severe economic slowdown, and iii) another political standoff between the Palestinian Authority (PA) and the government of Israel — that are disrupting clearance revenues.
Following a ﬁscal crisis in 2019, the Palestinian economy was projected to slowly recover in 2020. However, the pandemic outbreak seems to be largely weighing on economic activity. Living conditions are difficult with a quarter of the labor force being unemployed and 24% of Palestinians living below the 2011 purchasing power of US$5.5 a day — even prior to the recent outbreak. A larger than expected decline in aid and a further spread of the virus pose signiﬁcant downside risks.
Growth in 2019 was estimated to have been weak, reaching 0.9%, as economic activity was disrupted for most of the year due to the ﬁscal crisis. Notably, this outturn is a result of Gaza registering minimal positive growth following a steep recession in 2018 (-3.5%), while growth in the West Bank in 2019 was expected to reach the lowest level over the last ﬁve years (1.1%), down from 2.3% in 2018.
Going forward, measures put in place by the PA since early March 2020 to halt the spread of the pandemic outbreak, while effective in limiting the spread of the virus, seemed to have resulted in disruptions in economic activity, especially in the West Bank. As a result, the economy is expected to contract by 2.5% in 2020.
Preview of 2021
There are signiﬁcant risks to the outlook. If the pandemic outbreak is not controlled soon, its impact on economic activity and livelihoods is going to be severe in Palestine. Under this scenario, drastic measures are expected to be put in place including a complete lockdown of the West Bank and Gaza and a ban on movement between cities.
A difficult year is already assured even with no further escalation of public health measures. While some measures to curb movement and gatherings are still in place, most activity remains open. Assuming that the lockdowns remain limited, the severe first half contraction will likely avoid a repetition, though not sufficient to offset the losses in the first half.
Consequently, GDP for 2020 is expected to contract by about 8%. A modest bounceback is expected in the forecast period with growth averaging 2.5% as full normalization of activity is not expected to occur before the second half of 2021. The poverty rate is projected to stall around 27.5% in 2021.
Private sector representatives have also announced plans to cut pay by 50%. The largest impact would be through a decision to stop the entry of more than 140,000 Palestinian workers to Israel, as these workers and their families account for a third of private consumption given their higher take-home pay.
A sharp reduction in the number of tourists is also expected to contribute negatively. The lack of policy tools, such as ﬁscal stimulus, liquidity injections or external borrowing could leave the economy vulnerable. The impact on consumption could be severe and the economy could contract by more than 7%.
Islamic banks in Palestine focus on their social role toward the community by explaining well the different aspects of the Islamic banking sector and clarifying the features of the offered services as well as the dedicated social responsibility to the community.
The customers’ perspectives regarding Islamic banks are considered as a cornerstone for success. Hence, the Islamic banks in Palestineb are developing a questionnaire that aims to explore the reasons of preferring to deal with Islamic banks.
Hence, Palestine in particular is given a wide focus so as to recognize why Islamic banking is dominating, whereas the economy in general is unstable in terms of growth and performance. Islamic banks in Palestine play a significant role in the growth of society in terms of market share as well as their international outreach. These elements together help to attract non-Muslims too.
As mentioned earlier, a difficult year is already assured even though most activity remains open. Assuming that the lockdowns remain limited, the severe first half contraction will likely not be repeated, though not enough to offset the period’s losses.
GDP for 2020 is expected to contract by about 8% with a modest bounceback in the forecast period with growth averaging 2.5% as full normalization of activity is not expected before the second half of 2021. The poverty rate is projected to stall around 27.5% in 2021. On the fiscal side, the outlook depends on whether there is a resumption of clearance.