The Palestinian Economy and Future Prospects: Interview with Mohammad Mustafa, Head of the Palestine Investment Fund

Dr. Mohammad Mustafa is chairman and CEO of the Palestine Investment Fund (PIF) and an economic adviser to Palestinian Authority President Mahmud Abbas. PIF, the leading investor in Palestine, is a publicly limited company fully owned by the people of Palestine. It was established in 2003 with the transfer of assets managed by the Palestinian Authority.

Financially and administratively autonomous, it is governed by an independent board of directors and a general assembly representing civil society, nongovernmental organizations, academia, and the public and private sectors. In pursuit of its mandate—which is to strengthen the local economy through investments that foster sustainable economic development while maintaining and increasing existing national reserves—PIF owns direct majority and minority stakes in companies and follows a business model based on public-private partnerships.

Currently, PIF has approximately $800 million in assets under management and is leading a $4 billion investment program aimed at stimulating economic growth and creating over 100,000 new job opportunities within the next five years.

The interview was conducted in Amman, Jordan, in mid-December 2009 by Nasr Abdul Karim, former dean of economics at An-Najah University, Nablus, and by Salim Tamari and Khalid Farraj, respectively director and associate director of the Institute for Palestine Studies, Ramallah.

Abdul Karim: We wanted to start by asking about the current state of the Palestinian economy, particularly after the 2007 split [between Fatah and Hamas]. There have been reports of significant improvement in the gross domestic product (GDP). Is the improvement due to government action or to Israeli steps to facilitate trade and economic development after Netanyahu’s call for “economic peace”?

Mustafa: There’s been a marked improvement in the Palestinian economy in the West Bank in the last three years. Obviously, it hasn’t reached where we want it to be. The Israeli occupation and its harsh and arbitrary policies negatively impact its performance and make it heavily dependent on the Israeli economy. Despite our recent efforts to decrease trade with Israel, it still constitutes 90 percent of total Palestinian trade. The result is an economy with only limited self-reliance and high donor dependency. And even though it is stable at present, it’s still below its 1967 and 1999 levels.

Let me go into some detail with regard to the current economic indicators. According to the World Bank and the International Monetary Fund [IMF], the growth rate for the first half of 2009 was about 5 percent. Without Israeli restrictions, it would have been higher, perhaps as much as 12 percent. There is no question that the very considerable international support received by the [Palestinian] Authority—which amounted to $1.7 billion in 2008 and a bit less in 2009—played a large part in realizing this growth, but a significant part also resulted from the political stability and improved security in the West Bank, and from institutional, legal, and economic reforms. These two factors—international support and the improved situation on the ground—led to the recovery, albeit partial, of the private sector. One factor that had very adverse effects on the economy this year—especially on small investors whose ventures depend on Israel—was the difference in the exchange rate of the U.S. dollar against the Israeli shekel. The world economic downturn also had an impact on inflation, which decreased by 2 percent in 2009 relative to 2008 thanks to a drop in the price of certain commodities, specifically oil and some foodstuffs. It could decline further in 2010. Finally, unemployment remains extremely high, reaching 26 percent overall—40 percent in Gaza, 18 percent in the West Bank. These figures do not even include disguised unemployment. For the West Bank, however, we expect to see the rate begin to fall soon.

We still have a long way to go, of course, before we reach our goal of an independent, sustainable economy, but this requires not only continuing the program of reform but also removing Israeli restrictions.

Farraj: You mentioned unemployment in Gaza. What about the economic situation there?

Mustafa: Gaza’s economy is in a catastrophic state as a result of Israel’s embargo and the absence of Palestinian legitimacy. The economy has been totally destroyed, particularly the private sector. The organized destruction of the economy in the past two years has completely done away with the economic wealth it took decades to build. Some enterprises established in the 1920s and 1930s have now been destroyed and cannot be rebuilt without huge effort. At present, Gaza’s economy is based on three sources: (1) the salaries paid by the Authority to nearly 60,000 employees, which support about a million people; (2) the salaries and donor aid paid by the government in Gaza to its employees and members of its security forces; and (3) informal trade—in other words, the tunnels.

I think Israel’s ongoing embargo and policy of collective punishment of the entire Gaza population is utterly disgraceful. Even a partial reconstruction of Gaza has not been allowed to take place. The Sharm al-Shaykh donor conference [held on 2 March 2009] raised $4 billion, which was allocated for reconstruction, yet to this day there is no mechanism for getting even a fraction of these funds into Gaza. Furthermore, the Israeli embargo prevents materials, such as cement, steel, and wood, needed to restore destroyed homes and buildings from entering. Certainly Gaza’s economy was already bad before the blockade, but with the ongoing embargo and the catastrophic destruction of the Israeli invasion it continues to get worse.

In my view, the Palestinian economy will never be strong until the two halves of the nation are reunited, national reconciliation is achieved, and Palestinian legality in Gaza is restored.