Gaza war continues to have 'catastrophic' effect on Palestinian economy, World Bank warns

The real GDP of the Palestinian territories is expected to drop by 26% this year

The war has displaced nearly 1.9 million people, or about 90 per cent of Gaza's population. Getty Images

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The Gaza war continues to have a "catastrophic impact" on the Palestinian economy and has plunged it into a crisis of “unprecedented magnitude”, the World Bank has warned.

The real gross domestic product of the Palestinian territories is expected to contract by 26 per cent this year, in the steepest decline in economic activity in two decades, a World Bank report said on Monday.

While Gaza’s economy shrunk by 86 per cent in the first half of 2024, the West Bank's economy contracted by 23 per cent. In Gaza, annual per capita income has fallen from $2,328 in 1994 to less than $200 today.

The war has caused infrastructure destruction, surging unemployment, soaring prices and the collapse of essential services in the Palestinian territories, the report said.

"The conflict has entered its second year. Palestinians continue to endure an unprecedented level of trauma, violence, economic hardship and uncertainty," the report said.

The war, which has killed more than 45,000 and injured over 106,000 since October last year, has displaced nearly 1.9 million people, or about 90 per cent of Gaza's population. It began with the Hamas-led attacks on southern Israel on October 7, 2023, in which 1,200 people were killed.

Economic activity in Gaza has almost stopped, the report said, adding that its contribution to the overall Palestinian economy has plunged from 17 per cent to just 3.5 per cent, even though it is home to 40 per cent of the population in the Palestinian territories. The report estimated that 66 per cent of businesses in Gaza have been completely wiped out, while 22 per cent have sustained partial damage, leaving the commercial sector on the verge of collapse.

Rising unemployment

The war's ripple effects have also devastated the labour market, especially in Gaza, where the unemployment rate has surged more than 80 per cent.

In the West Bank, the unemployment rate has climbed to 35 per cent, fuelled by access restrictions to Israeli labour markets and disruptions in local economic activity. As of the first half of the year, the combined unemployment rate for Palestinian territories reached a record 51 per cent. The collapse of the labour market has led to a rise in informal work, including street selling and irregular employment, as families struggle to survive.

Food prices have soared, with the cost of essentials rising 448 per cent in October compared to the same period last year. Fuel costs during the period increased by 207 per cent, due to supply chain disruptions and logistical bottlenecks caused by the conflict.

Shortages of essential goods have driven thousands of households deeper into poverty, the World Bank said. “The erratic access, limitations and looting of goods entering Gaza have contributed to food insecurity at unprecedented levels.”

No access to emergency services

Gaza’s telecommunications infrastructure has also been destroyed. “The destruction of infrastructure in Gaza has led to widespread outages in mobile and internet connectivity, disrupting critical communication services, including emergency response and life-saving services, and exacerbating the hardships facing civilians,” the report said.

Operators have resorted to installing mobile towers on lorries and offering free calls and data packages to affected residents. Despite these efforts, the vast majority of Gaza's population remains digitally isolated, with no access to communication services.

The financial sector, which has historically been one of the more resilient pillars of the Palestinian economy, is also under strain. Although Palestinian banks remain well capitalised, with a 16.1 per cent capital adequacy ratio as of June, the sector faces heightened risks, the World Bank said.

Additionally, banks have taken action to bolster resilience further, with some issuing new capital, bringing total own funds to $2.1 billion, it added.

But virtually all bank branches and ATMs in Gaza are no longer operational, with 33 of 57 head offices and bank branches destroyed and another 19 partially damaged. "A deepening cash liquidity shortage has reduced purchasing power, leading to black-market withdrawals with high commissions," the World Bank said.

Meanwhile, the Palestinian Authority's financing needs after aid and increased clearance revenue deductions reached $1.04 billion for the January to October period. As a result, the PA has had to reduce public sector salaries, paying workers only 60 to 70 per cent of their full wages since October last year. This has further weakened household spending, slowed consumption and fuelled social discontent, the report said.

The PA is now relies heavily on borrowing from domestic banks and deferring payments to private suppliers and pension funds.

The World Bank warned that the conflict has had a larger economic impact on the Palestinian territories than any previous crisis, including the Second Intifada (2000-2005), the 2006 internal political divide, the 2014 Gaza war and the Covid-19 pandemic.