INVESTMENT IN THE FUTURE

DISAPPOINTED BY PEACE

by: Alessandra Antonelli

At first glance, the handshake between Yitzak Rabin and Yasser Arafat on the White House lawn meant simply peace, no more intifada, no more Israelis soldiers in the streets. But with a closer look, the signing of the Declaration of Principles should have meant much more for the entire region, particularly economically, and particularly for the Palestinians. The expectations of the latter were great, as great as their disappointment four and a half years on from that sunny day in Washington.

Building a suitable economic environment to facilitate and encourage investments was one of the chief goals on the Palestinian agenda. But investments depend mainly on political stability, development of the financial sector, favorable and fair laws that govern business, adequacy of infrastructure, and these are not, or barely, being met today.

We anticipated that in peace time the private sector would have been the engine of economic growth , said Mohammed Shtayyeh, general manager of PECDAR, the Palestinian Economic Council for Development and Reconstruction. But Israel kept putting on its wide range of coercive measures, from closures, which prevented mobility of goods and workers, to the refusal of establishing clearance agencies, seriously damaging this potential.

Closures means banning movement of goods, factors of production and people between Palestinian areas and Israel. The strict measures adopted at border crossings have often spoiled imported and exported goods and prevented workers from reaching their jobs, with a total daily loss of income estimated at around US$6 million. What is more, the Palestinian Authority has been forced to divert funds that were allocated for spending to cover recurrent costs and emergency employment programs. Most importantly, the Israeli measures blocked the possibility of a positive investment trend.

One of the market opportunities that has collapsed because of the severe closure policy is the flower market in Gaza. While the industrial sector has been paralyzed from closure policy, agriculture and tourism are the sectors who suffer most. Vegetables cannot remain too long at borders because they are easily perishable; tourism is strictly related to security issues, which go hand in hand with the political situation, and its instability plays a key role in the investing trend, said Anis Al-Qaq, deputy minister for planing and international cooperation.

Mohammed Shtayyeh also highlights this point, The election of Benjamin Netanyahu was a black mark for the economic environment. The rigidity of his policy toward the peace process created a huge uncertainty that prevents many investors from pouring their ideas and money into Palestine.

If in these conditions investors are reluctant to invest, banks, which are not sufficiently guaranteed for the lack of registered assets, are reluctant to lend money.

There is US$2.3 billion in bank deposits in Palestine today. But only between 25 to 27 percent is given in loans to investors. In Jordan, 65 percent of deposits are given out in loans, and in Israel 80 percent , Shtayyeh explained. This is also due to the fact that many of the banks [now working in Palestine] are not from the Palestinian reality, and are more profit- than investment-oriented.

Nasser Abdelhadi, general manager of the Arab Hotels Company and member of one of the most prominent Palestinian business families, agrees, placing the lack of financing among the biggest obstacles investors have been facing. Banks are very careful in conceding loans and the required standards to get international funds are hard to reach for a developing country. Too often they seem forget we are not fully developed yet. The Abdelhadi family has been investing in Palestine for decades despite continuous obstacles stemming first from the occupation and, paradoxically, from the peace process later. During the occupation we gave Palestinians the services they needed. The establishment of the PA opened up the market but did it too fast. The result was a chaotic situation since there were not adequate laws to regulate the sector. Open market does not mean free market. The stronger and better-rooted companies survived, some went into bankruptcy, others left the market considering it not safe enough. But this kind of scenario still confuses and worries investors, especially foreign ones, who do not feel adequately protected in Palestine.

The legal framework that regulates and encourages investment has the been subject of study and redefinition so that it will better suit an economic environment able to attract businesspeople to a land that potentially has many resources to offer. In 1995, the PA approved the Investment Promotion Law, and many steps have been taken to level the various legal landscapes in the West Bank and Gaza Strip, but still the situation is not optimal. According to PECDAR's general manager, the legal framework needs to be freed of overly-complex procedures.

Nonetheless, even given the transitional confusion and the unstable political situation which deeply concerns everyone, the Abdelhadi family is investing in a multi-million dollar hotel resort project. Each investor takes his own risks, but I believe that to build this country we need to have a global vision, we have to overcome the contingent difficulties to predict the final result. We face troubles daily, with closures, with permits, with trainers, but in the end we demonstrate that it is possible to succeed despite the obstacles, that is possible to keep building the country and a solid economic and service environment which will encourage other investors to trust the Palestinian market.

Anis Al-Qaq shares this view. He describes what he sees as the top priority tasks for Palestinians. The first is national liberation, which means a Palestinian state without Israeli interference. The second is the construction of the country itself that can go on, maybe slowly, even in the darkest days of the peace process. To minimize investor fears, we established an International Guarantee Fund that will cover political risks.

So far, the fund totals US$6 million and only a few of the donor countries have effectively participated in the initiative.

The last big obstacle on the investing road is the condition and sometimes the lack of infrastructure. Roads, electricity, telecommunications devices, water, sewage system all indispensable services to even minimal industrial development. Donor countries should have financed most of these relate d projects, but of the pledged sum only US$1.5 billion has been handed to the PA.

The established programs are named development programs', but we call them rehabilitation programs' because with an average of US$350 million given per year, we can just repair the existent infrastructure but not build responding to need new ones, said Shtayyeh.

This is also one of the reasons why so much has been invested in housing. At first considered a safe business, the housing sector is now suffering from a mix of all the problems discussed earlier. The disappointment of economic expectations brought a general recession, a decrease of per capita income and a consequent lowering of purchasing power. The result is the halt of one of the only promising sectors, which also means unemployment and as many as 3,116 empty houses in the Ramallah area alone.