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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 PALESTINE SECURITIES EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Political Developments: The year 2005 has witnessed the most electoral processes for the Palestinians, starting with municipal and presidential elections early this year (municipal elections were actually begun in the end of 2004) and continued with the second phase of municipal elections in May for most major cities and towns and culminating in those for the Palestinian Legislative Council in January 25, 2006. Economic Conditions 1 Real GDP continued to rebound in 2004 from the effects of the Intifada, with growth estimated at 6%, driven by increases in manufacturing, trade, and transportation. In addition, speculative real state activities boosted construction in some parts of the West Bank. Growth continued at a similar pace in the first half of 2005, supported by substantial increase in public spending, with notable increase in activity in trade, transportations, services, and agriculture, which together constitute half of the GDP. In addition, the Israeli disengagement from Gaza fuelled activity in construction and real estate. Consequently, GDP growth is projected to remain at around 6% in 2005. Nevertheless, economic activity remains well below its potential, constrained by the volatile security situation, continued Israeli restrictions on passage, and further extensions of the separation wall- all of which continue to severely limit the movement of goods and people. The recent agreement on movement and access is a very welcome step that should help to ease some of those constraints. Robust since 2002, nominal income per capita remains around 25% lower than in 1999, prior to the Intifada. Despite rising employment (mainly in services), the overall rate of unemployment in the West Bank is over 20%, with Gaza unemployment at 30%. Inflation remains relatively low, at 5% in October 2005. Price increases in WBG largely mirror inflation developments in Israel, although the cost of living in WBG continues to be adversely affected by the high costs of transportation, mainly reflecting restrictions on the movement of goods. A small spike in inflation in October 2005 was largely due to increased food prices. Despite the volatile economic and political situation, the financial sector is sound. Private sector growth has slowed, but the level of deposits remains high, at 74 of GDP. Credit to the private sector has expanded rapidly, by about 30% over the past year, with the increase benefiting various sectors, including real estate projects in Gaza following the Israeli disengagement. As a result, credit to the private sector has risen to 28% of the GDP but remains very low relative to other countries in the region. Moreover, liquidity in the banking sector remains high, with a liquidity ratio of about 72%. The situation of commercial banks continues to strengthen, with increased profitability and a lower rate of nonperforming loans. Budgetary revenues continued to outperform budget projections in 2005. Gross revenues in the first three quarters of 2005 exceeded budget projections by 12% and are projected to reach over 25.5% of GDP in 2005, above the regional average of 23.5% of GDP but lower and middle-income countries. Macroeconomic outlook for 2006 Recent economic growth, particularly in 2005, has been sustained in part by a sizeable fiscal stimulus. As this stimulus is withdrawn, growth is likely to slow initially, before recovering to recent rates over the medium terms, as the beneficial effects of fiscal consolidation on the PNA’s credibility help to boost private sector confidence and revive investment. The projections also assume that a steady improvement in the political and security situation will also provide a positive boost to growth and help to limit any temporary slowdown. Key Reforms Late in 2004, the President signed a law governing financial institutions which has established a Capital Market Authority (CMA) to regulate financial markets, insurance companies, and the use of various financial instruments. This was followed by the ratification of the Securities law early 2005. The CMA was established in August 2005. Dr. Atef Alawneh was appointed as a CEO. The new income tax became a law effective January 1, 2005. It has only three rates (8, 12, and 16%) for individuals; corporations will be subject to the 16% rate. 1 Macroeconomic projections are based on the World Bank and the International Monetary Fund projections. Key Information Contacts Ministry of Finance www.mof.gov.ps Ministry of National Economy www.met.gov.ps Palestinian Central Bureau of Statistics www.pcbs.org Palestine Media Center www.palestine-pmc.com The Palestinian Legislative Council www.pal-plc.org ECONOMIC RATIOS Palestine Lower-middle-income group GROWTH OF INVESTMENT AND GDP (%) GDI GDP Domestic savings Trade Investment 10 0 -10 -20 -30 -40 -50 -60 -70 -80 97 98 99 00 01 02 03 Indebtedness * World Bank reports PAGE 120
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT OCTOBER 2006 PALESTINE SECURITIES EXCHANGE PALESTINE MONEY SUPPLY, INTEREST RATES AND FOREIGN EXCHANGE RESERVES 1999 2000 2001 2002 2003 Real Growth Gross domestic product 8.40 -5.00 -14.80 -10.10 6.10 Private consumption 9.80 -5.60 -12.50 -14.20 3.40 Public consumption 9.30 8.90 -4.30 0.70 0.10 Investment 35.90 -30.50 -41.20 5.00 5.40 Exports 1.20 -7.90 -15.50 -11.80 -4.00 Imports 22.50 -16.40 -20.00 -6.60 -3.00 Real GDP, cumulated decline since 1999 -5.60 -19.60 -27.70 -23.30 Real GDP per Capita, cumulated decline since 1999 -9.50 -26.40 -37.30 -36.60 Net Factor Income, NIS (US$ millions) 3,121 2,733 1,611 1,579 1,894 Net Current Transfers, NIS (US$ millions) 1,547 2,349 3,896 5,250 6,479 Population (million) 2.83 2.95 3.09 3.26 3.42 Exchange Rate (NIS:US$) 4.14 4.08 4.2 4.74 4.55 GNI per Capita, US$ 1,739 1,620 1,201 97 1,041 Consumer Price Inflation (%) 5.50 2.70 1.20 5.70 4.40 Source: World Bank Staff Calculated & PCBS GROWTH OF EXPORTS AND IMPORTS (%) INFLATION (%) Exports Imports GDP deflator CPI 10 5 0 -5 -10 -15 -20 -25 97 98 99 00 01 02 03 18 16 14 12 10 8 6 4 2 0 97 98 99 00 01 02 03 EXPORT AND IMPORT LEVELS (US$ millions) CURRENT ACCOUNT BALANCE TO GDP (%) Exports Imports 3,000 0 97 98 99 00 01 02 03 2,000 -10 -20 1,000 -30 0 97 98 99 00 01 02 03 -40 Source: World Bank reports PAGE 121
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