Proposal includes incentives while Palestinians remain dependent on Israel
Salim A. Essaid & Fareed Rahman
For decades, Palestine’s economy has operated in the shadow of political uncertainty, reliant on international aid and constrained by local authorities’ limited control over its borders and resources.
Now, as momentum builds for wider recognition of Palestinian sovereignty, the stakes are no longer only diplomatic. Statehood could mean access to trade agreements, international markets and investment on terms shaped by the Palestinian people.
However, the Palestinian cause continues to be beset by its usual opponents.
Announced on Monday, US President Donald Trump’s 20-point peace proposal for Gaza stipulates that US-approved experts draft an economic development plan for the enclave’s reconstruction. It also envisions a special economic zone for investment in the enclave, with tariffs and access rates to be negotiated.
However, the plan does not grant Gaza, or the occupied West Bank, any kind of economic sovereignty.
Point 19 of Trump’s plan does indicate that when certain conditions are met, including economic and political reform, they may provide “a credible pathway to Palestinian self-determination and statehood”.
Yet some experts say the message is purposefully vague and difficult to believe given the history.
“It’s pie in the sky stuff that won’t have a tangible impact for Palestinians any time soon … because it’s not attached to sovereignty,” Ryan Bohl, senior analyst at risk management consultancy Rane Network, told The National.
Without recognised statehood, the West Bank and Gaza remain heavily dependent on Israel for even the most basic aspects of economic life.
“[The Israelis] control the airspace. That is critical for trade, and Israel can interdict that,” Mr Bohl said.
Israel also has significant control of access to borders, trade routes and natural resources. It determines what goods can move in and out of the territories, and imposes restrictions on the movement of building materials, agricultural exports and other crucial goods.
In the West Bank, tax and customs revenue are collected by Israel and transferred to the Palestinian Authority. These payments are often delayed or withheld during political disputes, leaving Palestinian institutions vulnerable to financial pressure.
Even essential services such as electricity, water and telecommunications are intertwined with Israeli systems, making the Palestinian economy highly exposed to external decisions made outside Palestinian control.
Most importantly, a sovereign Palestine would need security, which Mr Trump’s plan does not guarantee.
“Without security, there is no investment,” said Mr Bohl. “It might result in some very localised, symbolic investments, but nothing that would affect the standard of living for Palestinians at large.”
What has changed?
Since the outbreak of war in Gaza, a swell in global support has taken the concept of a sovereign Palestinian state, within 1967 borders, closer to reality.
Countries such as Canada had previously been consistent in opposition to Palestinian statehood, often aligning with US and Israeli positions. In 2012, Ottawa even voted against granting Palestine non-member observer status at the UN.
That changed this month, when Canada – along with Australia, Britain and several other western nations – formally recognised Palestine at the UN General Assembly.
According to Mr Bohl, though, the move to recognise Palestine was mostly intended as a message to Israel. “These are sanctions without sanctions,” he said.
“They don’t want to actually pinch the Israelis yet, but they’re trying to suggest that they will. By going down the recognition path, they could also move to a level where they recognise widespread Israeli war crimes.”
About 157 of the 193 UN member states currently recognise Palestine according to the Palestinian Ministry of Foreign Affairs. The US – Israel’s closest ally – continues to oppose full Palestinian membership in the world body.
Path to independence
While full financial independence for Palestine will take a long time, improved and consistent access to development aid could significantly accelerate the process.
“Formal recognition lowers political risk for bilateral grants and multilateral trust funds, and invites fresh donors and non-traditional creditors to provide direct state-to-state financing,” said Rania Gule, senior analyst at XS.com.
She added that recognition would shift the composition of aid from short-term humanitarian relief towards “budget support, infrastructure, and capacity-building programmes” by providing donors with a legal partner for multiyear development contracts.
However, constraints exist. For example, the status of the shekel as the primary currency in Palestine means that Israel dictates monetary policy in the territories.
Palestine’s economy has been devastated by the war in Gaza and continued conflict in the West Bank. According to the World Bank, by the end of last year, the Palestinian GDP had fallen back to 2009 levels, wiping out 15 years of growth. Nominal GDP per capita dropped to about $2,600, less than its 2011 level.
The conflict has also severely eroded the Palestinian Authority’s revenue, with Israeli deductions from clearance revenue increasing. As a result, public sector salaries have fallen by 30 per cent, further weakening the economy.
Trusted lenders
UN recognition, experts say, would help Palestine gain access to funding from international institutions such as the World Bank and International Monetary Fund.
Currently, the two bodies engage with the Palestinian Authority in the form of technical assistance, policy advice and donor-funded programmes, but this “could evolve into a funded programme with the IMF and loans from the World Bank once Palestine becomes a voting member of the two organisations”, said Nassib Ghobril, chief economist at Lebanon’s Byblos Bank.
While Palestine holds observer status at the UN, it lacks voting rights. Full membership would require approval from the Security Council, where the US – as a permanent member – holds veto power.
Recognition could “remove legal and procedural frictions that currently limit sovereign lending”, Ms Gule said, allowing Palestine to access preferential financing and infrastructure loans. It could also eventually lead to a sovereign credit rating and access to international capital markets.
But it will take time for economic benefits to emerge, Mr Ghobril noted. “A new state will require its own currency and independent fiscal monetary policies.”
Trading rights
UN recognition would also strengthen Palestine’s legal position in negotiating and enforcing trading rights, analysts say.
As a full UN member, Palestine could seek membership or observer status in global trade bodies such as the World Trade Organisation, negotiate trade agreements and conclude investment treaties that mitigate investor risk.
“Recognition also improves Palestine’s leverage in customs and border negotiations, which is crucial because many trade bottlenecks today stem from restrictions on crossings, customs procedures and movement that are not purely economic, but political and security-driven,” said Ms Gule.
Access to gasfields
Formal recognition of Palestine will also boost investments in Gaza’s Marine gasfield, which holds an estimated 30 to 35 billion cubic metres of gas.
Discovered in 2000, the gasfield sits 30km off the enclave’s coast in the eastern Mediterranean. Due to access restrictions imposed by Israel, however, its development remains stalled.
In late 2023, several weeks into the current war, Israel awarded gas exploration licences to six companies, including Italy’s Eni, Britain’s Dana Petroleum and Israel’s Ratio Energies, in areas that significantly overlap with Gaza’s maritime borders.
Human rights organisations urged the companies to refrain from signing the licensing documents because of the territorial dispute between Israel and Palestine.
“Palestinian statehood would make it far easier for foreign energy firms and regional partners to justify investment and contracts with a sovereign counterparty, and for donors and multilateral creditors to back the requisite infrastructure,” said Ms Gule.
Pipe dream or possibility?
However, experts conceded that formal UN recognition by itself would do little to establish Palestinian sovereignty. “The UN doesn’t compel any countries to do anything unless they want to,” Mr Bohl said.
“Unless it is accompanied by sanctions, it doesn’t necessarily change facts on the ground, and it doesn’t create pressure on the Israelis. The further you go into the future, the murkier this becomes.”
Israel’s current government is not expected to make any meaningful shift in stance on the issue. However, a different government might, and with Prime Minister Benjamin Netanyahu’s floundering domestic approval ratings, a change in administration could come as soon as next year.
This would offer more clarity as to whether Israelis as a whole prefer a one-state solution under a reservation-style model – with Palestinians in a similar situation to Native Americans, who retain control over borders, resources and political decisions in limited territories – or a return to the decades-old discussion of a two-state model.
“If a new Israeli government emerges, one that’s more centrist and less maximalist about Gaza and the West Bank, we could begin to see gradual sovereignty for elements of Palestine, and with it, the first steps towards an economy that functions beyond aid, remittances, and tourism,” Mr Bohl said.
However, he added, there are also questions to be asked of the Palestinian side. “What is the future of Hamas? Do they go underground, into exile or remain an insurgent force?”
Hamas is expected to respond to Trump’s plan, but if nothing changes, Mr Bohl warned, “we’re stuck with the status quo”.