Sam Bahour
Bitterlemons (Opinion)
March 24, 2008 - 5:54pm

As if the Palestinian economic reality was not complicated enough, the rapid drop in the value of the dollar has put many Palestinians between a rock and a hard place, not knowing how to make ends meet and not seeing an end to this perplexing situation.

The Palestinian market uses four main currencies. The Israeli shekel is traded in daily purchases; the Jordanian dinar, euro and US dollar are used for business and real estate transactions. The JD is pegged to the dollar at 0.709 so any devaluation of the dollar directly devalues the JD.

The vast majority of private sector employee contracts are in either JDs or dollars. Very few employee contracts use the Israeli shekel, mainly due to its historic fluctuation and because using it is a sign of Israeli dominance over the Palestinian market, which many prefer not to contribute to. And while all civil servant contracts are in shekels and thus the devaluation of the dollar benefits public employees, this is not so for the other major employment sector, the NGO sector, which is very reliant on the dollar and where the devaluation is deeply felt.

It is here important to note that the Palestinian economy is not only an Israeli-occupied one, but a donor-driven one. International assistance, which at the best of times barely props up the economy, comes to Palestinians mainly in dollars. Thus, every dollar donated to Palestinians in the past two years, when the dollar has lost almost a quarter of its value, has brought much less in terms of real value, in turn causing serious strain on the general Palestinian Authority budget.

Many large employers, such as universities, have already faced labor actions calling on them to supplement salaries to make up for the loss in currency value. While many organizations complied early on, with no end in sight to the dollar's decline the question is no longer whether the employer wants to compensate employees, but rather that many simply no longer can afford to do so. More labor actions can therefore be expected and are bound to disrupt the market.

A barely stuttering Palestinian economy cannot afford any more body blows. The pressure from Israeli-imposed closures and violence has already caused huge damage. Now a sharp increase in prices and inflation could just become the straw that breaks the camel's back. Households are sinking deeper into debt just to keep up with payment of bills.

The PA is being looked at to provide direction, but is, like most small countries around the world (except Israel which has announced it will purchase $25 million daily for the next two years to support the dollar), at a loss as to how to address the problem in the short term. The PA, furthermore, is at an even greater disadvantage given that it has no national currency and thus no monetary policy to affect currency issues. Nevertheless, it could promote the euro or even the shekel, given that consumer goods are all shekel-based.

But the knock-on effects are not only direct. The dollar crisis offers yet another reason to fear the danger of a new wave of brain drain from the occupied Palestinian territory. A significant currency devaluation, in addition to an already depressed market and political and security volatility, can easily cause more Palestinians to consider looking for more prosperous markets in the Gulf or Europe. With a recent poll showing that 44 percent of Palestinians living under occupation desire to emigrate, it will not take much to convince those with the resources to emigrate to do so.

The Salam Fayyad government is placing high hopes on the upcoming Palestine Investment Conference in May. However, the value of the dollar may prove an unexpected complication to recruiting already low foreign direct investment. Many voices are calling on Fayyad to postpone the conference until the security, political and global economic states of affairs are more conducive to real investment. The fear is that the conference will be merely a demonstration of economic solidarity and empty of any real investment.

Some hope was registered last week when the governor of the Bank of Israel, in an interview with Globes Magazine, warned currency speculators that the dollar would eventually rebound, and when it does, could do so rapidly. This is one case where most Palestinians would be pleased to see an Israeli official's prognosis be absolutely correct.

Meanwhile, the faltering economy will only complicate the political situation.


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