Over a decade has passed since Hamas took over the Gaza Strip by force from the Palestinian Authority (PA), a decade that has witnessed three armed conflicts with Israel, the imposition of various restrictive regimes on access and movement, and severe shortages in basic utilities. The result today is a decimated economy, a society teetering on the edge of total collapse, an impending humanitarian crisis, and a growing risk of implosion of the de facto governance and security structures established by Hamas. In the absence of a tangible political horizon, the risks for the people of Gaza and for the stability of the region are both imminent and substantial.
Bordering Egypt to the south and Israel to the east and north, the Mediterranean enclave of Gaza is 41 kilometres long and varies from six to 12 kilometres wide. With a population of close to 2 million in a total area of some 365 square kilometres, Gaza is one of the most densely populated areas in the world. Part of the Ottoman Empire before being occupied by Britain in 1917, it was under Egyptian rule from 1948 to 1967, and then seized by Israel in the Six-Day War. In 1994, as part of the Oslo Accords, the PA was given (limited) self-governance in Gaza and parts of the West Bank. Under Israeli occupation, there was a degree of movement between Gaza, Israel and the West Bank, with Gazans employed in Israel (mostly in the construction sector) and Israelis visiting Gaza for a variety of services, including car repairs and dental work. Israel dismantled its settlements and withdrew under the 2005 disengagement, although it maintained control over the borders, sea and airspace. Since 2007, Gaza has been de facto governed by Hamas, following a violent takeover that ejected the Fatah-led Palestinian Authority from the Strip. Between 2008 and 2014, there were three major, and increasingly violent, military conflicts between Israel and Gaza, with Hamas firing rockets and using attack tunnels to target Israelis. While there have been periods of tension since 2014, and the Israel Defence Forces (IDF) have destroyed a number of offensive tunnels built by terrorist organisations to infiltrate Israel, recent months have once again brought the region to the brink of a crisis. The most senior officials in the Israeli defence establishment warn that Gaza is on the brink of collapse, and that the impending humanitarian disaster will inevitably lead to another war.
The political upheavals in Gaza are reflected in an extremely volatile economic growth pattern, with steep falls in periods of intense violence, and high growth rates in periods of relatively relaxed restrictions. As of February 2018, the Gazan economy was moribund, and cash increasingly scarce and businesses shuttered; unemployment was close to 50 percent (see figure 1), with water and electricity severely restricted and prohibitively expensive.
Unemployment in Gaza and the West Bank, 2000–2017
The political events that preceded the takeover of Gaza by Hamas, and the siege that followed it, led to a steep GDP fall of 11 per cent a year in 2006–2008 (see figure 2). In 2009, the trend changed to positive growth and continued with the partial relaxation of Israeli restrictions that followed the Mavi Marmara Affair of June 2010, after international pressure and the negotiation of the then Quartet Representative Tony Blair and the work of the Office of the Quartet Representative.
Average GDP growth in 2009–2013 was 10 per cent; but the 2014 Gaza war resulted in a 15 per cent fall in real terms that year (see figure 2). In 2015, the trend changed again, and an annual growth rate of around 6 per cent was recorded, increasing to 8 per cent in 2016. Initial economic data for 2017 shows a sudden and significant drop in GDP to a net decline of 4 per cent. In real terms, this translates to an 8 per cent drop in per capita GDP, coupled with an increase in unemployment to almost 50 per cent.
Real GDP Growth in Gaza and the West Bank, 1995–2017
The significant drop in the number of truckloads passing through the crossings between Gaza and Israel since 2007 is another important economic indicator, as well as one of the causes, of the dire economic situation in Gaza (see figure 3).
Freight Movement Between Gaza and Israel, 1997–2017
While there was a slight improvement in 2014–2017, export and import rates remain significantly below the quantities required for restoring normal economic life in Gaza. Exports of under 200 trucks per month are just 10 per cent of the rate of exports in 2000, before the outbreak of the Second Intifada, and well below 5 per cent of the volume required to support restoring normal economic life in Gaza.
The average import rate of about 10,000 truckloads per month in 2017 was still a third below the rate registered before the Second Intifada, and is insufficient to restore normal economic life in Gaza given population growth and the reconstruction needs after the 2014 conflict. This year opened with a marked drop in the number of trucks entering Gaza from Israel due to a fall in demand for goods in Gaza as money dried up. The purchasing power of the Gazan population has plummeted by 20 per cent, decimating both savings and cash available to families for basic consumption needs. If this trend continues in 2018, the economic situation in Gaza will implode and hit unprecedented levels of poverty and despair, resulting in a serious humanitarian crisis.
The economic and social degeneration of Gaza pulls Palestinian macro-economic indicators down, even in comparison with the poorest Arab countries. The GDP per capita of Gaza in 2016 was lower than that of Sudan; and if not for external aid, it would have been one-third lower than that of Mauritania (see figure 4).
GDP per Capita in the West Bank, Gaza and the Region, 2016
External aid contributes, directly and indirectly, more than half of the total GDP and approximately two-thirds of all jobs in Gaza. A deeper analysis of the economic dynamics and the role of external aid shows that roughly 55 per cent of Gaza’s formal GDP is enabled by external aid. If it were not for external aid, the ‘real’ GDP of Gaza would be just 45 per cent of formal GDP (see figure 5). The contribution of external aid to employment in Gaza is even higher, and analysis shows that close to two-thirds of the 280,000 fully employed people in Gaza in 2016 owed their jobs to external aid.
Unemployment in the West Bank and Gaza With and Without the Contribution of External Aid and Work in Israel, 2016
The impact of the severe restrictions was especially devastating for Gaza’s manufacturing sectors. By December 2008, 95 per cent of the 3,900 industrial businesses that were active in Gaza in 2005 had ceased operation. The number of industrial employees dropped by a similar rate—from 35,000 in 2005 to just 2,000 by the end of 2008. Despite improvements since then, employment in industry today is still only 60 per cent of its size in 2005; and no more than 7 per cent of all people employed in Gaza work in industry. This is in contrast to the West Bank, where approximately 120,000 people are employed in industry, 17 per cent of the total number of employed people.It is important to note, however, that the relaxation of Israeli restrictions, following improved security conditions, has supported economic growth and a significant increase in employment. The number of fully employed people grew from 220,000 in 2014 to 280,000 in 2016. The formal unemployment rate, however, declined only marginally (from 44 per cent to 42 per cent), since the growth of employment was barely enough to absorb new entrants into the labour market. Initial figures for 2017 unfortunately show unemployment rising again, to around 50 per cent. The rehabilitation of the Gazan economy and sustainable economic growth requires rehabilitating the Palestinian private sector in Gaza in agriculture and industry. A small set of well-chosen local projects can make a dramatic difference. Indeed, the Israeli government has announced it will permit the development of monitored industrial zones as well as the export of agricultural produce to Israel and other countries. Construction would have an immediate impact on employment levels, help deal with the housing shortage and increase cash flows inside the Strip in a short space of time. Should the security situation allow for a significant relaxation of restrictions, Gaza could regain its lost GDP over a period of seven to ten years from returning to normal economic conditions according to our calculations, based on data from the Palestinian Central Bureau of Statistics. In conjunction with other growth engines, Gaza could show long-term GDP growth of around 10 per cent a year on average. Under such a favourable scenario, Gaza’s GDP per capita and total employment may triple over ten to 15 years, with unemployment falling from the present rate of over 40 per cent to under 20 per cent in ten years and about 10 per cent in 15 years.
Reconstruction and Reconciliation
The end of the last armed conflict of July–August 2014 (dubbed “Operation Protective Edge” by Israel) was initially followed by a degree of positive expectations in Gaza. The Palestinian Government of National Consensus, established under the leadership of PA Prime Minister Rami Hamdallah in June 2014, was tasked with restoring unity between Gaza and the West Bank, based on a national reconciliation process, and assumed the lead in the reconstruction effort. The positive momentum was sustained by a relatively successful donor conference in Cairo in October 2014, with some $3.5 billion pledged for Gaza, of which some 55 per cent has been disbursed to date. Moreover, initial steps were taken to resume PA control over Gaza, including visits by senior PA officials, and an easing of tensions between Fatah and Hamas. At the same time, Israel relaxed restrictions on the entry of construction materials into Gaza. While falling short of the actual requirements of the population given the scale of destruction to residential property and basic infrastructure, reconstruction and other donor-funded activity generated a tangible impact on the ground. By late 2016, however, donor funding, and with it the reconstruction effort, slowed substantially, due at least in part to the continuing political rift between Fatah and Hamas, and its political implications for donors in the region. Previous agreements between the two rival parties, such as the 2012 Cairo Agreement or the 2014 Beach Camp Agreement, which were intended to bridge the rift and allow a genuine consensus government to emerge, failed to be implemented. Antagonism fuelled by a deep mistrust has continued to grow between the two parties, and with it reciprocal accusations of deliberate sabotage of the reconciliation process: Fatah insists that Hamas’s objective is to offload the burden of Gaza’s expenses on the PA while maintaining its rule by force on the ground. Hamas, meanwhile, accuses the PA of diverting reconstruction funds to the West Bank and spending less on Gaza than it collects from import taxes that it levies. While the 2014 agreement made Gaza nominally subject to the West Bank–based Consensus Government (with Hamas’s approval), ministries in Gaza continued to be effectively run by Hamas. This was formalised practically in March 2017 by the formation of an Administrative Committee through the Hamas-dominated Palestinian Legislative Council in Gaza. This seven-member committee came to be viewed as a Hamas shadow government by the PA and thus a breach of the 2014 agreement, and an attempt to form a separate political entity in Gaza. The PA demanded that Hamas assume the consequences of its move and bear the financial burden of Gaza by itself. It began to introduce successive policies that cut funding to Gaza, which its detractors have labelled “punitive measures”.
A New Course for Hamas?
In February 2017, Hamas decided on a new political leadership. In Gaza, Yihya Sinwar, a veteran of Hamas’s military wing and long-time Israeli prisoner, assumed the leadership, while Ismail Haniyeh, the former Hamas prime minister in Gaza, became head of the Political Bureau. Many believed that the new leadership attempted to present itself as more dynamic, pragmatic and able to take control of the movement’s cadres on the ground in Gaza, given its leaders’ Gaza-based credentials. In May 2017, Hamas issued a new policy document, considered by some to be its new charter, in which it declared a willingness to accept an interim Palestinian state on the 1967 borders. While the text attempts to steer away from extremist rhetoric and anti-Semitic references present in its original charter, and distances itself from links to the Muslim Brotherhood, it falls short of recognising Israel. Hamas officials were explicit that they hoped this new document would enable the movement to restore and improve ties with other countries, thereby reversing its increasing isolation following the fall of the Muslim Brotherhood in Egypt, and the failure of reconciliation with the PA. On some level, these developments seemingly opened certain political doors for Hamas, enabling it to enter into a more open engagement with members of the Fatah ‘reform wing’, led by ousted Fatah Leader Muhammad Dahlan, and, subsequently, with Egyptian authorities. Several meetings were held by senior Hamas members, including Haniyeh and Sinwar in Cairo over the course of 2017, which are understood to have formed the foundations of Egypt’s efforts to advance a new reconciliation agreement between Fatah and Hamas in October 2017.
Punitive Measures Take Effect
The PA’s incremental measures against the de facto authorities in Gaza began to bite in the second half of 2017. These measures included funding cuts to services, social benefits and salaries paid to PA-appointed staff (around 25,000), and halting of tax exemptions for fuel used at Gaza’s sole power plant, as well as a subsequent reduction by one-third in electricity supplied through Israel when the PA refused to pay. These measures had a devastating effect on the ground and left their mark on Gaza, which is already suffering from a weak economy marked by GDP per capita levels of around $1,000 (down from about $1,150 in 2012) and unemployment of over 40 per cent (up from 30 per cent in 2012). Electricity provision fell from six to eight hours to three to five hours a day, as reported by the UN. Beyond affecting households, reduced electricity supply caused a further strain on the operation of hospitals and clinics, as well as water and sanitation facilities, resulting in over 110,000 litres of raw waste or untreated water being released into the Mediterranean Sea daily. Coming under growing pressure from within, and with limited options, Hamas decided to dissolve its Administrative Committee in mid-September 2017, in response to the PA condition that it must do so before any of the punitive measures would be reversed. Hamas also decided to engage in a new round of reconciliation talks under Egyptian auspices. Additionally, with the dissolution of the Administrative Committee, Hamas offered the PA to take over all government functions (including taxation), and assume full control over the crossings. The only issue on which Hamas appeared unwilling to concede was control over its armed wing and its weapons, although it was showing signs of flexibility regarding arrangements curtailing their use, or subjecting it to joint decision-making mechanisms.
Egypt Leads Renewed Reconciliation Talks
Egypt’s mounting security challenges with Islamist militant groups in the Sinai, which it accused Hamas of aiding and abetting, is understood to have motivated Egypt’s effort, at least in part, to engage with Hamas to help contain the situation in Sinai, as well to avoid escalation or collapse in Gaza that could be exploited by radical Islamist groups in the Sinai, in Gaza and throughout the region. In fact, Hamas has been facing and countering a growing radical Salafi movement in Gaza, with a significant number of militants migrating away from Hamas and seeking more radical affiliations. As part of the Egypt-Hamas engagement, it is understood that Hamas undertook to put an end to any engagement with, and support for, ISIS in Sinai and agreed to clear the border area with Egypt to fight smuggling tunnels and cross-border movement. Additionally, Hamas has been arresting and pursuing Salafis in Gaza, with some 300 imprisoned, according to some reports. Signs of the growing threat posed by Salafis in Gaza included an attack on a Hamas group near the border area in mid-August 2017 and an assassination attempt on Gaza’s chief of security in late October 2017.The reconciliation agreement signed by Fatah and Hamas on 12 October 2017 in Cairo, under the patronage of Egyptian intelligence, came as a result of Egyptian pressure on PA and Hamas leaders, as well as mounting public pressure among Palestinians in both Gaza and the West Bank. In principle, it paved the way for the PA to retake control of governance functions in Gaza, including ministries and crossings, and contained provisions on resolving the issue of salaries of public employees and the formation of an interim government in anticipation of legislative, presidential and Palestinian National Council elections to be conducted within one year of its signing. It is not surprising that the implementation of the agreement’s provisions has so far failed to follow the agreed timeline, given the level of mistrust between the parties, and the reflex to resort to maximalist demands that have led to several setbacks in the months since these understandings were reached. Hence, the process remains stalled, at best. While the PA did initially assume control of the crossing points to Gaza, and Hamas maintains that all ministries in Gaza were free to adhere to government instructions, the PA insists that the government is not truly “enabled to govern” (and therefore lacks real control) in Gaza until all weapons and security fall under its control, in reference not only to the ‘official’ security apparatus but also the armed militant groups in Gaza, such as al-Qassam, Hamas’s militant wing. The PA has also insisted that it is unable to collect taxes as agreed and thus continues to refrain from paying the salaries of de facto public-sector employees, exacerbating the economic situation in Gaza and undermining the prospects of a successful reconciliation. While Hamas has suggested that it is amenable for the PA to assume policing and other internal security functions, it is only willing to place the ‘weapons of the resistance’ under control of the Palestine Liberation Organisation (PLO) once Hamas itself is admitted within the PLO. Although Hamas partly pays its public-sector salaries from taxes collected internally, such as the value-added tax (VAT) surcharge, it is unclear how much longer Hamas can make these payments, given the limited tax sources still at its disposal. Egypt remains committed to continuing to salvage the reconciliation process, though the public profile of its efforts has dropped substantially since early December 2017, and it is not clear how Egypt intends to revitalise its pivotal role in this regard, given the state of antagonistic paralysis that continues to mark the relationship between the competing Palestinian camps.
The situation in Gaza remains extremely unstable. Even the restoration of 50 megawatts of Israeli-supplied electricity in January, initially cut as part of the PA punitive measures, has only increased the availability of electricity to around six hours per day. The restoration of this electricity supply, provided by the Israel Electric Corporation and paid for by the PA, at roughly $3 million per month, is suggested to have taken place through Israeli efforts to prevent further collapse of conditions on the ground.
Without addressing in the first instance the serious shortage of cash as a result of the continued salary cuts to PA-appointed public-sector employees, as well as the lack of funds for de facto employees, the lack of compensation for and the continued imposition of fuel taxes (of over 100 per cent) for fuel destined for Gaza’s power plant, the Gaza Strip will continue to edge closer to collapse.
While the interest and ability of the PA to proceed with the reconciliation process was the object of scepticism from the outset, it is now seemingly in a critical state after the assassination attempt on Prime Minister Hamdallah in March, and even more dependent on the Egyptian mediation effort. On the one hand, the process could potentially end the split between Gaza and the West Bank and empower the PLO by placing all Palestinian factions under its umbrella. On the other hand, there are substantial risks: At what price would reconciliation come for the Fatah leadership and its dominance over Palestinian national politics? And to what extent might Hamas be willing, ultimately, to moderate its basic political positions and give up its control over its weapons? Both these questions remain stumbling blocks along the way to reconciliation. It should also be kept in mind that the potential response of the international community to Hamas joining the PLO (while it would not be the only faction in the organisation that does not recognise Israel) could lead to the isolation of the current Fatah leadership, as well as cause financial implications for PA donor support.
In light of US President Donald Trump’s decision to recognise Jerusalem as Israel’s capital, and the planned opening of the US Embassy in Jerusalem in May 2018, the PLO and Fatah leadership are reviewing their overall posture towards the US, Israel and the peace process. Whether, and how, this will have an impact on their position towards Hamas, Palestinian Islamic Jihad and the other factions’ role in the national movement remains to be seen.
While late February saw re-engagement by Cairo on the reconciliation process, there are still significant gaps between the sides. As noted, the attack on Hamdallah’s convoy in Gaza has caused the rift to widen, with PA officials placing the blame squarely on Hamas and its armed elements, accusing it of sabotaging the PA’s efforts in Gaza, as well as the reconciliation. The failure of Hamas to ensure the safety of the convoy (while claiming to have carried out several patrols to check the route beforehand) has given greater political ammunition to the PA’s demand that Hamas must hand over all security control over Gaza before the PA can be “enabled” to govern there. It may also bolster the argument that the PA, while it seeks to improve conditions in Gaza, is limited in its ability to do so by Hamas’s effective grip on power through control over security in the Strip.
The looming economic collapse would mean Hamas likely finds itself challenged both from within as well as by more radical groups, not to mention the rise in anger among the Gazan population. The calm is very precarious, and incidents with a potential to cause a serious escalation can arise quickly. In recent months, the situation has flared dangerously, including following the Israeli demolition of a tunnel between Gaza and Israel in early November that killed 12 Islamic Jihad Movement militants, as well as an uptick in rocket fire from Gaza into Israel. Several roadside bombs have also been detonated along the Gaza perimeter fence, including in mid-February, when four Israeli soldiers were wounded by such a device in the most serious incident on the Gaza border since the 2014 war. It reportedly took substantial Egyptian and Hamas intervention to dissuade the Islamic Jihad Movement from retaliating against the tunnel demolition, and even Israel—while holding Hamas ultimately responsible—has identified Salafi elements as responsible for the recent rocket attacks.
The ambush on Hamdallah, along with weekly demonstrations near the border zone, which Israeli security officials warn could turn violent, may point to a dangerous decline in Hamas’s capacity to maintain order—both within the fringe elements of its own organisation and in terms of overall security in the Gaza Strip. As tensions have risen, so too have the calls within Israel for it to take firmer action. The Israeli army chief of staff Gadi Eizenkot has criticised these calls for more force to be used against Gaza, while urging immediate action to prevent a humanitarian collapse that would likely lead to war.
For these reasons, the risk of armed conflict between Israel and Gaza is growing, even if both Hamas and Israel have expressed their interest in avoiding such a conflict. The discussions in Cairo, Washington and Brussels in recent weeks are an important step forward in tackling both the short- and longer-term needs that are essential to stabilising the Gaza Strip. It is imperative that the widely agreed set of measures needed to address the water and energy crises receive the full and immediate support of the international community in the coming months. This will help ensure the progress necessary to avert a crisis, and create the circumstances to support the ongoing Egyptian effort to advance the reconciliation process and restore Gaza under PA control. While it appears that neither Israel nor Hamas is actively seeking another round of violence, if the situation on the ground does not improve quickly, the likelihood of the situation spiralling into violence increases.