The Palestinian and Jordanian Banking Sector

Suffocated by strict closures and battered by violence during the recent intifada , the Palestinian economy and the situation of the Palestinian people have been in steady decline for the last several years . Per capita GDP is estimated to have fallen by nearly 30. 0 percent from its height of USD 1610 in 1999 to around USD 1130 in 2006 . Except for a short period between 2003 and 2005, when the economy was recovering from the worst of the Intifada's violence and incursions, growth has been negative every year since 2000. During the last two years, the collapse has accelerated .

GDP contracted by nearly 8.8 percent in 2006 and by 4. 2 percent in the first quarter of 2007. Though 2007figures released by Palestinian Central Bureau of Statistics May ,2008 , it appears that growth resumed in the second half of 2007 concurrent with the improved security situation and despite the closure of Gaza, GDP in 2007 was USD 4,135. 8 million and it is expected to be higher in 2007 than 2008. However, it will still be around 15 percent below its peak in 1999. The economically and politically unstable environment that has been characterizing WBG for these last years, explains the very modest role of the financial sector as a whole.

The banks play a limited role in economic growth and essentially act as deposit taking and salary distribution centers while the insurance companies still represent an embryonic sector. Despite the existence of a capital market, its contribution to the financing of the economy is minor. Additionally, since the payment system suffers from many deficiencies, financial transactions are dominated by cash and other paper - based payment instruments, which limits further economic growth.

The Palestinian economy bore the brunt of the deteriorating political conditions in the Palestinian territories blamed on the Israeli and international political and economic boycott of the Hamas-led government. Preliminary figures unveiled that real GDP in the Gaza Strip & remaining West Bank shrank by 6. 5% in 2006 compared with an expansion of 4. 6% in 2005. GDP witnessed a drop of 8. 79% in 2006 to reach USD4,107. 0 million after it rose by 6% in 2005 to USD4,502. 6 million. And its about USD 4,135. 8 million in 2007.

Israel suspended transferring hundreds of millions of dollars in tax revenues it collects on behalf of Palestinians on border crossings. And even much-needed external aid was not channeled to the government, but to the accounts of the Palestinian presidency. The Gaza Strip also suffered almost a complete closure, and the movement of goods and services in the West Bank was heavily disrupted by the occupation forces. Consequently, the flow of foreign investments into the PNA ruled areas has nearly stopped which further strained the government and left 165,000 employees unpaid for months.

Though the international sanctions, imposed after the rise of the Islamic group "Hamas" to power in early 2006, have nearly paralyzed the economy, several businesses remained afloat and even saw a pickup in activity during the year. Among those were the "agriculture and fishing", "transport, storage, and communications", "wholesale and retail trade", and real estate sectors. Although the contribution of the financial intermediation sector, which mainly covers banks, insurance, and brokerage firms, grew by a minimal 0. 1% in 2006 against 2005, its contribution to GDP rose to 4.5% in 2006 from 4. 2% in 2005, and maintain the same contribution of 4. 5% in 2007.

The national economy continued its solid performance in 2007 despite increasing challenges, particularly, the unprecedented rise in international oil prices; the GDP grew by 6. 0 percent, at constant market prices, compared with 6. 3 percent in 2006. In addition, the GDP grew by 12. 3 percent, at current market prices, compared with 11. 8 percent in 2006. This performance came in light of the growth of the GDP deflator by 6. 0 percent in 2007 compared with 5.2 percent in the preceding year.

 The solid economic performance was mainly driven by the increase in total consumption spending; the continuing FDI inflows to the Kingdom, as well as the increase in total exports. The sector of "finance and insurance" recorded the highest growth rate during 2007; growing at 15. 5 percent, at constant market prices, against 15. 7 percent in 2006, thereby coming in the forefront of economic sectors in terms of contribution to the overall GDP growth rate at constant market prices; accounting for 1. 1 percentage points.

The remaining economic sectors displayed divergent performance in 2007; the item of "net taxes on products" and the sector of "producers of government services" grew at fast pace amounting to 7. 7 percent and 6. 3 percent, respectively, against a growth of 2. 0 percent and 3. 1 percent in 2006, respectively.

Meanwhile, the other sectors experienced either a slowdown or a contraction in their performance; the sectors of construction, "trade, restaurants and hotels", "transport and communications" and manufacturing were the most prominent sectors which witnessed a slowdown in their performance to grow at 8. 0 percent, 5.1 percent, 4. 9 percent and 4. 7 percent, respectively, in 2007 against a growth amounting to 11. 3 percent, 6. 6 percent, 7. 9 percent and 9. 5 percent, respectively, in 2006.

On the other side, the value added of the sectors of agriculture and "mining and quarrying" contracted by 3. 3 percent and 1. 4 percent, respectively against a growth of the former by 0. 9 percent and a contraction of the latter by 9. 5 percent in 2006. The commodity-producing sectors accounted for 1. 3 percentage points to the overall GDP growth rate at constant market prices in 2007, while the service-producing sectors accounted for 3. 8 percentage points.

As for the item of "net taxes on products", it accounted for 0. 9 percentage point. i?? The inflation rate in Jordan in expected to reach 5. 4% in 2007 compared with 6. 3% recorded in 2006. However, it is projected that the inflation rate will reach about 8-9% next year mainly because of lifting the subsidies on certain items. i?? Total revenues in 2007 expected to reach JD 4,074 million, representing an increase of 17. 74% relative to 2006. However, total expenditure in 2007 is forecasted to reach JD 4,842. 3 million resulting in a deficit of JD 768. 3 million.

During the first ten months of 2007, total revenues and grants reached JD 3,239.7 million, representing an increase of 13. 2% compared to JD 2,861. 9 million recorded during the corresponding period of 2006. Domestic revenues reached JD 2,994. 1 million during the first ten months of 2007, compared to JD 2,686 million recorded in the relative period of 2006. Total expenditure totaled to JD 3,449. 8 million during the first ten months of 2007, compared to JD 2,994. 3 million recorded during the corresponding period of last year. The increase in total expenditure during the first ten months of 2007 is mainly attributed to the increase in current expenditure and the increase in capital expenditure.