(Bloomberg) -- The Palestinian economy is crippled by restrictions on trade, investments and access to natural resources, but driving around Ramallah you might get the impression it’s booming. Underground parking lots are brimming with Audis and BMWs, residential buildings are popping up at a frenetic pace, and cafes and restaurants are buzzing with customers.
Helping drive the appearance of wealth in the West Bank city, just 6 miles from Jerusalem, is the emergence of a consumer loan market that was all but non-existent just a decade ago. Its growth can be can be attributed to a 2008 law that forced banks operating in the Palestinian territories – which preferred to lend their money abroad – to extend at least 40 percent of their credit to locals. In the past four years, the debt market has more than doubled to $6.4 billion, of which $2.6 billion has gone to local residents, according to the Palestine Monetary Authority.
“This is a relatively new phenomenon,” said Samir Abdullah, a former Palestinian Authority planning and labor minister who now does research at the Palestine Economic Policy Research Institute. “It’s opened a new world of possibilities for some Palestinians, and of course the banks are quite happy too, because they charge relatively high margins on the loans.”
The credit growth has allowed members of the Palestinian middle class – those who already have a steady job – to boost their quality of life.
But the overall picture for the West Bank’s economy is still one of stagnation. Israeli restrictions on trade and investments and a shallow production base mean that large parts of the local society are falling behind.
Unemployment in the West Bank and Gaza is at about 30 percent (versus a low of 4.3 percent in Israel) and economic growth in the West Bank is expected to be about 2 percent in coming years, which won’t be enough to keep up with population growth, according to the World Bank. Palestinians import more than three times what they manage to export – a trade structure the World Bank says resembles failed states such as Somalia.
The danger is the expansion of credit could lead to an asset bubble and widen inequalities between those with a steady job – typically people working for NGOs or the Palestinian Authority – and those who don’t have a reliable income.
“In many ways it’s just leading to higher prices, which makes life unaffordable for many,” said Chris Harker, a lecturer at the Institute for Global Prosperity at the University College London who has researched Palestinian debt. “Because there’s nowhere to build, the price of housing has skyrocketed in Ramallah.”
“All this debt is a coping mechanism,” he says. “A way to deal with the disillusionment of the failed Oslo peace process.”
But those in charge of the economy aren’t concerned. The debt buildup is still low by global standards and the banks are careful in their lending, according to Palestine Monetary Authority Governor Azzam Shawwa, a former banker. He says defaults are relatively low and that the economy is on solid footing, though he’s concerned that recent turmoil following U.S. President Donald Trump’s decision to recognize Jerusalem as Israel’s capital could derail growth.
“There’s no credit bubble here and there won’t be one, because banks are very conservative,” said Shawwa, from his glimmering new central bank building in Ramallah. “We have a very sophisticated credit scoring system here. Banks aren’t lending wildly.”
With Trump’s envoys shuttling back and forth in pursuit of the elusive peace deal, Shawwa stressed there is much to do to strengthen the economy, including granting Palestinians more control of lands and resources in the West Bank.
“The Palestinian economy is being managed conservatively, we are doing everything we can to boost growth,” he said. “But eliminating restrictions and allowing us to invest in infrastructure would really help the economy to take off.”
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