Palestinian exporters face a unique set of challenges. Nigel Wilson visits those on the ground trying to beat the blockade.
In a back office at the Donna Tella footwear factory in Hebron, Palestine, Peter Racklyeft, a 75 year-old Briton, is inspecting a line of ladies’ shoes.
Selecting a blue leather ankle boot from the assortment, he holds it up in the glare of the strip light. Turning the boot over, and over again, his disinterested expression giving little away, he returns the shoe to the desk and reaches for another.
“Not bad at all,” he purrs, admiring the stitching. “They’ll have to change the name,” he adds, in an aside. “That won’t do for the international market.”
The Hebron Chamber of Commerce, more specifically its one-year-old Leather and Shoe Cluster – an initiative designed to promote and support the sector – hired Racklyeft to help get more Hebron-made shoes into international markets. It’s one part of the country’s first National Export Strategy (NES), which aims to boost exports from nine key sectors in the Palestinian economy.
It is the British consultant’s first visit to Palestine and he’s spent the last few days touring Hebron’s footwear factories, tanneries and designers. He’s spent much of his visit trying to convey to producers the importance of complying with regulatory standards in preparation to export.
The overall level of craftsmanship is surprisingly good, he says, adding that many of the companies only had minor adjustments to make before they could export successfully. Indeed, many are already doing so, reaching regional markets like Jordan and Saudi Arabia, with some even selling to Europe and the United States.
Of course, Palestine’s exports do not begin and end with shoes and sandals. Most of its export revenues come from selling unworked stone and marble, which accounted for around 25% of total exports from 2008-10. Other significant exports include plastics, pharmaceuticals, furniture and footwear, as well as agricultural products, including virgin olive oil, dates and fresh strawberries.
Yet, while a number of firms have succeeded in selling their products abroad, their journeys to such a point were not smooth and their status as exporters is far from secure. After all, Palestine remains fragmented, politically and geographically, with the West Bank under military occupation and separated from Gaza by the state of Israel. While both territories are ostensibly Palestinian, their political realities, and in turn their economies, are extremely different.
The state of Palestinian exports
Palestine has ample free trade agreements in place, meaning that regional and international markets are, theoretically, within reach. Free trade partners include the US, Canada, the European Union and Russia. Closer to home, Palestine has free trade deals with Egypt, Turkey, Jordan, Saudi Arabia and Israel. It is also a member of the Greater Arab Free Trade Area (GAFTA) – a 17-nation pan-Arab free trade zone that came into existence in 1997.
Yet, despite this array of potential trading partners, Palestinian exports remain relatively weak, when compared to neighbouring Israel. In 2014, exports reached a total value of US$864.8mn, according to preliminary data from the Palestinian Central Bureau of Statistics. In Israel, exports totalled US$96.7bn last year.
Moreover, Palestine conducts the vast majority of its trade with Israel, which absorbed 85.9% of Palestinian exports in 2011, according to the Palestinian Trade Centre (PalTrade.) The second-biggest export market is its eastern neighbour, Jordan, which took only 5.4% of Palestinian exports in the same year. Gulf markets Saudi Arabia and the UAE each accounted for 1.3% and 1.2% of Palestinian exports, while the US also took 1.2% in that year.
While the Palestinian Authority (PA) has established Palestine as an open market economy and pursued free trade policy, Palestinian companies and the administration itself have failed to apply the agreements effectively.
“Palestine has a number of free trade agreements making it an open market economy,” says Lilia Naas Hachem, chief of the Office for Arab States at the International Trade Centre (ITC,) the joint United Nations and World Trade Organisation agency.
“Due to lack of knowledge, companies are not using and benefiting from the provisions of these agreements: capacity building in this area would be advantageous to enable companies to benefit from better market access.”
Palestine lacks an airport, seaport and its land borders to neighbouring Jordan are controlled by Israeli security forces. The only crossing from a Palestinian territory that is not controlled by Israel is the border between Gaza and Egypt, although movement at this border outpost has been severely curtailed since Egypt joined the Israeli economic blockade on Gaza in 2013. In order to export, Palestinian companies must navigate both the Palestinian and Israeli bureaucracies, both of which present a number of hurdles that often slow down the movement of goods between the neighbours, and onward to a third destination.
“The most important obstacles are related to the administrative procedures, internally and going through Israel,” Naas Hachem tells GTR. “High fees are a factor, plus a degree of unpredictability can mean that the application procedure may change from one day to another without companies knowing. The rest of the obstacles relate to the quality of infrastructure, quality of products, and obtaining the relevant certificates that are delivered by accredited laboratories and recognised internationally.”
“Procedural changes are often unpredictable and companies are not informed as to the required administrative procedures and processes, such
as shipment inspections. These procedures and processes, when carried out by different individuals, vary in time depending on their availability. Unpredictability is, in some cases, also related to unexpected measures taken by Israel, for example when they close the border or decide that a
shipment cannot go through.”
Despite the hurdles, Naas Hachem is confident that Palestine has the capacity to improve its export performance in the medium and long term. Along with the ITC, the Palestinian Authority has recently embarked on an ambitious five-year programme to boost its economy through export-led growth. June 2015 saw the launch of the NES.
“The Palestinian brand is a selling point and a good marketing point,” she says, adding that some of the identified sectors such as textiles and garments were already well set to boost exports. “With other sectors, like agricultural products, there is a need to do more work on building awareness and capacity to meet international requirements.”
Another issue that presents an obstacle to both exporters and importers is a lack of access to finance. Given the political risk associated with the West Bank and Gaza, lenders usually demand levels of collateral that are prohibitive to smaller companies and even some of Palestine’s bigger firms.
“We have unique political circumstances, different from any other country as we don’t have control of our borders,” says Suleiman Nasr, head of investments and placements at the Bank of Palestine, by way of explanation.
According to an ITC report published last year, the relatively “fragile” and “limited” financial sector is to be expected given security tensions and the social and political unrest relating to Israeli occupation.
Credit volume was valued at US$4bn in the 2014 report, while residential deposits were valued at US$7.2bn. It noted that there were 17 banks operating in Palestine, along with 17 insurance firms and 350 exchange offices. That said, the ITC found that access to credit was a “significant problem” due to the “incomplete and challenging institutional and regulatory framework”, along with conservative lending practices and issues with the creditworthiness of Palestinian enterprises.
The report noted a number of competitiveness constraints, including the lack of credit export schemes, inadequate laws and regulations that limited access to trade finance and the impossibility of using movable assets as collateral.
The Bank of Palestine has a special department for SMEs, and wants to encourage lending to small firms, according to Nasr. “Anybody who has a small project… we appreciate these customers and we encourage them to be bigger,” he says. There are also 10 microfinance institutions that cater to small companies. However, this type of lending is still relatively undeveloped in Palestine. A 2008 World Bank report stated that demand far exceeded credit supply.
The Palestinian coastal enclave of Gaza, bordered by Egypt and Israel, has been subject to an Israeli economic blockade since the Islamist party Hamas won elections there in 2007. Egypt too, has periodically imposed an economic blockade since Hamas took office, most recently doing so following the ousting of former President Mohamed Morsi in 2013.
The blockade has devastated Gaza’s economy and had reduced trade between the coastal territory and the West Bank to nil, leaving Gazan producers without their biggest market.
In the wake of last year’s war, the third in six years and the most devastating in modern times for Gaza, Israel announced that it would ease some of the restrictions on internal trade. Some goods, including furniture and agricultural products, would be allowed to travel from Gaza to the West Bank.
“The question is: how do you re-make the relationships between West Bank companies and Gaza companies?” asks Mohammed Skaik, programmes manager in the Gaza office of PalTrade.
Israel also made provisions for certain commodities to be allowed into Gaza from the West Bank, although it has placed restrictions on items it considers could have a dual-use military function, citing security concerns.
From October 2014 until the end of the year, around 100 truckloads of goods were transferred from Gaza to the West Bank, according to PalTrade. Most of them were agricultural commodities, such as strawberries and vegetables, and a small amount of furniture and textiles.
Currently, in 2015, about 400 truckloads have gone from Gaza to the West Bank. Most of these trucks transported textiles, garments
and agricultural commodities.
“If you compare this number to the number before the closure, it is very limited,” says Skaik. “It only represents around 20% of the number before the closure. It’s a very important issue.”
“There are some other sectors that have high demand from the West Bank but are not allowed, such as the food sector, handicraft sector, metals.
We need to widen the range of goods that are allowed to leave Gaza for the West Bank.”
Transporting goods from Gaza to the West Bank, or doing the reverse journey, can be an arduous mission. The route involves switching trucks twice – once at the Gaza crossing to Israel and then again when Israel meets the West Bank. Issues relating to pallet sizes and paperwork can therefore delay a shipment twice in one trip.
“Israel limits pallet sizes to one metre. It takes twice as many pallets, so that increases the costs. The area of the crossing is an open area not fit for purpose, so the commodities are open to the wind, rain. The third issue is the time it takes to cross,” Skaik explains.
If internal trade between Gaza and the West Bank were to begin flowing steadily once more, it could have a multiplier effect on other industries in both Palestinian territories.
Back in the shoe factories of Hebron, the Leather and Shoe Cluster manager Mohammed Husain is hopeful that at least one item will be added to the list of goods that can leave Gaza: rawhides.
“Almost 60% of the hide produced in Palestine, is in Gaza. But in Gaza, they don’t have tanneries and they don’t know what to do with that hide,” he tells GTR.
“If we could give the hide from Gaza to the tanneries in Hebron, it would be a win-win case. It would reduce the cost of the hide and then reduce the cost of leather and provide a competitive advantage to the local industry.”
“But this is not allowed,” he adds with a shrug.