FEATURE-West Bank high life masks deepening economic crisis

Wed Jul 4, 2012 11:04am EDT

* Palestinian Authority's financial problems grow

* Public sector, international aid concentrate wealth

* Occupation, poor planning have stifled growth

By Noah Browning

RAMALLAH, West Bank, July 4 (Reuters) - Past the Israeli sentry towers blackened by firebombs and the entrance to a refugee camp emblazoned with posters of rifle-clenching militants, downtown Ramallah sparkles.

The scars of an intractable conflict and occupation melt away: cafes bustle with smartly dressed patrons, water-pipe smoke perfumes the air and basslines from trendy clubs shake the night. New model BMWs ply leafy avenues beneath villas and tall apartment blocks sprout from the West Bank hills.

But it's more mirage than miracle.

"Thank God for loans," said Ibrahim el-Far, owner of the newly-opened branch of the upscale Italian cafe chain Segafredo Zanetti in Ramallah, the Palestinians' commercial capital and headquarters of their government in the Israeli-occupied West Bank.

Growth in the West Bank is concentrated in Ramallah and in real estate and services even as many sectors like agriculture and construction languish.

Government spending and living on credit at all levels of Palestinian society is rampant and, as the euro zone crisis has shown, may prove to be the economy's undoing.

Bank lending for personal consumption in the Palestinian territories has risen five-fold in the last two years to $417 million. Total credit for cars alone accounts for a further $119 million, according to the Palestinian Monetary Authority.

"If you're immersed in troubles, why not try to live well, have night life and good coffee? If we've been slapped once by occupation, the slap from the credit bill won't hurt as much," El-Far said.

Aid for the donor-dependent Palestinian Authority (PA), which exercises limited self-rule in the West Bank under interim peace deals with Israel, has slowed to a trickle.

Salaries for a swollen public sector again cannot be paid in full this month. The productive base for the economy is shrivelling while unemployment climbs along with poverty.

An economic crisis has deepened - growth is down from a peak of 9 percent in 2010 after the lows of the Intifada to 5.4 percent in the first quarter of 2012 from the same 2011 period.

The Palestinian Authority accounts for almost a third of the $3.5 billion in credit given by banks in the Palestinian territories but, with donor aid flagging and revenues down, it is not clear how much longer that can last.

A Palestinian request for a $1 billion loan from the International Monetary Fund was turned down, officials said this week. And foreign aid is waning partly because of global economic conditions and partly in a backlash to the Palestinians' abortive bid for statehood at the United Nations last fall.

Israeli-Palestinian violence has dropped off dramatically since the end of a 2000-2005 Palestinian uprising. But peace and coveted statehood remain elusive. Negotiations with Israel have been frozen since 2010 amidst bitter misgivings among Palestinians over Jewish settlement building in the West Bank.

LOOKING TO THE LAND

The appeal of property becomes clear by looking out the windows of the stately 10th-floor office of Kareem Abdul Hadi, a manager in Palestine Development and Investment Inc., or PADICO, the biggest privately-owned enterprise in the Palestinian territories and a holding company for everything from swish eateries and luxury hotels to real estate and construction.

Cement highrises surge from the ground in the middle of verdant patches of nothing - "bald spots", Abdul Hadi dubs them - rendered largely out of bounds to Palestinian administration and construction as per the 1994 Oslo agreements setting out different zones of control in the West Bank.

The wall built by Israel winds across the landscape - part of a barrier Israel says ensures its security against suicide bombers but the international court of justice says is illegal and Palestinians decry as a land grab. While Israel's controls hamstring commerce, they are a boon to the property market.

"Land in Palestine is one of the only safe investments, both because the Oslo agreements made it more scarce and because it has historically never gone down in value," Abdul Hadi said.

"The same doesn't apply for real estate, and while value hasn't dropped, some housing projects are sitting empty, and people haven't bought them up yet."

Abdul Hadi's firm is investing in a members-only executive club and spa with views of the sweeping Mediterranean littoral below, and importing a luxury restaurant from Jordan, but prospects for undertakings that would create a substantial number of jobs and spur growth have dimmed.

Sectors like agriculture, manufacturing, and construction actually contracted in the first quarter of this year, according to preliminary figures from the World Bank.

"The problem is an unfriendly investment environment, caused by the Israeli occupation's wall and restricted access. It makes investors unsure about putting money into Palestine," said Mohammed Shtayyeh, a minister in charge of the Palestinian Economic Council for Development and Reconstruction.

Around two-thirds of the West Bank is policed and administered exclusively by Israel, and the Palestinian-run cantons float precariously in an interstice of Israeli settlements, military bases and roads.

But Shtayyeh admits his government also deserves blame.

"The PA is not the owner of the means of production, but it should have encouraged more interest by the private sector and foreign direct investment in developing the productive base here," he said.

"AMERICANISATION"

Beyond occupied land and limited water, even the air waves in the West Bank offer no safe outlet for economic growth.

Israeli authorities deny the Palestinian Authority and therefore Palestinian mobile phone providers access to the high-tech 3G frequency, while granting it even to Jewish settlements.

Sam Bahour, a telecoms entrepreneur-turned-business consultant, said any potential for a high-tech industry had been stymied by that move.

"Israel is in total control of the assets that could make for a real economy, and we've been left to manage the crumbs," he said. "It's a donor-driven economy and will remain one until the occupation ends."

International organisations and the public sector concentrate in Ramallah, where 75,000 people live, pulling jobs and wealth from the rest of the West Bank into its orbit and leaving other towns and cities in its shadow.

Poverty and joblessness have increased in the West Bank in 2012, both hovering at around a fifth of the population of 2.6 million.

"The government focuses on growth regardless of how it is achieved so that it will get some compliments abroad," Nasser Abdul Kareem, an economic analyst, told Reuters.

"Unfortunately, too much of it depends on government spending, which is neutral, and doesn't distribute wealth among people and geography," he said.

As division festers between the Gaza Strip, which is run by Hamas Islamists, and Palestinian President Mahmoud Abbas's dominant Fatah party in the West Bank, wealth disparities and the preoccupation with making ends meet are breeding alienation among a people already in no short supply of it.

"Indebtedness and financial problems are taking a toll on society, and making people 'Americanised' in a way," noted Bahour, the consultant.

"The focus on the individual and his ownership is increasing, and the sense of community and the collective fades."

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