The Service Sector in the Palestinian Market: How the Value Chain Collapsed and the Economic Multiplier Shifted from a Growth Engine to a Contraction Engine?

Restaurants, cafes, wedding halls, and daily services facing a contracting economy
In normal economies, restaurants, cafes, wedding halls, and daily service centers are not just commercial projects that provide goods or services to consumers; they represent a live indicator of economic activity level, spending movement, and community confidence in the future. When these activities begin to decline or close, the problem is not confined to a specific sector but extends its impacts to various parts of the economy.

Today, the Palestinian service sector stands before one of the most severe economic crises it has witnessed in recent decades. The current crisis has surpassed traditional recession boundaries or seasonal profit declines and has turned into a structural crisis that strikes the production, distribution, operation, and consumption processes simultaneously, pushing the economy into a rapidly contracting cycle.

Estimates by the World Bank, United Nations, and European Union indicate that the Palestinian economy contracted by about 28% during 2024, while the West Bank economy recorded a decline estimated at around 16%. Meanwhile, the Gaza Strip economy experienced an unprecedented collapse exceeding 83%.

Despite the severity of these aggregate indicators, the picture at the local economic level seems more complex, especially within the service sector, which is one of the most connected sectors to the daily lives of citizens.

According to a field survey conducted by the Ministry of National Economy in the northern West Bank governorates, 52.6% of economic establishments ceased operation either fully or partially, with stoppage rates reaching 83.1% in Jenin and 82.9% in Tulkarem.

These numbers do not merely signify the closure of restaurants, cafes, or wedding halls but indicate the disruption of an integrated economic network that extends from farmers and food factories and transport and distribution companies to accountants, designers, marketers, and workers in dozens of professions and support services.
Value Chain: How has the cycle of the service economy been disrupted?

The Palestinian service sector relies on an interconnected value chain that begins with suppliers and ends with the final consumer.

First Link: Inputs and Supply

This link includes farmers, dairy factories, bakeries, poultry slaughterhouses, food companies, importers, and raw material suppliers.

This link has faced unprecedented pressures due to rising prices, transportation and distribution challenges, and increased operating costs.

Data from the Palestinian Central Bureau of Statistics indicate that the wholesale price index increased by 4.10% during the third quarter of 2025 compared to the previous quarter.

Some commodity groups recorded sharp increases, namely:

Meat and fish: 27.71%

Cereals and agricultural products: 19.70%

Dairy and eggs: 19.27%

Beverages: 10.13%

At the same time, economic surveys reported that 77.8% of establishments faced difficulties in transporting goods between governorates, while 74% of small business owners indicated their struggles in obtaining raw materials and production inputs regularly.

Second Link: Employment and Production

This link includes restaurants, cafes, wedding halls, hospitality companies, hotels, guest houses, beauty salons, training and private education centers, nurseries, sports clubs, travel and tourism companies, delivery services, laundries, cleaning centers, office services, and consultations.

Data show that 87.4% of establishments are operating below their usual capacity, with the average decline in production capacity reaching about 58.4%.

In clearer terms, most projects still open their doors daily, but they are actually operating at almost half of their economic capacity.

Third Link: Marketing and Market Access

The internal trade movement has faced significant pressures due to movement restrictions and the closure of roads and crossings.

The results of the Bethlehem Chamber of Commerce and Industry survey showed that 66.1% of companies were affected by the closure of commercial crossings between April and June 2025, while 27.9% of companies indicated that the impact lasted more than twenty days.

About 80% of small business owners reported significant delays in delivering products and services to targeted markets.

This indicates that part of the crisis is not only related to production but also to the ability of the product or service to reach the consumer in a timely manner.

Fourth Link: Demand and Consumption

This link represents the core of the current crisis and its primary driver.

According to field data, 93.3% of establishments attributed their performance decline to decreased purchasing power among citizens.

Moreover, 92% of establishments reported a decline in monthly revenues, with an average drop of 58% compared to the previous period.

These figures reflect a clear shift in spending priorities among Palestinian households, with focus now directed toward food, medicine, and basic needs, while expenses for entertainment, occasions, personal services, and tourism have declined.

Restaurants and Cafes: Between Rising Costs and Decreased Customers

Restaurants and cafes are facing a harsh operational equation.

On one hand, food input prices for various items have risen by over 20%,

while on the other hand, the number of customers has dropped to unprecedented levels.

Many establishments that used to require a hundred customers daily to cover their operating costs are now receiving only between twenty and thirty customers.

Thus, working capital has shifted from a tool for expansion and investment to a means of covering daily losses and delaying closure.

Wedding Halls and Event Venues: The Biggest Victims of the Economic Multiplier

The events sector is one of the most connected sectors with the local economic multiplier.

Every wedding or social occasion would engage a wide range of economic activities including photography, hospitality, decorations, fashion, beauty, sweets, transportation, printing, music, and logistics services.

Field estimates suggest that some areas experienced a decline in the number of social events reaching about 90% compared to previous years.

Therefore, it is not only the venues that have been harmed, but also dozens of activities that directly relied on them.

Daily Services: The Economy of Survival

This category includes beauty salons, hairdressing, cleaning services, laundries, domestic services, technical maintenance, private fitness centers, and nurseries.

The majority of these projects are currently operating at break-even point or below, facing continuous increases in operating costs with a continuing decline in demand.

For many owners of these projects, the primary goal has become survival in the market rather than achieving profits.

The Economic Multiplier: When It Works in the Opposite Direction

In normal conditions, the economic multiplier for the local service sector is estimated to range between 1.8 and 2.2.

This means that every shekel spent within a restaurant, cafe, or wedding hall generates additional economic activity in other connected sectors.

However, what is happening today is a transformation of this multiplier into a contraction multiplier, where the closure of one service establishment leads to suppliers losing a main client, then suppliers' purchases from farmers and producers drop, leading to layoffs, decreased consumer spending, declining sales from other establishments, and then the economy enters a new wave of closures.

Data reveal that average revenue decline reached 58%, while the number of workers decreased by 38.5%, with more than half of the establishments completely or partially ceasing operations in some areas.

Consequently, the loss of one job in the service sector may lead to the loss of between 0.6 and 0.8 additional jobs in the connected sectors due to reduced spending and economic activity contraction.

Conclusion

Economic and field indicators reveal that the Palestinian service sector is undergoing one of the deepest contractions in its modern history. More than half of the establishments have ceased operations in some areas, and about 87.4% of the remaining establishments operate below their normal capacity, while revenues have declined by an average of 58% and operating costs have continuously increased.

These indicators do not reflect a transient sectoral crisis but rather indicate an escalating congestion in the entire Palestinian economic cycle. Restaurants, cafes, wedding halls, hotels, tourism companies, training centers, and daily services are not merely commercial projects; they represent the arteries of the economic and social life of the Palestinian community.

With each passing day of this decline without radical solutions, the circle of contraction widens and the cost of recovery in the future rises. The real challenge today is not achieving growth or expansion but preserving what remains of Palestinian productive and service capacity and preventing the current recession from turning into a long-term economic drain that is difficult to escape from.