Palestinian Economy... Or Two Economies?

Author: Dr. Said Sabri

At the beginning of 2026, the Palestinian Monetary Authority and the Central Bureau of Statistics forecasted a growth in the Palestinian economy of between 4.1% and 4.5%. However, just six months later, the same official data revealed a contraction of 8%, with per capita income falling to only $545. Between these two figures lies not just a statistical gap, but a story of an economy changing faster than predictions can keep up.

A forecast based on assumptions, not actual recovery

The scenario upon which this forecast was built was not one of substantial improvement, but an assumption of "the status quo continuing without significant changes" — with restrictions on movement and crossings remaining in place, and continued limited activity in Gaza within the scope of humanitarian aid, along with a large part of the workforce unable to access the Israeli labor market. In other words, this was a marginal growth calculated from a very low base after Gaza’s contraction, which exceeded 80% in 2024.

The problem is that even this modest forecast did not withstand the data of the first quarter, where the economy of the West Bank alone registered a decline of 8%, despite being the least directly affected region by the war. This means that the contraction is no longer confined to the most devastated sector, but has extended to the economy that was supposed to lead the recovery.

Are we still talking about one Palestinian economy?

Today, the Palestinian economy is no longer a single economy in practical terms, but rather two economies differing in the structure of activity, price levels, labor markets, poverty rates, and even in the dynamics of growth and contraction. The inflation rate in Palestine experienced sharp fluctuations over the past year, reaching an annual increase of 10.5% overall for 2025, but with a stark disparity between regions: almost total stability in the West Bank (-0.11%), compared to a shocking rise in Gaza of 21.93% due to scarcity of goods and collapse of supply chains. The same applies to the labor market: an unemployment rate of 28.7% in the West Bank by the end of 2025, compared to over 80% in Gaza, and in poverty: 11.5% in the West Bank versus 63.6% in Gaza.

This disparity means that discussing a "single Palestinian economy" has become a misleading simplification; what happens in the West Bank does not necessarily reflect what’s happening in Gaza, which calls for a systematic review of the statistical presentation itself, so that data from the two regions is presented separately instead of merging them into a single national figure that may conceal more than it reveals.

The gap in causation: Why was the scenario not realized?

The difference between expectation and reality does not reflect a flaw in statistical methodology as much as it reflects a change in the variables themselves. While the report assumed relative stability in restrictions, the following months saw an escalation in the withholding of clearance funds, which constitute about 70% of public revenues, and continued restrictions on transferring them for over a year, in addition to the exacerbation of the banking liquidity crisis linked to the accumulation of shekels. The index of industrial production, a direct operational measure away from consumption funded by aid, also recorded an additional decline of 1.15% in May 2026, further documenting that the contraction is a continuing trend, not a transient event in a single quarter.

This gap is referred to in economic literature as the "Economic Forecast Error"—the difference between expected outcomes and actual results, which usually widens in economies exposed to repeated political and security shocks.

The impact of the contraction does not stop at a decline in production; it also extends to the private sector's reluctance to invest and a sharp decline in gross fixed capital formation amid political and security uncertainty. This is also reflected in the banking sector, where pressures on liquidity increase, credit risks rise, and appetite for financing diminishes, turning the crisis from an economic slowdown into a mutually reinforcing cycle of financial and economic contraction. This means that the effects of the crisis will not stop in 2026 but will extend to the productive capacity of the Palestinian economy for years to come, as the investment deferred today becomes lost productive capacity tomorrow.

A recurring pattern in fragile economies

The gap between forecasts and results is not an exceptional matter in fragile and conflict-affected economies, where growth expectations are repeatedly revised as field conditions change. However, the uniqueness of the Palestinian case lies in the fact that political and financial variables are changing at a pace faster than traditional models can assimilate, making forecasts susceptible to being outdated within a few months.

Why is this gap important for decision-makers and donors?

The difference between an official forecast and actual reality may seem purely a technical matter, but it carries a deeper significance: official scenarios are used as a basis for public budget planning and designing international support programs. When the baseline forecast is higher than reality by nearly 12 percentage points, any planning based on it risks being subject to funding and implementation issues right from day one.

When international financing plans are based on a scenario assuming gradual recovery, while quarterly data reveals continued contraction, the financing gap becomes a natural outcome of this discrepancy, not just a shortfall in the size of aid provided in conferences such as the recent donors' conference held in Brussels. This gap is not only theoretically measured; the public debt, which has exceeded $15.4 billion, reflects how the unaccounted financing gap has turned into accumulated borrowing that will burden future generations.

Conclusion: The importance of a critical reading of official figures

This analysis does not imply doubting the professionalism of the Monetary Authority or the Central Bureau of Statistics, as both operate within internationally recognized scientific methodologies, and economic forecasts are probabilistic by nature based on assumptions that are subject to change, especially in an economy functioning under external political constraints. The Palestinian economy needs not only greater funding but also an early economic warning system that updates forecasts quarterly, providing decision-makers and donors with a more accurate picture of reality. When conditions change faster than measurement tools, updating data becomes part of crisis management, not just a periodic statistical exercise. In an economy changing at this speed, the flexibility of forecasts becomes part of the quality of economic governance, not just a technical matter. The most dangerous gap is not between expectation and reality, but between the policies built on numbers that have already been overtaken by reality.