Palestinian Economy... Or Two Economies?

By: Dr. Said Sabri, International Economic and Financial Consultant – Member of the International Authority for Transformation and Digital Economy – General Secretariat At the beginning of 2026, the Palestine Monetary Authority and the Palestinian Central Bureau of Statistics projected the Palestinian economy to grow by 4.1% to 4.5%. However, just six months later, the same official data revealed a contraction of 8%, and a decline in per capita GDP to only $545. Between these two figures lies not just a statistical gap, but the story of an economy changing faster than forecasts can keep up. Forecast based on assumptions, not actual recovery The scenario on which this forecast was built was not a prediction of fundamental improvement, but an assumption of "the continuation of existing conditions without significant changes" — the persistence of movement and crossing restrictions, the continued limited activity in Gaza within the scope of humanitarian aid, with a large portion of the workforce being unable to access the Israeli labor market. In other words, it was a marginal growth calculated from a very low base after Gaza's contraction exceeded 80% in 2024. The problem is that even this modest forecast did not hold up against the first-quarter data, as the West Bank economy alone recorded an 8% decline, despite being the area least directly affected 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 the practical sense, but rather two economies that differ in activity structure, price levels, labor market, poverty rates, and even growth and contraction dynamics. The inflation rate in Palestine recorded sharp fluctuations over the past year, reaching an annual increase of 10.5% overall for 2025, but with a stark disparity between regions: near-complete stability in the West Bank (-0.11%), compared to a shocking increase in Gaza of 21.93% due to scarcity of goods and the collapse of supply chains. The same applies to the labor market: unemployment reached 28.7% in the West Bank at the end of 2025, compared to over 80% in Gaza, and to poverty: 11.5% in the West Bank compared to 63.6% in Gaza. This disparity means that talking about "one Palestinian economy" has become a misleading simplification; what happens in the West Bank does not necessarily reflect what happens in Gaza, which calls for a review of the statistical presentation methodology itself, so that data for the two regions are presented separately instead of being merged into a single national figure that may conceal more than it reveals. The Cause Gap: Why the Scenario Didn't Materialize? The difference between forecast and reality does not reflect an error 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 witnessed an escalation in the withholding of clearance funds, which constitute about 70% of public revenues, and the continuation of restrictions on their transfer for more than a year, in addition to the exacerbation of the banking liquidity crisis associated with the accumulation of the shekel. The industrial production index, a direct operational measure away from aid-funded consumption, also recorded an additional decline of 1.15% in May 2026, which documents that the contraction is a continuous trend, not a transient event in one quarter. This gap is referred to in economic literature as "economic forecast error," meaning the difference between expected and actual results, a gap that usually widens in economies exposed to repeated political and security shocks. The impact of the contraction is not limited to a decline in production, but extends to the private sector's reluctance to invest and a sharp decline in fixed capital formation amid political and security uncertainty. This is also reflected in the banking sector, where liquidity pressures increase, credit risks rise, and financing appetite declines, transforming the crisis from an economic slowdown into a mutually reinforcing financial and economic contraction cycle. 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 subsequent years, because deferred investment today turns into lost productive capacity tomorrow. A recurring pattern in fragile economies The gap between forecasts and results is not exceptional in fragile and conflict-affected economies, where growth forecasts are frequently revised as field conditions change. However, the specificity of the Palestinian case lies in the fact that political and financial variables change at a faster pace than traditional models can absorb, making forecasts susceptible to being overtaken 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 like a purely technical matter, but it carries a deeper meaning: 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 a margin of nearly 12 percentage points, any planning based on it becomes susceptible to funding and implementation flaws from day one. When international funding plans are built on a scenario that assumes gradual recovery, while quarterly data reveal continued contraction, a funding gap becomes a natural consequence of this disparity, and not just a shortage in the amount of aid provided at conferences like the recent donor conference in Brussels. This gap is not only measured theoretically; the public debt, which exceeded $15.4 billion, reflects how an unmonitored funding gap has turned into accumulated borrowing borne by future generations. Conclusion: The importance of a critical reading of official figures This analysis does not question the professionalism of the Palestine Monetary Authority or the Palestinian Central Bureau of Statistics, as both operate within internationally recognized scientific methodologies, and economic forecasts are by nature probabilistic, based on assumptions that can change, especially in an economy operating under political constraints beyond its control. The Palestinian economy needs not only greater funding, but also an early economic warning system that updates forecasts quarterly, and provides decision-makers and donors with a picture closer to reality. When conditions change faster than measurement tools, data updating becomes part of crisis management, not just a routine statistical task. And in an economy that changes so rapidly, the flexibility of forecasts becomes part of good economic governance, not just a technical matter. The most dangerous gap is not between forecast and reality, but between policies built on figures that reality has already surpassed.