Political Context

Economic Indicators (Economic Trends, Government Role, Balance of Payments, GDP Breakdown),

Foreign Trade (Trade Balance, Main Trading Partners, Export/Imports by Commodity, Trends for 1999),

Market Access (Trade Policy of the PNA, Customs Valuation, Export/Import Control, Import Procedures, Distribution channels,   Bilateral Agreements, Investment Regulations, Restricted Products, Free Trade Zone, Required Trade Documentation, Quality and Technical Standards, Advertising and Media, Packaging and Marking),

Investment Climate (Openness to Foreign Investment, Investment Incentives, Transparency of the Regulatory System, Labor,  Efficient Capital Markets and Portfolio Investment, Banking Law and Regulation, Dispute Settlement),

Logistics (Exports from Palestine, Imports from Egypt and Jordan),

Trade Finance

Investment Climate

5.1 Openness to Foreign Investment

5.1.1 Law on the Encouragement of Investment
Following the national commitment of encouraging investors and building a modern market economy, the new Law on the Encouragement of Investment 1998 superseded the 1995 law.

Guarantees:

1. Protection for all investors and investments and grants specific incentives for projects creating or expanding economic activities in certain sectors.

2. Prohibition of discrimination against any investor on the basis of nationality.

3. Prohibition of expropriation of investment; in the event of expropriation for a public purpose, enterprises will be compensated fair market value.

4. Protection of all confidential information unless the investor gives his written consent or a court order from a Palestinian court compels disclosure.

5. Preferential treatment permitted on a narrow basis arising from bilateral or multilateral agreements.

In addition, private foreign investors can benefit from political risk insurance offered by MIGA.

Benefits:

1. Free transfers of foreign currency and freedom for repatriation of income generated from investment in Palestine.

2. Investors may invest in any sector of the Palestinian economy under the free admission principle.

Protecting your product from IPR infringement

Preparation is underway for an intellectual property law, which will allow registration of patents, trademarks, and trade names.

5.2 Investment Incentives

1. Exemption from Income Taxation:

• All investments will be exempt from intax for the first five years.

• Investments exceeding US$5 million are granted an additional 20-year period at the rate of 10%.

• Any special investment in type and capital may be entitled to an additional 20-year period at the rate of 10%.

• Exemptions below US$1 million to $5 million are granted an additional 12-year period at the rate of 10%.

2. Exemption from Customs Duties:

• Equipment and heavy machinery and their imported spare parts.

• Furniture imported for hotels, electrical appliances, and electronics imported for tourism enterprises, hotels and hospitals.

• A price increase in the value of fixed assets when increase is a result of rising prices outside the investor’ s contract.

• The exemption period may be extended for two years if local input in the equipment, machines, and fixtures exceed 60%.

• The exemption period may be extended up to five years depending on the nature and location of the enterprise.

• Additional exemptions may be granted to enterprises engaged in export, provided export percentage is not less than 30% of the total.

• Exemption from payment of VAT on specific items, VAT refunds.

5.3 Transparency of the Regulatory System
The new laws govern transparency and availability of clear, unambiguous rules and regulations, which provides investors with uncontested ability for recourse to the legal system, and ensures added benefits to investors by invoking freedom on control of capital investment and tax exemptions and protection of investment against nationalization and expropriation.

5.4 Labor
The rate of participation of the working-age population in the labor force (crude activity rate) remains relatively low, at around 42 per cent. The PCBS has estimated the size of the Palestinian labor force at 585,000 in 1998, an increase of 5.9 per cent from 1997. The average full employment rate grew to 78 per cent in 1998 (from an average of 69% in 1997), with the total number of employed in 1998 at about 456,000, leaving 91,000 persons unemployed (16 per cent of the labor force).

The number of Palestinians working in Israel and the settlements increased steadily until 1992, when it reached its peak of 116,000. The number began declining after Israel adopted the work permits policy, and the rate of decline increased after 1993, reaching 37,000 in the spring of 1996. As workers with and without permits began sporadically to return to places of work in Israel, the total estimated number of Palestinians working in Israel reached around 70,000 by the fall of 1996. The total, including registered and non-registered workers averaged 75,000 in 1997 and grew significantly to 107,000 in 1998 – topping 100,000 for the first time in 6 years. The share of employment in Israel out of total Palestinian employment in the West Bank and Gaza reached its peak of 39 per cent in 1987 but by 1998, this had been sharply reduced to around 22 per cent.

According to PCBS projections, the resident Palestinian population was expected to exceed 3 million at the turn of the century, reflecting an annual population growth rate of 5.4 per cent. Together with an expatriate Palestinian population of an estimated 3.5 million, this constitutes a formidable reservoir of economic and human resources on which the future of the Palestinian national economy should be able increasingly to draw, in the productive trade and services sectors alike.

The Palestinian Labor force is characterized as being:

1. A relatively well educated labor force;

2. An aggressive and diversified entrepreneurial class that has strong extensions into wealthy expatriate communities and corporate structures in the Arab countries as well as in Europe and North America;

3. Experienced in trading with both the Arab countries and Israel, with a versatility acquired through operating in non-optimal circumstances;

4. Ready to open trade with other countries in the region, given that it does not have a large industrial base to protect

5.5 Efficient Capital Markets and Portfolio Investment

5.5.1 Capital Markets Authority Law
The Capital Markets Authority Law was passed in May 1999. This law establishes an autonomous governmental institution with full legal jurisdiction to regulate the following non-banking related financial institutions:

Palestine Security Exchange,
Clearing, Deposit and Settlement Center,
Management Officers,
Financial Advisers,
other Securities Professionals,
Securities Companies,
Issuers,
Custodians,
Custody Services,
Major Holders,
Public Offers,
Tender Offers,
Securities Holders,
Private Placements,
Institutional Placements, Underwriters, Collective Investment Schemes,
Fund Administrators,
Fund Custodians,
Fund Overseers,
Fund Sponsors,
Portfolio Managers,
Offerors,
Insurance Agents,
Insurance Brokers,
Insurance Intermediaries,
Insurance Companies and other Insurance Dealers,
Venture Capital Companies,
Leasing Companies and other non-banking Financial Intermediaries.

Objectives:

1. Provide an environment to achieve stable and sound non-banking financial market activities including, but not limited to, securities, issuance and trading activities, insurance activities, and leasing activities.

2. Safeguard the interest of the investors and the public.

3. Regulate disclosure of any adequate information and data of the non-banking financial sector.

Powers:

1. Formulate the policy guidelines for conducting the duties of the authority;

2. License, regulate, and supervise individuals and entities listed above in accordance with this law and other laws;

3. Adopt accounting, auditing, and performance evaluation standards for individuals and entities falling under the supervision of the authority;

4. Determine standards, requirements, and duties for qualified auditors to audit the books and records of individuals and entities falling under the supervision of the authority;

5. Impose administrative penalties in terms of fines, in accordance with the laws, as well as corrective action or suspension of all or some of the activities of the supervised individuals and entities.

5.6 Banking Law and Regulations
The Palestinian Monetary Authority Law (central bank) enacted in 1997, and the Banking Law, to be enacted, contain extensive provisions for the licensing and supervision of banks by the Palestinian Monetary Authority (PMA). The PMA Law regulates and licenses all banks; local and foreign alike. The PMA supervises banking transactions and relations between banks, as well as regulates foreign currency exchange and sets financial and credit policies. Palestine has three currencies that constitute legal tender; the Jordanian Dinar, the US dollar, and the new Israeli shekel.

5.6.1 Compulsory Banking Regulations:

• Required reserves on deposits:

- JD – 14% of deposits.
- US$ – 10% of deposits.
- NIS – 8% of deposits.
- Convertible currencies – 10% of deposits.
- Non-convertible currencies – 20% of deposits.
- Liquidity ratio (cash) – 4%.
- Liquidity ratio (non-cash) – 25%.
- Credit accorded to related parties – 20% of total equity base.
- Credit accorded to one client – 10% of equity base, 15% with prior approval of the PMA.
- Provisioning on non-performing loans is allowed as in Jordan.

5.6.2 Source of Funds:
Commercial banks can either obtain funds from customer deposits, inter-bank lending, the issuance of negotiable Certificates of Deposits (CDs), or securities. At present, customer deposits account for the majority of liabilities of the Palestinian banking system.

5.6.3 Competition with Foreign Banks
Banks operating in Palestine have to compete for deposits with banks elsewhere; the competition being mostly for local resident deposits. There are no restrictions whatsoever on money transfers from or to Palestine.

5.7 Dispute Settlement
When either an Investor or the Authority believes that a dispute between them has arisen, it may request that good faith negotiations begin according to procedures established in the Regulations. Either party to a dispute must request good faith negotiations before it may have access to the dispute settlement procedures provided hereunder:

If good faith negotiations fail to resolve the dispute in the period of time specified in the Regulations, either party shall have the right to take the dispute to:

1. Binding, independent arbitration as provided in the Regulations

2. Palestinian courts

Logistics

6.1 Exports from Palestine

(As procedures are constantly changing, exporters should contact Paltrade at info@paltrade.org, or a local trucking agency to obtain the most accurate information)

To the port of embarkation, goods can be transported in containers or in other transport cases. In the latter case, the clearing agent, the trucking agency or the forwarding company can load the container. If the goods are to be transported in containers, then the exporter should arrange for the shipping or forwarding company for the container to be brought and filled at the factory.

6.1.1 Procedures from Gaza:

For goods originating in Gaza, they must be transported to a crossing point with Israel, using Palestinian trucks. There the exporter has two options:

i) Israeli licensed trucks:
Goods may be moved using either a back-to-back system or an unloading-reloading procedure. Both procedures are subject to Israeli security checks, verification of documentation and crossing charges.

ii) Palestinian licensed trucks:
To use Palestinian licensed trucks permits for the vehicle and driver should be obtained from the Israeli Authorities. These trucks then proceed to the port of departure in a convoy with other Palestinian trucks, escorted by Israeli security. Arrangements for this are coordinated through the Palestinian Ministry of Civil Affairs.

6.1.2 West Bank to/through Jordan via the Damya and Al Karama crossing points
These are the most practical routes for land transport of West Bank-produced goods destined for export to or through Jordan. Goods are either loaded onto green trucks or other West Bank-licensed vehicles at the producer’s factory, which then proceed to Damya or Al Karama. At these bridges, all vehicles must pass through Palestinian and Israeli crossing points for security inspection and customs and document checks. They are then driven to the Jordanian side and are inspected by Jordanian customs officials.

Non green truck vehicles then transfer the goods back-to-back to Jordanian trucks, which proceed to deliver the goods to the importer or across the Jordanian borders to other Arab countries.

6.2 Imports From Egypt and Jordan
The level of import transactions is much higher than levels of export transactions for Palestinian traders. In 1998, a monthly average of 2,822 truckloads was exported through all the monitored crossing points, compared to 14,476 imported truckloads.

Many traders indicated that importing procedures are much more complicated than those for exporting. The reason for this attitude stems from the fact that imported products are subject to lengthy and costly inspection and “security” procedures. Besides the security inspection, many imported items are subject to laboratory inspection, as they have to meet Israeli standards (in accordance to the Israeli Standards Institute - ISI).

6.2.1 Importing from Jordan via Al Karama crossing point
Palestinian traders should have a prior arrangement with a Jordanian and an Israeli clearing (customs) agent, since Palestinian clearing agencies are not permitted at any of the crossing points. The trader should provide the clearing agents with an identical copy of all the original documents (the L/C, Packing List, Performa Invoice, Certificate of Origin, Import License, and the Standard Certificate). The trader should inform the agents at least 48 hours before the arrival of the shipment to avoid any unnecessary delays.

6.2.1 Import procedures at Rafah crossing point
The general import procedures at Al Karama are also applicable at Rafah crossing point. The importer should have completed all the arrangements with the clearing agent and prepared all the needed documents. The cargo loaded on Egyptian trucks should pass all the inspection procedures at the Egyptian side of the crossing point. Then the cargo will be unloaded in area “X” at the Israeli side for security and inspection procedures. A Palestinian truck should be ready for the reloading process. After the cargo is checked and reloaded on the truck, the driver will be given a pass to exit the crossing point.

If the destination of imported goods is Gaza, then the goods will be transported to their destination in the Strip. If the final destination is the West Bank, all the checking and the “back-to-back” procedures will take place at Beit Hanoun checkpoint if an Israeli truck is to transport the cargo. Special arrangements can be done whereby Gazan trucks transport the cargo into the West Bank through the Al Muntar crossing point. In this case the security inspections and the convoy system will be implemented. An average of 30 Palestinian trucks cross Al Muntar to the WB daily. At the same time about 200 shipments, coming from Israel crosses Al Muntar into Gaza. The “back-to-back” process is used where the goods will be loaded onto Palestinian trucks and transported into Gaza.

6.2.2 Vehicle routes
The table below shows the routes that freight transport vehicles are permitted to use:

Transport Vehicles and Routes

Costs associated with a trade Transaction:
Imports from Jordan (per shipment)

Other possible costs for Gaza traders

• Add to that figure the entrance fees of $30 at the gate in Jericho

6.4 Shipping Lines and Freight Forwarding

Shipping Agents, Courier, and Clearing

6.5 Warehousing Facilities
No public or private warehouses or storage areas are operated on the bridges or on the way to the bridges, or between the Amman Customs center and the bridges. However, Industrial and Free Trade Zones have such facilities.

Trade Finance

7.1 Financial Sector
The financial sector is developing rapidly in the WBGS. A total of 22 banks are operating with a combined of over 100 branches located in the main cities. In addition to banks, the financial sector comprises venture capital, equity funds and donor-supported lending NGOs.

Financing trade transactions ranks first in the distribution of credit facilities available by sector with 29% of available capital allocated to trade (consolidated balance sheets of the operating banks in Palestine, December 31, 1998, Palestinian Monetary Authority). Banks finance trade activities primarily through the provisioning of direct and indirect credit facilities.

7.1.1 Direct Credit Facilities
Direct credit facilities constitute financing tools as overdraft facilities and loans with specific repayment schedules. Overdraft facilities provide the client with a ceiling that may be exploited as required. In turn, the client is committed to deposit money in the overdraft account covering the overdraft ceiling with no fixed repayment schedule. Overdraft facilities are annually renewable by the bank depending on the cash flow activity of the account. In addition to overdraft facilities, banks offer loans with specific repayment schedules.

7.1.2 Indirect Credit Facilities
Indirect credit facilities are financial transactions that do not require direct cash but are essentially documents against cash. Banks normally cover up to 20 - 35% of the value of the import through indirect credit facilities and often either grant direct credit facilities or request from the client to cover the remaining part of the value of the imported goods. Indirect credit facilities financing trade mainly comprise letters of credit (L/C) and bank guarantees. Although letters of credit, particularly irrevocable, are the safest means of payment for both the exporter as well as banks, it is not compulsory to open a letter of credit unless the traders negotiate to open one.

7.2. Requirements, Procedures and Cost of Credit

7.2.1 Requirements and Procedures
The Client is required to provide the bank with the following documents:

1. Personal identification papers and commercial registration certificate;

2. Ownership certificate of business and property;

3. Financial statements of business (balance sheet and income statement);

4. A business plan, if the credit facility to be used is large.

5. A Performa invoice for the imported goods.

After receiving the required documentation, the credit application undergoes the following procedures:

1. Credit risk assessment to examine the credit worthiness of the client through exploring information about the client’s accounts and credit status.

2. Credit analysis to evaluate the viability of the business.

3. Character assessment to examine the seriousness and credibility of the applicant.

4. The validity of the documentation supporting the client’s proposal.

Should the client meet the above mentioned procedures, the client is required to provide the bank with collateral, such as a cash deposit, third party guarantee and/or mortgage depending on the amount and terms of the credit facility.

The time cycle required to process the credit facility varies according to the credit amount and the bank-client relationship.

7.2.2 Cost of Borrowing
The cost of borrowing comprises the interest rate (direct credit facility), commission fees and sometimes other related administrative fees. The cost of borrowing varies according to bank and currency. With respect to exports, the bank charges only a confirmation fee on the payment received by the Palestinian exporter.

7.3 Major Banks

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