## 1. Estimating the Size of Informal Economy ## Source details **Canonical URL:** [1. Estimating the Size of Informal Economy](https://www.imf.org/-/media/files/publications/cr/2022/english/1wbgea2022003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1wbgea2022003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1wbgea2022003.pdf.json) --- ### Excess cash in the Palestinian banking system: overview and institutional context - WBG has no national currency; the New Israeli Shekel (NIS) is the main means of payment, with the Jordanian Dinar (JOD) and the U.S. Dollar (USD) also widely used. - PA employees’ wages and retirees’ pensions are paid in NIS; goods traded with Israel are settled in NIS; Palestinian workers in Israel are paid and remit in NIS. Real estate is normally appraised in USD, and land in JOD and USD. Private sector employees are mostly paid in USD, except bank employees who are paid in JOD. - Since 2009 Israeli correspondent banks largely terminated cash clearing services for Palestinian banks. The Bank of Israel (BoI) began servicing cash shipments from domestic Palestinian banks operating in the West Bank in 2009 but set a monthly limit on coins and notes it accepts back. - BoI limits were set in coordination with the Coordinator of Government Activities in the Territories (COGAT) because of perceived ML/TF concerns. Limiting cash shipments mitigates perceived ML/TF risks but does not address transaction-level risks and can increase informality and cash use in WBG. ### How much excess shekel cash is there? - PMA defines excess shekel cash as shekel cash in banks’ vaults exceeding 6 percent of short-term shekel deposits. PMA requires banks to hold 3 percent of their deposits in each currency at each branch in vault cash, plus 3 percent of total deposits in each currency for daily customer needs. The PMA’s reserve requirement of 9 percent of deposits in all currencies must be met separately. - Transfers of NIS cash from banks operating in the West Bank rose from NIS 9.6 billion in 2013 to NIS 21.1 billion in 2021. - Current BoI limit: NIS 4.5 billion per quarter (or NIS 18 billion per year), five times the initial monthly quota of NIS 300 million set in 2009. - BoI authorized ad-hoc additional cash transfers above limits, including exceptional shipments of: - NIS 2.4 billion in 2021Q4 and NIS 2.3 billion in 2022Q1 (PMA figures). - PMA notes: exceptional shipments were of NIS 3 billion in 2021Q4 and NIS 2.5 billion in 2022Q1 according to BoI official data. The BoI has also authorized an additional exceptional shipment of NIS 2.5 billion for 2022Q3 (BoI official data). - Banks held excess shekel cash of NIS 5 billion (equivalent to 7.2 percent of assets) at end-June 2022 (PMA figures including West Bank and Gaza). West Bank-only excess shekel cash comprised NIS 4.7 billion (6.8 percent of assets) at end-June 2022. - The amount of excess shekel cash varies daily. The average total 2022Q2 holdings amounted to NIS 4.2 billion (6 percent of assets). West Bank-only average 2022Q2 holdings were NIS 3.9 billion (5.5 percent of assets). - All-time high: banks’ excess holdings peaked at an all-time high of NIS 6 billion in September 2021. The all-time high for West Bank-only excess cash was NIS 5.6 billion at end-September 2021. ### Costs to the banking system - Holding excess shekel cash creates or increases six types of costs and lowers bank profits by about 20 percent. Despite costs, banks remained profitable: return on equity and assets stood at 10.4 and 1.4 percent respectively at end-June 2022. - Cost categories and details: - Opportunity costs of holding excess cash: - Lost interest that could have been earned if excess shekel amounts were deposited in interest-bearing accounts. - Cash shipments can take weeks, prolonging time outside interest-bearing accounts. - Interest rates some Israeli correspondent banks offer are significantly below the BoI policy rate. - Uncertainty of ad-hoc shipments and unpredictability of limit adjustments complicate liquidity management. - Banks may avoid customers from cash-heavy sectors (gas stations, supermarkets, restaurants), foregoing portfolio growth or losing clients. - NIS borrowing and NIS-USD swap costs: - Banks may borrow shekels from the PMA as emergency liquidity assistance or swap JOD/USD for NIS to settle transactions while shekel cash piles in vaults. - USD and JOD used as collateral cannot be lent out to customers. - Vault capacity and transportation costs: - Branch vaults periodically reach maximum capacity; new vaults must be built and excess cash shipped across branches at bank expense. - Security and insurance costs: - Cash insurance premiums have skyrocketed. Security and insurance costs alone comprised an estimated USD 12 million in 2021. - BoI-authorized private cash center administrative costs: - Palestinian banks were requested to contract an Israeli operational cash center to process notes and coins. Initial administrative fee was NIS 1,200 per million processed, later raised to NIS 1,500 per million processed. - Time costs of negotiations: - Intense, periodic negotiations for ad-hoc shipments or to raise transfer limits are resource-intensive for PMA, BoI, and banks. ### Breakdown of sources of excess cash and cash flow drivers - Addressing excess shekel cash requires accounting for shekel cash in circulation in the West Bank — formal and informal cash inflows from Israel and the rate at which cash flows in and out of the Palestinian banking system. Changes in largely cash-based informal economic activity and financial inclusion affect shekel cash flows into the banking system. - Significant correlation between growth of excess cash in WBG banking system and NIS cash in circulation: - A one percent increase in NIS cash in circulation is associated with a 9 percent increase in excess cash (using PMA and BoI monthly data for January 2012–December 2021). - NIS cash in circulation grew by 32 percent during 2019–21 (about 10 percent a year), twice the annual rate it grew during 2016–18. - Israel’s nominal GDP grew by annual averages of 4 percent in 2016–18 and 5 percent in 2019–21. - Formal and informal cash inflows from Israel into the West Bank: - Palestinian workers in Israel: - Number rose from some 83,000 in 2010 to 153,000 at end-2021 (145,450 on average in 2021). - These 145,450 Palestinians earned an estimated NIS 17.4 billion, 95 percent of which (some NIS 16.5 billion) was paid in cash. - Planned increases in Israeli work permits (including permitting Gazan workers to reach 15,500) will increase cash inflows into Gaza starting in 2022 and require Gaza-specific solutions to ship excess shekel coins and notes back to Israel. - Informal trade with Israel: - Shifted from reducing net inflows to adding net shekel cash inflows in recent years. - Informal trade generated an estimated net cash inflow into WBG of NIS 1.3 billion in 2021, compared to an outflow of NIS 5.9 billion in 2016. - The shift is mostly due to lower informal imports from Israel (partly from better enforcement by Israel). - Arab Israelis’ and East Jerusalem residents’ cash purchases in the West Bank: - Informal flows estimated at NIS 3.72 billion in 2020, up from NIS 2.74 billion in 2016. - Arab Israelis and East Jerusalem residents also prefer exchanging shekels for dinars in the West Bank because sell rates for JOD are more attractive and fees are lower. - Cash purchases of gold and real estate (particularly in Jericho and Ramallah) added an estimated NIS 1.01 billion to inflows in 2020. ### Key quantitative points - NIS 9.6 billion: transfers of NIS cash from West Bank banks in 2013. - NIS 21.1 billion: transfers of NIS cash from West Bank banks in 2021. - NIS 4.5 billion per quarter / NIS 18 billion per year: current BoI limit. - Initial monthly quota in 2009: NIS 300 million. - Exceptional shipments (PMA figures): NIS 2.4 billion in 2021Q4; NIS 2.3 billion in 2022Q1. - Exceptional shipments (BoI official data): NIS 3 billion in 2021Q4; NIS 2.5 billion in 2021Q1; additional NIS 2.5 billion authorized for 2022Q3. - NIS 5 billion (7.2 percent of assets): banks held excess shekel cash at end-June 2022 (PMA figures, West Bank and Gaza). - NIS 4.7 billion (6.8 percent of assets): West Bank-only excess shekel cash at end-June 2022. - Average total 2022Q2 holdings: NIS 4.2 billion (6 percent of assets). - West Bank-only average 2022Q2 holdings: NIS 3.9 billion (5.5 percent of assets). - All-time high excess cash: NIS 6 billion in September 2021. - All-time high West Bank-only: NIS 5.6 billion at end-September 2021. - Bank profitability at end-June 2022: return on equity 10.4 percent; return on assets 1.4 percent. - Security and insurance estimated cost: USD 12 million in 2021. - Private cash center administrative fee: initial NIS 1,200 per million processed; later NIS 1,500 per million processed. - Workers in Israel: 153,000 at end-2021; 145,450 on average in 2021. - Estimated wages of Palestinian workers in Israel: NIS 17.4 billion total; NIS 16.5 billion paid in cash (95 percent). - Informal trade net cash inflow/outflow (millions NIS): 2016 = (5,924.8); 2017 = (3,149.3); 2018 = (2,310.3); 2019 = (1,983.6); 2020 = 393.1; 2021 = 1,347.5. - Informal trade components (Informal Exports, Informal Imports) in millions NIS: - Informal Exports: 2016 = 4,090.4; 2017 = 4,368.5; 2018 = 4,373.4; 2019 = 4,470.9; 2020 = 3,862.5; 2021 = 5,152.8. - Informal Imports: 2016 = 5,633.1; 2017 = 5,243.4; 2018 = 5,016.8; 2019 = 5,027.4; 2020 = 3,748.3; 2021 = 4,735.6. ### Uncertainty in estimates of Palestinian workers and shekel cash flows - PCBS labor survey data may not reflect the true number of Palestinians working in Israel and settlements. - Official figures put their total number at an estimated 145,000 in 2021, but unofficially numbers as high as 215,000 are mentioned. - Shekel cash outflows may be higher than estimated because available data does not capture all Palestinians’ cash purchases in Israel (including, for example, real estate and other purchases). - Both inflows and outflows may be underestimated; measurement errors can be in either direction. ### Informal economic activity, financial inclusion, and shekel cash deposits - Financial inclusion progress since 2014 has increased shekel cash deposits and hence excess shekel in the banking sector. - Deposits grew as a share of GDP from 63 percent of GDP in 2014 to 91 percent of GDP in 2021. - The share of Palestinians over 15 with a bank account rose from 24 percent in 2014 to 34 percent in 2021. - Some digital and e-payment adoption: - Some 2 percent of those aged 15 and over had a mobile account in 2021. - Demand deposits in NIS rose while demand deposits in JOD stagnated. - The number of NIS accounts increased by about 78,000 between 2020 and 2021. - The average deposit value per account rose to around NIS 13,000. - Estimated additional NIS 1 billion in cash deposits in 2021 in new (basic, current, savings and deposit) accounts, up from an estimated NIS 850 million inflow in cash deposits in new accounts in 2016. ### Informality and cash outside the banking system - The size of WBG’s informal economy is difficult to estimate; employment data suggest informality has decreased, while electricity consumption–based estimates suggest the opposite. - Large amounts of NIS in circulation in WBG remain outside the banking system; business in many sectors is conducted almost exclusively in cash (gas stations, restaurants, electricity and fuel vendors). ### Shekel cash inflows vs. Bank of Israel (BoI) shipping quotas - The regular BoI cash shipment limit has historically been below estimated shekel inflows into the Palestinian banking system. - Example: shipping quota was NIS 3.6 billion compared to an estimated inflow from Palestinian workers alone of NIS 6.3 billion in 2010. - Exceptional shipments above the annual limit have been used ad hoc to accommodate unpredictable inflows but are unreliable for liquidity management. - 2021 example: - Shekel inflows into the banking system estimated as just short of NIS 20 billion. - Regular shipments of NIS 16.6 billion and exceptional shipments of NIS 4.6 billion. ### Total cash flows (in billions of NIS) — selected series 2017–2021 - Palestinian workers in Israel: 12.7, 12.8, 13.9, 13.5, 16.5 - Informal trade: -3.1, -2.3, -2.0, 0.4, 1.3 - Arab Israelis' real estate purchases in the West Bank 1/: 1.0, 1.0, 1.0, 1.0, 1.0 - Financial inclusion: 0.88, 0.91, 0.94, 0.97, 1.00 - Total (A): 11.4, 12.4, 13.8, 15.9, 19.8 - Regular cash shipments (BoI limit) (B1): 12.7, 12.1, 15.5, 13.7, 16.6 - Exceptional cash shipments (B2): 0.0, 2.4, 1.6, 3.1, 4.6 - Total cash shipments (B) = (B1) + (B2): 12.7, 14.5, 17.1, 16.9, 21.1 - (A) - (B1): -1.3, 0.3, -1.7, 2.1, 3.3 - (A) - (B): -1.3, -2.1, -3.3, -1.0, -1.3 - Excess cash (PMA definition): 3.4, 2.8, 3.6, 3.0, 4.6 Note: 1/ Figures also include gold purchases. There are no available estimates for real estate purchases only. ### Box 1 — Estimates of the size of the informal economy - Commonly used estimates put the informal Palestinian economy at over 50 percent of GDP. - Employment data: - A 2014 study estimated informal employment as equivalent to more than a third of formal private sector employment (62,493 informal firms employing 152,262 workers in WBG), with an average wage 27 percent lower than for workers with formal jobs. - According to ILO harmonized LFS data, 51 percent of WBG’s workers were informal workers in 2021, putting informal sector output at 51 percent of WBG’s official GDP (down from 54 percent in 2016). - Electricity consumption data: - Using a gap between observed output growth and electricity consumption growth as a proxy, staff estimates unobserved output at 57 percent of total economic activity (assuming electricity consumption per unit of output remained flat since 1997). ### Final considerations and policy recommendations - Holding excess shekels at the PMA’s vault: - Allowing Palestinian banks to deposit excess shekels in the PMA’s vault would displace rather than solve the problem; it would shift the burden from commercial banks to the PMA. - Allowing banks to use vault cash as part of the 9 percent reserve requirement would not solve the excess shekel cash problem but would shift custody. - Dollarization: - Dollarization could, in principle, be a solution to excess cash but is impractical given the volume of trade and formal flows between WBG and Israel. - Eighty percent of WBG’s imports come from Israel and all government transactions are in NIS, making a shift from NIS to USD undesirable. - GoI electronic wage payment requirement (pilot expected second half of 2022): - If swiftly broadened to cover all Palestinian workers with working permits, electronic payment is expected to help significantly alleviate banks’ excess physical cash problems by reducing the main source of cash inflows. - Paying Palestinians electronically would also lower ML/TF and tax evasion risks, provided effective AML/CFT preventive measures and due diligence are implemented and compliance is appropriately supervised. - Palestinian authorities should coordinate with the BoI to ensure the current cash shipment limit is not automatically reduced as workers start being paid electronically; a premature reduction would undermine the contribution of electronic payments to reducing excess cash. - Strengthen AML/CFT and stem illicit cash flows: - Palestinian authorities should close gaps identified in ML/TF national risk assessments and the MENAFATF on-site mutual evaluation, with possible capacity development support from the Fund. - Israeli authorities should strive to ensure that proceeds from any illegal activity in Israel cannot be brought across the border. - Consider future limits on large cash transactions. - Improve cross-border payment infrastructure and promote digital payments: - Recent measures: licensing five new financial digital payments service providers; financial awareness campaigns; limiting interchange fees and reducing credit card merchant fees from 3.4 percent to 0.5 percent; launching a regulatory sandbox; lowering regulatory barriers to entry. - PMA effort: raised share of fuel stations in the West Bank with a point-of-sale terminal to 70 percent at end-July 2022 and committed to a zero-merchant fee for 6 months to encourage e-payments at the pump. - Further measures needed: facilitate Arab Israelis’ use of Israeli cards, promote domestic cashless transactions, shrink the informal economy, and PMA collaboration with the BoI on greater interconnection of Israeli and Palestinian payments systems. - Rule-based periodic adjustments of the cash transfer limit: - Periodic discrete rule-based adjustments of the cash transfer limit according to fixed metrics reflecting sources and sizes of shekel cash flows would improve predictability and banks’ liquidity management. - These reviews will be resource-intensive and require constant and consistent data gathering. *Source: PMA; and IMF staff calculations.* ### 1. Estimating the Size of Informal Economy ____________________________________________ 10 ### 1. Estimating the Size of Informal Economy ### Excess cash in the Palestinian banking system: overview and institutional context - WBG has no national currency; the New Israeli Shekel (NIS) is the main means of payment, with the Jordanian Dinar (JOD) and the U.S. Dollar (USD) also widely used. - PA employees’ wages and retirees’ pensions are paid in NIS; goods traded with Israel are settled in NIS; Palestinian workers in Israel are paid and remit in NIS. Real estate is normally appraised in USD, and land in JOD and USD. Private sector employees are mostly paid in USD, except bank employees who are paid in JOD. - Since 2009 Israeli correspondent banks largely terminated cash clearing services for Palestinian banks (Gaza classified a “hostile entity” in 2007; Israeli banks severed Gaza relations in 2009). The Bank of Israel (BoI) began servicing cash shipments from domestic Palestinian banks operating in the West Bank in 2009 but set a monthly limit on coins and notes it accepts back. - BoI limits were set in coordination with the Coordinator of Government Activities in the Territories (COGAT) because of perceived ML/TF (money laundering and terrorism financing) concerns. Limiting cash shipments mitigates perceived ML/TF risks but does not address transaction-level risks and can increase informality and cash use in WBG. ### How much excess shekel cash is there? - The Palestine Monetary Authority (PMA) defines excess shekel cash as shekel cash in banks’ vaults exceeding 6 percent of short-term shekel deposits. PMA requires banks to hold 3 percent of their deposits in each currency at each branch in vault cash, plus 3 percent of total deposits in each currency for daily customer needs. The PMA’s reserve requirement of 9 percent of deposits in all currencies must be met separately. - Transfers of NIS cash from banks operating in the West Bank rose from NIS 9.6 billion in 2013 to NIS 21.1 billion in 2021. - Current BoI limit: NIS 4.5 billion per quarter (or NIS 18 billion per year), five times the initial monthly quota of NIS 300 million set in 2009. - BoI authorized ad-hoc additional cash transfers above limits, including exceptional shipments of: - NIS 2.4 billion in 2021Q4 and NIS 2.3 billion in 2022Q1 (PMA figures). - PMA notes: exceptional shipments were of NIS 3 billion in 2021Q4 and NIS 2.5 billion in 2022Q1 according to BoI official data. The BoI has also authorized an additional exceptional shipment of NIS 2.5 billion for 2022Q3 (BoI official data). - Banks held excess shekel cash of NIS 5 billion (equivalent to 7.2 percent of assets) at end-June 2022 (PMA figures including West Bank and Gaza). West Bank-only excess shekel cash comprised NIS 4.7 billion (6.8 percent of assets) at end-June 2022. - The amount of excess shekel cash varies daily. The average total 2022Q2 holdings amounted to NIS 4.2 billion (6 percent of assets). West Bank-only average 2022Q2 holdings were NIS 3.9 billion (5.5 percent of assets). - All-time high: banks’ excess holdings peaked at an all-time high of NIS 6 billion in September 2021. The all-time high for West Bank-only excess cash was NIS 5.6 billion at end-September 2021. ### Costs to the banking system - Holding excess shekel cash creates or increases six types of costs and lowers bank profits by about 20 percent. Despite costs, banks remained profitable: return on equity and assets stood at 10.4 and 1.4 percent respectively at end-June 2022. - Cost categories and details: - Opportunity costs of holding excess cash: - Lost interest that could have been earned if excess shekel amounts were deposited in interest-bearing accounts. - Cash shipments can take weeks, prolonging time outside interest-bearing accounts. - Interest rates some Israeli correspondent banks offer are significantly below the BoI policy rate. - Uncertainty of ad-hoc shipments and unpredictability of limit adjustments complicate liquidity management. - Banks may avoid customers from cash-heavy sectors (gas stations, supermarkets, restaurants), foregoing portfolio growth or losing clients. - NIS borrowing and NIS-USD swap costs: - Banks may borrow shekels from the PMA as emergency liquidity assistance or swap JOD/USD for NIS to settle transactions while shekel cash piles in vaults. - USD and JOD used as collateral cannot be lent out to customers. - Vault capacity and transportation costs: - Branch vaults periodically reach maximum capacity; new vaults must be built and excess cash shipped across branches at bank expense. - Security and insurance costs: - Cash insurance premiums have skyrocketed. Security and insurance costs alone comprised an estimated USD 12 million in 2021. - BoI-authorized private cash center administrative costs: - Palestinian banks were requested to contract an Israeli operational cash center to process notes and coins. Initial administrative fee was NIS 1,200 per million processed, later raised to NIS 1,500 per million processed. - Time costs of negotiations: - Intense, periodic negotiations for ad-hoc shipments or to raise transfer limits are resource-intensive for PMA, BoI, and banks. ### Breakdown of sources of excess cash and cash flow drivers - Addressing excess shekel cash requires accounting for shekel cash in circulation in the West Bank — formal and informal cash inflows from Israel and the rate at which cash flows in and out of the Palestinian banking system. Changes in largely cash-based informal economic activity and financial inclusion affect shekel cash flows into the banking system. - Significant correlation between growth of excess cash in WBG banking system and NIS cash in circulation: - A one percent increase in NIS cash in circulation is associated with a 9 percent increase in excess cash (using PMA and BoI monthly data for January 2012–December 2021). - NIS cash in circulation grew by 32 percent during 2019–21 (about 10 percent a year), twice the annual rate it grew during 2016–18. - Israel’s nominal GDP grew by annual averages of 4 percent in 2016–18 and 5 percent in 2019–21. - Formal and informal cash inflows from Israel into the West Bank: - Palestinian workers in Israel: - Number rose from some 83,000 in 2010 to 153,000 at end-2021 (145,450 on average in 2021). - These 145,450 Palestinians earned an estimated NIS 17.4 billion, 95 percent of which (some NIS 16.5 billion) was paid in cash. - Planned increases in Israeli work permits (including permitting Gazan workers to reach 15,500) will increase cash inflows into Gaza starting in 2022 and require Gaza-specific solutions to ship excess shekel coins and notes back to Israel. - Informal trade with Israel: - Shifted from reducing net inflows to adding net shekel cash inflows in recent years. - Informal trade generated an estimated net cash inflow into WBG of NIS 1.3 billion in 2021, compared to an outflow of NIS 5.9 billion in 2016. - The shift is mostly due to lower informal imports from Israel (partly from better enforcement by Israel). - Arab Israelis’ and East Jerusalem residents’ cash purchases in the West Bank: - Informal flows estimated at NIS 3.72 billion in 2020, up from NIS 2.74 billion in 2016. - Arab Israelis and East Jerusalem residents also prefer exchanging shekels for dinars in the West Bank because sell rates for JOD are more attractive and fees are lower. - Cash purchases of gold and real estate (particularly in Jericho and Ramallah) added an estimated NIS 1.01 billion to inflows in 2020. ### Key quantitative points (preserved) - NIS 9.6 billion: transfers of NIS cash from West Bank banks in 2013. - NIS 21.1 billion: transfers of NIS cash from West Bank banks in 2021. - NIS 4.5 billion per quarter / NIS 18 billion per year: current BoI limit. - Initial monthly quota in 2009: NIS 300 million. - Exceptional shipments (PMA figures): NIS 2.4 billion in 2021Q4; NIS 2.3 billion in 2022Q1. - Exceptional shipments (BoI official data): NIS 3 billion in 2021Q4; NIS 2.5 billion in 2022Q1; additional NIS 2.5 billion authorized for 2022Q3. - NIS 5 billion (7.2 percent of assets): banks held excess shekel cash at end-June 2022 (PMA figures, West Bank and Gaza). - NIS 4.7 billion (6.8 percent of assets): West Bank-only excess shekel cash at end-June 2022. - Average total 2022Q2 holdings: NIS 4.2 billion (6 percent of assets). - West Bank-only average 2022Q2 holdings: NIS 3.9 billion (5.5 percent of assets). - All-time high excess cash: NIS 6 billion in September 2021. - All-time high West Bank-only: NIS 5.6 billion at end-September 2021. - Bank profitability at end-June 2022: return on equity 10.4 percent; return on assets 1.4 percent. - Security and insurance estimated cost: USD 12 million in 2021. - Private cash center administrative fee: initial NIS 1,200 per million processed; later NIS 1,500 per million processed. - Workers in Israel: 153,000 at end-2021; 145,450 on average in 2021. - Estimated wages of Palestinian workers in Israel: NIS 17.4 billion total; NIS 16.5 billion paid in cash (95 percent). - Informal trade net cash inflow/outflow: - Net informal trade: (5,924.8) in 2016; (3,149.3) in 2017; (2,310.3) in 2018; (1,983.6) in 2019; 393.1 in 2020; 1,347.5 in 2021 (in millions NIS). - Informal trade components (selected years, in millions NIS): - Informal Exports: 2016 = 4,090.4; 2017 = 4,368.5; 2018 = 4,373.4; 2019 = 4,470.9; 2020 = 3,862.5; 2021 = 5,152.8. - Informal Imports: 2016 = 5,633.1; 2017 = 5,243.4; 2018 = 5,016.8; 2019 = 5,027.4; 2020 = 3,748.3; 2021 = 4,735.6. *September 13, 2022 — WEST BANK AND GAZA, INTERNATIONAL MONETARY FUND* ### 14. There is uncertainty around these estimates for Palestinian workers in Israel ### 14. There is uncertainty around these estimates for Palestinian workers in Israel ### Uncertainty in estimates of Palestinian workers and shekel cash flows - PCBS labor survey data may not reflect the true number of Palestinians working in Israel and settlements. - Official figures put their total number at an estimated 145,000 in 2021, but unofficially numbers as high as 215,000 are mentioned. - Shekel cash outflows may be higher than estimated because available data does not capture all Palestinians’ cash purchases in Israel (including, for example, real estate and other purchases). - Both inflows and outflows may be underestimated; measurement errors can be in either direction. ### Informal economic activity, financial inclusion, and shekel cash deposits - Financial inclusion progress since 2014 has increased shekel cash deposits and hence excess shekel in the banking sector. - Deposits grew as a share of GDP from 63 percent of GDP in 2014 to 91 percent of GDP in 2021. - The share of Palestinians over 15 with a bank account rose from 24 percent in 2014 to 34 percent in 2021. - Some digital and e-payment adoption: - Some 2 percent of those aged 15 and over had a mobile account in 2021. - Demand deposits in NIS rose while demand deposits in JOD stagnated. - The number of NIS accounts increased by about 78,000 between 2020 and 2021. - The average deposit value per account rose to around NIS 13,000. - Estimated additional NIS 1 billion in cash deposits in 2021 in new (basic, current, savings and deposit) accounts, up from an estimated NIS 850 million inflow in cash deposits in new accounts in 2016. ### Informality and cash outside the banking system - The size of WBG’s informal economy is difficult to estimate; employment data suggest informality has decreased, while electricity consumption–based estimates suggest the opposite. - Large amounts of NIS in circulation in WBG remain outside the banking system; business in many sectors is conducted almost exclusively in cash (gas stations, restaurants, electricity and fuel vendors). ### Shekel cash inflows vs. Bank of Israel (BoI) shipping quotas - The regular BoI cash shipment limit has historically been below estimated shekel inflows into the Palestinian banking system. - Example: shipping quota was NIS 3.6 billion compared to an estimated inflow from Palestinian workers alone of NIS 6.3 billion in 2010. - Exceptional shipments above the annual limit have been used ad hoc to accommodate unpredictable inflows but are unreliable for liquidity management. - 2021 example: - Shekel inflows into the banking system estimated as just short of NIS 20 billion. - Regular shipments of NIS 16.6 billion and exceptional shipments of NIS 4.6 billion. ### Total cash flows (in billions of NIS) — selected series 2017–2021 - Palestinian workers in Israel: 12.7, 12.8, 13.9, 13.5, 16.5 - Informal trade: -3.1, -2.3, -2.0, 0.4, 1.3 - Arab Israelis' real estate purchases in the West Bank 1/: 1.0, 1.0, 1.0, 1.0, 1.0 - Financial inclusion: 0.88, 0.91, 0.94, 0.97, 1.00 - Total (A): 11.4, 12.4, 13.8, 15.9, 19.8 - Regular cash shipments (BoI limit) (B1): 12.7, 12.1, 15.5, 13.7, 16.6 - Exceptional cash shipments (B2): 0.0, 2.4, 1.6, 3.1, 4.6 - Total cash shipments (B) = (B1) + (B2): 12.7, 14.5, 17.1, 16.9, 21.1 - (A) - (B1): -1.3, 0.3, -1.7, 2.1, 3.3 - (A) - (B): -1.3, -2.1, -3.3, -1.0, -1.3 - Excess cash (PMA definition): 3.4, 2.8, 3.6, 3.0, 4.6 Note: 1/ Figures also include gold purchases. There are no available estimates for real estate purchases only. ### Box 1 — Estimates of the size of the informal economy - Commonly used estimates put the informal Palestinian economy at over 50 percent of GDP. - Employment data: - A 2014 study estimated informal employment as equivalent to more than a third of formal private sector employment (62,493 informal firms employing 152,262 workers in WBG), with an average wage 27 percent lower than for workers with formal jobs. - According to ILO harmonized LFS data, 51 percent of WBG’s workers were informal workers in 2021, putting informal sector output at 51 percent of WBG’s official GDP (down from 54 percent in 2016). - Electricity consumption data: - Using a gap between observed output growth and electricity consumption growth as a proxy, staff estimates unobserved output at 57 percent of total economic activity (assuming electricity consumption per unit of output remained flat since 1997). ### Final considerations and policy recommendations - Holding excess shekels at the PMA’s vault: - Allowing Palestinian banks to deposit excess shekels in the PMA’s vault would displace rather than solve the problem; it would shift the burden from commercial banks to the PMA. - Allowing banks to use vault cash as part of the 9 percent reserve requirement would not solve the excess shekel cash problem but would shift custody. - Dollarization: - Dollarization could, in principle, be a solution to excess cash but is impractical given the volume of trade and formal flows between WBG and Israel. - Eighty percent of WBG’s imports come from Israel and all government transactions are in NIS, making a shift from NIS to USD undesirable. - GoI electronic wage payment requirement (pilot expected second half of 2022): - If swiftly broadened to cover all Palestinian workers with working permits, electronic payment is expected to help significantly alleviate banks’ excess physical cash problems by reducing the main source of cash inflows. - Paying Palestinians electronically would also lower ML/TF and tax evasion risks, provided effective AML/CFT preventive measures and due diligence are implemented and compliance is appropriately supervised. - Palestinian authorities should coordinate with the BoI to ensure the current cash shipment limit is not automatically reduced as workers start being paid electronically; a premature reduction would undermine the contribution of electronic payments to reducing excess cash. - Strengthen AML/CFT and stem illicit cash flows: - Palestinian authorities should close gaps identified in ML/TF national risk assessments and the MENAFATF on-site mutual evaluation, with possible capacity development support from the Fund. - Israeli authorities should strive to ensure that proceeds from any illegal activity in Israel cannot be brought across the border. - Consider future limits on large cash transactions. - Improve cross-border payment infrastructure and promote digital payments: - Recent measures: licensing five new financial digital payments service providers; financial awareness campaigns; limiting interchange fees and reducing credit card merchant fees from 3.4 percent to 0.5 percent; launching a regulatory sandbox; lowering regulatory barriers to entry. - PMA effort: raised share of fuel stations in the West Bank with a point-of-sale terminal to 70 percent at end-July 2022 and committed to a zero-merchant fee for 6 months to encourage e-payments at the pump. - Further measures needed: facilitate Arab Israelis’ use of Israeli cards, promote domestic cashless transactions, shrink the informal economy, and PMA collaboration with the BoI on greater interconnection of Israeli and Palestinian payments systems. - Rule-based periodic adjustments of the cash transfer limit: - Periodic discrete rule-based adjustments of the cash transfer limit according to fixed metrics reflecting sources and sizes of shekel cash flows would improve predictability and banks’ liquidity management. - These reviews will be resource-intensive and require constant and consistent data gathering. *Source: PMA; and IMF staff calculations.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1wbgea2022003.pdf_