MEII Chairman Berl Bernhard, OPIC CEO Robert Mosbacher, Jr. & PIF CEO Dr. Muhammad Mustafa
"MEII is unique because it involves American-Palestinian partnership."Palestinian economic development is vital to creating a viable economic, political, and secure future for Palestinians, Israelis, and the region. With the recent changes in control of the Palestinian Authority, including the appointment of Salam Fayyad as prime minister, the world community is looking for ways to help stimulate and develop the Palestinian economy. We are yet again at a window of opportunity, but the question remains - what is the best approach for fostering Palestinian economic development?
Palestinian businesses face many challenges, including restrictive movement due to internal checkpoints and border delays, lack of access to credit, high wages relative to regional competitors, lack of access to foreign markets, corruption. These challenges have hampered businesses’ productive capacity and eroded their competitiveness in the local and international market. At the end of the day, it is more cost effective for many Palestinian businesses not to invest in their businesses, rather than to try to manage the costs associated with doing more business under the current economic and security situation.
But smartly designed economic programs can target issues that address the specific needs of Palestinian businesses. While the private sector alone cannot offer the financial tools Palestinians need to invest in and grow their businesses, a new breed of public-private partnerships is emerging to fill the gap.
The Middle East Investment Initiative (MEII) is a 10-year, $160 million loan guarantee facility that will guarantee loans made by local banks to small- and medium-sized Palestinian businesses. MEII was officially launched at President Abbas’s office in Ramallah on July 25. It results from two years of planning and development by the Aspen Institute, the Overseas Private Investment Initiative (OPIC) and the Palestine Investment Fund (PIF).
Loan guarantee facilities in developing economies are not new, but MEII is unique because it involves American-Palestinian partnership. The PIF, led by CEO Dr. Muhammad Mustafa, has committed $50 million to the initiative (OPIC has contributed $110 million, and Aspen Institute, through MEII, is raising approximately $10 million in operating funds). MEII has targeted the credit market as a way to stimulate investment in Palestinian businesses.
Palestinian businesses need access to reasonable and fair credit to invest in their businesses, take on additional production contracts, improve their productive capacity, and hire more workers. Current conditions have made this nearly impossible, with banks demanding a high level of collateral (at times 100 to 200% of the loan request). As a result, many businesses either spend their own capital or delay projects all together. By insuring 70% of loans made by local banks, MEII aims to encourage banks to make more loans available at reasonable rates and more manageable collateral amounts. –Over time, and in conjunction with other programs, MEII’s capital influx can lead to more business transactions, more sustainable jobs, and a more prosperous Palestinian economy.
Neither MEII, nor any other single program, provides a silver bullet that can solve all problems. However, coordinated efforts, targeting specific market needs, can have a significant impact.
For example, a Clinton Global Initiative commitment is developing a political risk insurance product for Palestinian exporters that face increasing costs related to checkpoint and border delays and closures. As the costs of transportation rise and delay costs and fees mount, many Palestinian businesses are choosing not to export their goods to Israel (approximately 80% of the Palestinian export market) or international destinations. Given a risk management tool in the form of trade disruption insurance, Palestinian businesses could take on export contracts they had previously abandoned or otherwise would not have pursued. In many cases, if Palestinian businesses do take on these contracts, they would need access to credit to expand their production capacity, and/or hire additional workers to perform the work – which would stimulate the demand for credit, reinforcing the loan guarantee initiative.
By helping the Palestinian businesses gain access to reasonable credit, better manage their political risk, and gain access to other financial tools not currently being provided by the private sector, MEII and other economic development programs give Palestinian entrepreneurs the ability to continue to grow their operations under very challenging circumstances.
Palestinian businesses benefit far more from concrete programs, like MEII, that provide the tools to succeed, than from promises of foreign aid. No one can give the Palestinians a viable, growing economy. But the international community can partner with Palestinians to provide the services that will grow and expand businesses in current circumstances. As the economic, political, and security environments improve, the need for bank loan guarantees and political risk insurance will fade and services provided by public-private partnerships will be replaced with those of the private sector.
This current window of opportunity may not stay open long. International partners can best serve shared interests by investing in the near term in concrete targeted efforts such as MEII’s loan guarantee project. This and other similar projects show an important commitment in the near term, and over time, to strengthening the Palestinian economy, and thus taking an important step toward building a better future and opportunity for the Palestinian people, for Israel, and for the region.