While the corona pandemic has paralyzed the global economy, the Palestinian Authority (PA) has been consulting private sector representatives to propose resilience tools. IZDEHAR conducted a recovery plan that has grabbed the attention of PA and is currently being discussed with Islamic Development Bank (ISDB) as a potential promising partner. The Corona pandemic will hit Palestine’s already fragile economy hard and will severely inflect long term scars on its progress if compared to other countries. 

It is evident that the PA alone cannot handle any economic recovery on its own. Meanwhile, donor countries are also facing a big hit due to the Corona virus pandemic, indicating a possible drop in forecasted aid contribution to Palestine. 

Therefore, the world economies might enter into recession, in which, private sector investors will be the most affected, and thus cannot be blamed for their limited contribution. Hence, this plan was designed to distribute the economic recovery load over the three sectors in order to consolidate their resources and improve responsiveness capabilities.

While daily workers and poor families suffer the most, the PA is working to support them, along with the socially responsible private sector. However, an immediate intervention should take place to avoid poverty expansion among those who are employed but whose income is at risk. Government’s across both developed and developing countries have rushed to launch financing programs for MSMEs to avoid a significant rise in unemployment rates, as MSMEs employ 90 percent of the global labour force. The ultimate aim is to improve their ability to reboot operations and pay their wage bills. For example, the United States announced a financing package of US $349 billion in the form of forgivable loans at a one percent interest rate for MSMEs, on the condition that 75 percent of the amount is used for payroll. Comparatively, the Central Bank of Jordan launched a JD 500 million (US$ 700 million) financing package with a grace period and subsidized interest rates. On the contrary, the PA’s hands are tied with a budget deficit, struggling to provide basic support tools to its private sector. The tools being used by other countries cannot be replicated in Palestine, and therefore, “We are obliged to think out of the box” 

IZDEHAR proposing a plan in a fund structure, calling it the Palestine Economic Rescue Fund (PERF), which is meant to inject finance, strategically support SME’s, ensure improvement in financial positions and exit after complete recovery within five years.

The rescue fund is a hybrid model that is a combination of equity, grants and loans which are to be injected into MSME’s on a fast-track basis, as MSME’s employ 66.2% of the Palestinian work force. The ultimate goal is to save target beneficiaries from bankruptcy, and thus, job retention. Nevertheless, financing under the current circumstances is risky for equity and debt providers. Therefore, Diversifying resources and utilizing multiple financing instruments is the best tool to de-risk stakeholders’ contributions. The fund is also relatively virtual, as financing isn’t necessarily collected in single bank account under the control of a conventional fund manager – an issue that might be opposed by potential partners. The idea is to bring in the funds under one umbrella, with consolidated resources to achieve the desired outcomes and the ability of participants to monitor the flow of their funds.

The main objective of donors is to save the highest amount of jobs as possible, which they have invested heavily in pre corona pandemic, and prevent supply chains from disruption. At the same time, lenders will focus on borrowers’ ability, bearing in mind their historical financial position and the importance of their sector to end-users,  to pay and equity investors will focus on the business ability to reboot and earn profits, under the same above conditions, in order to buy back shares at a premium in year five (Put option assumed). This model provides comfort to donors as beneficiaries, as they are less likely to collapse and fire employees. On the other hand, banks will lend a portion of the amount required by SMEs to reboot and sustain in the coming hard times, thus, smaller loan instalments will be more applicable to the SME’s disrupted cash flows. 

Additionally, equity and grant injection will re-balance the financial position of SME’s, increasing the equity to debt ratio, while there is significant value-add to having new shareholders in companies keen to support them survive. Equity investors are incentivized the most, as they can utilize credit assessment reports from partnering banks to perform evaluation & due diligence. They will also indirectly benefit from the recovery package as they became partners in beneficiary SME’s. 

The fund size depends on stakeholders’ commitments, especially donors. We analysed the socio-economic impact, assuming the minimum of US$ 100 million to be raised. The plan aims to save 20,000 jobs deploying US $5,000 for each job the SME retains. In reference to an ISDB study, each direct job saved 4x the equivalent indirect jobs. This means the intervention could save up to 100,000 jobs in total, assuming a US $500 average monthly salary will result in maintaining US $0.6 billion in annual cash flow within economy. Low-income wages are especially important considering that it is all cycled into the economy, since the money is spent on living expenses. In addition to saving US $300 million worth of the SME’s exposed to the risk of bankruptcy, it’s likely to result in a socio-economic impact of 10x the fund size.

Please click here to download the proposal document for PERF intervention, covering the fund operations phased out over the next five years, SME’s evaluation criteria, valuation methodologies, and the fund structure..