By Wesam Awashreh- PNN/ Bethlehem/
While the corona pandemic has paralyzed the global economy, the Palestinian Authority (PA) has been consulting private sector representatives to propose resilience tools. Fulfilling the national duty, Palestine Prosperity Investment & Development Corp. (PPID – IZDEHAR in Arabic) conducted a recovery plan that has grabbed the attention of PA and is currently being discussed with international development banks for replication in other developing countries.
According to Wesam Awashreh (Investment Advisor at PPID), the Corona pandemic will hit Palestine the worst “Economically,” as compared to other countries. Several factors are at work here, including the country’s economic fragility, the absence of a national currency or natural resources, and its lack of control over other resources due to the Israeli Occupation. It is evident that the PA cannot handle economic recovery on its own. Meanwhile, donor countries are also facing a big hit due to the Corona virus pandemic, indicating a drop in forecasted aid contributions to Palestine. During this recession, private sector investors will be the most affected, and thus cannot be blamed for their limited contributions. Given these factors, 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 labor 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,” Awashreh stated.
Economists forecast recovery to be Nike “✓” shaped rather than “V” shape, meaning that the economy will need time to rebuild. For this reason, financing packages must include grace periods and long-term financing to help SME’s reboot and gradually reach their pre-corona positions, even though financing is required for working capital that is typically financed in short-term instruments. Awashreh shaped the plan in a fund structure, calling it the Palestine Economic Rescue Fund, which is meant to inject finance, strategically support SME’s, ensure improvement in financial positions and exit after complete recovery in 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. 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, and prevent supply chains from disruption. At the same time, lenders will focus on borrowers’ ability to pay and equity investors will focus on the business ability to reboot and earn profits in order to buyback 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 installments 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.
Awashreh said they prepared a comprehensive plan for the intervention, covering the fund operations phased out over the next five years, SME’s evaluation criteria, valuation methodologies, and the fund structure. He is also currently adapting the implementation instruments to be Shari’a compliant. The fund size depends on stakeholders’ commitments, especially donors. He analyzed 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.
Lastly, Awashreh praised the efforts made in response to the COVID-19 pandemic by the PA currently headed by prime minister Dr. Mohammed Shtayyeh. He regarded the board of directors and staff of PPID – IZDEHAR, who sponsored the idea and supporting him in developing the plan. Special thanks were made to the Chairman of PPID (Rafiq Abu Munshar) who has personally shared the plan with PM Shtayyeh and the CEO (Basel Alqadi) who has supported him and shared the model with international developmental institutions to replicate it in other developing countries.
Palestine Prosperity Investment & Development Corp. (IZDEHAR) was founded in 2019 by a group of development driven investors. PPID operates on the firm belief that private sector-led initiatives play a critical role in long-term economic growth in developing and complex markets like Palestine. Its mission is to strengthen the Palestinian economy by originating and developing complex projects in partnership with government, private sector investors, DFIs, IFIs and donors.
Wesam Awashreh is a Palestinian citizen, born and raised in Sinjel village near Ramallah, and is a financial advisor specializing in investment & development funds. Awashreh started his career at a private equity firm in the UAE, and has since worked in several multinational institutions. He currently serves as an Investment & Business Development Advisor for PPID, The Managing Partner of Assalam Consulting Group and Founder of Clever-Water Corp. Awashreh holds a B.A from Birzeit University and an Executive MBA from Indiana University.