Page last updated at 09:52 GMT, Thursday, 31 December 2009

Smuggling fuels Gaza's stalled economy

Gaza smuggler lowers himself into tunnel
Many investors lost money in a scheme they believed made profits on tunnel smuggling

By Heather Sharp
BBC News, Gaza

The day Israel launched its 22-day offensive on Gaza , a year ago, Osama and his family lost most of their $70,000 life savings.

The Gaza accountant, who gives only his first name, had put his money into a local investment scheme - even selling an apartment and his wife's jewelry to do so.

The scheme initially produced excellent returns, which Osama understood came from trade through the smuggling tunnels from Egypt to the blockaded Gaza Strip.

But when the violence broke out, including air raids targeting the tunnels, he rushed to recover his savings, only to discover hundreds of others doing the same and that the scheme's brokers had vanished.

Economy Minister Ziad Zaza, from Hamas administration in Gaza
Economy Minister Ziad Zaza says Hamas intervened to stop the scam

"It was the biggest disaster of my life," he says.

Exactly where Osama's money went, and who was responsible, is one of many grey areas related to the shady, informal economy that has grown up in Gaza under the Israeli-Egyptian blockade.

Israel says the blockade aims to target the Islamic movement Hamas, which controls Gaza and has fired thousands of rockets into Israel in the past decade.

But some locals and international observers are asking whether it is instead strengthening the group.

Legal economy halted

After Hamas forced its rival Fatah from Gaza in 2007, Israel and Egypt tightened their restrictions on Gaza , banning virtually all exports and allowing in only humanitarian basics.

Much legal economic activity had ground to a halt even before Israel's military operation a year ago destroyed or seriously damaged 700 businesses.

But over the years a flourishing mini-economy developed around the tunnels.

Gazans rely on them for cheap Egyptian petrol and products to supplement the basic foodstuffs Israel allows in.

And larger items such as fridges, washing machines, cows, motorbikes, disassembled cars, and - according to Israel - weapons are also moved through the tunnels.

Gazan economist Omar Shaban estimates that the tunnels trade amounts to about US $20-25m a month, and supplies two-thirds of the range of products on sale in Gaza.

With its active black market, and little to invest in the legal economy, Gaza was fertile ground for the investment scheme.

Brick factory, northern Gaza
Cement is available and some brick factories have begun working again

The Hamas administration says more than US $100m invested by Gazans was lost in what turned out to be something like a pyramid scheme.

The brokers offered initial returns by paying "from me to you, from you to him and from him to me," explains economy minister Ziad Zaza, "like Madoff in the US".

The administration blames two men, now in imprisoned as alleged ringleaders. It is carrying out an investigation and has recovered 16.5% of the money invested.

Osama says he was initially suspicious of the scheme, but increased his investment because the brokers collecting the money were respected men with good links to Hamas. He says he even saw Hamas ministers investing.

Mr Zaza says this was all part of the criminals' web of deception and is yet to be fully investigated.

Goods from the tunnels on sale in Gaza City
A wide range of electrical appliances are available from the tunnels

But Osama believes some Hamas-linked people had early warning and got their money back, and is angry that many brokers have not yet been prosecuted.

"They bought houses, cars, nice jeeps, land, why are they not convicted? They are enjoying their lives on our money!"

He voted for Hamas in 2006 out of frustration with their more secular and nationalist rivals Fatah, but is now furious.

"May they account before God for the single shekel I spent to go and vote for them!"

Private sector weakened

Local businessmen also warn that by driving trade underground, the blockade is weakening the generally more politically moderate private sector.

Israel bombed the tunnels during its operation, but a year later, traders say the volume of smuggled goods is greater than ever.

Tunnel owner "Abu Ibrahim" - who also speaks on condition of anonymity - sits in his Gaza City shop among goods ranging from electric ovens to plasma TVs and deep fat fryers.

Total Palestinian deaths:
1,409 (PCHR)
1,387 (B'Tselem)
1,166 (Israeli military)
Palestinian children killed:
326 (under 17, PCHR)
252 (under 16, B'tselem)
89 (under 16, Israeli military)
Palestinian civilians killed:
916* (PCHR)
773* (B'tselem)
295 plus 162 unknown (Israeli military)
Israelis killed:
3 civilians
10 security forces (includes 4 by friendly fire)
*Figs exclude about 250 Hamas police officers

PCHR=Palestinian Human Rights Centre, B'Tselem=Israeli human rights group

He says that competition has increased in recent months and he has had to drop his prices, although most items are still relatively expensive.

And recently, workmen can again be seen shovelling cement into mixers at a few brick factories in Gaza .

Cement is massively in demand for post-war rebuilding, but virtually none enters through legal channels. Israel says it can be used to build rocket launch pads and military tunnels.

Before the blockade, cement was 20 shekels (US $5) a bag. It then became unavailable, until after the Israeli offensive, when it began to enter through the tunnels at about 180 shekels.

Now it is somewhere between 60 and 90 shekels a bag - cheaper, but still too expensive and limited in quantity for large-scale building work.

"Hamas doesn't need cement, it has enough of it - whatever Hamas needs, it has," says Ali el-Haik, of the Palestinian Businessmen Association.

His message to Israel is that "by maintaining this siege, you've actually lost control of what goes in and out of Gaza".

Tunnel tax?

It is widely believed that Hamas runs tunnels of its own, and levies some kind of tax on the trade coming through them.

In his office at the economy ministry, Mr Zaza admits that he would not even have the new-looking fax machine on his desk without the tunnels, although he says they damage the ethical case for lifting the blockade.

He concedes that Rafah municipality used to charge a fee for each tunnel built - reported to be about $2,500 - but says this has now been stopped.

Mr Zaza denies reports that Hamas's military wing takes a cut of tunnel profits or demands that owners supply a certain monthly volume of cement at cost price.

Abu Ibrahim says he has not paid any fees, but confirms he is expected to supply cement - "but it's like a contribution to the nation - they don't force us," he says.

Mud brick house built by the UN, Gaza
The UN has struggled to bring in cement through official channels, and has built this house from mud bricks

Members of the formal business community believe it is impossible to run a tunnel without Hamas co-operation.

They point to the bank and insurance company the movement has set up, and the large beachfront hotel a well-known supporter bought this year, and say it is becoming harder to do business without good links to the movement - something Mr Zaza denies vehemently.

A year on from the Israeli operation, there are small signs of economic activity.

The Palestinian Federation of Industries says 7% of industrial businesses are now operating, up from 3% after the war - some by buying smuggled supplies.

Gazans with salaries from Hamas, the Palestinian Authority or international organisations can buy consumer items - if not extend their homes or develop businesses.

But with 80% of Gazans reliant on some kind of aid, much of the population still faces poverty.

And Egypt has begun building an underground wall to curb the tunnel trade, which may stall even the few current signs of economic life.

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