Program Note
West Bank and Gaza
Last Updated: July 08, 2009
Background
Under the Oslo Accords, agreed between the Israelis and Palestinians in 1993-95, the Palestinian Authority (PA) was established with the task of building new institutions from scratch and developing a policy and legal framework for the West Bank and Gaza (WBG) that could provide the basis for a future Palestinian state. Considerable progress was made toward these objectives, until the outbreak of the second “intifada” in 2000. Despite efforts to put the peace process back on track (the “road map”), the situation continued to deteriorate, culminating with the election of the Hamas-led government in 2006, the subsequent Israeli blockade, and the effective division of WBG into separate political blocs for Gaza and the West Bank. Throughout this time, the PA has struggled to maintain its relevance, keep up the reform effort, and prevent the ongoing economic crisis from turning into a humanitarian disaster.
Role of the IMF
The IMF was mandated to engage with the PA under the Oslo Accords. While the IMF cannot provide financial support to WBG (because it is not a member state), it is able to provide policy advice in the macroeconomic, fiscal, and financial areas and has been doing so since 1994.
The IMF has also been providing technical assistance to support capacity building in the areas of tax administration, public expenditure management, banking supervision and regulation, and macroeconomic statistics.
Most recently, IMF staff worked with the PA to develop the Palestinian Reform and Development Plan presented at the Paris Donors’ Conference in 2007. More recently, IMF staff worked with the PA to develop the Palestinian Reform and Development Plan presented at the Paris Donors’ Conference in 2007. The IMF’s staff reports review progress in implementing the plan, with a focus on the macroeconomic and fiscal areas. These reports have been taken into account by donors in their disbursement decisions (see www.imf.org/wbg for recent reports).
A meeting of donors in New York on September 22, 2009, took stock of the Palestinian economy’s situation, including the authorities’ reform efforts and financial needs. Participants supported Prime Minister Fayyad’s two-year plan for continued institution building and reforms to pave the way for a viable Palestinian state.
Recent Developments
Following its creation in 1994, the PA began a program of reform and institution building, financing its operations from customs revenue (collected by the Israeli authorities on its behalf) and donor support. Worsening relations between the Israelis and the Palestinians in recent years have, however, resulted in frequent interruptions to the transfer of customs revenue. As such, the fiscal burden has fallen increasingly on foreign donors.
The economic recovery that began in 1994 came to an abrupt halt in 2000 and then went into reverse in 2006. Between 2006 and 2008, real GDP per capita fell by an average of about 4 percent per year. The rate of unemployment remains very high (about one fifth of the labor force in the West Bank and over one third in Gaza).
Despite these difficult conditions, the PA has managed to reduce the fiscal deficit (before grants) to about 20 percent of GDP in 2008 from 24 percent of GDP in 2007. The PA has also made important progress in strengthening the public financial management system, which helped prioritize and raise the quality of public spending; maintained tight controls on public sector employment and wage rates; implemented measures to improve the payment of utility bills; and repaid its arrears on wages.
The Challenges Ahead
During 2009, there has been an improvement in the macroeconomic situation in the West Bank as a result of concerted actions by the Palestinian Authority, the Government of Israel and the donor community. The private sector’s confidence has been bolstered by the Palestinian Authority reestablishment of a secure environment in major West Bank cities, as well as by its public sector reforms and prudent fiscal policy. These reforms were supported by generous donor budgetary support. Complementing the PA’s measures, the government of Israel has significantly relaxed restrictions on the movement of goods and people within the West Bank, which provided significant impetus to private sector activity and growth. However, with the persistence of the blockade, Gaza’s living standards continue to deteriorate.
So far, the WBG economy has not been significantly affected by the global crisis, due to the lack of strong banking and trade links with the rest of the world. Nevertheless, looking forward, the global recession could substantially reduce growth in Israel, which would adversely affect Palestinian exports, although these now represent only 15 percent of GDP. Also, the global recession could reduce donor financing, as well as remittances from Palestinians in the Diaspora.
In addition, the macroeconomic and fiscal outlook is subject to substantial risks:
- The timely disbursement of foreign aid and the full remittance to the PA of its share of customs revenues will be essential to avoid the re-emergence of liquidity problems and expenditure arrears. Over the medium term, implementation of civil service and pension reforms will also be needed to ensure fiscal sustainability.
- Private sector growth and investment and reconstruction in the Palestinian territories will continue to be hampered as long as border and movement restrictions are not lifted for both the West Bank and Gaza.
- Restrictions on cash transfers to banks in Gaza are reducing the ability of Gazans to cover their basic needs through cash payments.
Close cooperation among the Palestinian Authority, the government of Israel, and donors will be essential to reduce these risks and enable a recovery of the Palestinian economy. It is important for the Palestinians to form a unity government that ensures the integration of Gaza and the West Bank and helps maintain the international community’s support.
