Statement by Adam Bennett, Senior Advisor, IMF Middle East and Central Asia Department
At the International Conference in Support of the Palestinian Economy

1. I would like to join the other delegates here in thanking the Government of Egypt for hosting this conference.

2. A report prepared by IMF staff was published in advance of today’s meeting, and presents our detailed analysis and assessment. I will therefore confine my remarks to a summary of the key conclusions of this report.

3. Since the Annapolis and Paris Conferences in 2007, the Palestinian economy has suffered major setbacks, particularly as a result of the conflict in Gaza. Private sector activity and investment remains seriously constrained by the restrictions on movement and access. Real GDP per capita has continued its downward trend started in 2006. The rate of unemployment remains very high in the Palestinian territories, and particularly in Gaza.

4. Despite very difficult conditions on the ground, the Palestinian Authority has continued to work on institution-building and reform, and has been pursuing prudent fiscal policies. Since the advent of Prime Minister Fayyad’s government, the Palestinian Authority has made impressive strides in strengthening the Public Financial Management System, which is helping prioritize and raise the quality of public expenditure. The authorities have maintained a strict government employment policy and virtually frozen wage rates. They have implemented measures to improve the payment of utility bills, and they have completed the repayment of arrears on wages and to the private sector.

5. The generous support from the donor community last year was essential in ensuring the timely execution of the budget and in supporting the implementation of reforms by the Palestinian Authority. The 2009 budget—which excludes expenditures to address the damage caused by the war in Gaza—envisages a substantial retrenchment in recurrent spending which should reduce the need for external assistance for the recurrent budget and allow for a shift in external financing to cover public investment needs. Expenditures to address Gaza’s war-related damage are expected to be presented in a supplementary budget in due course. As for financing, it will be important to channel as much donor assistance as possible through the Palestinian Authority’s Single Treasury Account, to ensure maximum transparency, accountability, and control by the ministry of finance, in line with international best practice.

6. The implementation of the 2009 budget will be subject to substantial risks. First, adequate pledges to fill the financing gap, and their timely disbursement, will be essential to avoid the re-emergence of liquidity problems and expenditure arrears. Second, private sector growth and investment and reconstruction in the Palestinian territories will continue to be severely hampered as long as the border restrictions persist. Third, related to these physical restrictions, are the problems resulting from restrictions on cash transfers to banks in Gaza. This is reducing the ability of local people to cover their basic needs through cash payments, and also undermining the viability of the banks.

7. Close cooperation between the Palestinian Authority, the Government of Israel, and donors will be essential to reduce these risks and enable a recovery of the Palestinian economy. For its part, the IMF staff will continue to support the Palestinian Authority’s reform efforts through policy advice and technical assistance to the ministry of finance and Palestinian Monetary Authority. IMF staff will also continue to regularly report to donors on macroeconomic and fiscal developments and public finance reforms.