However, economic policies and cooperation can go a long way toward the change needed to boost growth and ease human hardship.
The IMF issued the latest report on the Palestinian economy ahead of the September 19, 2016 meeting of the Ad Hoc Liaison Committee—a mechanism chaired by Norway to coordinate donor assistance and explore ways to make the Palestinian economy more sustainable.
IMF mission chief Karen Ongley spoke to IMF News on the report’s key findings and the policies that could help lay the basis for future growth.
IMF News: What is the economic outlook for the West Bank and Gaza?
Ongley: The Palestinian economy faces some very significant challenges. A major concern is that economic growth will not generate enough jobs or raise average incomes enough to meaningfully improve people’s lives.
This year we’re likely to see growth of 3.3 percent and then to average around 3½ percent per year over the next 3 to 5 years. For many countries, 3½ percent growth might seem quite comfortable, but in the West Bank and Gaza, unemployment is already close to 30 percent—and much higher in Gaza, where two‑thirds of young people don’t have a job. At the same time, more than half the population is under the age of 25, so the labor force and demand for jobs will grow even more rapidly.
There are two other important considerations. One, growth in Gaza has been extremely volatile and dependent on the reconstruction efforts since the 2014 war. This has made it extremely difficult to tackle the chronic humanitarian situation. Two, even average growth of 3½ percent is subject to considerable uncertainty.
IMF News: What are the biggest risks?
Ongley: Donor support for the Palestinian Authority’s budget has been declining since 2008, with a more dramatic reduction last year by about one‑third. It’s likely we’ll see more steep declines in donor aid, particularly with competing demands to assist refugees and parts of the region affected by conflict, and low oil prices constraining donor budgets. This could create pressure for deeper budget cuts—too deep—that would be detrimental to growth.
A deterioration in the security situation would also undermine the outlook. In fact, even the current political situation poses a serious constraint on raising growth. That said, there are some bright spots. For instance, improved economic cooperation between the Government of Israel and the Palestinian Authority has been a positive factor in managing the authorities' budget.
IMF News: Can you talk a bit more about how political and security issues have hindered economic progress?
Ongley: Political uncertainties, the continuous threat of conflict, and restrictions have created an environment in which private investment and activity are both costly and risky. Also, restrictions that limit the movement of people, trade in goods, and access to resources have, over time, eroded the productive capacity of the economy, especially in agriculture and manufacturing.
Our latest report includes some analysis estimating the economic costs of political uncertainty and restrictions over the past two decades. It shows that, absent these constraints, average income per person would have been considerably higher than it is today—possibly more than double.
IMF News: In this context, what can the IMF do to assist the Palestinian authorities?
Ongley: The West Bank and Gaza is not a member of the IMF, so the institution isn’t able to provide financial support. However, since 1994 we have provided policy advice and technical assistance to help build capacity in line with our commitments under the Oslo Accords. For instance, our advice on macroeconomic, fiscal and financial policies helps to support and guide the Palestinian Authority’s policy choices. Our analysis and advice in these areas also informs members of the Ad Hoc Liaison Committee and donor discussions about ways to make the Palestinian economy more sustainable.
IMF News: What are some of the key recommendations to keep the economy moving forward?
Ongley: Despite political uncertainties and restrictions, there is much the Palestinian Authority can do to help improve economic outcomes. Let me highlight three priorities.
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One, the immediate challenge is the fragile fiscal situation. This means keeping the 2016 budget on track by resisting spending pressures, especially spending on wages, which is among the highest in the world as a share of the economy.
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Two, the goal should be to gradually reduce the budget deficit. I want to stress that this is not just about cutting the deficit, but rebalancing government spending toward investment to help rebuild the economy. This can be achieved with further efforts to boost revenues and a review of non-priority spending, supported by reforms to strengthen budget planning and procedures.
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Three, maintaining a healthy and stable financial sector is essential for economic progress. We are pleased to see the Palestine Monetary Authority actively monitoring potential risks in two key areas—the large exposure of banks to the Palestinian Authority and the possibility that Israeli banks terminate correspondent relationships with Palestinian banks. The banking relationship is especially important as allows for settling trade and commercial transactions between the two economies.
The authorities’ policy efforts, while essential, will not be enough. A viable future for the Palestinian economy requires cooperation and partnership between all stakeholders. Continued donor support is vital and it's a bit of a ‘two-way street’—sustained reforms can provide a stronger basis for donor engagement. Also, strengthening the economic dialogue between the Palestinian Authority and the Government of Israel can help mobilize additional revenues and move towards integrating the Palestinian economy into the global economy.
IMF News: Given that the big change needed is on the peace process, is there a trade‑off between focusing on economic policies rather than peace?
Ongley: Quite the contrary. Moving forward with economic reforms has two benefits. One, it helps continue to strengthen economic institutions to ensure the economy is ready to take off when there is a political breakthrough. Two, policies preserving economic stability and easing human hardship will help support a path toward peace.
