Stalled Peace Process Clouds Growth Prospects for the West Bank and Gaza

IMF News, September 19, 2016

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The Palestinian economy has long labored under political and security uncertainty; achieving a real improvement requires fundamental change.
Economic policies and cooperation can boost growth and ease human hardship.
The IMF issued the report ahead of the September 19, 2016 meeting of the Ad Hoc Liaison Committee.

Growth projections:
- This year we’re likely to see growth of 3.3 percent.
- Then to average around 3½ percent per year over the next 3 to 5 years.
Labor market and demographics:
- Unemployment is already close to 30 percent.
- In Gaza, two‑thirds of young people don’t have a job.
- More than half the population is under the age of 25.
Gaza-specific risks:
- Growth in Gaza has been extremely volatile and dependent on the reconstruction efforts since the 2014 war.
Long-run cost of constraints:
- Analysis estimates that, absent these constraints, average income per person would have been considerably higher than it is today—possibly more than double.

Donor support:
- 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 there will be more steep declines in donor aid, which could create pressure for deeper budget cuts.
Security and political risks:
- A deterioration in the security situation would undermine the outlook.
- The current political situation poses a serious constraint on raising growth.
Banking and financial sector risks:
- The Palestine Monetary Authority is monitoring two key areas of potential risk: 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 it allows for settling trade and commercial transactions between the two economies.

The West Bank and Gaza is not a member of the IMF; the IMF cannot provide financial support.
Since 1994 the IMF has provided policy advice and technical assistance in line with commitments under the Oslo Accords.
IMF support focuses on macroeconomic, fiscal, and financial policy advice to inform the Palestinian Authority and donor discussions about making the economy more sustainable.

Immediate fiscal priority:
- Keep 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.
Medium-term fiscal strategy:
- Gradually reduce the budget deficit while rebalancing government spending toward investment to help rebuild the economy.
- Achieve this with further efforts to boost revenues, a review of non-priority spending, and reforms to strengthen budget planning and procedures.
Financial sector stability:
- Maintain a healthy and stable financial sector; monitor and mitigate banks’ large exposure to the Palestinian Authority and risks related to correspondent banking relationships.
Need for cooperation and donor engagement:
- Continued donor support is vital; sustained reforms can provide a stronger basis for donor engagement.
- Strengthening 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.
Reform rationale:
- Moving forward with economic reforms helps strengthen institutions in preparation for a political breakthrough and preserves economic stability while easing human hardship.

IMF News: Stalled Peace Process Clouds Growth Prospects for the West Bank and Gaza (September 19, 2016).