IMF Staff Concludes Visit to West Bank and Gaza
IMF News, August 22, 2023
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- Published: August 22, 2023
Mission overview
- IMF staff team led by Ms. Kerstin Gerling held discussions from August 8 to 18, 2023.
- The team met with Prime Minister Mohammad Shtayyeh, Finance Minister Shukry Bishara, Palestine Monetary Authority Governor Feras Milhem, Palestinian Central Bureau of Statistics President Ola Awad, other Palestinian economic team members, Israeli officials, and representatives of the Palestinian private sector, donors, and international organizations.
- Press Release No. 23/292; end-of-mission statement issued August 22, 2023.
Economic outlook and macroeconomic dynamics
- Growth trajectory:
- Growth nearly halved to 3.9 percent in 2022.
- Growth is expected to further decline to 3.0 percent in 2023.
- Projections point to a gradual reduction of per capita incomes over the medium term and a continued widening of the gap in living standards between the West Bank and Gaza.
- Inflation:
- Projected at 3.2 percent in 2023.
- Projected at 2 percent over the medium term.
- Drivers and risks:
- Deteriorating security, political, and social environment amid lower regional growth is weighing on supply and demand.
- Persistently high unemployment and poverty increase macroeconomic fragilities and social tensions.
- Downside risks persist; a fundamental change in prospects ultimately hinges on a political peace settlement.
Fiscal situation and public finances
- Fiscal crisis persists under broadly unchanged policies, undermining delivery of basic government services.
- Revenue and liquidity:
- Ministry of Finance continues a strong revenue performance in a challenging environment.
- The PA suffered increased Israeli deductions from clearance revenues in the first half of the year and persistently lackluster support from the international community.
- An ever-binding liquidity crunch has led to cash-based execution of the 2023 budget and constrained full payment of public sector wages and pensions (persisting since late 2021) and cash transfers to the most vulnerable.
- Government has limited bank borrowing; arrears continue to accumulate.
- Debt:
- Without substantial adjustment policies, public debt remains unsustainable.
Banking sector and financial stability
- Banking sector remains broadly resilient with adequate system-wide capital and liquidity buffers.
- Emerging concerns:
- Early signs of asset quality deterioration are emerging.
- Continued vigilance required in view of rising interest rates and accumulating domestic PA arrears.
- Regulatory and operational priorities:
- PMA continues efforts to strengthen the anti-money laundering and countering terrorism financing (AML/CFT) framework.
- MENAFATF’s repeated delays of its planned onsite visit are noted as unfortunate.
- PMA has made significant progress in bolstering its financial stability toolkit and should continue to strengthen its risk-based supervisory framework.
- PMA, together with the Bank of Israel and other Israeli authorities and entities, should operationalize new long-term correspondent banking arrangements and find solutions for excess physical shekel cash in the Palestinian banking system.
Key policy recommendations and reforms
- Easing external constraints:
- Boosting economic growth and employment hinges critically on easing Israeli-imposed restrictions on movement, access, and investment—including in Area C—and opening up of Gaza.
- Recent Israeli measures (expanding door-to-door trade program; increasing permits for Palestinians from the West Bank and Gaza to work in Israel) are welcome modest steps but more measures are needed.
- Structural reforms to raise growth:
- Improve business climate.
- Advance digital transformation.
- Step up critical energy infrastructure projects.
- Increased donor grants to support reform efforts, pace fiscal consolidation, and alleviate burden on the most vulnerable.
- Fiscal and expenditure reforms:
- Public sector wage bill reform is the highest priority.
- Authorities’ commitment to hire only 1 new employee for every 2 employees that leave the public service (a 1-for-2 rule) is commendable and should be implemented as planned.
- Significant wage increases negotiated in early 2023 following prolonged strikes will worsen public finances.
- Further reforms needed to address net lending (including at the local government level) and health spending.
- Over the medium term, consider public pension reform balancing fiscal and social considerations.
- Outstanding fiscal files and tangible outcomes requested:
- Eliminate the handling fee on fuel completely and align handling fees on other products with actual costs (note: handling fee was halved previously).
- Transfer the tax revenue on economic activity in Area C (outside settlements and military locations) to the PA.
- Transfer the Palestinian share of the Allenby crossing fees.
- Transfer customs authority.
- Social protection:
- Higher growth would support public finances and facilitate much-needed expenditure reform, freeing resources for development and social spending.
IMF engagement and closing
- IMF staff thanked Palestinian authorities, representatives from the Central Bank and Government of Israel, the Palestinian private sector, and the international community for frank and constructive discussions.
- The IMF team will remain closely engaged with all interlocutors to help address the myriad challenges the Palestinian economy faces.
IMF Staff Concludes Visit to West Bank and Gaza. Press Release No. 23/292. August 22, 2023.