Press Release No. 23/292

IMF Staff Concludes Visit to West Bank and Gaza

August 22, 2023

• Amid a deteriorating security, political, and social environment, the growth momentum is abating while inflation is projected to ease. Persistently high unemployment and poverty add to macroeconomic fragilities.
• Under entrenched challenges and tight policy space, traction for public expenditure reforms remains limited, and public finances as well as debt unsustainable. Despite a commendable revenue performance, the liquidity squeeze continues, undermining the delivery of essential government services.
• Boosting economic growth and putting public finances in order are interrelated goals. They will require easing constraints from Israel, ambitious structural and fiscal reforms, including on the public wage bill, as well as garnering more support from donors. A fundamental change in prospects ultimately hinges on a political peace settlement.

Washington, DC: An International Monetary Fund (IMF) staff team led by Ms. Kerstin Gerling held discussions from August 8 to 18, 2023, to assess recent economic developments in West Bank and Gaza. The team met with Prime Minister Mohammad Shtayyeh, Finance Minister Shukry Bishara, Palestine Monetary Authority (PMA) Governor Feras Milhem, Palestinian Central Bureau of Statistics President Ola Awad, and other members of the Palestinian economic team, as well as Israeli officials and representatives of the Palestinian private sector, donors, and international organizations.

At the end of the visit, Ms. Gerling issued the following statement:

“The outlook for the Palestinian economy remains bleak amid a volatile political and security situation, with downside risks persisting. Together with lower regional growth, the increasingly difficult environment is weighing on both the supply and demand side of the economy. Following the post-pandemic rebound in 2021, growth nearly halved to 3.9 percent in 2022 and 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 amid a continued widening of the already large gap in living standards between the West Bank and Gaza. Weakening activity and lower international commodity prices are contributing to easing inflation, projected at 3.2 percent in 2023 and 2 percent over the medium term. Persistently high unemployment and poverty add to fragilities and social tensions.”

“The fiscal crisis continues under broadly unchanged policies, undermining the delivery of basic government services. Despite the Ministry of Finance’s continued strong revenue performance in a very challenging socioeconomic environment, the Palestinian Authority (PA) has suffered from increased Israeli deductions from clearance revenues in the first half of the year, as well as the persistently lackluster support from the international community. An ever-binding liquidity crunch has led to a cash-based execution of the 2023 budget and constrained the full payment of public sector wages and pensions (persisting since late 2021) and cash transfers to the most vulnerable. The government has also limited bank borrowing. Arrears continue to accumulate and, without substantial adjustment policies, public debt remains unsustainable.”

“The banking sector has remained broadly resilient, with adequate system-wide capital and liquidity buffers. However, early signs of asset quality deterioration are emerging and continued vigilance is required in view of rising interest rates and accumulating domestic PA arrears. The PMA continues to lead the efforts to strengthen the anti-money laundering and countering terrorism financing (AML/CFT) framework. MENAFATF’s repeated delays of its planned onsite visit that would inform this agenda are unfortunate in this regard. The PMA has made significant progress in bolstering its financial stability toolkit and should continue working to further strengthen its risk-based supervisory framework. Together with the Bank of Israel (as well as other Israeli authorities and entities involved), the PMA should also keep up efforts to operationalize new long-term correspondent banking arrangements and find solutions for the excess physical shekel cash in the Palestinian banking system.”

“Achieving higher economic growth requires coordinated efforts from the PA, Israel, and the international community. Boosting economic growth and improving Palestinian employment and real incomes hinges critically on the easing of Israeli-imposed restrictions on movement, access, and investment—including in Area C—and opening up of Gaza. In this regard, the Government of Israel’s recently adopted measures, including expanding the door-to-door trade program and increasing the number of permits for Palestinians from both the West Bank and the Gaza Strip to work in Israel, are welcome modest steps, but more measures are needed. Faster Palestinian growth also requires further improving the business climate, advancing the digital transformation of the economy, and stepping up critical energy infrastructure projects. Increased donor grants would provide support and facilitate the PA’s reform efforts, allowing to pace fiscal consolidation and alleviate the burden on the most vulnerable.”

“Deep policy reforms are necessary to restore fiscal sustainability and free up resources for development and social spending. Higher economic growth would greatly contribute to support public finances, and would support the much-needed expenditure reform. In this respect, public sector wage bill reform remains the highest priority, but progress has been erratic. The 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. However, significant wage increases negotiated in early 2023 following prolonged strikes work in the opposite direction and will worsen public finances. Further reforms to address net lending, including at the local government level, and health spending are also needed. Over the medium term, the authorities should also consider public pension reform that balances fiscal and social considerations. Following the halving of the handling fee charged on Palestinian fuel imports and recent procedural progress with the Israeli legislation mandating the use of the e-VAT system for Israeli traders, further tangible outcomes on the other outstanding fiscal files are warranted. These should include eliminating the handling fee on fuel completely and aligning it on other products with actual costs, transferring the tax revenue on economic activity in Area C (outside settlements and military locations) to the PA, transferring the Palestinian share of the Allenby crossing fees, and transferring customs authority.”

“The IMF team would like to thank the Palestinian authorities, as well as 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.”